FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 of 15(d)
of the Securities Exchange Act of 1934
For quarter ended September 30, 1999 Commission file number 333-37185
NATIONAL HEALTHCARE CORPORATION
(Exact name of registrant as specified in its Charter)
Delaware 52-2057472
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
100 Vine Street
Murfreesboro, TN 37130
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (615) 890-2020
Indicate by check mark whether the registrant
(1) Has filed all reports required to be filed by Section 13 or 15(d),
of the Securities Exchange Act of 1934 during the preceding 12 months.
Yes x No
(2) Has been subject to such filing requirements for the past 90 days.
Yes x No
11,429,844 shares were outstanding as of October 31, 1999.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
NATIONAL HEALTHCARE CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
(in thousands) (in thousands)
REVENUES:
Net patient revenues $ 97,648 $ 99,931 $ 295,084 $ 307,563
Other revenues 8,029 8,523 26,244 25,974
Net revenues 105,677 108,454 321,328 333,537
COSTS AND EXPENSES:
Salaries, wages and benefits 59,410 58,724 180,750 183,855
Other operating 26,496 30,807 81,656 92,745
Rent 12,034 11,174 34,988 32,269
Depreciation and amortization 3,238 2,864 8,957 8,702
Interest 1,380 234 4,296 2,852
Total costs and expenses 102,558 103,803 310,647 320,423
Income Before Income Taxes 3,119 4,651 10,681 13,114
Income Tax Provision (1,273) (1,750) (4,348) (4,897)
NET INCOME $ 1,846 $ 2,901 $ 6,333 $ 8,217
EARNINGS PER SHARE:
Basic $ .16 $ .26 $ .55 $ .74
Diluted $ .16 $ .26 $ .55 $ .74
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,429,811 11,308,282 11,418,955 11,050,177
Diluted 11,430,074 11,365,571 11,424,243 11,368,753
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
September 30 December 31
1999 1998
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 9,182 $ 12,630
Cash and securities held by trustees 3,724 3,871
Marketable securities 25,448 23,207
Accounts receivable, less allowance for
doubtful accounts of $8,758 and $7,960 53,873 54,197
Notes receivable 3,400 18,182
Inventory at lower of cost (first-in,
first-out method) or market 5,259 4,207
Deferred income taxes 6,013 2,644
Prepaid expenses and other assets 2,890 873
Total current assets 109,789 119,811
PROPERTY AND EQUIPMENT AND ASSETS UNDER
ARRANGEMENT WITH OTHER PARTIES:
Property and equipment at cost 154,716 136,247
Less accumulated depreciation and
amortization (58,072) (50,498)
Assets under arrangement with other parties 3,635 4,120
Net property, equipment and assets under
arrangement with other parties 100,279 89,869
OTHER ASSETS:
Bond reserve funds, mortgage replacement
reserves and other deposits 771 668
Unamortized financing costs 812 777
Notes receivable 382 5,999
Notes receivable from National 12,170 12,078
Deferred income taxes 8,871 12,374
Minority equity investments and other 7,746 8,112
Total other assets 30,752 40,008
$240,820 $249,688
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 CAPITAL
September 30 December 31
1999 1998
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,117 $ 3,779
Trade accounts payable 14,177 16,317
Accrued payroll 18,691 23,846
Amount due to third-party payors 30,323 33,599
Accrued interest 390 235
Other current liabilities 21,246 14,965
Total current liabilities 88,944 92,741
Long-term Debt, less current portion 47,286 56,311
Debt Serviced by Other Parties, less
Current Portion 15,502 15,891
Other Noncurrent Liabilities 11,922 11,248
Minority Interests in Consolidated Subsidiaries 695 670
Subordinated Convertible Notes 4 714
Deferred Income 22,847 21,798
Commitments, Contingencies And Guarantees
SHAREOWNERS' EQUITY:
Preferred stock, $.01 par value;
10,000,000 shares authorized;
none issued or outstanding --- ---
Common stock, $.01 par value;
30,000,000 shares authorized;
11,429,844 shares issued and
outstanding 114 114
Capital in excess of par value,
less notes receivable 53,600 52,838
Retained earnings (accumulated deficit) (66) (6,399)
Unrealized gains (losses) on securities (28) 3,762
Total shareowners' equity 53,620 50,315
$240,820 $249,688
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)
Nine Months Ended
September 30
1999 1998
(in thousands)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 6,333 $ 8,217
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 8,396 8,131
Provision for doubtful accounts receivable 798 2,335
Amortization of intangibles and deferred charges 694 822
Amortization of deferred income (403) (427)
Equity in earnings of unconsolidated investments (170) (776)
Distributions from unconsolidated investments 102 149
Deferred income taxes 808 (924)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (474) 19,614
Increase in inventory (1,052) (253)
Increase in prepaid expenses and other assets (1,671) (535)
Increase (decrease) in trade accounts payable (2,486) 617
Decrease in accrued payroll (5,155) (15,281)
Increase (decrease) in amounts due to
third party payors (3,276) 5,058
(Increase) decrease in accrued interest 155 (331)
Increase in other current liabilities 6,281 5,065
Increase in entrance fee deposits 1,500 ---
Net cash provided by operating activities 10,380 31,481
CASH FLOWS (USED IN) INVESTING ACTIVITIES:
Additions to and acquisitions of property and
equipment, net (18,845) (23,268)
Investment in notes receivable (1,495) (24,881)
Collection of notes receivable 21,802 13,515
(Increase) decrease in minority equity investments & other (151) 169
(Increase) decrease in marketable securities (6,031) 253
Net cash used in investing activities (4,720) (34,212)
CASH FLOWS PROVIDED BY USED IN FINANCING ACTIVITIES:
Proceeds from debt issuance 13,890 46
(Increase) decrease in cash and securities held by trustee 147 (3,377)
Decrease in minority interests in subsidiaries (15) (48)
Increase in bond reserve funds, mortgage
replacement reserves and other deposits (103) (148)
Issuance of partnership units 86 40
Collection of receivables 5 66
Payments on debt (23,013) (2,985)
Cash distributions to partners --- (5,388)
(Increase) decrease in financing costs (105) 309
Net cash used in financing activities (9,108) (11,485)
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,448) (14,216)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,630 17,205
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,182 $ 2,989
Supplemental Information:
Cash payments for interest expense $ 4,140 $ 3,183
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)
Nine Months Ended
September 30
1999 1998
(in thousands)
During the nine months ended September 30, 1999 and
September 30, 1998, $710,000 and $18,438,000, respectively,
of convertible subordinated debentures were converted
into 46,690 and 1,212,504 shares of common stock:
Convertible subordinated debentures $ (710) $(18,438)
Financing costs 47 10
Accrued interest (8) (89)
Common stock --- 12
Capital in excess of par value 671 18,505
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 and Partners' Capital
(in thousands, except share and unit amounts)
Unrealized Total Share-
Receivables Gains owners' Equity
Common Stock from Sale Paid in Retained (Losses) on and Partners'
Shares/Units Amount of Units Capital Earnings Securities Capital
Balance at 12/31/98 11,378,558 $ 114 $(16,807) $69,645 $ (6,399) $3,762 $ 50,315
Net income --- --- --- --- 6,333 --- 6,333
Unrealized losses on
securities --- --- --- --- --- (3,790) (3,790)
Total Comprehensive Income 2,543
Shares sold 4,596 --- --- 86 --- --- 86
Collection of
receivables --- --- 5 --- --- --- 5
Shares issued in conversion of
convertible debentures to
common shares 46,690 --- --- 671 --- --- 671
Balance at 9/30/99 11,429,844 114 (16,802) 70,402 (66) (28) 53,620
Balance at 12/31/97 10,103,172 101 (16,875) 50,123 --- 4,387 37,736
Net income --- --- --- --- 8,217 --- 8,217
Unrealized losses on
securities --- --- --- --- --- (542) (542)
Total Comprehensive Income 7,675
Collection of
receivables --- --- 66 --- --- --- 66
Shares sold 4,222 --- --- 115 --- --- 115
Units purchased (3,000) --- --- (75) --- --- (75)
Units issued in conversion of
convertible debentures to
partnership units 1,212,504 12 --- 18,505 --- --- 18,517
Balance at 9/30/98 11,316,898 $ 113 $(16,809) $68,668 $ 8,217 $3,845 $ 64,034
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
September 30, 1999
(Unaudited)
Note 1 - CONSOLIDATED FINANCIAL STATEMENTS:
The financial statements of National HealthCare Corporation ("NHC") for
the nine months ended September 30, 1999 and 1998, which have not been
examined by independent public accountants, reflect, in the opinion of
management, all adjustments necessary to present fairly the data for such
periods. The results of the operations for the nine months ended September
30, 1999 are not necessarily indicative of the results that may be expected
for the entire fiscal year ended December 31, 1999. The interim condensed
balance sheet at December 31, 1998 is taken from the audited financial
statements at that date. The interim condensed financial statements should be
read in conjunction with the consolidated financial statements, including the
notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included in NHC's Form 10-K for the year ended
December 31, 1998.
Note 2 - OTHER REVENUES:
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
(in thousands)
Revenue from managed centers $ 5,072 $ 5,701 $16,641 $17,036
Guarantee fees 140 144 395 436
Advisory fee from NHI 693 828 2,100 2,483
Advisory fee from NHR 117 110 353 331
Earnings on securities 390 379 1,175 1,118
Equity in earnings of
unconsolidated investments 55 2 170 165
Interest income 802 765 2,636 2,705
Other 760 594 2,774 1,700
$ 8,029 $ 8,523 $26,244 $25,974
Revenues from managed centers include management fees and interest
income on notes receivable from the managed centers. "Other" revenues include
non-health care related earnings.
Note 3 - INVESTMENTS IN MARKETABLE SECURITIES:
NHC considers its investments in marketable securities as available for
sale securities and unrealized gains and losses are recorded in shareowners'
equity in accordance with SFAS 115.
8
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
Proceeds from the sale of investments in debt and equity securities
during the nine months ended September 30, 1999 were $41,000. Gross
investment gains of $10,000 were realized on these sales during the nine
months ended September 30, 1999. Realized gains and losses from securities
sales are determined on the specific identification of the securities.
Note 4 - ACQUISITIONS:
Effective May 1, 1999, NHC purchased for the assumption of long-term
debt and other liabilities in the approximate amount of $15,861,000 two
long-term health care centers and the related assets. The centers are located
in Pensacola, Florida (180 beds) and Lake City, Florida (120 beds) and have
been managed by NHC since their openings in 1987 and 1992, respectively.
The purchase price for the acquisitions above were allocated to the
underlying assets based on their relative fair market values. The
Consolidated Statements of Income for the nine months and three months ended
September 30, 1999 includes the results of operations from the date of
acquisition.
Note 5 - GUARANTEES AND CONTINGENCIES:
In order to obtain management agreements and to facilitate the
construction or acquisition of certain health care centers which NHC manages
for others, NHC has guaranteed some or all of the debt (principal and
interest) on those centers. For this service, NHC charges an annual guarantee
fee of 1% to 2% of the outstanding principal balance guaranteed, which fee is
in addition to NHC's management fee. The principal amounts outstanding under
the guarantees is approximately $66,286,000 (net of available debt service
reserves) at variable and fixed interest rates with a weighted average rate of
7.2% at September 30, 1999. 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. The notice of default is the result of
a dispute over collateral and there has been no lack of payment by the debtor.
NHC has offered to collateralize its guarantee by pledging approximately
$4,000,000 of marketable securities with The Bank of Tokyo-Mitsubishi to agree
to leave its letter of credit outstanding through April 1, 2001. The bonds
are also secured by first mortgages on two licensed nursing homes owned by
Florida Convalescent Centers, Inc. or affiliates 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 flow.
9
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
In April 1999, foreclosure proceedings by a first mortgage lender were
commenced against six long-term health care centers in Florida which are
managed by NHC and for which NHC has extended its corporate guaranty in the
amount of $5,000,000. 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 has extended working capital loans to York Hannover in the amount of
approximately $2,251,000, including accrued interest, which are secured by a
lien on $2,000,000 of the accounts receivable of the centers. NHC
additionally has an unsecured claim against the bankrupt estate for
approximately $3,760,000. The first mortgage lender is owed approximately
$25,839,000 (after the application of certain debt service reserves) by the
bankruptcy estate which debt is collateralized by first mortgages on the six
long-term health care centers, the personal guarantee of certain of the
owners, accounts receivable above $2,000,000, and by NHC's $5,000,000
guaranty.
NHC was called upon by the first mortgage lender to either make payment
in full under NHC's guaranty, or collateralize the same. The guaranty was
collateralized at June 30, 1999 with marketable securities in the approximate
amount of the guaranty. If the guaranty is ultimately called, NHC's primary
source of repayment depends upon the underlying value of the properties.
Although NHC has filed a preliminary Plan of Liquidation with the Bankruptcy
Court pursuant to which NHC would acquire title to the six centers by the
assumption of the first mortgage debt and trade payables, this plan apparently
will result in significant tax liabilities to the bankrupt estate with
resulting loss of potential for the estate to have sufficient cash to pay
NHC's unsecured indebtedness. A hearing has been scheduled on NHC's plan by
the court on December 21, 1999. NHC continues to evaluate whether it has
sufficient reserves to cover any write-off of amounts due. Depending on the
outcome of that hearing and the final approval of a Plan of Liquidation,
payments by NHC under the guarantee and/or loss of unsecured indebtedness may
have a material adverse impact on NHC's earnings and cash flows.
NHC's bank credit facility (outstanding balance $12,841,000 at September
30, 1999) was financed through National Health Corporation ("National") and
through the National Health Corporation Leveraged Employee Stock Ownership
Plan and Trust.
10
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
On July 30, 1999, National was notified by SunTrust Bank of Nashville,
N.A., the Agent for itself and certain other lenders for the above-referenced
loan, that it disputes the allocation of certain collateral between itself and
another lending institution.
National and NHC are actively negotiating for resolution of this
dispute, with NHC agreeing to pledge additional collateral in the form of
marketable securities to secure the banks. In the event the dispute is not
resolved, the Agent may call the loan into default. If the loan is called
into default, payments by NHC to repay the loan may have a material adverse
impact upon NHC's cash flows and liquidity.
Note 6 - NEW ACCOUNTING PRONOUNCEMENT:
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5 ("SOP 98-5") effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires that all
nongovernmental entities expense the costs of start-up activities as those
costs are incurred. The statement also requires nongovernmental entities to
write off any unamortized start-up costs that remain on the balance sheet at
the date of adoption. NHC has adopted the provisions of SOP 98-5 effective
January 1, 1999. The adoption did not have a material impact on NHC's
financial position, results of operations or cash flows.
Note 7 - LEGAL PROCEEDINGS:
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
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. 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. Finally, FCC had
the right to cancel the management contracts for the remaining 14 centers,
which management contracts were in fact terminated July 31, 1999.
11
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
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.
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 significant
doubt on Mr. Braeuning's likelihood of success on the merits."
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.
12
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
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 York Hannover centers (See Note 5) 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.
13
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
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 September 30, 1999, the Company and/or its
managed centers are defendants in 70 such lawsuits in Florida, compared to 26
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 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. 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.
14
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
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. Preliminary
indications are that a minimum 25% increase in premiums and deductible amounts
will 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 centers at a total of $2.7 million. Currently the Company,
and/or centers and owners for which it manages, is the named defendant in
approximately 70 liability actions in the State of Florida and 26 in other
states. 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.
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, Mass. and the total claims
by NHC against the debtor are approximately $13,500,000. 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 in the State of Florida and
NHC has filed a plan of liquidation which would result, if approved by the
Court and other creditors, in NHC or its designee acquiring title to these six
properties for the assumption of the outstanding debt and the payment of trade
creditors. 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 facility is located in Carthage, Tennessee and may be impacted by the
bankruptcy.
15
NATIONAL HEALTHCARE CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NHC has been advised by the debtor that the disastrous 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.
There is certain additional litigation incidental to NHC's business,
none of which, in management's opinion, would be material to the financial
position or results of operations of NHC.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Overview
National HealthCare Corporation (NHC, or the Company) operates or
manages 95 long-term health care centers with 12,754 beds in nine states. NHC
provides nursing care as well as ancillary therapy services to patients in a
variety of settings including long-term care nursing centers, managed care
specialty units, subacute care units, Alzheimer's care units, homecare
programs, and facilities for assisted living. NHC also operates retirement
centers.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998.
Results for the three month period ended September 30, 1999 include a
2.6% decrease in net revenues compared to the same period in 1998 and a 32.9%
decrease in income before income taxes.
The decline in revenues and net income for the quarter, which occurred
during NHC's first year under the federal government's new prospective payment
system, reflects decreased levels of service and changes in payment systems
for rehabilitative services, homecare services and nursing home operations.
The decreased revenues for the quarter were partially offset by the
continued growth of operations. Compared to the quarter a year ago, NHC has
increased the number of owned or leased long-term care beds by 372 beds from
7,515 beds to 7,887 beds. Also contributing to increased revenues are
improved occupancy rates at assisted living centers and at independent living
centers.
16
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
Revenues from managed centers, which are included in the Statements of
Income in Other Revenues, decreased $.6 million 1999 compared to the quarter a
year ago. The decline in these revenues and earnings are the result of the
loss of management contracts for the 16 FCC centers as discussed below. Two
of the 16 FCC centers were purchased by NHC during the 1999 second quarter.
Total costs and expenses for the 1999 third quarter decreased $1.2
million or 1.2% to $102.6 million from $103.8 million in 1998. Salaries,
wages and benefits, the largest operating costs of this service company,
increased $.7 million or 1.2% to $59.4 million from $58.7 million. Other
operating expenses decreased $4.3 million or 14.0% to $26.5 million for the
1999 period compared to $30.8 million in the 1998 period. Rent increased $.9
million or 7.7% to $12.0 million from $11.2 million. Depreciation and
amortization increased 13.1% to $3.2 million. Interest costs increased 489.7%
to $1.4 million.
Increases in salaries, wages and benefits are attributable to the
increase in staffing levels due to long-term care bed additions and assisted
living occupancy improvements and expansions. Also contributing to higher
costs of labor are inflationary increases for salaries and the associated
benefits. These increases in costs were offset in part by decreased staffing
levels in therapy and home care services. Also, bonus and benefit programs
have been reduced compared to the quarter a year ago.
Decreases in operating costs are due primarily to the renegotiation at
lower rates of supplier contracts for inhalation therapy, pharmacy, x-ray and
medical supplies. These cuts were made in response to the lower rates of
reimbursement being received under the phase-in of the Medicare Prospective
Payment System ("PPS"), which began for the majority of NHC centers on January
1, 1999. Operating cost reductions were offset in part due to the increased
number of beds in operation and the higher occupancies in assisted living and
independent living services. Rent increases are due primarily to additions at
existing rental properties.
The total census at owned and leased centers for the quarter averaged
94.3% compared to an average of 91.3% for the same quarter a year ago.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998.
Results for the nine month period ended September 30, 1999 include a
3.7% decrease in net revenues compared to the same period in 1998 and a 18.6%
decrease in income before income taxes.
17
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
The decline in revenues for the nine months, which occurred during NHC's
first year under the federal government's new prospective payment system,
reflects decreased levels of service and changes in payment systems for
rehabilitative services, homecare services and nursing home operations.
The decreased revenues for the nine months were partially offset by the
continued growth of operations. Compared to the nine months a year ago, NHC
has increased the number of owned or leased long-term care beds by 372 beds
from 7,515 beds to 7,887 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 2.3% in 1999 from $17.0 million in 1998 to
$16.6 million in 1999. The decline in these revenues and earnings are the
result of the loss of management contracts for the 16 FCC centers as discussed
below. Two of the 16 FCC centers were purchased by NHC during the 1999 second
quarter.
Total costs and expenses for the 1999 nine months decreased $9.8 million
or 3.1% to $310.6 million from $320.4 million in 1998. Salaries, wages and
benefits, the largest operating costs of this service company, decreased $3.1
million or 1.7% to $180.8 million from $183.9 million. Other operating
expenses decreased $11.1 million or 12.0% to $81.7 million for the 1999 period
compared to $92.7 million in the 1998 period. Rent increased $2.7 million or
8.4% to $35.0 million from $32.3 million. Depreciation and amortization
increased 2.9% to $9.0 million. Interest costs increased 50.6% to 4.3
million.
Decreases in salaries, wages and benefits are attributable to decreased
staffing levels in therapy and home care services. Also, bonus and benefit
programs have been reduced compared to the quarter a year ago. These
decreases in costs were offset in part by the increase in staffing levels due
to long-term care bed additions and assisted living occupancy improvements and
expansions. Also contributing to higher costs of labor are inflationary
increases for salaries and the associated benefits.
Decreases in operating costs are due primarily to the renegotiation at
lower rates of supplier contracts for inhalation therapy, pharmacy, x-ray and
medical supplies. These cuts were made in response to the lower rates of
reimbursement being received under the phase-in of the Medicare Prospective
Payment System ("PPS"), which began for the majority of NHC centers on January
1, 1999. Operating cost reductions were offset in part due to the increased
number of beds in operation and the higher occupancies in assisted living and
independent living services. Rent increases are due primarily to additions at
existing rental properties.
18
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
The total census at owned and leased centers for the nine months of 1999
averaged 93.7% compared to an average of 90.1% for the same period a year ago.
Liquidity and Capital Resources
NHC generated net cash from operating activities during the first nine
months of 1999 totaling $10.4 million compared to $31.5 million in the prior
year period. The decrease in cash generated from operating activities is due
to the decline in net income and also in the amount of collections of accounts
receivable as compared to the prior period.
Cash flows used in investing activities during the first nine months of
1999 totaled $4.7 million compared to $34.2 million used in the same period in
1998. Cash used for investments in property, notes receivable and marketable
securities totaled $26.4 million in 1999 compared to $48.1 million in 1998.
Collections of notes receivable generated $21.8 million in 1999 compared to
$13.5 million in 1998.
Cash used in financing activities totaled $9.1 million in the first nine
months of 1999 compared to $11.5 million for the same period in 1998.
Payments on debt of $23.0 million in 1999 were offset by proceeds from new
debt issuance of $13.9 million. In the prior year, cash flows used included
$3.0 million for payments in debt and $5.4 million for distributions to
partners.
At September 30, 1999, the Company's ratio of long-term obligations to
convertible debt and capital is 1.2 to 1.
NHC has guaranteed approximately $66.3 million of the debt of certain
health care centers which NHC manages for others. Also, see Note 5 for
discussion of the possibility of NHC being called upon to pay up to $5.0
million related to debt guarantees, and to pledge additional collateral
against other guarantees.
NHC's current cash on hand, marketable securities, short-term notes
receivable, operating cash flows and, as needed, its borrowing capacity, are
expected to be adequate to finance NHC's operating requirements and growth and
development plans for 1999 and into 2000; however, as described in "Note 7 -
Legal Proceedings", there are several matters currently pending which, if
adversely determined, would materially impact NHC's liquidity. These matters
include existing litigation related to the Braeuning lawsuit, ongoing
professional liability insurance claims, and recovery of claims against
debtors in bankruptcy.
19
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
New Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5 ("SOP 98-5") effective for fiscal
years beginning after December 15, 1998. SOP 98-5 requires that all
nongovernmental entities expense the costs of start-up activities as those
costs are incurred. The statement also requires nongovernmental entities to
write off any unamortized start-up costs that remain on the balance sheet at
the date of adoption. NHC has adopted the provisions of SOP 98-5 effective
January 1, 1999. The adoption did not have a material impact on NHC's
financial position, results of operations or cash flows.
Cash Dividends
NHC may pay dividends at the discretion of the Board of Directors. NHC,
as a corporation, does not anticipate 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
20
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
costs. The per diem rate also covers substantially all items and services
furnished during a covered stay for which reimbursement was previously made
separately under Medicare. PPS is being phased in over a three-year period.
During the phase-in, payments are based on a blend of each center's specific
historical costs and federally-established per diem rates that are based on
the average costs of all U.S. skilled nursing facilities. NHC has analyzed
its center-specific historical costs, reviewed the expected federally-
determined rates, and analyzed the current acuity level of Medicare patients
in its centers. Based on such review and analyses, NHC has developed plans
for each center to deliver care to Medicare patients at a lower cost and in a
manner consistent with PPS requirements. These plans include a significant
reduction in the number of therapy staff positions and renegotiation at lower
rates of supplier contracts for inhalation therapy, pharmacy, x-ray and
medical supplies. Congress is currently considering certain changes to the
1997 BBA which wold allegedly provide some relief to skilled nursing center
providers, but no assurances are available that any such initiations will
become law.
Although NHC believes that it is positioned to operate effectively under
PPS, if NHC is unable to execute the center-specific plans to reduce the cost
of care to Medicare patients, PPS could have a material adverse effect on
NHC's financial position, results of operations and cash flows.
Litigation
As discussed in more detail in Note 7 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
21
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
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.
Also as discussed in more detail in Note 7 to the financial statements,
NHC settled, during 1998, a lawsuit filed by Florida Convalescent Centers,
Inc. ("FCC"), an independent Florida corporation for whom NHC manages 16
licensed nursing centers in Florida. Under the terms of the settlement, NHC
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, which were canceled on July 31, 1999.
As previously disclosed, the loss of the management contract and related
revenues from these 14 facilities will have a material negative impact on
NHC's earnings, even after taking into consideration the purchase of two of
the 16 long-term health care centers.
The Company is now involved in two bankruptcies (See Note 7) 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 will continue to evaluate the carrying value
of these investments.
As noted previously, the Company is currently engaged in litigation with
the 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.
22
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
Year 2000 Compliance and Related Risks
The Year 2000 issue generally relates to computer programs that were
written using two digits rather than four to define the applicable year. In
those programs, the year 2000 may be incorrectly identified as the year 1900,
which can result in a system failure or miscalculations causing a disruption
of operations, including a temporary inability to process transactions,
prepare financial statements or engage in other normal business activities.
The following discussion identifies the actions taken by NHC to assess and
address its Year 2000 issues.
State of Readiness--
NHC has formed an internal task force and developed a detailed plan to
address its Year 2000 issues, and is utilizing its internal resources to
assess, remediate and test its systems. NHC's plan includes an inventory and
review of all core applications systems, networks, desktop systems,
infrastructure and critical supply chains. NHC's Year 2000 readiness plan is
focused on addressing Year 2000 readiness in the following five categories:
(1) mainframe computer operations, critical applications and related networks,
(2) personal computer hardware and software, (3) other internal equipment such
as infusion pumps, phone systems, monitoring devices and smoke/fire alarms
which rely on microchips or telecommunications, (4) third party payors, and
(5) other third party vendors utilized by NHC's healthcare centers such as
financial institutions, electrical providers, and food services suppliers.
For each of the above categories, NHC will perform or has performed the
phases of assessment, remediation and testing of the applicable hardware,
software or equipment, as applicable. NHC has completed the assessment phase
for category 1 and is currently in the remediation phase of making applicable
modifications to the application programs found to be non-compliant. NHC has
historically developed the majority of its application programs internally.
All internally developed systems have been assessed and inventoried and plans
have been made to modify or replace them if necessary, in order to make them
Year 2000 compliant. Purchased applications are either being modified,
replaced or upgraded. Most critical applications, whether internally developed
or purchased externally, have been tested and are already Year 2000 compliant.
All server hardware, dumb terminals and printers have been assessed, repaired
as necessary and tested and are now Year 2000 compliant. It is expected that
the remediation and testing phases related to category 1 will be completed by
December 31, 1999.
23
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
NHC is currently in the assessment phase for categories 2 through 5.
For personal computer software vendors, NHC is aware of the packages that will
not be Year 2000 compliant and is currently in the process of assessing the
types of packages utilized by each NHC personal computer. NHC has also
requested all personal computer software vendors, medical equipment
manufacturers, third party governmental payors, fiscal intermediaries and
other third party vendors (financial institutions, electrical providers, etc.)
utilized by its healthcare centers to disclose their current Year 2000
readiness and their plan for achieving Year 2000 readiness. Responses have
been received from most vendors and third parties. For those vendors and
third parties that have not yet responded, NHC is in the process of sending
out additional requests. Although most third party vendors have indicated
that they are currently Year 2000 compliant or expect to be compliant prior to
January 1, 2000, there can be no assurance that such third parties will
achieve Year 2000 compliance by January 1, 2000. NHC is also in the process
of conducting an examination of the embedded chip technology utilized in the
various medical devices, telecommunications equipment, heating and air
conditioning systems, smoke/fire alarms and lighting systems at each of its
healthcare centers. The assessment of categories 2, 3, and 5 was completed
by October 1, 1999 with remediation and testing to be completed by December
31, 1999.
With respect to category 4 (third party payors), the largest sources of
NHC's revenues are state and federal governments through the Medicaid and
Medicare programs. NHC is reimbursed under these programs through fiscal
intermediaries. The Health Care Financing Administration ("HCFA"), the
government agency that administers the Medicare program, had previously
publicly stated that it would be Year 2000 compliant by December 31, 1998.
HCFA announced that it required all fiscal intermediaries to be Year 2000
compliant by December 31, 1998 and that it expected state Medicaid agencies to
be Year 2000 compliant by September 30, 1999. While HCFA has made no public
announcement as to whether the fiscal intermediaries and state Medicaid
agencies have met this schedule, reports by the General Accounting Office
report that the various states may not currently be in compliance. With
respect to itself, HCFA issued a Provider Correspondence Letter dated January
12, 1999 indicating that they have not met their schedule. This letter states
that HCFA's systems will function on January 1, 2000 and will be able to
process "acceptable" claims. NHC has little or no control over the Year 2000
compliance of its third party governmental payors and fiscal intermediaries
and it is expected that the assessment phase for third party payors will be an
ongoing process throughout 1999. NHC will continue to request and seek
information through all sources available related to the Year 2000 readiness
of these third parties.
24
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
Year 2000 Costs--
NHC currently estimates that its aggregate costs directly related to
Year 2000 compliance efforts will be approximately $250,000, of which
approximately $150,000 has been spent through September 30, 1999. The costs
primarily relate to the use of internal information systems personnel in NHC's
assessment of Year 2000 issues and modification of software applications as
discussed above. The Year 2000 costs have been and will be paid through funds
provided by NHC's ongoing operations. Approximately 25% of the information
systems department budget has been utilized in performing functions related to
Year 2000 preparedness. Management of NHC believes that there will be no
material impact on NHC's financial condition or results of operations
resulting from other information technology projects being delayed due to Year
2000 efforts.
Year 2000 Risks--
The failure of NHC or third parties to be fully Year 2000 compliant for
essential systems and equipment by January 1, 2000 could result in
interruptions of normal business operations. Based on all available
information as of September 30, 1999, management's estimate of NHC's most
reasonably likely worst case scenario includes: (i) the inability to deliver
patient care related services in its healthcare centers, (ii) the delayed
receipt of reimbursement from the federal or state governments, private payors
or intermediaries, (iii) the failure of security systems, heating systems,
lighting systems or other operational systems and equipment of the healthcare
centers, and (iv) the inability to receive critical equipment and supplies
from vendors. Each of these events could have a material adverse impact on
NHC's business, results of operations and financial condition.
Contingency Plans--
Contingency plans for NHC's Year 2000 issues continue to be developed
and include, but are not limited to, the identification of alternate
suppliers, alternate technologies and alternate manual systems and processes.
In the event that medical devices and other operational equipment containing
non-compliant embedded chip technology cannot be corrected prior to January 1,
2000, the equipment will be removed from service.
25
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
NHC's Year 2000 efforts are ongoing and its overall plan and cost
estimations will continue to evolve as new information becomes available. The
costs of NHC's Year 2000 compliance plan and the date on which NHC expects to
complete it are based on current estimates, which reflect numerous assumptions
about future events, including the continued availability of certain
resources, the timing and effectiveness of third party remediation plans and
other factors. NHC can give no assurance that these estimates will be
achieved, and actual results could differ materially from NHC's plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct relevant computer source codes and embedded
technology, the results of internal assessment, remediation and testing and
the timeliness and effectiveness of remediation efforts of third parties. In
addition, NHC's analysis of its Year 2000 issues is based in part on
information from third parties. There can be no assurance that such
information is accurate or complete.
Item 3. Quantitative and Qualitative Information About Market Risk
Interest Rate Risk--
The Company's cash and cash equivalents consist of highly liquid
investments with a maturity of less than three months. As a result of the
short-term nature of the Company's cash instruments, a hypothetical 10% change
in interest rates would have no impact on the Company's future earnings and
cash flows related to these instruments. A hypothetical 10% change in
interest rates would also have an immaterial impact on the fair values of
these instruments. Approximately $10 million of the Company's notes
receivable bear interest at fixed interest rates. As the interest rates on
these notes receivable are fixed, a hypothetical 10% change in interest rates
would have no impact on the Company's future earnings and cash flows related
to these instruments. A hypothetical 10% change in interest rates would also
have an immaterial impact on the fair values of these instruments.
Approximately $22.6 million of the Company's notes receivable bear interest at
variable rates (generally at prime plus 2%). Because the interest rates of
these instruments are variable, a hypothetical 10% change in interest rates
would result in a related increase or decrease in interest income of
approximately $220,000. However, a hypothetical 10% change in interest rates
would have an immaterial impact on the fair values of these instruments. As
of September 30, 1999, $30.2 million of the Company's long-term debt and debt
serviced by other parties bear interest at fixed interest rates. Because the
interest rates of these instruments are fixed, a hypothetical
26
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
10% change in interest rates would have no impact on the Company's future
earnings and cash flows related to these instruments. A hypothetical 10%
change in interest rates would have an immaterial impact on the fair values of
these instruments. The remaining $45.3 million of the Company's long-term
debt and debt serviced by other parties bear interest at variable rates.
Because the interest rates of these instruments are variable, a hypothetical
10% change in interest rates would result in a related increase or decrease in
interest expense of approximately $275,000. However, a hypothetical 10%
change in interest rates would have an immaterial impact on the fair value of
these instruments. The Company does not currently use any derivative
instruments to hedge its interest rate exposure. The Company has not used
derivative instruments for trading purposes and the use of such instruments in
the future would be subject to strict approvals by the Company's senior
officers. Therefore, the Company's exposure related to such derivative
instruments is not material to the Company's financial position, results of
operations or cash flows.
Equity Price Risk--
The Company considers its investments in marketable securities as
available for sale securities and unrealized gains and losses are recorded in
stockholders' equity in accordance with Statement of Financial Accounting
Standards No. 115. The investments in marketable securities are recorded at
their fair market value based on quoted market prices. Thus, there is
exposure to equity price risk, which is the potential change in fair value due
to a change in quoted market price. Hypothetically, a 10% change in quoted
market prices would result in a related 10% change in the fair value of the
Company's investments in marketable securities.
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 7, page 11, of this
Form 10-Q.
Item 2. Changes in Securities. Not applicable
Item 3. Defaults Upon Senior Securities. None
27
NATIONAL HEALTHCARE CORPORATION
September 30, 1999
(Unaudited)
Item 4. Submission of Matters to Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
(a) List of exhibits - Exhibit 27 - Financial Data Schedule
(for SEC purposes only)
(b) Reports on Form 8-K. Filed November 9, 1999
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL HEALTHCARE CORPORATION
(Registrant)
Date November 12, 1999 /s/ Richard F. LaRoche, Jr.
Richard F. LaRoche, Jr.
Secretary
Date November 12, 1999 /s/ Donald K. Daniel
Donald K. Daniel
Vice President and Controller
Principal Accounting Officer
29