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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the Transition period from _________ to _________.
Commission file number 0-28656
KARRINGTON HEALTH, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1461482
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
919 Old Henderson Road
Columbus, Ohio 43220
(Address of principle executive offices)
(614) 451-5151
(Registrant's telephone number, including area code)
Indicated by check mark whether registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Shares of Registrant's common shares, without par value, outstanding at
November 6, 1996 was 6,700,000.
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KARRINGTON HEALTH, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.................................... 1
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1995 and 1996........ 2
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1996.................. 3
Notes to Consolidated Financial Statements................... 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 6-9
Part II. Other Information
Item 6. Exhibits................................................ 10
Signatures.............................................. 11
Note: Items 1-5 of Part II are omitted because they are not applicable.
Part I. Financial Information
Item 1. Financial Statements
KARRINGTON HEALTH, INC.
AND AFFILIATES
Consolidated Balance Sheets
ASSETS
December 31, September 30,
1995 1996
---------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 144,833 $ 18,397,677
Accounts receivable 243,914 107,051
Amounts due from affiliates 523,278 904,692
Prepaid expenses 98,821 210,519
----------- ------------
Total current assets 1,010,846 19,619,939
Property and equipment -- net 24,879,363 38,615,023
Other assets -- net 786,233 3,749,493
----------- ------------
Total assets $26,676,442 $ 61,984,455
=========== ============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 614,713 $ 995,053
Construction payables 810,334 1,849,219
Payroll and related taxes 410,590 357,411
Unearned resident fees 414,821 241,696
Interest payable 129,699 134,663
Current portion of long-term obligations 205,485 251,128
----------- ------------
Total current liabilities 2,585,642 3,829,170
Long-term obligations 18,249,893 26,325,370
Deferred income taxes 1,100,000
Equity:
Common shares -- 32,025,358
Partners' equity 5,840,907 --
Accumulated deficit -- (1,295,443)
----------- ------------
Total equity 5,840,907 30,729,915
----------- ------------
Total liabilities and equity $26,676,442 $ 61,984,455
=========== ============
SEE ACCOMPANYING NOTES.
1
KARRINGTON HEALTH, INC.
AND AFFILIATES
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1995 and 1996
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1995 1996 1995 1996
-------- -------- -------- --------
Revenues:
Residence operations $ 1,571,573 $ 2,403,331 $ 4,482,733 $ 6,242,125
Development and management fees 126,681 67,321 292,609 493,308
----------- ----------- ----------- -----------
Total revenues 1,698,254 2,470,652 4,775,342 6,735,433
Expenses:
Residence operations 1,048,171 1,696,036 3,088,564 4,488,088
General and administrative 461,764 669,387 1,098,929 1,927,484
Depreciation and amortization 232,884 468,374 659,960 1,055,243
----------- ----------- ----------- -----------
Total expenses 1,742,819 2,833,797 4,847,453 7,470,815
----------- ----------- ----------- -----------
Operating loss (44,565) (363,145) (72,111) (735,382)
Interest expense (239,929) (213,422) (728,155) (1,047,356)
Interest income -- 239,846 -- 239,846
Equity in net earnings
(loss) of unconsolidated entity (25,230) 15,756 (77,889) 32,379
----------- ----------- ----------- -----------
Loss before income taxes (309,724) (320,965) (878,155) (1,510,513)
Deferred income taxes -- (1,100,000) -- (1,100,000)
----------- ----------- ----------- -----------
Net loss $ (309,724) $(1,420,965) $ (878,155) $(2,610,513)
=========== =========== =========== ===========
Proforma information:
Net loss per share $ (.07) $ (.23) $ (.20) $ (.52)
Weighted average common shares outstanding 4,350,000 6,240,200 4,350,000 4,984,700
SEE ACCOMPANYING NOTES.
2
KARRINGTON HEALTH, INC.
AND AFFILIATES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1996
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
1995 1996
------------- -------------
Operating activities
Net loss $ (878,155) $ (2,610,513)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of intangible assets 95,000 --
Depreciation and amortization 659,960 1,055,243
Deferred income taxes -- 1,100,000
Straight-line rent expense 9,389 13,836
Equity in net (earnings) loss of unconsolidated entity 77,889 (32,379)
Change in operating assets and liabilities:
Accounts receivable (88,053) (244,551)
Prepaid expenses (20,054) (111,698)
Accounts payable and accrued liabilities 46,191 380,340
Other liabilities (92,283) (221,340)
------------ ------------
Net cash used in operating activities (190,116) (671,062)
Investing activities
Increase in assets whose use is limited (239,000) (1,132,314)
Purchases of property and equipment (7,329,186) (13,317,550)
Equity contribution to unconsolidated entities -- (1,171,039)
Payments of pre-opening costs (197,389) (517,742)
Payments for organization costs and other (21,050) (125,902)
------------ ------------
Net cash used in investing activities (7,786,625) (16,264,547)
Financing activities
Net proceeds from public offering -- 27,499,521
Proceeds from mortgages 15,366,744 12,961,243
Repayment of mortgages (7,439,460) (4,820,119)
Proceeds from debentures due partner -- 5,501,535
Repayment of debentures due partner -- (5,535,375)
Payment for financing fees (211,678) (758,119)
Proceeds from partner's capital contribution 750,000 --
Distributions from unconsolidated entity -- 339,767
------------ ------------
Net cash provided by financing activities 8,465,606 35,188,453
------------ ------------
Increase in cash 488,865 18,252,844
Cash at beginning of period 137,062 144,833
------------ ------------
Cash at end of period $ 625,927 $ 18,397,677
============ ============
Supplemental disclosure of cash flow information
Cash paid for interest $ 1,060,860 $ 1,623,938
============ ============
SEE ACCOMPANYING NOTES.
3
KARRINGTON HEALTH, INC.
Notes to Consolidated Financial Statements
For the Unaudited Three and Nine Months Ended September 30, 1995 and 1996
1. Basis of Presentation
Karrington Health, Inc. was incorporated in April 1996 to become the
parent of Karrington Operating Company (Karrington Operating) upon
consummation of the reorganization transactions which occurred immediately
prior to the effective date of the Company's initial public offering in July
1996 (see Note 2). Hereinafter, all references to the "Company" include
Karrington Operating and Karrington Health, Inc. Karrington Operating is an
Ohio General Partnership.
The consolidated financial statements as of September 30, 1996 and for
the three and nine months ended September 30, 1995 and 1996 are unaudited;
however, in the opinion of management, all adjustments (consisting of normal
recurring adjustments except for those adjustments relating to the adoption of
AICPA SOP 93-7 "Reporting on Advertising Costs" in the first quarter of 1995)
necessary for a fair presentation of the consolidated financial statements for
these interim periods have been included. The results for the interim period
ended September 30, 1996 are not necessarily indicative of the results to be
obtained for the full fiscal year ending December 31, 1996. Certain
information and note disclosures which would duplicate the disclosures
normally included in annual financial statements have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission.
2. Initial Public Offering
The Company consummated an initial public offering of 2,350,000 of its
authorized and unissued common shares on July 18, 1996 at $13.00 per share. Of
the net proceeds from the offering ($27.8 million), a portion was used to
retire $5.7 million of subordinated debentures payable to a partner. The
balance of the net proceeds will be used to finance the development and
acquisition of additional assisted living residences, as well as for working
capital and general corporate purposes.
3. Long-Term Obligations
In May 1996, the Company entered into a $5,800,000 loan agreement with a
county industrial development authority for the permanent financing of an
assisted living residence in Pittsburgh, Pennsylvania. The loan bears interest
at a weekly rate determined by the remarketing agent (4.0% at September 30,
1996). Annual principal payments are due on July 1, 1998 through 2021 in
amounts ranging from $100,000 to $300,000.
In September 1996, the Company entered into two mortgage loan agreements
totaling $11.6 million for construction and permanent financing on residences
in Indianapolis, Indiana. Interest during construction floats at 2% above the
prime rate. On the completion of each residence, interest rates are set at a
rate equal to 3.25% over the yield at the time on the ten-year U.S. Treasury
Notes with the same maturity date. Principal and interest payments begin one
year after completion of the residences and are based on a 25-year
amortization schedule. Additional interest payments are based on increased
revenues of these residences during specific periods. The entire principal
balances are due in September, 2010.
4
At September 30, 1996, there was $1.4 million of restricted cash recorded
in other assets on the consolidated balance sheet. Approximately $850,000 of
this total is for project development expenditures. The remaining amount
represents collateral under various loan agreements.
4. Investments in Joint Ventures
During 1995, the Company entered into a joint development arrangement
with Catholic Health Initiatives (CHI). Pursuant to this arrangement, the
Company expects to develop, construct and operate up to six assisted living
residences by 1998. As of September 30, 1996, construction was in progress on
residences in Albuquerque, New Mexico, Colorado Springs, Colorado, Cincinnati,
Ohio and Dayton, Ohio. For the nine months ended September 30, 1996, the
Company made equity contributions of approximately $1.2 million for these
projects (recorded in other assets on the consolidated balance sheet).
Effective July 18, 1996, these ventures entered into financing agreements
totaling $23 million for construction and permanent financing.
5. Incentive Stock Plan
The Company has adopted the 1996 Incentive Stock Plan (the "Plan"). The
Plan provides for the grant of incentive and non-qualified stock options,
stock appreciation rights, restricted stock, performance shares, and
unrestricted common shares to key associates. The Plan also provides for the
purchase of common shares through payroll deductions by employees of the
Company who have satisfied certain eligibility requirements. The maximum
number of shares available for issuance under the Plan is 550,000. No shares
have been issued under the Plan.
The Company has granted non-qualified options to employees totaling
115,000 common shares. These options were granted as of the effective date of
the initial public offering with an exercise price equal to the initial public
offering price of $13.00 per share. The options have a ten-year term with 25%
of the options vesting on each of the second through the fifth anniversaries
of the date of grant. In addition, non-employee directors received, on the
first business day after the effective date of the initial public offering,
grants of non-qualified options to purchase an aggregate of 54,000 common
shares at an exercise price equal to the public offering price. These director
options will become exercisable beginning six months after the date of grant
with a ten-year term.
6. Tax Status
As a partnership, Karrington Operating recorded no provision for income
taxes. Partnership income and losses were allocated to the partners for
inclusion in their respective income tax returns. As a result of the
reorganization (described above), the Company will apply the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred income taxes are provided for differences in the basis for tax
proposes and for financial accounting purposes of recorded assets and
liabilities, principally, depreciable property and certain capitalized
development costs. A net deferred income tax provision and liability of
approximately $1,100,000 was recorded in the third quarter of 1996 primarily
as a result of the reorganization.
5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of results of operations and financial condition
contains forward-looking information that involves risks and uncertainties.
The Company's actual results could differ materially from those anticipated.
Factors that could cause or contribute to such differences include, but are
not limited to, development activity and construction process risks,
availability of financing for development, government regulations,
competition, and issues related to managing rapid growth and business
expansion.
Overview
At September 30, 1996, the Company had 7 assisted living residences open
(including one residence jointly- owned with CHI), 8 residences under
construction, and 17 residences in various stages of development. All 17 new
residences in development are under contract and construction starts are
expected for 10 of these new assisted living residences before the end of
1996. Subsequent to September 30, 1996, the Company opened two additional
jointly-owned residences, signed contracts for two additional sites and began
construction on one additional residence.
The Company derives its revenues from two primary sources: (i) resident
fees for the delivery of assisted living services and (ii) development and
management fee income for development and management services to residences in
which the Company does not own a controlling interest. Residence operating
revenues include fees from basic care, community fees, extended care,
Alzheimer's care and other services provided to residents. Community fees are
one-time fees payable by a resident upon admission, and extended care and
Alzheimer's care fees are paid by residents who require personal care in
excess of services provided under the basic care program. Development and
management fee income consists of development fees recognized over the
development and construction period and management fees which are a percentage
of the managed residence's total operating revenues.
The Company categorizes operating expenses as follows: (i) residence
operations, which includes labor, food, media advertising and marketing costs,
and other direct general operating expenses; (ii) general and administrative
expenses, consisting of corporate and support functions; and (iii)
depreciation and amortization. In anticipation of its growth, the Company made
significant investments in the number of staff at its headquarters in 1995 and
the first three quarters of 1996.
6
Results of Operations
The following table sets forth certain data from the respective
consolidated statements of operations as a percentage of total revenues:
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1995 1996 1995 1996
-------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Residence operations 61.7 68.6 64.7 66.6
General and administrative 27.2 27.1 23.0 28.6
Depreciation and amortization 13.7 19.0 13.8 15.7
-------- -------- -------- --------
Total expenses 102.6 114.7 101.5 110.9
-------- -------- -------- --------
Operating loss (2.6)% (14.7)% (1.5)% (10.9)%
======== ======== ======== ========
Resident days 16,934 22,573 49,632 61,892
Average stabilized occupancy percentage 97.9% 93.9% 96.4% 93.3%
End of period:
Number of residences 3 6 3 6
Number of units 160 312 160 312
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
Total revenue increased $772,000, or 45%, to $2.5 million in the third
quarter of 1996 from $1.7 million in the third quarter of 1995 primarily due
to the growth in resident revenues. Resident revenues increased $832,000, or
53%, primarily due to the opening of three residences in October 1995,
February 1996, and August 1996 (total of $784,000) and an increase of $95,000
resulting from higher average daily resident rates, offset by a slight
decrease of $47,000 due to occupancy levels. The average daily resident rate
increased 7% to $95 in the third quarter of 1996 compared to $89 for the same
period in 1995 primarily due to an increase in the average daily basic care
rate.
Development and management fees decreased $59,000, or 47% from $127,000
in the third quarter of 1995 to $67,000 in the third quarter of 1996 primarily
due to development fees associated with residences in which the Company does
not own a controlling interest.
Residence operations expenses increased $648,000, or 62%, to $1,696,000
in the third quarter of 1996 from $1,048,000 in the third quarter of 1995. As
a percentage of residence operations revenues, residence operations expenses
increased from 67% in the third quarter of 1995 to 71% in the same period of
1996 primarily due to the opening of three new residences reflecting
operations expenses which are higher as a percent of total revenues during the
first year of operations of a residence.
General and administrative expenses increased $208,000, or 45%, to
$669,000 in the third quarter of 1996 from $462,000 in the third quarter of
1995 primarily due to increased compensation, payroll taxes and related
benefits of $165,000 as a result of hiring additional management and staff at
the Company's headquarters to implement the Company's growth plans. The
Company expects the rate of increase in its general and administrative
expenses will decrease as new staff needs have been reduced by recent hires.
In addition, the Company expects its general and administrative expenses will
decrease as a percentage of its total operating revenues due to anticipated
economies of scale resulting from the Company's development program.
7
Depreciation and amortization increased $235,000, or 101%, to $468,000 in
the third quarter of 1996 from $233,000 in the third quarter of 1995 primarily
due to the opening of the three new residences discussed above.
Interest income resulted from the investment of $22.1 million in initial
public offering proceeds (after debt retirement) received in late July 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Total revenue increased $1,960,000, or 41%, to $6.7 million in the first
nine months of 1996 from $4.8 million in the first nine months of 1995
primarily due to the growth in resident revenues. Resident revenues increased
$1,759,000, or 39%, primarily due to the opening of three residences in
October 1995, February 1996, and August 1996 (total of $1,599,000) and an
increase of $279,000 resulting from higher average daily resident rates,
offset by a slight decrease of $119,000 due to occupancy levels. The average
daily resident rate increased 8% to $93 in the first nine months of 1996 from
$86 in the first nine months of 1995 primarily due to an increase in the
average daily basic care rate.
Development and management fees increased $201,000, or 69%, to $493,000
in the first nine months of 1996 from $293,000 in the first nine months of
1995 primarily due to development fees associated with an increased number of
residences in which the Company does not own a controlling interest.
Residence operations expenses increased $1,400,000, or 45%, to $4,488,000
in the first nine months of 1996 from $3,089,000 in the first nine months of
1995 primarily due to the opening of three new residences (total of
$1,450,000). As a percentage of residence operations revenues, residence
operations expenses increased from 69% in the first nine months of 1995 to 72%
in the first nine months of 1996 primarily due to new residences opened in
October 1995, February 1996, and August 1996 as operations expenses are higher
as a percent of revenues during the first year of operations.
General and administrative expenses increased $829,000, or 75%, to
$1,927,000 in the first nine months of 1996 from $1,099,000 in the first nine
months of 1995 primarily due to increased compensation, payroll taxes and
related benefits of $647,000 as a result of hiring additional management and
staff at the Company's headquarters to implement the Company's growth plans,
including the addition of a manager-in-training program in the Spring of 1995,
increased incentive compensation and compensation increases for existing staff
and management.
Depreciation and amortization increased $395,000, or 60%, to $1,055,000
in the first nine months of 1996 from $660,000 in the first nine months of
1995 primarily due to the opening of three new residences (total of $558,000).
This increase was offset by a decrease of $158,000 as a result of the adoption
of AICPA SOP 93-7 in the first quarter of 1995 and a change in estimate in
1995 relating to the amortization period of pre-opening costs which was
reduced from three years to one year.
Interest expense increased $319,000, or 44%, to $1,047,000 in the first
nine months of 1996 from $728,000 in the first nine months of 1995 primarily
due to the opening of three new residences.
Interest income resulted from the investment of $22.1 million in initial
public offering proceeds (after debt retirement) received in late July 1996.
8
Liquidity and Capital Resources
In July 1996, the Company completed its initial public offering of
2,350,000 common shares. The net proceeds to the Company were approximately
$27.8 million. Approximately $5.7 million of the net proceeds were used to pay
the outstanding principal and accrued interest of subordinated debentures
payable to a partner. The balance of the net proceeds will be used to finance
the development and acquisition of additional assisted living residences and
for working capital and general corporate purposes. The Company has no current
agreements or understandings with respect to any acquisition of residences.
Pending such uses, the Company intends to invest the net proceeds in
short-term, investment grade, interest-bearing securities or certificates of
deposit.
In May, 1996, the Company entered into non-binding financing commitment
letters with a large health care REIT to provide up to approximately $88
million in financing for one existing and approximately 12 new residences,
subject to various terms and conditions. The financings, which may be mortgage
or lease financings, are to be entered into on a residence-by-residence basis,
and are to be for terms of up to 14 years (with two additional five-year
extensions periods for the lease transactions). Interest during construction
is to float at 2% above the prime rate. On completion of each residence,
payments are to be set at an amount equal to 3.25% over the yield at that time
on the ten-year U.S. Treasury notes with the same maturity date. Additional
interest or lease payments are based on increased revenues of a financed
residence during specified periods.
In May 1996, the Company entered into a $5,800,000 loan agreement with a
county industrial development authority for the permanent financing of an
assisted living residence in Pittsburgh, Pennsylvania. The loan bears interest
at a weekly rate determined by the remarketing agent (3.65% as of August 28,
1996). Annual principal payments are due on July 1, 1998 through 2021 in
increasing amounts of $100,000 to $300,000.
In September 1996, the Company entered into two mortgage loan agreements
totaling $11.6 million for construction and permanent financing on residences
in Indianapolis, Indiana. Interest during construction floats at 2% above the
prime rate. On the completion of each residence, interest rates are set at a
rate equal to 3.25% over the yield at the time on the ten-year U.S. Treasury
Notes with the same maturity date. Principal and interest payments begin one
year after completion of the residences and are based on a 25-year
amortization schedule. Additional interest payments are based on increased
revenues of these residences during specific periods. The entire principal
balances are due in September, 2010.
Effective July 18, 1996, four newly formed unconsolidated entities in
which the Company owns interests ranging from 20% to 35%, entered into
financing agreements totaling $23 million for construction and permanent
financing for five assisted living residences.
For the nine months ended September 30, 1995 and 1996, cash flows used by
operating activities were $190,000 and $671,000, respectively. The Company
used $7,787,000 and $16,265,000, respectively, to acquire property and
equipment and other assets, and received $8,466,000 and $35,188,000,
respectively, in cash from financing activities. At September 30, 1996, the
Company had restricted cash of $1.4 million recorded in other assets on the
consolidated balance sheet.
The Company expects that the net proceeds from its public offering,
together with existing financing commitments and additional financing the
Company anticipates will be available, will be sufficient to fund its
development and acquisition programs for at least the next 18 months.
Additional financing will be required to complete the Company's growth plans
and to refinance certain existing indebtedness.
9
Part II. Other Information
Items 1-5 Are Not Applicable
Item 6. Exhibits
Exhibit Number Description
- -------------- -----------
27.1 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
10
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated November 8, 1996
KARRINGTON HEALTH, INC.
(Registrant)
_________________________________
Richard R. Slager
Chief Executive Officer
_________________________________
Alan B. Satterwhite
Chief Financial Officer
11
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
27.1 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only.
12