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 March 31, 1997
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 May
9, 1997 was 6,837,363.
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.................................. 1
Consolidated Statements of Operations
Three Months Ended March 31, 1997 and 1996................... 2
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996................... 3
Notes to Consolidated Financial Statements.................. 4-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 7-10
Part II. Other Information
Item 6. Exhibits..................................................... 11
Signatures................................................... 12
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 SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
March 31, December 31,
1997 1996
______________________________
(Unaudited)
Current assets:
Cash and cash equivalents $ 7,990,483 $ 12,283,185
Accounts receivable 158,253 105,315
Amounts due from affiliates 769,650 678,893
Prepaid expenses 139,590 170,254
------------ ------------
Total current assets 9,057,976 13,237,647
Property and equipment -- net 60,042,305 52,011,748
Other assets -- net 3,958,960 4,300,546
------------ ------------
Total assets $ 73,059,241 $ 69,549,941
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 873,031 $ 788,981
Construction payables 2,648,826 3,181,560
Notes payable - bank 2,600,000 --
Payroll and related taxes 448,269 735,337
Unearned resident fees 529,422 325,111
Interest payable 54,421 158,103
Current portion of long-term obligations 374,668 242,211
------------ ------------
Total current liabilities 7,528,637 5,431,303
Long-term obligations 34,442,984 32,758,692
Deferred income taxes 574,000 683,000
Shareholders' equity:
Common shares 31,984,712 31,984,712
Accumulated deficit (1,471,092) (1,307,766)
------------ ------------
Total shareholders' equity 30,513,620 30,676,946
------------ ------------
Total liabilities and shareholders' equity $ 73,059,241 $ 69,549,941
============ ============
SEE ACCOMPANYING NOTES.
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KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 1997 and 1996
(Unaudited)
Three Months Ended
March 31,
1997 1996
-------- --------
Revenues:
Residence operations $ 2,939,488 $ 1,822,164
Development and management fees 194,152 122,006
----------- -----------
Total revenues 3,133,640 1,944,170
Expenses:
Residence operations 2,075,198 1,311,952
General and administrative 890,182 574,894
Rent expense 47,592 15,575
Depreciation and amortization 375,113 294,158
----------- -----------
Total expenses 3,388,085 2,196,579
----------- -----------
Operating loss (254,445) (252,409)
Interest expense (148,990) (314,784)
Interest income 155,060 --
Equity in net earnings
(loss) of unconsolidated entities (23,951) 16,499
----------- -----------
Loss before income taxes (272,326) (550,694)
Deferred income taxes 109,000 --
----------- -----------
Net loss $ (163,326) $ (550,694)
=========== ===========
Per share information:
Net loss per share $ (.02) $ (.13)
Weighted average common shares outstanding 6,700,000 4,350,000
SEE ACCOMPANYING NOTES.
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KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996
(Unaudited)
Three Months Ended
March 31,
1997 1996
-------- --------
Operating activities
Net loss $ (163,326) $ (550,694)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 375,113 294,158
Deferred income taxes (109,000) --
Straight-line rent expense 4,343 3,534
Equity in net (earnings) loss of unconsolidated entities 23,951 (16,499)
Change in operating assets and liabilities:
Accounts receivable (143,695) 15,851
Prepaid expenses 30,664 (15,716)
Accounts payable and accrued liabilities 84,050 246,764
Other liabilities (186,439) (207,213)
------------ -----------
Net cash used in operating activities (84,339) (229,815)
Investing activities
Purchases of property and equipment (8,831,976) (3,291,406)
Decrease in restricted cash balances 670,289 --
Distributions from unconsolidated entity -- 100,000
Payments of pre-opening costs (255,514) (130,469)
Payments for organization costs and other (182,650) (45,282)
------------ -----------
Net cash used in investing activities (8,599,851) (3,367,157)
Financing activities
Proceeds from note payable - bank 2,600,000 --
Proceeds from mortgages 1,889,231 2,512,691
Repayment of mortgages (76,825) (43,976)
Proceeds from debentures due partner -- 1,029,633
Payment for financing fees (20,918) (2,956)
------------ -----------
Net cash provided by financing activities 4,391,488 3,495,392
------------ -----------
Decrease in cash and cash equivalents (4,292,702) (101,580)
Cash and cash equivalents at beginning of period 12,283,185 144,833
------------ -----------
Cash and cash equivalents at end of period $ 7,990,483 $ 43,253
============ ===========
Supplemental disclosure of cash flow information
Cash paid for interest $ 941,077 $ 467,369
============ ===========
SEE ACCOMPANYING NOTES.
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KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Unaudited Three Months Ended March 31, 1997 and 1996
1. Basis of Presentation
The consolidated financial statements as of March 31, 1997 and for the
three months ended March 31, 1997 and 1996 are unaudited; however, in the
opinion of management, all adjustments (consisting of only normal recurring
items) necessary for a fair presentation of the consolidated financial
statements for these interim periods have been included. The results for the
interim period ended March 31, 1997 are not necessarily indicative of the
results to be obtained for the full fiscal year ending December 31, 1997.
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. Per Share Information
The net loss per share for the three months ended March 31, 1997 is
computed based on the weighted average number of shares outstanding during the
period. For the three months ended March 31, 1996, a proforma net loss per share
calculation is presented. The proforma net loss per share is computed based on
the weighted average number of shares outstanding during the period based on
4,350,000 common shares outstanding following the July 1996 reorganization and
the 2,350,000 common shares issued as a result of the Company's initial public
offering in July 1996.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share,"
which eliminates the presentation of primary earnings per share (EPS) and
requires the presentation of basic EPS (the principal difference being that
common stock equivalents are not considered in the computation of basic EPS). It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures. The Company
is required to adopt Statement No. 128 for its year ending December 31, 1997,
but is not permitted to apply its provisions to 1997 interim financial
statements. Basic EPS calculated under the provisions of Statement No. 128 would
not differ from the net loss per share as disclosed in the accompanying
statements of operations.
3. Revolving Credit Agreements
In February 1997, the Company entered into a $3,000,000 revolving credit
agreement expiring on March 31, 1998. Interest is payable monthly and accrues at
the bank's prime rate or LIBOR plus 2% if certain financial ratios are met. The
company is required to pay a commitment fee of .25% on the unused portion of the
total credit allowed under the agreement and is required to maintain minimum net
worth and current ratio amounts. At March 31, 1997, $2,600,000 was outstanding
under this agreement.
In March 1997, the Company entered into a $5,000,000 line of credit
expiring February 25, 1998. Interest is payable monthly and, at the Company's
option, accrues at the bank's prime rate or LIBOR rate plus 2%. The Company is
required to maintain a minimum current ratio amount and may borrow up to the
lesser of $5,000,000 or the Company's total aggregate balance of cash and cash
equivalents at the time of borrowing. No amounts were outstanding under this
line of credit as of March 31, 1997 (see Note 7).
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4. Long-Term Obligations
The Company entered into non-binding financing commitment letters with
Meditrust Mortgage Investments, Inc. ("MMI"), an affiliate of Meditrust (a large
health care REIT). Under the letters, MMI is to provide up to approximately $100
million in financing for one existing and approximately 13 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
extension 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. Additional interest or lease payments are
contingent on increased revenues of a financed residence during specified
periods. As of March 31, 1997, the Company has completed mortgage agreements for
one existing and three new residences totaling $22 million.
5. Investments in Unconsolidated Entities
The Company and Catholic Health Initiatives ("CHI"), have entered into five
joint venture agreements to develop, own and operate six assisted living
residences in Ohio, New Mexico and Colorado. Each project is owned jointly by
the Company and CHI, with the Company typically owning approximately 20% of the
equity of the project. As of March 31, 1997, the Company has guaranteed $1
million of joint venture debt financing.
As of March 31, 1997, three residences were open (one stabilized residence
and two residences in the fill-up phase), three residences were under
construction, and eight other sites were under development. One residence was
open at March 31, 1996. Summarized income statement information of these joint
ventures is presented below.
Three months ended
March 31,
Statements of Operations 1997 1996
-------- --------
Residence revenues $ 1,069,255 $503,730
Operating expenses 877,648 330,709
Depreciation and amortization expense 194,542 42,555
Interest expense 189,795 97,470
----------- --------
Total expenses 1,261,985 470,734
----------- --------
Net income (loss) $ (192,730) $ 32,996
=========== ========
6. Incentive Stock Plan
The Company has adopted the 1996 Incentive Stock Plan (the "Plan") that
provides for the grant of incentive and non-qualified stock options, stock
appreciation rights, restricted stock, performance shares and unrestricted
common shares. 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.
In June 1996, the Company granted non-qualified options to certain
officers, key employees and non-employee directors to acquire 169,000 common
shares. These options became effective July 19, 1996 with an exercise price
equal to the initial public offering price of $13.00 per share. In March 1997,
the Company granted non-qualified options to certain officers and a key employee
to acquire 24,500 common shares at an exercise price of $11.00. The 139,500
employee 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. Non-employee
-5-
directors received grants of non-qualified options to purchase an aggregate of
54,000 common shares which are exercisable beginning six months after the
effective date of grant with a ten-year term. In addition, each continuing
non-employee director will receive on the day after each annual meeting of
shareholders, a grant of a non-qualified stock option to purchase 2,000 common
shares of the Company at an exercise price equal to the fair market value of the
shares on the date of grant. As of March 31, 1997, options for 54,000 common
shares were exercisable. No options have been exercised.
7. Subsequent Events
On April 30, 1997, the Company completed the acquisition of Kensington
Management Group, Inc. (Kensington) of Golden Valley, Minnesota. Kensington
operates innovative Alzheimer's care communities under the name Kensington
Cottages which provide Alzheimer's care programs using medical directors with
geriatric and dementia specialties.
Kensington's annualized revenues approximate $10 million, and it operates
or has under construction 12 residences with 406 licensed beds in three states.
Development is in progress for 112 additional beds on its Rochester, Minnesota
campus, and for the establishment of new campus communities with approximately
100 beds each in Jacksonville, Florida, and Phoenix, Arizona.
The aggregate purchase price approximated $28 million, including cash,
approximately 137,000 of the Company's common shares, and approximately $23
million in new and assumed bank debt financing. Approximately $3 million of the
cash paid was borrowed under the Company's $5 million line of credit agreement.
The transaction will be accounted for using the purchase method of accounting.
Accordingly, the Company will include the operating results of Kensington in its
consolidated statement of operations subsequent to April 30, 1997.
-6-
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 March 31, 1997, the Company had 10 assisted living residences open
(including three residences jointly-owned with CHI), 16 residences under
construction, 15 sites under contract and 15 additional sites in various stages
of development. Subsequent to March 31, 1997, the Company signed contracts for 6
additional sites and began construction on 2 additional residences. The
Company's acquisition of Kensington Management Group, Inc. (Kensington) was
completed on April 30, 1997. At the time of acquisition, Kensington had 12
residences open or under construction with 406 licensed beds in three states.
Kensington operates Alzheimer's care communities under the name Kensington
Cottages.
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; (iii) rent expense; and
(iv) depreciation and amortization. In anticipation of its growth, the Company
made significant investments in the number of staff at its headquarters during
1996.
-7-
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
March 31,
1997 1996
-------- --------
Total revenues 100.0% 100.0%
Expenses:
Residence operations 66.2 67.5
General and administrative 28.4 29.6
Rent expense 1.5 .8
Depreciation and amortization 12.0 15.1
-------- --------
Total expenses 108.1 113.0
-------- --------
Operating loss (8.1)% (13.0)%
======== ========
Resident days 27,485 19,032
Average stabilized occupancy percentage 95.4% 93.9%
End of period:
Company owned:
Number of residences 7 5
Number of units 373 245
Total system, including joint ventures:
Number of residences 10 6
Number of units 515 298
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Total revenue increased $1.2 million, or 61.2%, to $3.1 million in the
first quarter of 1997 from $1.9 million in the first quarter of 1996 primarily
due to the growth in resident revenues. Resident revenues increased $1.1
million, or 61.3%, primarily due to the opening of new residences (total of
$730,000), an increase of $141,000 resulting from higher average daily resident
rates and the increased occupancy of a residence which was in the fill-up phase
in 1996. The average daily resident rate increased 8.3% to $97.36 in the first
quarter of 1997 compared to $89.92 for the same period in 1996 primarily due to
an increase in the average daily basic care rate. Revenues from residences open
throughout both periods increased 21.9% while revenues of stabilized residences
open throughout both periods increased 12.8%.
Development and management fees increased $72,000, or 59.1% from $122,000
in the first quarter of 1996 to $194,000 in the first quarter of 1997 primarily
due to development fees associated with residences in which the Company does not
own a controlling interest.
Residence operations expenses increased $763,000, or 58.2%, to $2.1 million
in the first quarter of 1997 from $1.3 million in the first quarter of 1996. As
a percentage of total revenues, residence operations expenses decreased from
67.5% in the first quarter of 1996 to 66.2% in the same period of 1997 primarily
due to the 1997 residences in the fill-up phase were closer to stabilization
and, to a lesser extent, an increase in operating margins of stabilized
residences.
General and administrative expenses increased $315,000, or 54.8%, to
$890,000 in the first quarter of 1997 from $575,000 in the first quarter of 1996
primarily due to increased compensation, payroll taxes and related benefits of
$200,000 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
-8-
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.
Depreciation and amortization increased $81,000, or 27.5%, to $375,000 in
the first quarter of 1997 from $294,000 in the first quarter of 1996 primarily
due to the opening of the new residences (total of $135,000) offset by lower
pre-opening cost amortization on stabilized residences.
Interest expense decreased $166,000, or 52.7%, from $315,000 in the first
quarter of 1996 to $149,000 in the first quarter of 1997 primarily due to
capitalization of interest related to the Company's increased level of
construction activity and the payoff of related party debt in July 1996.
Interest income resulted primarily from the investment of the Company's net
proceeds from its initial public offering in July 1996.
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 are being 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 has invested the net proceeds in short-term,
investment grade, interest-bearing securities or certificates of deposit.
The Company has entered into non-binding financing commitment letters with
Meditrust Mortgage Investments, Inc. ("MMI"), an affiliate of Meditrust (a large
health care REIT). Under the letters, MMI is to provide up to approximately $100
million in financing for one existing and approximately 13 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. Additional interest or lease payments are
contingent on increased revenues of a financed residence during specified
periods. As of March 31, 1997, the Company has completed mortgage agreements for
one existing and three new residences totaling $22 million.
For the three months ended March 31, 1997 and 1996, cash flows used by
operating activities were $84,000 and $230,000, respectively. The Company used
$9.3 million and $3.4 million, respectively, to fund residence development, and
received $4.4 million and $3.5 million, respectively, in cash from financing
activities. At March 31, 1997, the Company had restricted cash of $715,000
recorded in other assets on the consolidated balance sheet.
In 1997 through 1999, the Company plans to open or acquire approximately 71
new Company-owned residences and 9 jointly-owned residences bringing the total
number of residences to 89. To date, the Company has 29 of the 71 residences
open or under construction including the recently completed acquisition of
Kensington Management Group, Inc. which has 10 residences open and 2 residences
under construction. The Company has 21 additional sites under contract. The
Company has been, and will continue to be, dependent on third-party financing
for its development program.
The Company estimates that newly developed residences will generally range
in cost from $6.0 to $7.5 million, with the development cycle taking up to 24
months, from site identification to residence opening. There can be no assurance
-9-
that financing for the Company's development program will be available to the
Company on acceptable terms, if at all. Moreover, to the extent the Company
acquires properties that do not generate positive cash flow, the Company may be
required to seek additional capital for working capital and liquidity purposes.
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 programs for the next 9 months. Additional financing will be
required to complete the Company's growth plans and to refinance certain
existing indebtedness.
BUSINESS ACQUISITION
The Company's acquisition of Kensington Management Group, Inc. (Kensington)
was completed on April 30, 1997. At the time of acquisition, Kensington had open
or under construction 12 residences with 406 licensed beds in three states and
annualized revenues of approximately $10 million. Kensington operates
Alzheimer's care communities under the name Kensington Cottages. The purchase
price was approximately $28 million. The Company issued approximately 137,000
common shares, assumed debt of approximately $1.7 million, incurred new debt of
approximately $21.7 million and made cash payments of approximately $3.1 million
(approximately $3 million of which was borrowed under its $5 million line of
credit agreement). The Company has entered into a financing agreement with a
lender for $27.6 million of new debt, including an amount for new residences
under development. The Company will file a Form 8-K containing the audited and
proforma financial statements of Kensington as required by Regulation S-X.
-10-
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.
-11-
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 May 13, 1997
KARRINGTON HEALTH, INC.
(Registrant)
/s/ Richard R. Slager
______________________________________
Richard R. Slager
Chief Executive Officer
/s/ Alan B. Satterwhite
______________________________________
Alan B. Satterwhite
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit Number Description
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only.
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