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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 June 30, 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
August 12, 1997 was 6,837,363.
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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 Six Months Ended June 30, 1997 and 1996 . . . . . . . . . .2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 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 . . . . . . . . . . 7-11
PART II. OTHER INFORMATION
Item 2. Change in Securities. . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 12
Signature Page. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Note: Items 1 and 3 through 6 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
JUNE 30, DECEMBER 31,
1997 1996
------------ -----------
(UNAUDITED)
Current assets:
Cash and cash equivalents. . . . . . . . . . . $ 6,146,680 $12,283,185
Accounts receivable. . . . . . . . . . . . . . 432,927 105,315
Amounts due from affiliates. . . . . . . . . . 1,163,879 678,893
Prepaid expenses . . . . . . . . . . . . . . . 194,294 170,254
------------ -----------
Total current assets . . . . . . . . . . . . 7,937,780 13,237,647
Property and equipment -- net. . . . . . . . . . 89,220,498 52,011,748
Other assets -- net. . . . . . . . . . . . . . . 11,997,603 4,300,546
----------- -----------
Total assets . . . . . . . . . . . . . . . . $109,155,881 $69,549,941
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . $ 1,701,332 $ 788,981
Construction payables. . . . . . . . . . . . . 3,520,322 3,181,560
Notes payable - banks and affiliate. . . . . . 8,915,794 ---
Payroll and related taxes. . . . . . . . . . . 1,287,639 735,337
Unearned resident fees . . . . . . . . . . . . 834,265 325,111
Interest payable . . . . . . . . . . . . . . . 233,802 158,103
Current portion of long-term obligations . . . 250,736 242,211
------------ -----------
Total current liabilities. . . . . . . . . . 16,743,890 5,431,303
Long-term obligations. . . . . . . . . . . . . . 60,378,145 32,758,692
Deferred income taxes. . . . . . . . . . . . . . 584,000 683,000
Shareholders' equity:
Common shares. . . . . . . . . . . . . . . . . 33,484,712 31,984,712
Accumulated deficit. . . . . . . . . . . . . . (2,034,866) (1,307,766)
------------ -----------
Total shareholders' equity . . . . . . . . . 31,449,846 30,676,946
------------ -----------
Total liabilities and shareholders' equity . . . $109,155,881 $69,549,941
------------ -----------
------------ -----------
SEE ACCOMPANYING NOTES.
1
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
Revenues:
Residence operations . . . . . . . . . . . . . . $4,230,302 $2,016,630 $7,169,790 $ 3,838,794
Development and management fees. . . . . . . . . 341,966 303,981 536,118 425,987
---------- ---------- ---------- -----------
Total revenues. . . . . . . . . . . . . . . 4,572,268 2,320,611 7,705,908 4,264,781
Expenses:
Residence operations . . . . . . . . . . . . . . 3,098,597 1,448,140 5,173,795 2,760,092
General and administrative . . . . . . . . . . . 924,701 683,203 1,814,883 1,258,097
Rent expense . . . . . . . . . . . . . . . . . . 51,939 16,385 99,531 31,960
Depreciation and amortization. . . . . . . . . . 606,367 292,711 981,480 586,869
---------- ---------- ---------- -----------
Total expenses. . . . . . . . . . . . . . . 4,681,604 2,440,439 8,069,689 4,637,018
---------- ---------- ---------- -----------
Operating loss . . . . . . . . . . . . . . . . . . . (109,336) (119,828) (363,781) (372,237)
Interest expense . . . . . . . . . . . . . . . . . . (588,504) (519,150) (737,494) (833,934)
Interest income. . . . . . . . . . . . . . . . . . . 118,289 -- 273,349 --
Equity in net earnings
(loss) of unconsolidated entities. . . . . . . . . (19,223) 124 (43,174) 16,623
---------- ---------- ---------- -----------
Loss before income taxes. . . . . . . . . . . . . . (598,774) (638,854) (871,100) (1,189,548)
Deferred income taxes . . . . . . . . . . . . . . . 35,000 -- 144,000 --
---------- ---------- ---------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (563,774) $ (638,854) $ (727,100) $(1,189,548)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Proforma information:
Net loss per share. . . . . . . . . . . . . . . . . $ (.08) $ (.15) $ (.11) $ (.27)
Weighted average common shares outstanding. . . . . 6,792,000 4,350,000 6,746,000 4,350,000
SEE ACCOMPANYING NOTES.
2
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
------------ -----------
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (727,100) $(1,189,548)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . 981,480 586,869
Deferred income taxes. . . . . . . . . . . . . . (144,000) --
Straight-line rent expense . . . . . . . . . . . 5,327 7,877
Equity in net (earnings) loss of
unconsolidated entities . . . . . . . . . . . . 43,174 (16,623)
Change in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . (812,598) (40,871)
Prepaid expenses . . . . . . . . . . . . . . . (8,015) (49,118)
Accounts payable and accrued liabilities . . . 912,351 (126,230)
Other liabilities. . . . . . . . . . . . . . . 575,662 (157,678)
------------ -----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . 826,281 (985,322)
INVESTING ACTIVITIES
Purchases of property and equipment. . . . . . . . . (20,874,145) (7,990,652)
Decrease (increase) in restricted cash balances. . . 680,984 (2,101,677)
Acquisition of Kensington - net of cash acquired . . (2,785,468) --
Equity contribution to unconsolidated entities . . . -- (1,062,773)
Payments of pre-opening costs. . . . . . . . . . . . (548,678) (257,001)
Payments for organization costs and other. . . . . . (92,580) (48,492)
------------ -----------
Net cash used in investing activities. . . . . . (23,619,887) (11,460,595)
FINANCING ACTIVITIES
Proceeds from notes payable. . . . . . . . . . . . . 8,915,794 --
Proceeds from mortgages. . . . . . . . . . . . . . . 7,712,917 8,236,368
Repayment of mortgages . . . . . . . . . . . . . . . (141,856) (576,072)
Proceeds from debentures due partner . . . . . . . . --- 5,501,535
Payment for financing fees . . . . . . . . . . . . . (54,754) (558,920)
Distributions from unconsolidated entity . . . . . . 225,000 339,766
------------ -----------
Net cash provided by financing activities. . . . 16,657,101 12,942,677
------------ -----------
Increase (decrease) in cash and cash equivalents . . (6,136,505) 496,760
Cash and cash equivalents at beginning of period . . 12,283,185 144,833
------------ -----------
Cash and cash equivalents at end of period . . . . . $ 6,146,680 $ 641,593
------------ -----------
------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest . . . . . . . . . . . . . . . $ 1,776,818 $ 937,804
------------ -----------
------------ -----------
SEE ACCOMPANYING NOTES.
3
KARRINGTON HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE UNAUDITED THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1. BASIS OF PRESENTATION
The consolidated financial statements as of June 30, 1997 and for the
three and six months ended June 30, 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 June 30, 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 and six months ended June 30, 1997
is computed based on the weighted average number of shares outstanding during
each period. For the three and six months ended June 30, 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.
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. KENSINGTON ACQUISITION
On April 30, 1997, the Company completed the acquisition, except for one
entity which was completed on July 1, 1997, of Kensington Management Group,
Inc. and affiliates (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.
As of August 11, 1997, Kensington had 11 residences open and one
residence under construction for a total of 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,
the issuance of 137,363 of the Company's common shares, and approximately
$23 million in new and assumed bank debt financing. The transaction was
accounted for using the purchase method of accounting. Accordingly, the
Company began including the operating results of Kensington in its
consolidated statement of operations subsequent to April 30, 1997 for seven
of the entities and after July 1, 1997 for the remaining entity.
4
As a result of the Kensington acquisition, certain accounts in the June
30, 1997 consolidated balance sheet increased significantly. These increases
included approximately $17 million in property and equipment, other asset
increases of approximately $8 million related to costs in excess of net
assets acquired and deferring financing costs, increases in long-term
obligations of approximately $20 million and the issuance of $1.5 million of
common shares of the Company. On July 1, 1997, the Company completed the
acquisition of the remaining entity for $1.3 million in cash and the
assumption of $1.7 million in long-term debt.
The following unaudited proforma consolidated results of operations for
the six months ended June 30, 1997 and 1996 reflect the proforma effects of
the Kensington acquisition as if such transaction had occurred at the
beginning of the periods presented below. The unaudited proforma information
does not purport to be indicative of the Company's results of operations that
actually would have occurred had the acquisition of Kensington taken place at
the beginning of the periods presented below, or that may be expected to
occur in the future.
Six Months Ended
June 30,
-------------------------
1997 1996
----------- ----------
Revenues $10,400,000 $7,380,000
----------- ----------
----------- ----------
Net loss $(1,500,000) $(1,900,000)
----------- ----------
----------- ----------
Net loss per share $ (.22) $ (.42)
----------- ----------
----------- ----------
4. INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company and Catholic Health Initiatives ("CHI"), have entered into
joint venture agreements to develop, own and operate 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 each venture. As of June 30, 1997, the Company has
guaranteed $1 million of joint venture debt financing.
As of June 30, 1997, four residences were open (one stabilized residence
and three residences in the fill-up phase), two residences were under
construction, and five other sites were under development. One residence was
open at June 30, 1996. Summarized income statement information of these
joint ventures is presented below.
Three months ended Six months ended
June 30, June 30,
----------------------- ----------------------
1997 1996 1997 1996
---------- -------- ---------- --------
Statements of Operations
Residence revenues . . . . . . . . $1,112,895 $490,275 $2,182,150 $994,005
Operating expenses . . . . . . . . 912,633 351,404 1,790,281 682,113
Depreciation and amortization
expense. . . . . . . . . . . . . 195,592 46,077 390,134 88,632
Interest expense . . . . . . . . . 171,305 92,544 361,100 190,014
---------- -------- ---------- --------
Total expenses . . . . . . . . 1,279,530 490,025 2,541,515 960,759
---------- -------- ---------- --------
Net income (loss). . . . . . . . . $ (166,635) $ 250 $ (359,365) $ 33,246
---------- -------- ---------- --------
---------- -------- ---------- --------
5
5. NOTES PAYABLE
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 June
30, 1997, $3,000,000 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, as
defined, 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. At
June 30, 1997, $4,916,000 was outstanding under this agreement.
The note payable-affiliate outstanding as of June 30, 1997 represents an
advance payable to JMAC, Inc., the Company's largest shareholder. Subsequent
to June 30, 1997, the entire amount outstanding was repaid.
6. 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 accrues 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 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 June 30, 1997, the
Company has completed mortgage agreements for one existing and three new
residences and one lease transaction totaling $29 million. Subsequent to June
30, 1997, the Company completed two lease transactions totaling $13 million.
On April 30, 1997, the Company entered into a $27.6 million promissory
note in conjunction with its acquisition of Kensington (see Note 3) and the
build out of six Kensington cottages on the Rochester, Minnesota campus.
Interest accrues at 10% and is payable monthly. Principal and interest
installments are payable monthly (based on a 25-year amortization period)
beginning in June 1999 through April 2007 at which time the entire
outstanding principal balance becomes due. The amount outstanding under the
agreement was approximately $19.9 million as of June 30, 1997. The remaining
funds will be disbursed in two phases at such time that the six cottages
achieve certain debt service coverage ratios.
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 the challenge to manage rapid growth and business expansion.
OVERVIEW
The Company derives its revenues from two primary sources: (i) resident
fees for the delivery of assisted living services and (ii) development fees
and management services income for development and management of residences
in which the Company does not own a controlling interest. Resident fees
include revenue derived from basic care, community fees, extended care,
Alzheimer's care and other sources. Community fees are one-time fees
generally 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 fees
and management services income consist 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 following table sets forth certain information regarding Karrington
residences as of August 11, 1997:
Company Jointly Total
Residences Owned System
---------- ------- ------
Open 18 4 22
Under Construction 22 2 24
In Development:
Under Contract & Zoned 2 1 3
Under Contract & In Zoning 17 3 20
In Negotiation 17 1 18
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- -------
Total revenues. . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Expenses:
Residence operations . . . . . . . . . . . . 67.8 62.4 67.1 64.7
General and administrative . . . . . . . . . 20.2 29.5 23.6 29.5
Rent expense . . . . . . . . . . . . . . . . 1.1 .7 1.3 .7
Depreciation and amortization. . . . . . . . 13.3 12.6 12.7 13.8
------- ------- ------- -------
Total expenses. . . . . . . . . . . . . . . . . 102.4 105.2 104.7 108.7
------- ------- ------- -------
Operating income (loss) . . . . . . . . . . . . (2.4)% (5.2)% (4.7)% (8.7)%
------- ------- ------- -------
------- ------- ------- -------
Average stabilized occupancy percentage . . . . 93% 92% 94% 93%
End of period:
Company owned:
Number of residences . . . . . . . . . . . . 15 5 15 5
Number of units. . . . . . . . . . . . . . . 593 245 593 245
Total system, including joint ventures:
Number of residences . . . . . . . . . . . . 19 6 19 6
Number of units. . . . . . . . . . . . . . . 802 298 802 298
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Total revenue increased $2.3 million, or 97%, to $4.6 million in the
second quarter of 1997 from $2.3 million in the second quarter of 1996
primarily due to the growth in resident revenues. Resident revenues
increased $2.2 million, or 110%, primarily due to the acquisition of
Kensington Management Group, Inc. and affiliates ("Kensington") on April 30,
1997 ($1.1 million), the opening of new residences (total of $.7 million),
the increased occupancy of residences in the fill-up phase in 1996 ($.3
million) and an increase resulting from higher average daily resident rates.
The average daily resident rate, excluding Kensington, increased 6% to $98.25
in the second quarter of 1997 compared to $92.68 for the same period in 1996.
Development and project management fees increased $38,000, or 12%, to
$342,000 in the second quarter of 1997 from $304,000 in the second quarter of
1996 primarily due to consulting fees associated with third party assisted
living providers.
Residence operating expenses increased $1.7 million, or 114%, to $3.1
million in the second quarter of 1997 from $1.4 million in the second quarter
of 1996. As a percentage of residence operating revenues, residence
operating expenses increased from 72% in the second quarter of 1996 to 73% in
the second quarter of 1997.
General and administrative expenses increased $241,000, or 35%, to
$925,000 in the second quarter of 1997 from $683,000 in the second quarter of
1996 primarily due to increased compensation, payroll taxes and
8
related benefits as a result of hiring additional management and staff at the
Company's headquarters and the acquisition of Kensington. The Company
expects the rate of increase in its general and administrative expenses will
continue to decrease as new staff needs have been reduced by recent hires.
In addition, the Company expects general and administrative expenses will
continue to decrease as a percentage of total operating revenues due to
anticipated economies of scale resulting from the Company's development
program.
Depreciation and amortization increased $314,000, or 107%, to $606,000 in
the second quarter of 1997 from $293,000 in the second quarter of 1996
primarily due to the opening of two new residences (total of $241,000) and
the acquisition of Kensington.
Interest expense increased $69,000, or 13%, to $589,000 in the second
quarter of 1997 from $519,000 in the second quarter of 1996 primarily due to
the opening of two new residences (total of $222,000) and the acquisition of
Kensington ($283,000), offset by increased capitalization of interest related
to the Company's increased level of construction activity.
Interest income resulted primarily from the investment of the Company's
net proceeds from its initial public offering in July 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Total revenue increased $3.4 million, or 81%, to $7.7 million in the
first six months of 1997 from $4.3 million in the first six months of 1996
primarily due to the growth in resident revenues. Resident revenues
increased $3.3 million, or 87%, primarily due to the acquisition of
Kensington ($1.1 million), the opening of new residences (total of $1.1
million), the increased occupancy of residences in the fill-up phase in 1996
($.8 million) and an increase resulting from higher average daily resident
rates. The average daily resident rate, excluding Kensington, increased 7%
to $97.82 in the first six months of 1997 from $91.35 in the first six months
of 1996.
Development and project management fees increased $110,000, or 26%, to
$536,000 in the first six months of 1997 from $426,000 in the first six
months of 1996 primarily due to consulting fees associated with third party
assisted living providers.
Residence operating expenses increased $2.4 million, or 87%, to $5.2
million in the first six months of 1997 from $2.8 million in the first six
months of 1996. Residence operating expenses were 72% of residence
operating revenues in the first six months of 1997 and 1996.
General and administrative expenses increased $557,000, or 44%, to $1.8
million in the first half of 1997 from $1.3 million in the first half of 1996
primarily due to increased compensation, payroll taxes and related benefits
as a result of hiring additional management and staff at the Company's
headquarters and the acquisition of Kensington.
Depreciation and amortization increased $395,000, or 67%, to $981,000 in
the first six months of 1997 from $587,000 in the first six months of 1996
primarily due to the opening of new residences (total of $366,000) and the
acquisition of Kensington, offset by lower amortization of preopening costs.
Interest expense decreased $96,000, or 12%, to $737,000 in the first six
months of 1997 from $834,000 in the first six months of 1996 primarily due to
capitalization of interest related to the Company's increased level of
construction activity ($794,000), offset by the opening of two new residences
(total of $309,000) and the acquisition of Kensington.
9
Interest income resulted primarily from the investment of the Company's
net proceeds from its initial public offering in July 1996.
The $144,000 deferred tax benefit recorded for the six months ended June
30, 1997 represents an effective tax rate of 17% resulting from limitations
associated with the recognition of operating loss carryforwards. Deferred
tax assets, including operating loss carryforwards, can be realized by offset
to existing taxable temporary differences that will reverse in the
carryforward period.
LIQUIDITY AND CAPITAL RESOURCES
In July 1996, the Company completed its initial public offering for the
sale 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 extension periods for the lease transactions).
Interest during construction accrues 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 June 30, 1997, the
Company has completed mortgage agreements for one existing and three new
residences and one lease transaction totaling $29 million. Subsequent to
June 30, 1997, the Company completed two lease transactions totaling $13
million.
On April 30, 1997, the Company entered into a $27.6 million promissory
note in conjunction with its acquisition of Kensington and the build out of
six Kensington cottages on the Rochester, Minnesota campus. Interest accrues
at 10% and is payable monthly. Principal and interest installments are
payable monthly (based on a 25-year amortization period) beginning in June
1999 through April 2007 at which time the entire outstanding principal
balance becomes due. The amount outstanding under the agreement was
approximately $19.9 million as of June 30, 1997. The remaining funds will be
disbursed in two phases at such time that the six cottages achieve certain
debt service coverage ratios.
For the six months ended June 30, 1997, cash flows provided by operating
activities were $826,000 compared to cash flows used by operating activities
of $985,000 for the six months ended June 30, 1996. The Company used $23.6
million and $11.5 million, respectively, to primarily fund residence
development and acquire Kensington, and received $16.7 million and $12.9
million, respectively, in cash from financing activities. At June 30, 1997,
the Company had restricted cash of $725,000 recorded in other assets on the
consolidated balance sheet.
The Company estimates that newly developed residences will generally
range in cost from $6.5 to $8.0 million, with the development cycle taking up
to 24 months, from site identification to residence opening. There can be no
assurance that financing for the Company's development program will be
available to the
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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 has been, and will continue to be, dependent on
third-party financing for its development program.
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 through December 31, 1997. Additional financing will be
required to complete the company's growth plans and to refinance certain
existing indebtedness.
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PART II. OTHER INFORMATION
Items 1 and 3 through 6 are not applicable.
Item 2. Change in Securities
On April 30, 1997, the Company issued 137,363 common shares (valued at
$1.5 million) to Mr. Jon D. Rappaport as part of its acquisition of
Kensington Management Group, Inc. and seven affiliated entities. The
Company's common shares were issued to Mr. Rappaport in a private placement
pursuant to Section 4 (2) of the Securities Act of 1933 and Rule 506 of
Regulation D. The common shares issued are "restricted" securities and are
subject to a certain Registration Rights Agreement between Mr. Rappaport
and the Company.
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.
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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 August 14, 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
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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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