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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, 1998
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 11, 1998 was 6,837,363.
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KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets......................................3
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1998 and 1997................4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997..........................5
Notes to Consolidated Financial Statements.....................6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................9-14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............15
Item 6. Exhibits and Reports on Form 8-K................................15
Signature Page..................................................16
Note: Item 3 of Part I and Items 1 through 3 and 5 of Part II are omitted
because they are not applicable.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
--------------- -----------------
Current assets:
Cash and cash equivalents .................... $ 1,161,282 $ 4,370,488
Receivables:
Trade ...................................... 897,128 482,597
Due from REIT .............................. 7,831,096 4,330,981
Affiliates ................................. 379,090 649,172
Prepaid expenses ............................. 511,549 281,722
--------------- -----------------
Total current assets ..................... 10,780,145 10,114,960
Property and equipment - net ................... 110,102,461 115,983,043
Cost in excess of net assets acquired - net .... 8,184,174 8,231,073
Other assets - net ............................. 10,782,557 6,986,724
--------------- -----------------
Total assets ............................. $ 139,849,337 $ 141,315,800
--------------- -----------------
--------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ..... $ 3,214,270 $ 2,535,969
Construction payables ........................ 6,609,963 4,717,230
Notes payable-banks .......................... 5,000,000 6,000,000
Payroll and related taxes .................... 1,228,807 1,080,884
Unearned resident fees ....................... 1,037,736 861,266
Interest payable ............................. 481,065 614,919
Current portion of long-term obligations ..... 392,207 998,523
--------------- -----------------
Total current liabilities ................ 17,964,048 16,808,791
Long-term obligations .......................... 100,076,429 97,507,467
Deferred income taxes .......................... 493,000 493,000
Minority interests ............................. 652,000 -
Shareholders' equity:
Common shares ............................... 33,484,712 33,484,712
Accumulated deficit ......................... (12,820,852) (6,978,170)
--------------- -----------------
Total shareholders' equity ................ 20,663,860 26,506,542
--------------- -----------------
Total liabilities and shareholders' equity. $ 139,849,337 $ 141,315,800
--------------- -----------------
--------------- -----------------
SEE ACCOMPANYING NOTES.
3
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------- --------------- ------------
Revenues:
Residence operations ...................... $ 7,534,415 $ 4,230,302 $ 13,968,380 $ 7,169,790
Development and management fees ........... 178,518 341,966 445,163 536,118
------------- ------------- --------------- ------------
Total revenues ........................ 7,712,933 4,572,268 14,413,543 7,705,908
Expenses:
Residence operations ...................... 5,954,133 3,098,597 10,968,587 5,173,795
General and administrative ................ 1,475,380 924,701 3,164,926 1,814,883
Rent expense .............................. 884,216 51,939 1,045,095 99,531
Depreciation and amortization ............. 1,134,747 606,367 2,238,130 981,480
------------- ------------- --------------- ------------
Total expenses ........................ 9,448,476 4,681,604 17,416,738 8,069,689
------------- ------------- --------------- ------------
Operating loss .............................. (1,735,543) (109,336) (3,003,195) (363,781)
Interest expense ............................ (1,309,416) (588,504) (2,656,258) (737,494)
Interest income ............................. 117,753 118,289 157,118 273,349
Equity in net loss of unconsolidated entities (128,507) (19,223) (340,346) (43,174)
------------- ------------- --------------- ------------
Loss before income taxes .................... (3,055,713) (598,774) (5,842,681) (871,100)
Deferred income taxes ....................... - 35,000 - 144,000
------------- ------------- --------------- ------------
Net loss .................................... $(3,055,713) $ (563,774) $ (5,842,681) $ (727,100)
------------- ------------- --------------- ------------
------------- ------------- --------------- ------------
Net loss per common share-basic and diluted $ (0.45) $ (0.08) $ (0.85) $ (0.11)
Weighted average common shares outstanding 6,837,400 6,792,000 6,837,400 6,746,000
See accompanying notes.
4
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
1998 1997
---------------- ----------------
OPERATING ACTIVITIES
Net loss ............................................ $ (5,842,681) $ (727,100)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ..................... 2,238,130 981,480
Provision for terminated projects ................. 675,000 -
Deferred income taxes ............................. - (144,000)
Equity in net loss of unconsolidated entities ..... 340,346 43,174
Change in operating assets and liabilities:
Accounts receivable ............................ (366,687) (812,598)
Prepaid expenses ............................... (229,827) (8,015)
Accounts payable and accrued liabilities ....... 1,278,903 912,351
Other liabilities .............................. 208,459 575,662
---------------- ----------------
Net cash (used in) provided by operating activities (1,698,357) 820,954
INVESTING ACTIVITIES
Purchase of property and equipment .................. (29,434,259) (20,874,145)
Proceeds from sale of property and equipment ........ 30,895,125 -
Decrease (increase) in restricted cash balances ..... (485,750) 680,984
Payments of pre-opening costs ....................... (1,537,420) (548,678)
Payments for organization costs and other ........... (39,908) (92,580)
Acquisition of Kensington-net of cash acquired ...... - (2,785,468)
---------------- ----------------
Net cash used in investing activities ............. (602,212) (23,619,887)
FINANCING ACTIVITIES
Proceeds from (repayment of) notes payable .......... (1,000,000) 8,915,794
Proceeds from mortgages ............................. 26,400,571 7,718,244
Repayment of mortgages .............................. (26,533,953) (141,856)
Minority interests equity contributions ............. 652,000 -
Payment for financing fees .......................... (427,255) (54,754)
Distributions from unconsolidated entity ............ - 225,000
---------------- ----------------
Net cash (used in) provided by financing activities (908,637) 16,662,428
---------------- ----------------
Decrease in cash and cash equivalents ............... (3,209,206) (6,136,505)
Cash and cash equivalents at beginning of period .... 4,370,488 12,283,185
---------------- ----------------
Cash and cash equivalents at end of period .......... $ 1,161,282 $ 6,146,680
---------------- ----------------
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest .............................. $ 2,590,165 $ 1,776,818
---------------- ----------------
---------------- ----------------
SEE ACCOMPANYING NOTES.
5
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE UNAUDITED THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
1. BASIS OF PRESENTATION
The consolidated financial statements as of June 30, 1998 and for the three
and six months ended June 30, 1998 and 1997 are unaudited; however, in the
opinion of management, all adjustments (consisting of 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
periods ended June 30, 1998 are not necessarily indicative of the results to
be obtained for the full fiscal year ending December 31, 1998. 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. NET LOSS PER COMMON SHARE
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 was required to adopt Statement No. 128 for its year ended December
31, 1997.
The net loss per common share-basic and diluted for the three and six months
ended June 30, 1998 and 1997 is computed based on the weighted average number
of shares outstanding during each period as the effect of including any
common share equivalents would be antidilutive. Common share equivalents are
comprised of outstanding stock options.
3. INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company and Catholic Health Initiatives ("CHI") have entered into 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 owning 20-50% of the equity of each
venture. As of June 30, 1998, the Company has guaranteed $1 million of joint
venture debt financing.
Effective January 1, 1998, the Company entered into a joint venture agreement
with a local hospital to operate an assisted living residence in Findlay,
Ohio, which opened on December 31, 1997. The joint venture is owned 50% by
the Company and is accounted for using the equity method of accounting.
6
As of June 30, 1998, seven joint venture residences were open and three other
potential joint venture sites were under development. Three joint venture
residences were open at June 30, 1997. Summarized unaudited income statement
information of these joint ventures is presented below.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- ------------ ------------- --------------
Residence revenues $ 2,664,154 $ 1,112,895 $ 4,953,919 $ 2,182,150
Expenses:
Operating expenses 2,012,567 912,633 4,012,267 1,790,281
Depreciation and amortization expense 518,467 195,592 1,024,225 390,134
Interest expense 588,041 171,305 1,137,080 361,100
-------------- ------------ ------------- --------------
Total expenses 3,119,075 1,279,530 6,173,572 2,541,515
-------------- ------------ ------------- --------------
Net loss $ (454,921) $ (166,635) $(1,219,653) $ (359,365)
-------------- ------------ ------------- --------------
-------------- ------------ ------------- --------------
4. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
In March 1997, the Company entered into a $5 million line of credit expiring
May 1999. At June 30, 1998, there was $5 million outstanding under this
agreement.
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 approximately 14 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). As of
June 30, 1998, the Company has completed mortgage agreements for four
residences totaling $22.4 million and six operating lease transactions
totaling $46.2 million.
On April 30, 1997, the Company entered into a $27.6 million promissory note
in conjunction with its acquisition of Kensington. The amount outstanding
under the agreement was approximately $19.9 million as of June 30, 1998. The
remaining funds will be received in two phases prior to April 30, 1999,
subject to certain Rochester, Minnesota cottages achieving specified debt
service coverage ratios.
In September 1997, the Company entered into a $7.5 million promissory note
with JMAC, Inc. (JMAC), a 34% shareholder of the Company. Interest is payable
monthly and accrues at a bank=s prime rate. The note expires on January 2,
2000. At June 30, 1998, $7.5 million was outstanding under this agreement.
On October 17, 1997, the Company entered a $14 million construction loan
agreement for the development and construction of assisted living residences
in the State of Ohio. As of June 30, 1998, the Company has completed mortgage
agreements for three residences totaling $12.0 million.
In April 1998, the Company sold four assisted living residences for
approximately $23.3 million and leased them back under a 20-year master lease
agreement which includes two ten-year renewal
7
options. The transaction resulted in a gain of approximately $8.8 million,
which was deferred and will be amortized over the initial lease period. The
proceeds of the transaction were used to repay mortgage debt of $15.6 million
and short-term debt of $3.5 million. The balance of the proceeds will be used
for future development activities and working capital needs.
In May and June 1998, the Company sold an additional two assisted living
residences for $16.1 million and leased them back under the same 20-year
master lease agreement as the residences sold in April. All six home leases
will be co-terminus and option periods must be exercised for all or none of
the residences. These two residences opened shortly after completion of the
sale-leaseback transaction. The transactions resulted in a gain of
approximately $600,000, which was deferred and will be amortized over the
lease period. The proceeds of the transaction were used to repay mortgage
debt of $10.6 million. The balance of the proceeds will be used to pay
retainage and project start-up losses, and general working capital needs.
Approximately $2.4 million of the net proceeds was received subsequent to
June 30, 1998 and accordingly was recorded as a receivable as of June 30,
1998.
In April 1998, the Company entered into a $4 million construction mortgage
for the completion of five Karrington Cottages expiring on April 30, 1999.
Interest is payable monthly and accrues at a rate of prime plus 1%.
8
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 or construction, government
regulations, competition, and the challenge to manage rapid growth and
business expansion.
OVERVIEW
The Company is an operator and owner of licensed, assisted living residences
which provides quality, professional, personal and health-care services,
including an emphasis on Alzheimer's care, for individuals needing assistance
with activities of daily living. These activities include bathing, dressing,
meal preparation, housekeeping, taking medications, transportation, and other
activities that, because of the resident's condition, are difficult for
residents to accomplish in an independent living setting. The Company offers
its customers a dignified residential environment focused on quality of life.
The Company also provides development, support and management services to its
joint venture residences. As of June 30, 1998, the Company had 36 residences,
including joint ventures, open in nine states with a capacity of
approximately 1,970 residents and 10 additional residences under construction
(6) or completed and being readied for occupancy (4) in six states with a
capacity of 655 residents.
The Company derives its revenues primarily from two sources: (i) resident
fees for the delivery of basic assisted living care services (80% of total
revenues in 1998) and (ii) resident fees for extended and special needs care
services and community fee revenue (17% of total revenues in 1998). Resident
fees include revenue derived from basic assisted living care, community fees,
extended and special needs 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.
The following table sets forth certain information regarding Karrington
residences as of June 30, 1998:
COMPANY JOINTLY OWNED TOTAL
RESIDENCES RESIDENCES SYSTEM
------------------------- ------------------------ -------------------------
RESIDENCES UNITS BEDS RESIDENCES UNITS BEDS RESIDENCES UNITS BEDS
Open 29 1,242 1,528 7 369 438 36 1,611 1,966
Under Construction 10 526 655 - - - 10 526 655
In Development:
Under Contract & Zoned 8 539 622 1 67 75 9 606 697
Under Contract & In Zoning 2 165 188 - - - 2 165 188
9
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,
-------------------- --------------------
1998 1997 1998 1997
--------- -------- --------- ---------
Total revenues 100.0% 100.0% 100.0% 100.0%
Expenses:
Residence operations 77.2 67.8 76.1 67.1
General and administrative 19.1 20.2 22.0 23.6
Rent expense 11.5 1.1 7.3 1.3
Depreciation and amortization 14.7 13.3 15.4 12.7
--------- -------- --------- ---------
Total expenses 122.5 102.4 120.8 104.7
--------- -------- --------- ---------
Operating income (loss) (22.5)% (2.4)% (20.8)% (4.7)%
--------- -------- --------- ---------
--------- -------- --------- ---------
End of period (a):
Number of residences 29 15 29 15
Number of units 1,242 593 1,242 593
(a) Excludes residences jointly owned by the Company accounted for by
the equity method.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Total revenue increased $3.1 million, or 69%, to $7.7 million in the second
quarter of 1998 from $4.6 million in the second quarter of 1997 primarily due
to the opening of new residences ($2.3 million), the acquisition of
Kensington Management Group, Inc. and affiliates ("Kensington") on April 30,
1997 ($0.6 million) and the increased occupancy of residences in the fill-up
phase in 1997.
Average occupancy for the 13 stabilized residences for the three months ended
June 30, 1997 was 93%. For the three months ended June 30, 1998, the average
occupancy for 17 stabilized residences was 84%. Excluding an older 66-unit
hotel conversion acquired in the Kensington transaction which averaged 70%
occupancy and one Indianapolis location opened in March 1997 which averaged
43% occupancy, the remaining 15 stable residences averaged 91% occupancy for
the second quarter. Comparing the same 13 stabilized residences in each
quarter, average occupancy decreased from 93% to 88% or approximately 24
occupied units over 13 residences. The Company defines stabilized residences
as those residences (72 units or less) that have been operated by the Company
for 12 months or more as of the beginning of the period presented or that has
achieved occupancy of 95%.
Residence operating expenses increased $2.9 million, or 92%, to $6.0 million
in the second quarter of 1998 from $3.1 million in the second quarter of
1997. As a percentage of residence operating revenues, residence operating
expenses increased from 73% in the second quarter of 1997 to 79% in the
second quarter of 1998 which resulted in a residence net operating income
margin (NOI) of 27% in 1997 and 21% in 1998. The decrease in NOI resulted
from start-up losses associated with residences open less than one year and
in the fill-up period. (12 residences in 1998 vs. 2 residences in 1997)
General and administrative expenses increased $0.6 million, or 60%, to $1.5
million in the second quarter of 1998 from $0.9 million in the second quarter
of 1997. This increase was primarily due to a provision for
10
terminated projects of $0.3 million (largely due to the abandonment of one
site) and an increase in uncapitalized construction and development costs of
$0.2 million. The Company expects general and administrative expenses will
continue to decrease as a percentage of total revenues due to anticipated
economies of scale resulting from an increase in the number of open
residences.
Rent expense increased $0.8 million to $0.9 million in the second quarter of
1998 due to the opening of three leased residences in the first quarter of
1998 and six residences sold pursuant to sale-leaseback transactions in the
second quarter of 1998.
Depreciation and amortization increased $0.5 million, or 87%, to $1.1 million
in the second quarter of 1998 from $0.6 million in the second quarter of 1997
primarily due to the opening of new residences ($0.7 million) offset by lower
depreciation and amortization resulting from six residences sold pursuant to
sale-leaseback transactions in the second quarter of 1998.
Interest expense increased $0.7 million, or 122%, to $1.3 million in the
second quarter of 1998 from $0.6 million in the second quarter of 1997
primarily due to the opening of new residences ($0.5 million), the
acquisition of Kensington ($0.2 million) and the increased use of the
Company's line of credit, offset by lower interest expense resulting from six
residences sold pursuant to sale-leaseback transactions in the second quarter
of 1998.
The equity in net loss of unconsolidated entities increased due to four joint
venture residences in the fill-up phase during the second quarter of 1998
compared to no joint venture residences in the fill-up phase during the
second quarter of 1997.
No deferred tax benefit was recorded in the second quarter of 1998 due to
limitations associated with the recognition of operating loss carryforwards
and other tax assets.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Total revenue increased $6.7 million, or 87%, to $14.4 million in the first
six months of 1998 from $7.7 million in the first six months of 1997
primarily due to the opening of new residences ($3.7 million), the
acquisition of Kensington ($2.2 million) and the increased occupancy of
residences in the fill-up phase in 1997.
Average occupancy for the 12 stabilized residences for the six months of 1997
was 93%. For the six months ended June 30, 1998, the average occupancy for 16
stabilized residences was 90%. Excluding an older 66-unit hotel conversion
acquired in the Kensington transaction which averaged 71% for the first six
months of 1998, the remaining 15 stabilized residences averaged 91% occupancy.
Residence operating expenses increased $5.8 million, or 112%, to $11.0
million in the first six months of 1998 from $5.2 million in the first six
months of 1997. As a percentage of residence operating revenues, residence
operating expenses increased from 72% in the first six months of 1997 to 79%
in the first six months of 1998 which resulted in a residence NOI of 28% in
1997 and 21% in 1998. The decrease in NOI resulted from start-up losses
associated with residences open less than one year and in the fill-up period.
(13 residences in 1998 vs. 3 residences in 1997)
General and administrative expenses increased $1.4 million, or 74%, to $3.2
million in the first six months of 1998 from $1.8 million in the first six
months of 1997, primarily due to an increase in the number of employees and
associated payroll, including the acquisition of Kensington, which was $0.3
million, a provision for terminated projects of $0.7 million (largely due to
the abandonment of one site
11
and the potential sale of two additional sites) and an increase in
uncapitalized construction and development costs of $0.2 million. The Company
expects general and administrative expenses will continue to decrease as a
percentage of total revenues due to anticipated economies of scale resulting
from the Company's forward home expansion.
Rent expense increased $0.9 million to $1.0 million in the first six months
of 1998 due to the opening of three leased residences in the first quarter of
1998 and six residences sold pursuant sale-leaseback transactions in the
second quarter of 1998.
Depreciation and amortization increased $1.2 million, or 128%, to $2.2
million in the first six months of 1998 from $1.0 million in the first six
months of 1997 primarily due to the opening of new residences ($1.2 million)
and the acquisition of Kensington, offset by lower depreciation and
amortization resulting from six residences sold pursuant to sale-leaseback
transactions in the second quarter of 1998.
Interest expense increased $2.0 million, or 260%, to $2.7 in the first six
months of 1998 from $0.7 million in the first six months of 1997 primarily
due to the opening of new residences ($1.0 million). The acquisition of
Kensington ($0.6 million) and the increased use of the Company's lines of
credit, offset by lower interest expense resulting from six residences sold
pursuant to sale-leaseback transactions in the second quarter of 1998.
The equity in net loss of unconsolidated entities increased due to four joint
venture residences in the fill-up phase during the first six months of 1998
compared to no joint venture residences in the fill-up phase during the first
six months of 1997.
No deferred tax benefit was recorded in the first six months of 1998 due to
limitations associated with the recognition of operating loss carryforwards
and other tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its initial growth through a combination of mortgage
financing, sale/leasebacks, a development bond, subordinated borrowings from
JMAC and its affiliates, bank lines-of-credit, equity contributions and
proceeds from the initial public offering in 1996. The Company's mortgage and
construction mortgage financings mature in the next one to thirteen years,
bear interest at various fixed and fluctuating rates and are secured by
substantially all of the assets of the Company. The Company expects to
refinance such amounts as they mature.
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 approximately 14 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). As of
June 30, 1998, the Company has completed mortgage agreements for four
residences totaling $22.4 million and six operating lease transactions
totaling $46.2 million.
On April 30, 1997, the Company entered into a $27.6 million promissory note
in conjunction with its acquisition of Kensington. The amount outstanding
under the agreement was approximately $19.9 million as of June 30, 1998. The
remaining funds will be received in two phases prior to April 30, 1999,
subject to certain Rochester, Minnesota cottage homes achieving specified
debt service coverage ratios.
12
On October 17, 1997, the Company entered a $14 million construction loan
agreement for the development and construction of assisted living residences
in the State of Ohio. As of June 30, 1998, the Company has completed mortgage
agreements for three residences totaling $12.0 million.
As of June 30, 1998, the Company had a line of credit totaling $5.0 million
of which $5.0 million was outstanding and had restricted cash of
approximately $1.6 million recorded in other assets on the consolidated
balance sheet.
In 1998 and 1999, the Company plans to open approximately 28 new Company and
jointly owned residences. The 28 planned openings does not include any
cottage homes beyond the 5 cottages open or completed and ready to open on
the Rochester, Minnesota campus. The Company is currently evaluating
potential and existing relationships with hospitals and clinics in order to
evaluate additional alternative, broader uses of its cottage model. As a
result of these evaluations, the Company's final plan for 1999 cottages will
be announced at a later date. To date, the Company has opened 9 of these
residences, has 4 cottage homes completed and being readied to open, has 6
residences under construction, has obtained zoning approval for an additional
9 residences and has entered into contracts to purchase 2 additional sites.
The Company has been, and will continue to be, dependent on third party
financing for its acquisition and development program. The Company estimates
that newly developed residences will generally range in cost from $5.0 to
$11.0 million, with the development cycle taking up to 24 months from site
identification and zoning through construction and residence opening. There
can be no assurance 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 opens properties that do not generate positive cash flow,
the Company may be required to seek additional capital for working capital
and liquidity purposes.
Additional financing will be required to develop and construct residences
opening in 1999 and beyond and to refinance certain existing indebtedness. As
of June 30, 1998, the Company had unused commitments of approximately $35
million from existing debt and lease agreements. In the second quarter 1998,
the Company completed sale/leaseback transactions for six residences
generating approximately $13 million in net proceeds after associated
mortgage repayment. The Company is currently evaluating and negotiating with
various lenders with respect to traditional mortgages, sale/leaseback
transactions and other forms of off-balance sheet financing. The Company has
existing financing in place in the form of loans or leases for the 10
residences which are currently completed and ready to open or under
construction.
The Company has an availability of funds for working capital related to home
project financing already in place. At this time, the Company expects to draw
on 11 home project mortgage and lease financings to support the Company's
working capital needs in the third and fourth quarters of 1998. In addition,
the Company has entered into two sale agreements to sell two parcels of land
in California for a total of $3.5 million to a major West Coast assisted
living operator. The land sales are contingent on normal due diligence review
procedures which must be completed on or before October 2, 1998. The net
proceeds to the Company are estimated at $2.5 million after paying off a
related note payable of approximately $1.0 million. The net proceeds are
expected to provide additional funds to support the Company's working capital
needs through the balance of 1998.
The Company does not presently have financing commitments in place for future
home project development. The Company has about $9 million invested in nine
home projects staged for a construction start during 1998 that is now
awaiting construction or lease financing. Investments in future projects will
be limited until future financing commitments are obtained.
13
The Company believes its existing financing commitments, together with
additional anticipated financing, will be sufficient to fund its development,
construction and working capital needs through 1998.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In April 1998, the Accounting Standards Executive Committee issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities" which requires that the costs
of start-up activities and organization costs be expensed as incurred. SOP
98-5 is effective for fiscal years beginning after December 15, 1998 with
earlier application encouraged. Management believes it will apply the
provisions of the SOP in 1999. The application of SOP 98-5 will require the
Company to write-off all existing deferred preopening and organization costs
(for example, $1.3 million at January 1, 1998) and expense all such items as
incurred on a prospective basis.
IMPACT OF YEAR 2000
The Company has completed its review of the impact of the Y2K issue on its
information and financial systems and is in the process of spending about
$700,000 to upgrade hardware and software to be Year 2000 compliant. The
Company is implementing a Year 2000 compliant home administrative information
system which will provide better and faster information, particularly
regarding resident history, service needs, and associated billing. This
upgrade and implementation is expected to be completed beginning in the
fourth quarter of 1998 through the second quarter of 1999 and will be
financed from working capital.
The Company is in the process of its review of all mechanical equipment
(i.e., telephone systems, elevators, security systems, HVAC systems,
vehicles, etc.) which shall be completed by the end of the third quarter of
1998. The Company believes its review is approximately 50% complete and
to-date has not identified any problems or issues which would require a
significant investment of time or capital.
The above effort should provide the Company with an internal solution to the
Y2K issue, but the Company remains cautious and continues to review external
issues that may impact the business or flow of funds. The Company's payroll
is processed by an independent third party that has assured the Company it
will be Year 2000 compliant. The Company will make contingent plans to resort
to manual operations if certain external interfaces fail. The Company is
continuing its review of Y2K issues.
14
II. OTHER INFORMATION
Items 1 through 3 and 5 are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On May 12, 1998, the Company held its 1998 annual meeting of shareholders at
the Wyndham Dublin Hotel in Dublin, Ohio. The only matter voted on at the
annual meeting was the election of four directors for terms of three years
each.
The following table sets forth the names of the directors elected at the
annual meeting and the number of votes cast for and withheld for each
director:
WITHHELD
DIRECTOR FOR AUTHORITY TO VOTE
-------- --- -----------------
John S. Christie 5,108,006 833,650
David H. Hoag 5,308,006 633,650
Charles H. McCreary 5,307,806 633,650
James V. Pickett 5,307,506 634,150
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- ------------
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three-month period
ended June 30, 1998.
15
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, 1998
KARRINGTON HEALTH, INC.
(Registrant)
/s/ RICHARD R. SLAGER
- ------------------------------------------
Richard R. Slager
Chief Executive Officer
/s/ THOMAS J. KLIMBACK
- ------------------------------------------
Thomas J. Klimback
Chief Financial Officer
16
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only.
17