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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
For the Transition period from __________ to __________.
Commission file number 0-28656
KARRINGTON HEALTH, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1461482
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
919 Old Henderson Road
Columbus, Ohio 43220
(Address of principle executive offices)
(614) 451-5151
(Registrant's telephone number, including area code)
Indicated by check mark whether registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _____ No __X__
Shares of Registrant's common shares, without par value, outstanding at
September 3, 1996 was 6,700,000.
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<PAGE>
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, 1995 and 1996............ 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1995 and 1996...................... 3
Notes to Consolidated Financial Statements................. 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 6-9
Part II. Other Information
Item 6. Exhibits..................................................... 10
Signature Page............................................... 11
Note: Items 1-5 of Part II are omitted because they are not applicable.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
KARRINGTON HEALTH, INC.
AND AFFILIATES
Consolidated Balance Sheets
ASSETS
December 31, June 30,
1995 1996
--------------------------
(Unaudited)
Current assets:
Cash .......................................... $ 144,833 $ 641,593
Accounts receivable ........................... 243,914 71,498
Accounts due from affiliates .................. 523,278 736,565
Prepaid expenses .............................. 98,821 147,939
----------- -----------
Total current assets ....................... 1,010,846 1,597,595
Property and equipment -- net .................... 24,879,363 32,265,731
Other assets -- net .............................. 786,233 4,294,525
----------- -----------
Total assets .................................. $26,676,442 $38,157,851
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ...... $ 614,713 $ 580,588
Construction payables ......................... 810,334 503,386
Payroll and related taxes ..................... 410,590 425,415
Unearned resident fees ........................ 414,821 190,423
Interest payable .............................. 129,699 181,594
Current portion of long-term obligations ...... 205,485 219,992
----------- -----------
Total current liabilities .................. 2,585,642 2,101,398
Long-term obligations:
Subordinated debentures payable to partners.... 33,840 5,535,375
Mortgages and other............................ 18,216,053 25,869,719
----------- -----------
Total long-term obligations................. 18,249,893 31,405,094
Partners' equity............................ 5,840,907 4,651,359
----------- -----------
Total liabilities and partners' equity ........ $26,676,442 $38,157,851
=========== ===========
SEE ACCOMPANYING NOTES.
1
<PAGE>
<TABLE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
Consolidated Statements of Operations
Three and Six Months Ended June 30, 1995 and 1996
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Residence operations ......... $ 1,520,818 $ 2,016,630 $ 2,911,160 $ 3,838,794
Development and
project management fees .... 97,448 303,981 165,928 425,987
----------- ----------- ----------- -----------
Total revenues ............ 1,618,266 2,320,611 3,077,088 4,264,781
Expenses:
Residence operations ......... 971,337 1,464,525 2,040,393 2,792,052
General and administrative ... 368,684 683,203 637,165 1,258,097
Depreciation and amortization 211,413 292,711 427,076 586,869
----------- ----------- ----------- -----------
Total expenses ............ 1,551,434 2,440,439 3,104,634 4,637,018
----------- ----------- ----------- -----------
Operating income (loss) ......... 66,832 (119,828) (27,546) (372,237)
Interest expense ................ (240,108) (519,150) (488,226) (833,934)
Equity in net earnings
(loss) of unconsolidated entity (1,951) 124 (52,659) 16,623
---------- ----------- ----------- -----------
Net loss ........................ $ (175,227) $ (638,854) $ (568,431) $(1,189,548)
=========== =========== =========== ===========
Proforma information:
Net loss per share .............. $ (.04) $ (.15) $ (.13) $ (.27)
Common shares ................... 4,350,000 4,350,000 4,350,000 4,350,000
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
<TABLE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1995 and 1996
(Unaudited)
Six Months Ended
June 30,
-------------------------------
1995 1996
------------- ---------------
<S> <C> <C>
Operating activities
Net loss ................................................ $ (568,431) $ (1,189,548)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of intangible assets ....................... 95,000 --
Depreciation and amortization ........................ 427,076 586,869
Straight-line rent expense ........................... 6,260 7,877
Equity in net (earnings) loss of unconsolidated entity 52,659 (16,623)
Change in operating assets and liabilities:
Accounts receivable ............................... 6,079 (40,871)
Prepaid expenses .................................. (56,542) (49,118)
Accounts payable and accrued liabilities .......... (64,525) (126,230)
Other liabilities ................................. (60,805) (157,678)
------------ ------------
Net cash used in operating activities ................ (163,229) (985,322)
Investing activities
Increase in assets whose use is limited ................. (121,000) (2,101,677)
Purchases of property and equipment ..................... (3,323,196) (7,990,652)
Equity contribution to unconsolidated entities .......... -- (1,062,773)
Payments of pre-opening costs ........................... (85,644) (257,001)
Payments for organization costs and other ............... (16,226) (48,492)
------------ ------------
Net cash used in investing activities ................ (3,546,066) (11,460,595)
Financing activities
Proceeds from mortgages ................................. 8,175,556 8,236,368
Repayment of mortgages .................................. (3,818,302) (576,072)
Proceeds from debentures due partner .................... -- 5,501,535
Payment for financing fees .............................. (102,117) (558,920)
Proceeds from partner's capital contribution ............ 750,000 --
Distributions from unconsolidated entity ................ -- 339,766
------------ ------------
Net cash provided by financing activities ............ 5,005,137 12,942,677
------------ ------------
Increase in cash ........................................ 1,295,842 496,760
Cash at beginning of period ............................. 137,062 144,833
------------ ------------
Cash at end of period ................................... $ 1,432,904 641,593
============ ============
Supplemental disclosure of cash flow information
Cash paid for interest .................................. $ 677,822 $ 937,804
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
KARRINGTON HEALTH, INC.
Notes to Consolidated Financial Statements
For the Unaudited Three and Six Months Ended June 30, 1995 and 1996
1. Basis of Presentation
Karrington Health, Inc. was incorporated in April 1996 to become the
parent of Karrington Operating Company (Karrington Operating) upon the
consummation of the reorganization transactions which occurred immediately
prior to the effective date of the Company's initial public offering in July
1996 (see Note 4). Hereinafter, all references to the "Company" include
Karrington Operating and Karrington Health, Inc. Karrington Operating is an
Ohio General Partnership.
The consolidated financial statements as of June 30, 1996 and for the
three and six months ended June 30, 1995 and 1996 are unaudited; however, in
the opinion of management, all adjustments (consisting of normal recurring
adjustments except for those adjustments relating to the adoption of AICPA SOP
93-7 "Reporting on Advertising Costs" in the first quarter of 1995) necessary
for a fair presentation of the consolidated financial statements for these
interim periods have been included. The results for the interim period ended
June 30, 1996 are not necessarily indicative of the results to be obtained for
the full fiscal year ending December 31, 1996. Certain information and note
disclosures which would duplicate the disclosures normally included in annual
financial statements have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
2. Long-Term Obligations
In May 1996, the Company entered into a $5,800,000 loan agreement with a
county industrial development authority for the permanent financing of an
assisted living residence in Pittsburgh, Pennsylvania. The loan bears interest
at a weekly rate determined by the remarketing agent (3.65% at August 28,
1996). Annual principal payments are due on July 1, 1998 through 2021 in
amounts ranging from $100,000 to $300,000. At June 30, 1996 there was
$5,800,000 outstanding and $2,102,000 of restricted cash for project
development expenditures recorded in other assets on the consolidated balance
sheet related to this agreement.
3. Investments in Joint Ventures
During 1995, the Company entered into a joint development arrangement
with Catholic Health Initiatives (CHI). Pursuant to this arrangement, the
Company expects to develop, construct and operate up to six assisted living
residences by 1998. As of June 30, 1996, construction had begun on residences
in Albuquerque, New Mexico, Colorado Springs, Colorado, Cincinnati, Ohio and
Dayton, Ohio. For the six months ended June 30, 1996, the Company made equity
contributions of approximately $1.1 million for these projects (recorded in
other assets on the consolidated balance sheet). Effective July 18, 1996,
these four joint ventures entered into financing agreements totalling $23
million for construction and permanent financing.
In June, 1996, Karrington of Oakwood Ltd. Liability Co. (in which the
Company owns a 50% interest) refinanced its $4.0 million construction mortgage
with a $5.5 million promissory note which bears interest at LIBOR plus 1/4% to
1/2% with the entire principal amount due on June 30, 1999.
4
<PAGE>
4. Subsequent Events
Initial Public Offering
The Company consummated an initial public offering of 2,350,000 of its
authorized and unissued common shares on July 18, 1996 at $13.00 per share. Of
the net proceeds from the offering ($27.8 million), a portion was used to
retire $5.7 million of subordinated debentures payable to a partner. The
balance of the net proceeds will be used to finance the development and
acquisition of additional assisted living residences, as well as for working
capital and general corporate purposes.
Incentive Stock Plan
The Company has adopted the 1996 Incentive Stock Plan (the "Plan"). The
Plan provides for the grant of incentive and non-qualified stock options,
stock appreciation rights, restricted stock, performance shares, and
unrestricted common shares to key associates. The Plan also provides for the
purchase of common shares through payroll deductions by employees of the
Company who have satisfied certain eligibility requirements. The maximum
number of shares available for issuance under the Plan is 550,000. No shares
have been issued under the Plan.
The Company has granted non-qualified options to employees totalling
115,000 common shares. These options were granted as of the effective date of
the initial public offering with an exercise price equal to the initial public
offering price of $13.00 per share. The options have a ten-year term with 25%
of the options vesting on each of the second through the fifth anniversaries
of the date of grant. In addition, non-employee directors received, on the
first business day after the effective date of the initial public offering,
grants of non- qualified options to purchase an aggregate of 54,000 common
shares at an exercise price equal to the public offering price. These director
options will become exercisable beginning six months after the date of grant
with a ten-year term.
Tax Status
As a partnership, Karrington Operating recorded no provision for income
taxes. Partnership income and losses are allocated to the partners for
inclusion in their respective income tax returns. As a result of the
reorganization (described above), the Company will apply the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred income taxes will be provided for differences in the basis for
tax proposes and for financial accounting purposes of recorded assets and
liabilities, principally, depreciable property and certain capitalized
development costs. A tax provision and a net deferred income tax liability of
approximately $1,100,000 will be recorded in the third quarter of 1996 as a
result of the reorganization.
5
<PAGE>
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
At June 30, 1996, the Company had 6 assisted living residences open
(including one residence jointly-owned with CHI), 9 residences under
construction, and 13 residences in various stages of development. All 13 new
residences in development are under contract and construction starts are
expected for all of these new assisted living residences before the end of
1996. Subsequent to June 30, 1996, the Company opened one additional residence
on August 8, 1996 and has 3 additional developments under contract.
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 Company categorizes its operating expenses as follows: (i) residence
operations, which includes labor, food, media advertising and promotions and
other direct general operating expenses; (ii) general and administrative
expenses, consisting of corporate and support functions; and (iii)
depreciation and amortization. In anticipation of its growth, the Company made
significant investments in the number of staff at its headquarters in 1995 and
the first half of 1996.
6
<PAGE>
Results of Operations
The following table sets forth certain data from the respective
consolidated statements of operations as a percentage of total revenues:
<TABLE>
Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues ......................... 100.0% 100.0% 100.0% 100.0%
Expenses:
Residence operations ................ 60.0 63.2 66.3 65.5
General and administrative .......... 22.8 29.4 20.7 29.4
Depreciation and amortization ....... 13.1 12.6 13.9 13.8
-------- -------- -------- --------
Total expenses ................... 95.9 105.2 100.9 108.7
-------- -------- -------- --------
Operating income (loss) ................ 4.1% (5.2)% (0.9)% (8.7)%
======== ======== ======== ========
Resident days .......................... 16,754 20,307 32,698 39,339
Average stabilized occupancy percentage 97.9% 92.3% 96.1% 93.1%
End of period:
Number of residences ................ 3 5 3 5
Number of units ..................... 160 245 160 245
</TABLE>
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Total revenue increased $702,000, or 43%, to $2.3 million in the second
quarter of 1996 from $1.6 million in the second quarter of 1995 primarily due
to the growth in resident revenues. Resident revenues increased $496,000, or
33%, primarily due to the opening of the Shaker Heights residence in October
1995 and the Alzheimer's care residence in February 1996 (total of $479,000)
and an increase of $80,000 resulting from higher average daily resident rates,
offset by a slight decrease of $63,000 due to occupancy levels. The average
daily resident rate increased 7.2% to $93 in the second quarter of 1996
compared to $86 for the same period in 1995 primarily due to an increase in
the average daily basic care rate.
Development and project management fees increased $207,000, or 212%, to
$304,000 in the second quarter of 1996 from $97,000 in the second quarter of
1995 primarily due to development fees associated with an increased number of
residences in which the Company does not own a controlling interest.
Residence operations expenses increased $494,000, or 51%, to $1,465,000
in the second quarter of 1996 from $971,000 in the second quarter of 1995. As
a percentage of residence operations revenues, residence operations expenses
increased from 64% in the second quarter of 1995 to 73% in the same period of
1996 primarily due to the opening of two new residences in October 1995 and
February 1996 reflecting operations expenses which are higher as a percent of
total revenues during the first year of operations of a residence.
General and administrative expenses increased $314,000, or 85%, to
$683,000 in the second quarter of 1996 from $369,000 in the second quarter of
1995 primarily due to increased compensation, payroll taxes and related
benefits of $265,000 as a result of hiring additional management and staff at
the Company's headquarters in anticipation of the Company's growth plans. The
Company expects the rate of increase in its general and administrative
expenses will decrease as new staff needs have been reduced by recent hires.
In addition, the Company expects its general and administrative expenses will
decrease as a percentage of its total operating revenues due to anticipated
economies of scale resulting from the Company's development program.
7
<PAGE>
Depreciation and amortization increased $81,000, or 38%, to $293,000 in
the second quarter of 1996 from $211,000 in the second quarter of 1995
primarily due to the opening of the two new residences discussed above.
Interest expense increased $279,000, or 116%, to $519,000 in the second
quarter of 1996 from $240,000 in the second quarter of 1995 primarily due to
the opening of the two new residences discussed above.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Total revenue increased $1,188,000, or 39%, to $4.3 million in the first
six months of 1996 from $3.1 million in the first six months of 1995 primarily
due to the growth in resident revenues. Resident revenues increased $928,000,
or 32%, primarily due to the opening of the Shaker Heights residence in
October 1995 and the Alzheimer's care residence in February 1996 (total of
$815,000) and an increase of $181,000 resulting from higher average daily
resident rates, offset by a slight decrease of $68,000 due to occupancy
levels. The average daily resident rate increased 8% to $91 in the first six
months of 1996 from $85 in the first six months of 1995 primarily due to an
increase in the average daily basic care rate.
Development and project management fees increased $260,000, or 157%, to
$426,000 in the first six months of 1996 from $166,000 in the first six months
of 1995 primarily due to development fees associated with an increased number
of residences in which the Company does not own a controlling interest.
Residence operations expenses increased $752,000, or 37%, to $2,792,000
in the first six months of 1996 from $2,040,000 in the first six months of
1995 primarily due to the opening of the Shaker Heights residence in October
1995 and the Alzheimer's care residence in February 1996 (total of $745,000).
As a percentage of residence operations revenues, residence operations
expenses increased from 70% in the first six months of 1995 to 73% in the
first six months of 1996 primarily due to new residences opened in October
1995 and February 1996 as operations expenses are higher as a percent of
revenues during the first year of operations.
General and administrative expenses increased $621,000, or 98%, to
$1,258,000 in the first half of 1996 from $637,000 in the first half of 1995
primarily due to increased compensation, payroll taxes and related benefits of
$481,000 as a result of hiring additional management and staff at the
Company's headquarters in anticipation of the Company's growth plans,
including the addition of a manager-in-training program in the Spring of 1995,
increased incentive compensation and compensation increases for existing staff
and management.
Depreciation and amortization increased $160,000, or 37%, to $587,000 in
the first six months of 1996 from $427,000 in the first six months of 1995
primarily due to the opening of two new residences in October 1995 and
February 1996 (total of $262,000) and the Company's move to its new
headquarters in July 1995. These increases were offset by a decrease of
$134,000 as a result of the adoption of AICPA SOP 93-7 in the first quarter of
1995 and a change in estimate in 1995 relating to the amortization period of
pre-opening costs which was reduced from three years to one year.
Interest expense increased $346,000, or 71%, to $834,000 in the first six
months of 1996 from $488,000 in the first six months of 1995 primarily due to
the two new residences opened in October 1995 and February 1996 (total of
$252,000) and interest costs related to the outstanding balances of a
$8,000,000 subordinated debenture (beginning in late 1995).
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
8
<PAGE>
were used to pay the outstanding principal and accrued interest of
subordinated debentures payable to a partner. The balance of the net proceeds
will be used to finance the development and acquisition of additional assisted
living residences and for working capital and general corporate purposes. The
Company has no current agreements or understandings with respect to any
acquisition of residences. Pending such uses, the Company intends to invest
the net proceeds in short-term, investment grade, interest-bearing securities
or certificates of deposit.
In May 1996, the Company entered into a $5,800,000 loan agreement with a
county industrial development authority for the permanent financing of an
assisted living residence in Pittsburgh, Pennsylvania. The loan bears interest
at a weekly rate determined by the remarketing agent (3.65% as of August 28,
1996). Annual principal payments are due on July 1, 1998 through 2021 in
increasing amounts of $100,000 to $300,000.
Effective July 18, 1996, four newly formed unconsolidated entities in which
the Company owns interests ranging from 20% to 35%, entered into four separate
financing agreements totalling $23 million for construction and permanent
financing for five assisted living residences.
In June 1996, Karrington of Oakwood Ltd. Liability Co. refinanced it $4.0
million construction mortgage with a $5.5 million promissory note which bears
interest at LIBOR plus 1/4% to 1/2% with the entire principal amount due on
June 30, 1999.
For the six months ended June 30, 1995 and 1996, cash flows used by
operating activities were $163,000 and $985,000, respectively. The Company
used $3,546,000 and $11,461,000, respectively, to acquire property and
equipment and other assets, and received $5,005,000 and $12,943,000,
respectively, in cash from financing activities. At June 30, 1996, the Company
had restricted cash of $2.3 million recorded in other assets on the
consolidated balance sheet. (See Note 2 to Consolidated Financial Statements.)
9
<PAGE>
Part II. Other Information
Items 1-5 Are Not Applicable
Item 6. Exhibits
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not filed.
10
<PAGE>
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 September 3, 1996
KARRINGTON HEALTH, INC.
(Registrant)
/s/Richard R. Slager
____________________________________
Richard R. Slager
Chief Executive Officer
/s/Alan B. Satterwhite
____________________________________
Alan B. Satterwhite
Chief Financial Officer
11
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Karrington Health, Inc. Form 10-Q for the quarterly period ended June 30, 1996
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 641,593
<SECURITIES> 0
<RECEIVABLES> 808,063
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,597,595
<PP&E> 33,970,266
<DEPRECIATION> 1,704,536
<TOTAL-ASSETS> 38,157,851
<CURRENT-LIABILITIES> 2,101,398
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,651,359
<TOTAL-LIABILITY-AND-EQUITY> 38,157,851
<SALES> 0
<TOTAL-REVENUES> 4,264,781
<CGS> 0
<TOTAL-COSTS> 2,792,052
<OTHER-EXPENSES> 1,828,343
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 833,934
<INCOME-PRETAX> (1,189,548)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,189,548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,189,548)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
