<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
November 11, 1997 was 6,837,363.
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<PAGE>
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets.................................1
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1997 and 1996.....2
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996...............3
Notes to Consolidated Financial Statements................4-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................8-12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................13
Item 6. Exhibits...................................................13
Signature Page.............................................14
Note: Items 1 and 3 through 5 of Part II are omitted because they are not
applicable.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- --------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 4,437,223 $ 12,283,185
Accounts receivable..................................... 495,844 105,315
Amounts due from affiliates............................. 899,500 678,893
Prepaid expenses........................................ 308,687 170,254
--------------- --------------
Total current assets.................................. 6,141,254 13,237,647
Property and equipment -- net............................ 97,382,962 52,011,748
Other assets -- net...................................... 14,056,031 4,300,546
--------------- --------------
Total assets.......................................... $117,580,247 $ 69,549,941
--------------- --------------
--------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................ $ 2,399,578 $ 788,981
Construction payables................................... 3,396,673 3,181,560
Notes payable used to finance construction in progress.. 8,000,000 ---
Payroll and related taxes............................... 1,169,958 735,337
Unearned resident fees.................................. 536,448 325,111
Interest payable........................................ 749,250 158,103
Current portion of long-term obligations................ 304,762 242,211
--------------- --------------
Total current liabilities............................. 16,556,669 5,431,303
Long-term obligations.................................... 71,599,495 32,758,692
Deferred income taxes.................................... 973,000 683,000
Shareholders' equity:
Common shares........................................... 33,484,712 31,984,712
Accumulated deficit..................................... (5,033,629) (1,307,766)
--------------- --------------
Total shareholders' equity.............................. 28,451,083 30,676,946
--------------- --------------
Total liabilities and shareholders' equity............... $117,580,247 $ 69,549,941
--------------- --------------
--------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
1
<PAGE>
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Residence operations........................... $ 5,447,800 $ 2,403,331 $ 12,617,902 $ 6,242,125
Development and management fees................ 77,446 67,321 613,252 493,308
-------------- ------------- -------------- ---------------
Total revenues.............................. 5,525,246 2,470,652 13,231,154 6,735,433
Expenses:
Residence operations........................... 4,190,287 1,675,611 9,364,082 4,435,703
General and administrative..................... 1,174,817 669,387 2,989,700 1,927,484
Rent expense................................... 93,548 20,425 193,079 52,385
Depreciation and amortization.................. 783,753 468,374 1,765,233 1,055,243
Unusual charges................................ 1,380,000 1,380,000
-------------- ------------- -------------- ---------------
Total expenses.............................. 7,622,405 2,833,797 15,692,094 7,470,815
-------------- ------------- -------------- ---------------
Operating loss.................................. (2,097,159) (363,145) (2,460,940) (735,382)
Interest expense................................ (855,579) (213,422) (1,593,073) (1,047,356)
Interest income................................. 28,397 239,846 301,746 239,846
Equity in net earnings
(loss) of unconsolidated entities............. (120,422) 15,756 (163,596) 32,379
-------------- ------------- -------------- ---------------
Loss before income taxes........................ (3,044,763) (320,965) (3,915,863) (1,510,513)
Deferred income taxes........................... 46,000 (1,100,000) 190,000 (1,100,000)
-------------- ------------- -------------- ---------------
Net loss........................................ $ (2,998,763) $ (1,420,965) $ (3,725,863) $ (2,610,513)
-------------- ------------- -------------- ---------------
-------------- ------------- -------------- ---------------
Proforma information:
Net loss per share.............................. $ (.44) $ (.23) $ (.55) $ (.52)
Weighted average common shares outstanding...... 6,837,400 6,240,200 6,777,000 4,984,700
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... $ (3,725,863) $ (2,610,513)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 1,765,233 1,055,243
Unusual charges........................................... 1,380,000
Deferred income taxes..................................... (190,000) 1,100,000
Equity in net (earnings) loss of unconsolidated entities.. 163,596 (32,379)
Change in operating assets and liabilities:
Accounts receivable................................... (611,136) (244,551)
Prepaid expenses...................................... (121,408) (111,698)
Accounts payable and accrued liabilities.............. 1,610,596 380,340
Other liabilities..................................... 332,870 (221,340)
---------------- ----------------
Net cash provided by (used in) operating activities....... 603,888 (684,898)
INVESTING ACTIVITIES
Purchases of property and equipment........................ (28,788,179) (13,317,550)
Decrease (increase) in restricted cash balances............ 749,372 (1,132,314)
Acquisition of Kensington - net of cash acquired........... (4,008,123) ---
Equity contribution to unconsolidated entities............. --- (1,171,039)
Payments of pre-opening costs.............................. (921,898) (517,742)
Payments for organization costs and other.................. (710,312) (125,902)
---------------- ----------------
Net cash used in investing activities..................... (33,679,140) (16,264,547)
FINANCING ACTIVITIES
Net proceeds from public offering.......................... --- 27,499,521
Proceeds from notes payable................................ 15,500,000 ---
Proceeds from mortgages.................................... 9,783,424 12,975,079
Repayment of mortgages..................................... (199,662) (4,820,119)
Proceeds from debentures due partner....................... --- 5,501,535
Repayment of debentures due partner........................ --- (5,535,375)
Payment for financing fees................................. (79,472) (758,119)
Distributions from unconsolidated entity................... 225,000 339,766
---------------- ----------------
Net cash provided by financing activities................. 25,229,290 35,202,289
---------------- ----------------
Increase (decrease) in cash and cash equivalents........... (7,845,962) 18,252,844
Cash and cash equivalents at beginning of period........... 12,283,185 144,833
---------------- ----------------
Cash and cash equivalents at end of period................. $ 4,437,223 $ 18,397,677
---------------- ----------------
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 2,702,050 $ 1,623,938
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
KARRINGTON HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE UNAUDITED THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1. BASIS OF PRESENTATION
The consolidated financial statements as of September 30, 1997 and for
the three and nine months ended September 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 September 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 nine months ended September 30,
1997 is computed based on the weighted average number of shares outstanding
during each period. For the three and nine months ended September 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 November 11, 1997, Kensington had
11 residences open and five residences under construction for a total of 491
beds in three states.
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
<PAGE>
As a result of the Kensington acquisition, certain accounts in the
September 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 nine months ended September 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.
Nine Months Ended
September 30,
------------------------------
1997 1996
-------------- --------------
Revenues $ 15,925,000 $11,410,000
-------------- --------------
-------------- --------------
Net loss $ (4,500,000) $(3,366,000)
-------------- --------------
-------------- --------------
Net loss per share $ (.66) $ (.61)
-------------- --------------
-------------- --------------
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 September 30, 1997, the Company has
guaranteed $1 million of joint venture debt financing.
As of September 30, 1997, five residences were open (one stabilized
residence and four residences in the fill-up phase), one residence was under
construction, and two other sites were under development. One residence was
open at September 30, 1996. Summarized income statement information of these
joint ventures is presented below.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ------------------------------
1997 1996 1997 1996
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Statements of Operations
Residence revenues............................... $ 1,409,638 $ 538,212 $ 3,591,788 $ 1,532,217
Operating expenses............................... 1,313,533 367,578 3,103,814 1,049,691
Depreciation and amortization expense............ 285,664 43,031 675,798 131,663
Interest expense................................. 290,409 79,856 651,509 269,870
-------------- ------------ -------------- --------------
Total expenses................................ 1,889,606 490,465 4,431,121 1,451,224
-------------- ------------ -------------- --------------
Net income (loss)................................ $ (479,968) $ 47,747 $ (839,333) $ 80,993
-------------- ------------ -------------- --------------
-------------- ------------ -------------- --------------
</TABLE>
5
<PAGE>
5. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
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. 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 .75%. At September 30, 1997,
there was $8,000,000 outstanding under these agreements.
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 September 30, 1997, the
Company has completed mortgage agreements for one existing and three new
residences and four lease transactions totaling $50.6 million. Subsequent to
September 30, 1997, the Company completed two lease transactions totaling
$18.0 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 nine 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 September 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 September 30, 1997. The
remaining funds will be disbursed in two phases at such time that the nine
cottages achieve certain debt service coverage ratios.
In September 1997, the Company entered into a $7,500,000 promissory
note with JMAC, Inc., 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 September 30, 1997, $7,500,000 was outstanding under this agreement.
On October 17, 1997, the Company entered a $14 million construction loan
agreement for the development and construction of four assisted living
residences in the State of Ohio. Interest is payable monthly and accrues at
the bank's prime rate plus 1 1/2% during construction. In October 1999, the
Company may elect, at its option, to convert the construction loan into a
term loan maturing in October 2004. Principal and interest payments under
the term loan would be based on a 25-year amortization schedule with interest
accruing at either prime plus 1 1/2% or an amount equal to 3.0% over the
yield at the time on five-year U.S. Treasury notes. The Company is required
to maintain minimum net worth and current ratio amounts and, if the term loan
is elected, to maintain debt service coverage ratios with respect to
individual residences.
6. UNUSUAL CHARGES
During the third quarter of 1997, the Company recorded an unusual charge
of approximately $1.4 million which primarily related to a $1.2 million
charge as a result of a decision to abandon certain projects. The Company's
property and equipment includes costs related to acquisition and development
of projects in process, including capitalized costs associated with the
Company's development department. At the time a project is abandoned, all
6
<PAGE>
previously capitalized costs are expensed. The remaining charges primarily
relate to severance costs associated with third quarter resignations.
7. TAX STATUS
As a result of the reorganization in July 1996, the Company applied the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Prior to July 1996, the Company was a partnership and
taxable income and losses were allocated to the partners for inclusion in
their respective income tax returns. Deferred income taxes are provided for
differences in the basis for tax purposes and for financial accounting
purposes of recorded assets and liabilities. A net deferred income tax
provision and liability of $1,100,000 was recorded in the third quarter of
1996 primarily as a result of the reorganization.
The $190,000 deferred tax benefit recorded for the nine months ended
September 30, 1997 represents an effective tax rate of 5% 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.
7
<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
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 September 30, 1997:
Company Jointly Total
Residences Owned System
--------------- ------------ ------------
Open 20 5 25
Under Construction 20 1 21
In Development:
Under Contract & Zoned 3 3 6
Under Contract & In Zoning 7 2 9
In Negotiation 6 - 6
The open residences represent 1,012 units (1,265 beds), of which 755
units (959 beds) are Company owned. Residences under construction represent
1,122 units (1,371 beds), of which 1,058 units (1,297) beds) are Company
owned.
8
<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>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
1997 1996 1997 1996
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues..................... 100.0% 100.0% 100.0% 100.0%
Expenses:
Residence operations............. 75.8 67.8 70.8 65.9
General and administrative....... 21.3 27.1 22.6 28.6
Rent expense..................... 1.7 .8 1.5 .7
Depreciation and amortization.... 14.2 19.0 13.3 15.7
Unusual charges.................. 25.0 --- 10.4 ---
---------- --------- --------- ---------
Total expenses..................... 138.0 114.7 118.6 110.9
---------- --------- --------- ---------
Operating income (loss)............ (38.0) % (14.7)%% (18.6)% (10.9)%
---------- --------- --------- ---------
---------- --------- --------- ---------
Average stabilized occupancy percentage 88.0% (a) 93.9% 89.4% (a) 93.3%
End of period:
Company owned:
Number of residences............. 20 6 20 6
Number of units.................. 755 312 755 312
Total system, including joint ventures:
Number of residences.......... 25 7 25 7
Number of units............... 1,012 365 1,012 365
</TABLE>
(a) Includes Kensington acquisition after April 30, 1997.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Total revenue increased $3.0 million, or 124%, to $5.5 million in the
third quarter of 1997 from $2.5 million in the third quarter of 1996
primarily due to the acquisition of Kensington Management Group, Inc. and
affiliates ("Kensington") on April 30, 1997 ($2.0 million), the opening of
new residences (total of $.4 million), the increased occupancy of residences
in the fill-up phase in 1996 ($.6 million) and an increase in revenues in
stable residences resulting from higher average daily resident rates, offset
by a decline in occupancy percentages.
Residence operating expenses increased $2.5 million, or 150%, to $4.2
million in the third quarter of 1997 from $1.7 million in the third quarter
of 1996. As a percentage of residence operating revenues, residence operating
expenses increased from 70% in the third quarter of 1996 to 77% in the third
quarter of 1997. The increase in operating expenses as a percentage of
operating revenues resulted from additional start up losses associated with
residences open less than one year and a decline in occupancy percentages of
stable residences.
General and administrative expenses increased $506,000, or 76%, to
$1,175,000 in the third quarter of 1997 from $669,000 in the third quarter 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
9
<PAGE>
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 $316,000, or 67%, to $784,000 in
the third quarter of 1997 from $468,000 in the third quarter of 1996
primarily due to the opening of new residences (total of $224,000) and the
acquisition of Kensington, offset by lower amortization of preopening costs.
See Note 6 of Notes to Consolidated Financial Statements for a
description of unusual charges.
Interest expense increased $642,000, or 301%, to $856,000 in the third
quarter of 1997 from $214,000 in the third quarter of 1996 primarily due to
the opening of new residences (total of $295,000) and the acquisition of
Kensington ($515,000), 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.
The equity in net earnings (loss) of unconsolidated entities decreased
due to four residences in the fill-up phase during the third quarter of 1997.
There were no residences in the fill-up phase during the third quarter of
1996.
The deferred tax benefit recorded in the third quarter of 1997
represents a year-do-date effective tax rate of 5% resulting from limitations
associated with the recognition of operating loss carryforwards.
See Note 7 to Consolidated Financial Statements for a description of the
nonrecurring tax charge of $1,100,000 recorded in the third quarter of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Total revenue increased $6.5 million, or 96%, to $13.2 million in the
first nine months of 1997 from $6.7 million in the first nine months of 1996
primarily due to the acquisition of Kensington ($3.1 million), the opening of
new residences (total of $.6 million), the increased occupancy of residences
in the fill-up phase in 1996 ($2.4 million) and an increase in revenues in
stable residences resulting from higher average daily resident rates, offset
by a decline in occupancy percentages.
Development and project management fees increased $120,000, or 24%, to
$613,000 in the first nine months of 1997 from $493,000 in the first nine
months of 1996 primarily due to consulting fees associated with third party
assisted living providers.
Residence operating expenses increased $5.0 million, or 90%, to $9.4
million in the first nine months of 1997 from $4.4 million in the first nine
months of 1996. As a percentage of residence operating revenues, residence
operating expenses increased from 71% in the first nine months of 1996 to 74%
in the same period of 1997. The increase in operating expenses as a
percentage of operating revenues resulted primarily from additional start up
losses associated with residences open less than one year.
General and administrative expenses increased $1.1 million, or 55%, to
$3.0 million in the first nine months of 1997 from $1.9 million in the first
nine months 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.
10
<PAGE>
See Note 6 of Notes to Consolidated Financial Statements for a
description of unusual charges.
Depreciation and amortization increased $.7 million, or 67%, to $1.8
million in the first nine months of 1997 from $1.1 million in the first nine
months of 1996 primarily due to the opening of new residences (total of $.4
million) and the acquisition of Kensington, offset by lower amortization of
preopening costs.
Interest expense increased $546,000, or 52%, to $1.6 million in the
first nine months of 1997 from $1.1 million in the first nine months of 1996
primarily due to the opening of new residences (total of $375,000) and the
acquisition of Kensington (798,000), offset by 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.
The $190,000 deferred tax benefit recorded for the nine months ended
September 30, 1997 represents an effective tax rate of 5% 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.
See Note 7 to Consolidated Financial Statements for a description of the
nonrecurring tax charge of $1,100,000 recorded in the third quarter of 1996.
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 were used to finance the development and acquisition of
additional assisted living residences and for working capital and general
corporate purposes. See Part II-Item2.
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 September 30, 1997, the
Company has completed mortgage agreements for one existing and three new
residences and four lease transaction totaling $50.6 million. Subsequent to
September 30, 1997, the Company completed two lease transactions totaling
$18.0 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
nine 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
September 1999 through April 2007 at which time the
11
<PAGE>
entire outstanding principal balance becomes due. The amount outstanding
under the agreement was approximately $19.9 million as of September 30, 1997.
The remaining funds will be disbursed in two phases at such time that the
nine cottages achieve certain debt service coverage ratios.
On October 17, 1997, the Company entered a $14 million construction loan
agreement for the development and construction of four assisted living
residences in the State of Ohio. Interest is payable monthly and accrues at
the bank's prime rate plus 1 1/2% during construction. In October 1999, the
Company may elect, at its option, to convert the construction loan into a
term loan maturing in October 2004. Principal and interest payments under
the term loan would be based on a 25-year amortization schedule with interest
accruing at either prime plus 1 1/2% or an amount equal to 3.0% over the
yield at the time on five-year U.S. Treasury notes. The Company is required
to maintain minimum net worth and current ratio amounts and, if the term loan
is elected, to maintain debt service coverage ratios with respect to
individual residences.
The Company has available lines of credit totaling $15.5 million. See
Note 5 of Notes to Financial Statements for a description of lines of credit.
For the nine months ended September 30, 1997, cash flows provided by
operating activities were $604,000 compared to cash flows used by operating
activities of $685,000 for the nine months ended September 30, 1996. The
Company used $33.7 million and $16.2 million, respectively, to primarily fund
residence development and acquire Kensington, and received $25.2 million and
$35.2 million, respectively, in cash from financing activities. At September
30, 1997, the Company had restricted cash of approximately $800,000 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 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 its 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.
The Company's capital requirements include seven projects on which
construction financing has not been closed; however five of the projects have
financing commitments in place and are in the process of closing while two
projects do not presently have a financing commitment.
The Company depends on outside mortgage or lease financing to fund the
majority of new residence construction costs. On the two ongoing projects
for which the Company does not have a current commitment, a total of
$4,800,000 out of total project costs of $12,650,000 has been invested
to-date. The Company expects to secure construction financing to fund the
additional $7,850,000 needed to complete these projects. The Company has
financing commitments in place for the five remaining projects now under
construction, and will need to close the associated financing or raise
additional capital in order to fund completion of these projects. All
closings of existing financing commitments are expected to occur before
year-end 1997. The Company will realize a net cash infusion of over
$8,500,000 from the closing of financing associated with the five projects as
the Company's equity in construction-in-progress exceeds the financing equity
requirement.
12
<PAGE>
II. OTHER INFORMATION
Items 1 and 3 through 5 are not applicable.
Item 2. Changes in Securities and Use of Proceeds
The information provided below represents only the information that has
changed since the Company's last report filed on Form SR for the six month
period ended April 18, 1997 as permitted under Item 701 (f) of Regulation S-K
(Use of Proceeds).
ITEM 701(f)(4)(vii)
- --------------------
<TABLE>
<CAPTION>
Direct or indirect
payments to directors,
officers, general
partners of the issuer
or their associates; to
persons owning ten
percent or more of
any class of equity
securities of the issue; Direct or indirect
and to affiliates of the payments to
issuer others
-------------------------- --------------------
<S> <C> <C>
Construction of plant,
building and facilities --- $1,511,285
Purchase of real estate --- 2,880,592
Acquisition of
Kensington
Management Group,
Inc. and affiliates --- 4,008,123
-------------------------- --------------------
$-0- $8,400,000
-------------------------- --------------------
-------------------------- --------------------
</TABLE>
The above disclosures represent a final report with respect to the use
of proceeds from the Company's initial public offering in July 1996. The use
of proceeds above do not represent a material change from the use of proceeds
described in the Company's July 1996 prospectus.
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.
13
<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 November 14, 1997
KARRINGTON HEALTH, INC.
(Registrant)
/s/ RICHARD R. SLAGER
---------------------------------
Richard R. Slager
Chief Executive Officer
/s/ MARK N. MACE
---------------------------------
Principal Accounting Officer
14
<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.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KARRINGTON
HEALTH, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,437,223
<SECURITIES> 0
<RECEIVABLES> 1,395,344
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,141,254
<PP&E> 100,733,555
<DEPRECIATION> 3,350,593
<TOTAL-ASSETS> 117,580,247
<CURRENT-LIABILITIES> 16,556,669
<BONDS> 0
0
0
<COMMON> 33,484,712
<OTHER-SE> (5,033,629)
<TOTAL-LIABILITY-AND-EQUITY> 28,451,083
<SALES> 0
<TOTAL-REVENUES> 13,231,154
<CGS> 0
<TOTAL-COSTS> 14,312,094
<OTHER-EXPENSES> (138,150)
<LOSS-PROVISION> 1,380,000
<INTEREST-EXPENSE> 1,593,073
<INCOME-PRETAX> (3,915,863)
<INCOME-TAX> 190,000
<INCOME-CONTINUING> (3,725,863)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,725,863)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
