<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 2)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 30, 1997
-------------------
KARRINGTON HEALTH, INC.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 0-28656 31-1461482
- --------------- ---------------- ------------------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
919 Old Henderson Road, Columbus, Ohio 43220
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 451-5151
--------------
Not Applicable
---------------------------------------------------
(Former name or former address, if changed since last report.)
1
<PAGE>
This Amendment No. 2 supplements the current report on Form 8-K
filed on May 15, 1997 and as amended on May 21, 1997 (the "Form 8-K") by
Karrington Health, Inc. (the "Company"). At the time of filing the Form 8-K,
it was impracticable for the Company to provide the financial statements of
businesses acquired and the proforma financial information required by Items
7(a) and 7(b), respectively.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired
Included in this report are the following combined financial
statements for Kensington Management Group, Inc. and affiliates, which are
audited with respect to the years ended December 31, 1995 and 1996 and are
unaudited with respect to the three months ended March 31, 1997 and 1996:
(1) Report of Independent Auditors
(2) Combined Balance Sheets of Kensington Management Group, Inc. and
affiliates as of December 31, 1996 and 1995 and March 31,
1997
(3) Combined Statements of Income of Kensington Management Group,
Inc. and affiliates for the years ended December 31, 1996
and 1995 and the three months ended March 31, 1997 and 1996
(4) Combined Statements of Equity of Kensington Management Group,
Inc. and affiliates for the years ended December 31, 1996
and 1995 and the three months ended March 31, 1997
(5) Combined Statements of Cash Flows of Kensington Management Group,
Inc. and affiliates for the years ended December 31, 1996
and 1995 and the three months ended March 31, 1997 and 1996
(6) Notes to Combined Financial Statements
(b) Proforma financial information
Included in this report are the following unaudited proforma
condensed financial statements of Karrington Health, Inc. and subsidiaries:
(1) Karrington Health, Inc. and subsidiaries unaudited Proforma
Condensed Consolidated Balance Sheet at March 31, 1997
(2) Karrington Health, Inc. and subsidiaries unaudited Proforma
Condensed Consolidated Statement of Operations for the
year ended December 31, 1996 and the three months ended
March 31, 1997
(3) Notes to Unaudited Proforma Information
(c) Exhibits
Exhibit Number Description
-------------- -----------
23 Consent of Ernst & Young LLP
2
<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.
KARRINGTON HEALTH, INC.
Date: July 14, 1997 By: /s/ Mark N. Mace
----------------------
Mark N. Mace
Senior Vice President, Finance
and Treasurer
3
<PAGE>
KARRINGTON HEALTH INC.
INDEX TO FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
Included are the following combined financial statements for
Kensington Management Group, Inc. and affiliates, which are audited with
respect to the years ended December 31, 1995 and 1996 and are unaudited for
the three months ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of Independent Auditors 5
Combined Balance Sheets of Kensington Management Group, Inc. and affiliates as
of December 31, 1996 and 1995 and March 31, 1997 6
Combined Statements of Income of Kensington Management Group, Inc. and
affiliates for the years ended December 31, 1996 and 1995 and the three months
ended March 31, 1997 and 1996 7
Combined Statements of Equity of Kensington Management Group, Inc. and
affiliates for the years ended December 31, 1996 and 1995 and the three months
ended March 31, 1997 8
Combined Statements of Cash Flows of Kensington Management Group, Inc. and
affiliates for the years ended December 31, 1996 and 1995 and the three months
ended March 31, 1997 and 1996 9
Notes to Combined Financial Statements 10-15
</TABLE>
(b) PROFORMA FINANCIAL INFORMATION
Included in this report are the following unaudited proforma
condensed financial statements of Karrington Health, Inc. and subsidiaries:
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Karrington Health, Inc. and subsidiaries unaudited Proforma Condensed
Consolidated Balance Sheet at March 31, 1997 17
Karrington Health, Inc. and subsidiaries unaudited Proforma Condensed
Consolidated Statement of Operations for the year ended December 31, 1996 and
the three months ended March 31, 1997 18-19
Notes to Unaudited Proforma Information 20
(c) EXHIBITS
Exhibit Number Description
-------------- -----------
23 Consent of Ernst & Young LLP 21
</TABLE>
4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholder of Kensington Management Group, Inc.
We have audited the accompanying combined balance sheets of
Kensington Management Group, Inc. and its affiliates (the "Company") as of
December 31, 1996 and 1995, and the related combined statements of income,
equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the 1996 and 1995 combined financial statements
referred to above present fairly, in all material respects, the financial
position of Kensington Management Group, Inc. and its affiliates as of
December 31, 1996 and 1995, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Columbus, Ohio
July 11, 1997
5
<PAGE>
KENSINGTON MANAGEMENT GROUP, INC.
AND AFFILIATES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996 1997
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 436,275 $ 1,009,830 $ 869,589
Accounts receivable......................... 152,469 207,570 201,046
Amounts due from related parties............ 122,200 292,000 292,000
Prepaid expenses............................ 65,509 63,627 114,164
----------- ------------ -----------
Total current assets............. 776,453 1,573,027 1,476,799
Property and equipment - net (NOTE 2).......... 6,185,779 7,973,022 8,181,359
Other assets - net (NOTE 3).................... 173,720 343,879 389,403
----------- ------------ -----------
Total assets..................... $ 7,135,952 $ 9,889,928 $10,047,561
----------- ------------ -----------
----------- ------------ -----------
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities.... $ 496,034 $ 755,848 $ 909,718
Unearned resident fees...................... 226,760 345,824 443,097
Current portion of long-term obligations.... 505,773 741,300 790,300
----------- ------------ -----------
Total current liabilities........ 1,228,567 1,842,972 2,143,115
Long-term obligations (NOTE 6)................. 7,778,196 10,258,144 10,226,074
Equity (NOTE 2):
Common shares............................... 338,700 338,700 338,700
Accumulated deficit......................... (518,602) (728,590) (837,239)
Partners' equity............................ (1,690,909) (1,821,298) (1,823,089)
----------- ------------ -----------
Total equity (1,870,811) (2,211,188) (2,321,628)
----------- ------------ -----------
Total liabilities and equity................... $ 7,135,952 $ 9,889,928 $10,047,561
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See accompanying notes.
6
<PAGE>
KENSINGTON MANAGEMENT GROUP, INC.
AND AFFILIATES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------- -----------------------------
1995 1996 1996 1997
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Residence operations . . . . . . . . . . . . . $ 4,995,864 $ 6,633,994 $ 1,501,496 $ 1,868,104
Management fees (Note 4) . . . . . . . . . . . 57,517 --- --- ---
------------ ------------ ----------- -------------
Total revenues . . . . . . . . . . . . . . . 5,053,381 6,633,994 1,501,496 1,868,104
Expenses:
Residence operations . . . . . . . . . . . . . 3,420,412 4,530,048 960,525 1,451,901
General and administrative . . . . . . . . . . 345,378 416,738 92,999 123,336
Depreciation and amortization. . . . . . . . . 371,867 415,546 90,639 92,870
Rent expense . . . . . . . . . . . . . . . . . 24,562 27,585 6,896 9,617
------------ ------------ ----------- -------------
Total expenses . . . . . . . . . . . . . . . 4,162,219 5,389,917 1,151,059 1,677,724
------------ ------------ ----------- -------------
Operating income . . . . . . . . . . . . . . . . 891,162 1,244,077 350,437 190,380
Interest expense . . . . . . . . . . . . . . . . (762,878) (960,278) (220,010) (267,135)
Interest income. . . . . . . . . . . . . . . . . 12,847 15,808 1,939 9,096
------------ ------------ ----------- -------------
Net income (loss). . . . . . . . . . . . . . $ 141,131 $ 299,607 $ 132,366 $ (67,659)
------------ ------------ ----------- -------------
------------ ------------ ----------- -------------
</TABLE>
See accompanying notes.
7
<PAGE>
KENSINGTON MANAGEMENT GROUP, INC.
AND AFFILIATES
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
COMMON ACCUMULATED PARTNERS'
SHARES DEFICIT EQUITY TOTAL
---------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 . . . . . . . . . . . $ 328,700 $ (386,411) $ (1,472,567) $ (1,530,278)
Cash contributions . . . . . . . . . . . . . . . 2,000 2,000
Cash distributions . . . . . . . . . . . . . . . (273,207) (220,457) (493,664)
Purchase of common shares. . . . . . . . . . . . 10,000 10,000
Net income . . . . . . . . . . . . . . . . . . . 141,016 115 141,131
---------- ----------- ------------ -------------
Balance at December 31, 1995 . . . . . . . . . . . 338,700 (518,602) (1,690,909) (1,870,811)
Cash distributions . . . . . . . . . . . . . . . (458,984) (181,000) (639,984)
Net income . . . . . . . . . . . . . . . . . . . 248,996 50,611 299,607
---------- ----------- ------------ -------------
Balance at December 31, 1996 . . . . . . . . . . . 338,700 (728,590) (1,821,298) (2,211,188)
Net loss . . . . . . . . . . . . . . . . . . . . (65,868) (1,791) (67,659)
Cash distributions . . . . . . . . . . . . . . . (42,781) --- (42,781)
---------- ----------- ------------ -------------
Balance at March 31, 1997 (unaudited). . . . . . . $ 338,700 $ (837,239) $ (1,823,089) $ (2,321,628)
---------- ----------- ------------ -------------
---------- ----------- ------------ -------------
</TABLE>
See accompanying notes.
8
<PAGE>
KENSINGTON MANAGEMENT GROUP, INC.
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
1995 1996 1996 1997
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . $ 141,131 $ 299,607 $ 132,366 $ (67,659)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . 371,867 415,546 90,639 92,870
Change in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . (73,911) (224,901) 25,353 6,524
Prepaid expenses . . . . . . . . . . . . . . . (31,537) 1,882 (13,409) (50,537)
Accounts payable and accrued liabilities . . . 129,361 259,814 136,462 153,870
Other liabilities. . . . . . . . . . . . . . . 66,948 119,064 44,663 97,273
---------- ---------- --------- ----------
Net cash provided by operating activities. . . 603,859 871,012 416,074 232,341
INVESTING ACTIVITIES
Purchases of property and equipment. . . . . . . . (1,652,496) (2,114,258) (26,903) (291,207)
Payments of pre-opening costs. . . . . . . . . . . (99,959) (14,570) --- (46,063)
Decrease (increase) in escrow balances . . . . . . (16,605) (74,127) 1,874 (3,194)
---------- ---------- --------- ----------
Net cash used in investing activities. . . . . (1,769,060) (2,202,955) (25,029) (340,464)
FINANCING ACTIVITIES
Proceeds from long-term obligations. . . . . . . . 1,703,509 5,481,194 1,730,000 199,000
Repayment of long-term obligations . . . . . . . . (185,938) (2,765,719) (1,413,207) (182,070)
Payment for financing fees . . . . . . . . . . . . --- (169,993) (28,549) (6,267)
Proceeds from partner's capital contribution . . . 2,000 --- --- ---
Proceeds from sale of common stock . . . . . . . . 10,000 --- --- ---
Payment of distributions to owners . . . . . . . . (493,664) (639,984) (408,339) (42,781)
---------- ---------- --------- ----------
Net cash provided (used) by financing
activities. . . . . . . . . . . . . . . . . 1,035,907 1,905,498 (120,095) (32,118)
---------- ---------- --------- ----------
Increase (decrease) in cash and cash equivalents . (129,294) 573,555 270,950 (140,241)
Cash and cash equivalents at beginning of period . 565,569 436,275 436,275 1,009,830
---------- ---------- --------- ----------
Cash and cash equivalents at end of period . . . . $ 436,275 $1,009,830 $ 707,225 $ 869,589
---------- ---------- --------- ----------
---------- ---------- --------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest . . . . . . . . . . . . . . $ 759,933 $ 936,798 $ 214,630 $ 270,772
</TABLE>
See accompanying notes.
9
<PAGE>
KENSINGTON MANAGEMENT GROUP, INC.
AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1. DESCRIPTION OF THE BUSINESS
Kensington Management Group, Inc. and affiliates (the "Company")
develops, owns and operates licensed, assisted living residences in
Minnesota, North Dakota and Iowa which provide quality, professional,
personal and health-care services 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
with a primary emphasis on Alzheimer's care.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements reflect the operations of Kensington
Management Group, Inc. and certain entities that are related due to ownership
(affiliates). Significant intercompany and interpartnership transactions and
accounts are eliminated in the accompanying combined financial statements.
The following table sets forth certain information regarding the operating
entities and their open residences as of December 31, 1996:
<TABLE>
<CAPTION>
Type of Commenced Licensed
Entity Entity Operations Units Beds
- ------ ------ ---------- ----- ----
<S> <C> <C> <C> <C>
Buffalo Hills Residence Partnership January 1981 72 77
Bismarck Investors / Kensington Partnership / May 1984 72 90
Kensington Cottages Corp of Minnesota S-Corp November 1993 12 20
October 1994 12 20
Kensington Cottages Corp of North Dakota S-Corp November 1993 12 24
Kensington Cottages Corp of Iowa S-Corp October 1994 12 24
Centex/Kensington Partnership I Partnership September 1995 12 23
Kensington Cottages Corp of Rochester S-Corp March 1995 12 22
April 1996 12 22
January 1997 16 28
--- ---
Total 244 350
--- ---
--- ---
</TABLE>
USE OF ESTIMATES
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported
10
<PAGE>
amounts of assets and liabilities, disclosures of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates.
REVENUE RECOGNITION
Residence operations include rental and service fee revenue which is
recognized in the period in which it is earned. Payments received in advance
are reflected as unearned resident fees.
CASH EQUIVALENTS
The Company considers all liquid investments purchased with a maturity
of three months or less to be cash equivalents. The carrying value of cash
equivalents approximates their fair value.
PROPERTY
Property and equipment are recorded at cost. In connection with the
development of residence projects, the Company has entered into land purchase
contracts, agreements with architects, financing agreements and construction
contracts which are administered by the Company. All costs related to the
development of residences are capitalized during the construction period.
Indirect project development and certain pre-acquisition costs are allocated
to projects and also are capitalized. Depreciation is computed when assets
are placed in service, using the straight-line and accelerated methods over
the respective useful lives of each class of asset which generally are as
follows:
Land improvements ......................................... 15 years
Buildings and building improvements ....................... 40 years
Furnishings and equipment ................................. 5 - 10 years
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------------ ------------
<S> <C> <C>
Land and land improvements ....................... 592,515 1,115,135
Buildings and building improvements .............. 5,609,200 6,310,218
Furnishings and equipment ........................ 1,107,472 1,200,988
Construction-in-progress ......................... -- 751,728
----------- -----------
Total .......................................... 7,309,187 9,378,069
Accumulated depreciation ......................... (1,123,408) (1,405,047)
----------- -----------
Property and equipment - net ................... $ 6,185,779 $ 7,973,022
----------- -----------
----------- -----------
</TABLE>
PRE-OPENING COSTS
Pre-opening costs include costs to hire and train staff, costs to
prepare the residence for operation and other related costs incurred prior to
opening. Costs incurred in connection with preparing the residence for
11
<PAGE>
opening and initial occupancy are capitalized and amortized over one year,
commencing with the opening of the residence.
DEFERRED FINANCING COSTS
Financing costs are capitalized and amortized using the straight-line
method, which approximates the interest method.
ADVERTISING EXPENSE
Advertising expenditures were approximately $35,000 and $37,000 for
1995 and 1996, respectively.
INCOME TAXES
Kensington Management Group, Inc. and certain affiliates in these
combined financial statements have elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. Under such election, the
S-Corporation's federal and state taxable income or loss are passed through
to the individual shareholders. Accordingly, no provision or benefit for
income taxes is recorded.
The remaining affiliates in these combined financial statements are
partnerships. Partnership taxable income and losses are allocated to the
partners for inclusion in their respective income tax returns. Accordingly,
no provision or benefit for income taxes is recorded.
CONCENTRATION OF CREDIT RISK
State Medicaid reimbursement programs constitute a significant source of
revenue for the Company. The Company intends to continue developing and
operating assisted living residences in states offering such reimbursement
programs. Adverse changes in general economic factors affecting these
states' respective health care industries or in these states' laws and
regulatory environment, including Medicaid reimbursement rates, could have a
material adverse effect on the Company's financial condition and results of
operations.
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
--------- --------
<S> <C> <C>
Pre-opening costs, less accumulated amortization of $54,846 and $6,899
at December 31, 1995 and 1996, respectively (SEE NOTE 2)................... $ 45,258 $ 7,816
Deferred financing costs, less accumulated amortization of $61,975
and $65,410 at December 31, 1995 and 1996, respectively (SEE NOTE 2)....... 70,395 203,924
Escrow balances (SEE NOTE 6)................................................. 57,342 131,469
Deposits..................................................................... 725 670
-------- --------
$173,720 $343,879
-------- --------
-------- --------
</TABLE>
12
<PAGE>
4. MANAGEMENT AGREEMENT
In 1990, Kensington Management Group, Inc. entered into a long-term
management agreement related to a 90-unit facility located in Hobbs, New
Mexico. The agreement provided for management fees based on 6% of monthly
gross revenues. The facility was 50%-owned by the sole shareholder of
Kensington Management Group, Inc. and his children and 50%-owned by a
relative of the sole shareholder and the relative's children. The facility
was sold in November 1995 at which time the management agreement was
terminated.
5. LEASE COMMITMENTS
The Company leases certain vehicles, equipment and office space. Future
minimum lease payments under noncancellable operating leases are as follows:
1997 . . . . . . . . . . . . . . . . . . . . . . $ 73,665
1998 . . . . . . . . . . . . . . . . . . . . . . 48,912
1999 . . . . . . . . . . . . . . . . . . . . . . 9,336
2000 . . . . . . . . . . . . . . . . . . . . . . 6,606
2001 . . . . . . . . . . . . . . . . . . . . . . 323
--------
Total. . . . . . . . . . . . . . . . . . . . . . $138,842
--------
--------
Total rental expense incurred was approximately $46,000 and $42,000 for
the years ended December 31, 1995 and 1996, respectively.
13
<PAGE>
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- -----------
<S> <C> <C>
$2,507,600 mortgage due in monthly principal and interest
installments of $20,766. Interest accrues at 9.75%. Balance due
in 2032........................................................ $2,481,428 $ 2,473,848
$2,200,000 construction mortgage due in monthly principal and
interest installments of $18,764. Interest accrues at prime +
1% or LIBOR + 3.5%. Balance due in 2003........................ -- 2,200,000
$1,700,000 mortgage due in monthly principal and interest
installments of $14,853. Interest accrues at 9.5%. Balance due
in 2006........................................................ -- 1,688,530
$1,400,000 mortgages due in monthly principal and interest
installments of $13,219. Interest accrues at 10.5%. Balance due
in 1998........................................................ 1,272,424 1,246,167
Promissory notes payable to individuals. Interest accrues at 15%.
Principal and accrued interest generally due in three years
from date of note.............................................. 1,042,000 727,000
Construction notes payable to general partners. Interest accrues
at 10% and is payable quarterly. Principal due upon disposition
of project, termination of partnership or sale of partnership
interest....................................................... 798,000 828,000
$420,000 mortgage due in monthly principal and interest
installments of $4,268. Interest accrues at 8.75%. Balance due
in 1999........................................................ 401,594 385,550
$355,000 mortgage due in monthly principal and interest
installments of $3,700. Interest accrues at 9.25%. Balance due
in 1998........................................................ 333,100 319,475
$240,000 construction note payable. Interest accrues at 10.25%.
Principal and accrued interest due in July 1997................ -- 240,000
$210,000 construction note payable. Interest is payable monthly
and accrues at 9.5%. Balance due in June 1997.................. -- 210,000
1995 construction loans refinanced in 1996....................... 1,235,196 --
Other long-term obligations...................................... 720,227 680,874
---------- -----------
Total long-term obligations...................................... 8,283,969 10,999,444
Less current portion............................................. (505,773) (741,300)
---------- -----------
Long-term obligations, less current portion...................... $7,778,196 $10,258,144
---------- -----------
---------- -----------
</TABLE>
Substantially all long-term obligations are collateralized by the
Company's property and equipment and, in certain instances, personal
guarantees of principle shareholders.
The $2,507,600 mortgage loan is insured by the Federal Housing and Urban
Development department (HUD) pursuant to Section 232 of the Code of Federal
Regulations. Under the terms of a Regulatory Agreement, the Company is
required to maintain a capital replacement reserve fund. This fund had a
balance of $57,342 and $74,469 at December 31, 1995 and 1996, respectively,
and is recorded in other assets in the accompanying combined balance sheets.
Distribution of any assets or income to the Company is limited to once every
six months after all reserve and loan payments have been made, and only after
receipt of written authorization from HUD. In the event of default, HUD may
terminate the management contract with Kensington Management Group, Inc.
Interest costs incurred were $813,529, and $992,189 for the years ended
December 31, 1995 and 1996, respectively. Of these amounts $50,639, and
$31,911 were capitalized to construction-in-progress in the respective
periods.
14
<PAGE>
The carrying amounts of long-term obligations approximate fair value
because the interest rates are comparable to mortgage rates currently
available.
As of December 31, 1996, the long-term obligations mature as follows:
1997 . . . . . . . . . . . . . . . . . $ 741,300
1998 . . . . . . . . . . . . . . . . . 1,814,345
1999 . . . . . . . . . . . . . . . . . 1,110,262
2000 . . . . . . . . . . . . . . . . . 113,843
2001 . . . . . . . . . . . . . . . . . 113,806
Thereafter . . . . . . . . . . . . . . 7,105,888
-----------
Total. . . . . . . . . . . . . . . . . $10,999,444
-----------
-----------
7. AMOUNTS DUE FROM RELATED PARTIES
The amounts due from related parties represent non-interest bearing
advances due from stockholders or their immediate family members.
Approximately $210,000 of advances outstanding as of December 31, 1996 were
repaid in May 1997.
8. COMMITMENTS
At December 31, 1996, the Company had commenced construction on two
cottages that are expected to be completed in 1997 at an aggregate cost of
approximately $1,800,000.
9. SUBSEQUENT EVENT
On April 30, 1997, Karrington Health, Inc. (KHI) completed its
acquisition of Kensington Management Group, Inc. and the other seven
affiliated entities in the accompanying combined financial statements. KHI
purchased the assets of six of these entities and purchased the stock of the
remaining two entities. KHI will continue to operate the acquired residences
under the Kensington name.
The aggregate purchase price for the ten open residences, the two
residences under construction and a management company approximated $28
million. Subsequent to April 30, 1997, all long-term obligations (see Note 6)
were retired with the exception of the $1,700,000 mortgage and approximately
$290,000 of other long-term obligations which were assumed by KHI.
15
<PAGE>
PROFORMA FINANCIAL INFORMATION
The accompanying unaudited proforma condensed financial statements set
forth the proforma effects of the recently completed acquisition by
Karrington Health, Inc. (the "Company") of (i) all the outstanding shares of
Kensington Management Group, Inc. and Kensington Cottages Corporation of
Minnesota and (ii) the operating assets of Buffalo Hills Residence, Bismarck
Investors and Kensington Living Centers, Inc., Kensington Cottages
Corporation of North Dakota, Kensington Cottages Corporation of Iowa,
Centex/Kensington Partnership I and Kensington Cottages Corporations of
Rochester (both (i) and (ii) collectively referred to as "Kensington"). The
total consideration for the above transactions included cash of $4.4 million,
assumed debt of approximately $2.0 million, new debt of approximately $19.9
million and $1.5 million in common shares of the Company (137,363 shares).
The following unaudited proforma condensed consolidated balance sheet of
the Company as of March 31, 1997 reflects the proforma effects of the
Kensington acquisition as if such transaction had occurred on March 31, 1997.
The following unaudited proforma condensed consolidated statements of
operations for the year ended December 31, 1996 and the three months ended
March 31, 1997 reflect the proforma effects of the Kensington acquisition as
if such transaction had occurred on January 1, 1996.
The following unaudited proforma condensed financial information has
been prepared by the Company based on the audited financial statements and
the related notes thereto of the Company and Kensington for the year ended
December 31, 1996 and the unaudited financial statements of the Company and
Kensington for the three months ended March 31, 1997, giving effect to the
assumptions and adjustments described in the accompanying notes.
The following unaudited proforma condensed financial information is
based on information currently available (which may be subject to further
adjustment) and 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 on January 1, 1996, or that may be expected to occur
in the future.
16
<PAGE>
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997
<TABLE>
<CAPTION>
ASSETS
Kensington
Karrington Management Proforma Proforma
Health, Inc. Group, Inc. Adjustments Consolidated
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 7,990,483 $ 869,589 $(4,255,766) (a)
(525,691) (b) $ 4,078,615
Receivables................................... 927,903 493,046 (397,941) (b) 1,023,008
Prepaid expenses.............................. 139,590 114,164 (102,639) (b) 151,115
----------- ----------- ----------- -----------
Total current assets........................ 9,057,976 1,476,799 (5,282,037) 5,252,738
Property and equipment -- net................... 60,042,305 8,181,359 10,974,891 (b) 79,198,555
Other assets -- net............................. 3,958,960 389,403 (166,103)(a)
(316,526)(b)
451,485 (b) 4,317,219
Cost in excess of net assets acquired........... -- -- 8,919,820 (b) 8,919,820
----------- ----------- ----------- -----------
Total $73,059,241 $10,047,561 $14,581,530 $97,688,332
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities...... $ 4,024,547 $ 909,718 $ (418,488)(b) $ 4,515,777
Notes payable -- bank......................... 2,600,000 -- 2,600,000
Unearned resident fees........................ 529,422 443,097 (107,223)(b) 865,296
Current portion of long-term obligations...... 374,668 790,300 (690,300)(a) 474,668
----------- ----------- ----------- -----------
Total current liabilities................... 7,528,637 2,143,115 (1,216,011) 8,455,741
Long-term obligations........................... 34,442,984 10,226,074 11,495,913 (a) 56,164,971
Deferred income taxes........................... 574,000 -- 480,000 (b) 1,054,000
Shareholders' equity:
Common shares................................. 31,984,712 338,700 1,500,000 (a)
(338,700)(b) 33,484,712
Accumulated deficit........................... (1,471,092) (2,660,328) 2,660,328 (b) (1,471,092)
----------- ----------- ----------- -----------
Total shareholders' equity................ 30,513,620 (2,321,628) 3,821,628 32,013,620
----------- ----------- ----------- -----------
Total....................................... $73,059,241 $10,047,561 $14,581,530 $97,688,332
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
17
<PAGE>
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Kensington
Karrington Management Proforma Proforma
Health, Inc. Group, Inc. Adjustments Consolidated
-------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Total revenue..................................... $ 9,595,562 $6,633,994 $16,229,556
Expenses:
Residence operations............................ 6,485,837 4,530,048 11,015,885
General and administrative...................... 2,772,727 416,738 3,189,465
Rent expense.................................... 89,121 27,585 116,706
Depreciation and amortization................... 1,379,060 415,546 $ 179,271 (a)
182,996 (b)
(59,199)(c)
20,077 (d) 2,117,751
----------- ---------- ----------- -----------
Total expenses................................ 10,726,745 5,389,917 323,145 16,439,807
----------- ---------- ----------- -----------
Operating income (loss)........................... (1,131,183) 1,244,077 (323,145) (210,251)
Interest expense.................................. (1,271,561) (960,278) (1,352,021)(e) (3,583,860)
Interest income................................... 470,065 15,808 (110,547)(f) 375,326
Equity in net earnings (loss) of unconsolidated
entities........................................ (7,157) -- (7,157)
----------- ---------- ----------- -----------
Income (loss) before income taxes................. (1,939,836) 299,607 (1,785,713) (3,425,942)
Deferred income taxes............................. (683,000) -- 225,000 (g) (458,000)
----------- ---------- ----------- -----------
Net income (loss)................................. $(2,622,836) $ 299,607 $(1,560,713) $(3,883,942)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Per share information:
Net loss per share.............................. $ (.48) $ (.70)
Weighted average common shares outstanding (h).... 5,415,800 5,553,163
</TABLE>
SEE ACCOMPANYING NOTES.
18
<PAGE>
KARRINGTON HEALTH, INC.
AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Kensington
Karrington Management Proforma Proforma
Health, Inc. Group, Inc. Adjustments Consolidated
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Total revenue....................................... $3,133,640 $1,868,104 $5,001,744
Expenses:
Residence operations.............................. 2,075,198 1,451,901 3,527,099
General and administrative........................ 890,182 123,336 1,013,518
Rent expense...................................... 47,592 9,617 57,209
Depreciation and amortization..................... 375,113 92,870 $ 68,438 (a)
55,749 (b)
(2,417)(c)
5,033 (d) 594,786
---------- ---------- --------- -----------
Total expenses.................................. 3,388,085 1,677,724 126,803 5,192,612
---------- ---------- --------- -----------
Operating income (loss)............................. (254,445) 190,380 (126,803) (190,868)
Interest expense.................................... (148,990) (267,135) (263,957)(e) (680,082)
Interest income..................................... 155,060 9,096 (55,274)(f) 108,882
Equity in net earnings (loss) of unconsolidated
entities.......................................... (23,951) -- (23,951)
---------- ---------- --------- -----------
Income (loss) before income taxes................... (272,326) (67,659) (446,034) (786,019)
Deferred income taxes............................... 109,000 (55,000) (g) 54,000
---------- ---------- --------- -----------
Net income (loss)................................... $ (163,326) $ (67,659) $(501,034) $ (732,019)
---------- ---------- --------- -----------
---------- ---------- --------- -----------
Per share information:
Net loss per share.................................. $ (.02) $ (.11)
Weighted average common shares outstanding (h)...... 6,700,000 6,837,363
</TABLE>
SEE ACCOMPANYING NOTES.
19
<PAGE>
NOTES TO UNAUDITED PROFORMA INFORMATION
NOTES TO UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a) Reflects reductions in cash and other assets, increase in outstanding
indebtedness and the issuance of 137,363 common shares of the Company
as a result of the acquisition of Kensington.
Paid in cash:
Purchase price............................ $ 3,446,013
Professional fees and other liabilities... 975,856
Long-term obligations........................ 10,805,613
Common shares ............................... 1,500,000
-----------
$16,727,482
-----------
-----------
(b) The following are proforma adjustments made to reflect Kensington's fair
values as of March 31, 1997.
Eliminate Kensington equity accounts...... $(2,321,628)
Net assets retained by seller............. (817,086)
Writeup of fixed assets .................. 10,974,891
Tax effect of fixed asset writeup ........ (480,000)
Financing fees and other.................. 451,485
Costs in excess of net assets acquired ... 8,919,820
-----------
$16,727,482
-----------
-----------
NOTES TO UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(a) To reflect increased depreciation resulting from adjustments to fair
value of fixed assets.
(b) To reflect the amortization of costs in excess of net assets acquired
assuming an amortization period of 40 years.
(c) To reflect decreased pre-opening cost amortization reflected in
Kensington's historical numbers.
(d) To reflect increased amortization of financing costs associated with
the issuance of additional borrowings.
(e) To reflect increased interest expense resulting from increased
borrowings.
(f) To eliminate interest income (assumed interest rate of 5%) resulting
from reduced cash balances.
(g) To adjust consolidated income tax expense for the effect of the
adjustments above. The proforma tax adjustment for the year ended December
31, 1996 does not reflect any benefit for the proforma adjustments
attributable to the period prior to July 18, 1996 as the Company
was a partnership and all proforma income and losses would have been
allocated to the partners' respective income tax returns. Realization
of proforma losses subsequent to December 31, 1996 were limited by the
amount of existing taxable temporary differences reversing in the
carryforward period. As a result, the proforma tax adjustment for the
three months ended March 31, 1997 reflects a reversal of $55,000 of the
tax benefit recorded by the Company.
(h) The Proforma Consolidated column reflects the issuance of 137,363
common shares of the Company pursuant to the Kensington acquisition.
20
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-16971) pertaining to the 1996 Incentive Stock Plan of our
report dated July 11, 1997, with respect to the combined financial statements
of Kensington Management Group, Inc. and Affiliates included in this Form 8-K.
/s/ Ernst & Young LLP
Columbus, Ohio
July 14, 1997
21
