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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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, OH 43220
(614) 451-5151
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the 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 the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K: [X]
Shares of registrant's common shares, without par value, outstanding at March
13,1998 was 6,837,363. As of March 13, 1998, the aggregate market value of
the voting stock held by non-affiliates of the registrant was $45,887,000.
Documents Incorporated By Reference
The information required by Part I, Item 2 and Part II, Items 5(a), 6, 7 and
8, of Form 10K is incorporated herein by reference to the registrant's Annual
Report to Shareholders for the year ended December 31, 1997. The information
required by Part III of Form 10K is incorporated herein by reference to the
registrant's definitive Proxy Statement relating to its 1998 Annual Meeting
of Stockholders to be held on May 12, 1998.
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PART I
ITEM 1. BUSINESS
The Company develops, owns and operates licensed assisted living
residences. Assisted living residences provide housing and care for elderly
or frail individuals who, although generally ambulatory, need assistance with
one or more activities of daily living, such as bathing, grooming, dressing,
eating or personal hygiene.
In 1990, Richard R. Slager, the Company's Chief Executive Officer, and
the Company's former Chief Operating Officer and Chief Financial Officer,
formed DevelopMed Associates, Inc., an Ohio corporation ("DMA"), for the
purpose of developing an assisted living residence business. In 1991, DMA
entered into a strategic alliance with JMAC, Inc. ("JMAC"), an investment
company owned by John H. McConnell and John P. McConnell, the founder and the
Chairman, respectively, of Worthington Industries, Inc., pursuant to which
alliance DMA and JMAC Properties, Inc., an Ohio corporation ("JMAC
Properties"), which is a wholly-owned subsidiary of JMAC, formed the
Company's predecessor, Karrington Operating Company, an Ohio general
partnership ("Karrington Operating"). Prior to the consummation of the
reorganization transactions (as described below), JMAC Properties owned a
two-thirds equity interest in Karrington Operating, and DMA owned a one-third
equity interest.
Immediately prior to the Company's initial public offering in July 1996,
JMAC transferred to the Company all of its shares of JMAC Properties in
exchange for two-thirds of the pre-offering outstanding common shares of the
Company and the shareholders of DMA transferred all of their shares of DMA to
the Company in exchange for one-third of the pre-offering outstanding common
shares of the Company.
As of March 23, 1998, the Company has developed 46 residences in its
target markets, 32 of which are open and 14 of which are under construction
and scheduled to open in 1998. These 46 residences are located in Ohio,
Pennsylvania, Illinois, Minnesota, North Dakota, Iowa, Indiana, Colorado,
North Carolina, Michigan and New Mexico. As part of its nationwide expansion
strategy, the Company has sites for an additional 20 residences under
contract in these states, as well as in Alabama, Mississippi, Texas,
Nebraska, Washington, California and Tennessee.
Recognizing that not all seniors share the same acuity at various income
levels, Karrington has created three standard models of residence, an
evolution of the Company's original prototype mansion-style residence. While
standardization to the three models will enable the Company to get its
product to market faster, Karrington's commitment to its residents remains
intact.
Along with creating three standard models, the Company has branded, or
named, its residential products to help build Karrington's national identity.
Karrington's original mansion-style residence, now known as K1 or the
Karrington model, was upgraded and enhanced in 1997. Located in established
upper-income communities, the K1 is a 72-unit model that replaces the
original 53-unit prototype.
Karrington Place, or K2, is the Company's one-story, small-town solution
to high-quality assisted living. Karrington Place offers residents of
smaller and rural communities access to the skilled and caring professionals,
unique products and services, and dignified environments that enable
Karrington residents to age-in-place gracefully.
The Company's third residential model is the outgrowth of Karrington's
May 1997 acquisition of Kensington Management Group, Inc. of Golden Valley,
Minnesota. Operating innovative Alzheimer's care communities, now known as
Karrington Cottages or KC, the Company provides residential Alzheimer's care
and other programs under the medical direction of geriatric and dementia
specialists.
The early 1998 completion of a nine-Cottage campus in Rochester,
Minnesota will further Karrington's relationship with geriatric physicians of
the world-famous Mayo Clinic. The Company expects to develop future
Karrington Cottages in conjunction with other regional health care systems
throughout the Midwest.
With the addition of Karrington Cottages to the Company's product mix,
management plans to broaden the way high-acuity care and assisted living in
general are viewed by the health care industry and the public. Residential
care for persons with Alzheimer's Disease and other forms of dementia will
continue to be the focus of Karrington Cottages. In addition, some
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residential Cottages on each campus will be devoted to other physical and
cognitive conditions, based on the needs or specialties of the regional
health care providers associated with Karrington.
Karrington residences typically are staffed with licensed nurses on a
24-hour basis and are designed to permit residents to "age in place" within
the residence as they develop further physical or cognitive frailties. The
Company believes that it is able to care for individuals with higher acuity
levels (i.e., those needing greater assistance with activities of daily
living) than is typical in the assisted living industry.
In addition to its own development activities, the Company has entered
into joint development relationships with health care providers, including
Sisters of Charity Health Care Systems, Inc. ("SCHCS"), a not-for-profit
corporation of which the sole member is Catholic Health Initiatives ("CHI").
CHI is a large, not-for-profit health organization formed by the recent
consolidation of Catholic Health Corporation, SCHCS and Franciscan Health
Systems. CHI operates 67 hospitals and 48 long-term care facilities in 22
states and has revenues of $4.7 billion. The Company and CHI currently intend
to develop and operate assisted living residences with CHI's health care
system. See "Relationship with CHI."
THE ASSISTED LIVING INDUSTRY
The assisted living industry has developed over the past decade to
provide a cost-effective residential alternative for elderly individuals who
do not require the intensive medical attention provided by a skilled nursing
facility but who cannot, or choose not to, live independently due to physical
frailty or cognitive disorders. It is estimated that the assisted living
industry has annual revenues of $15 billion. Assisted living represents a
combination of housing and 24-hour a day personal support services designed
to aid elderly residents with activities of daily living, such as bathing,
grooming, dressing, eating and personal hygiene. Assisted living residences
provide assistance to residents with limited medical needs and may provide
higher levels of personal assistance for special need residents, such as
incontinent residents or residents with Alzheimer's disease or other forms of
cognitive disorders.
The assisted living industry is fragmented and, to date, is
characterized by many small operators. The scope of assisted living services
varies substantially among operators, ranging from basic "board and care"
services to full service assisted living residences such as those operated by
the Company. Many smaller assisted living providers do not operate in
residences designed specifically for assisted living, do not have
professionally trained staffs and may provide only limited assistance with
low-level care activities. The Company believes there are few assisted living
operators in its markets who provide the same comprehensive range of assisted
living services, such as Alzheimer's care and other special care programs, as
the Company.
The Company believes that the following factors should continue to
positively affect the assisted living industry:
CONSUMER PREFERENCES. The Company believes assisted living is increasingly
the alternative preferred by prospective residents and their families in
providing care for the frail elderly. Assisted living residents have greater
independence, and assisted living services allow them to "age in place" in a
residential setting. The Company believes these factors result in a higher
quality of life than that experienced in the more institutional or clinical
settings, such as skilled nursing facilities.
POSITIVE DEMOGRAPHIC CHANGES. According to the U.S. Bureau of Census, the
number of individuals in the United States 85 years and older is expected to
increase by approximately 43% during the 1990s, from 3.0 million in 1990 to
an estimated 4.3 million in 2000, as compared to total U.S. population growth
of approximately 11% during the same period. It is further estimated that
approximately 57% of the population of seniors over age 85 currently need
assistance with activities of daily living and that more than one-half of
seniors are likely to develop Alzheimer's disease or other cognitive
disorders by age 85.
ASSISTED LIVING DEMAND EXCEEDS SUPPLY. The supply of long-term care beds per
1,000 individuals 85 years of age and older declined from 686 beds per
thousand to 604 beds per thousand between 1980 and 1991, according to the
U.S. Bureau of Census, and the Company expects this trend to continue. The
Company believes this decline is attributable to several factors. The
majority of states in the United States have adopted certificate of need
("CON") or similar statutes which generally require that, prior to the
addition of new beds, the addition of new services or the making of certain
capital expenditures, a state agency must determine that a need exists for
the new beds or the proposed activities. The Company believes that this CON
process tends to restrict the supply and availability of licensed nursing
facility beds. High construction costs, limitations on government
reimbursement for the full costs of construction and start-up expenses also
act to constrain growth in the supply of such facilities and beds. At the
same time, nursing facility operators are focusing on patients requiring
higher levels of nursing care
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which results in fewer nursing beds being available to patients with lower
acuity levels.
COST ADVANTAGES. The Company believes that the assisted living industry can
provide comparable services for significantly less than the cost of such
services to private pay residents in nursing facilities. The Company's market
research indicates that the Company provides services at a cost of 25% to 35%
less than the cost of comparable services provided by private intermediate
care nursing facilities in the same market.
CHANGES IN FAMILY COMPOSITION. As a result of the increasing number of
two-income families, the high divorce rate and the number of single-parent
households, as well as the increasing geographic dispersion of families, many
adult children are not available to care in their own homes for elderly
parents. Two-income families are, however, often better able to provide
financial support for elderly parents.
COST CONTAINMENT PRESSURES. Responding to rising health care costs,
governmental and private pay or sources have adopted cost containment
measures that have encouraged reduced lengths of stay in hospitals. A result
of this trend is an increase in the number of individuals receiving nursing
facility care as compared to hospitalization. That, in turn, causes nursing
facility operators to focus on improving occupancy and increasing services to
residents requiring high levels of nursing care. As the level of care for
nursing facility residents rises and the supply of nursing facility space is
filled by residents having more acute needs, the Company believes that there
will be greater demand for assisted living residences to provide for
residents requiring less nursing care than generally will be provided to
residents in nursing facilities.
STRATEGY
The principal components of the Company's strategy are to:
DEVELOP KARRINGTON MODEL RESIDENCES IN CURRENTLY-SERVED AND NEW COMMUNITIES.
The Company's plans call for rapid development of the Karrington models in
the communities it currently serves, as well as expansion into additional
communities. The Company targets middle-to upper-income metropolitan markets
which have well-established populations of persons 75 years of age and older.
This development activity, in conjunction with the Company's relationship
with CHI, is intended to result in regional concentrations of assisted living
residences. The Company's ultimate objective is to develop a nationwide
network of assisted living residences which will be utilized by managed care
companies.
EXPAND JOINT DEVELOPMENT RELATIONSHIPS WITH MAJOR HEALTH CARE SYSTEMS ACROSS
THE UNITED STATES. The Company believes that it will continue to benefit
from its relationship with major health care systems, including CHI, pursuant
to which the Company expects to develop and operate, and jointly own assisted
living residences in communities where these providers or their affiliates
have a major presence as a health care provider. In addition, the Company
believes its relationship with CHI provides a significant source of referrals
and the opportunity to leverage the Company's expertise by developing similar
relationships with other large, primarily not-for-profit, health care systems
throughout the country.
CONTINUE ITS FOCUS ON PROVIDING A BROAD RANGE OF SERVICES TO HIGHER-ACUITY
RESIDENTS. The Company believes it provides a higher acuity level of care to
its residents than is typically available at assisted living facilities,
including care for individuals with Alzheimer's disease and other cognitive
disorders. The Company is able to provide these services by building its
residences to higher standards and specifications, hiring licensed
professionals, providing advanced training to its staff and complying with
relevant regulations. In addition to providing care to residents with more
complex medical conditions, the Company seeks to offer a broad range of
services to meet the varied needs of all of its residents. In the future,
these services are expected to include physical, occupational, speech and
other rehabilitation therapy programs and other resident services. By
providing a higher level of care and a broader spectrum of services, the
Company is able to allow its residents to "age in place." The Company also is
able to provide these services at rates which are substantially less than the
cost of similar services provided by nursing care facilities.
RELATIONSHIP WITH CHI
In addition to its own residence development activities, the Company and
Catholic Health Initiatives have entered into five joint venture agreements
to develop, own and operate six assisted living residences, all of which are
open at the end of 1997. The genesis of the CHI relationship was the joint
development by the Company and SCHCS of Karrington of Oakwood, a 53-unit
assisted living residence located in the Dayton, Ohio area which opened in
November 1994. Following the success of the Karrington of Oakwood residence,
the Company and CHI determined to expand their relationship and in 1995,
entered into
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a letter of intent relating to the joint development of six additional
projects over a three-year period. The first of the six projects consists of
a 61-unit assisted living residence and an adjacent 28-unit Alzheimer's and
cognitive disorder residence located in Albuquerque, New Mexico, which opened
in October 1996. Three additional residences located in Cincinnati and
Dayton, Ohio and Colorado Springs, Colorado opened in 1997.
Each project is owned jointly by the Company and CHI, with CHI typically
owning approximately 80% of the equity of the project. Construction and
permanent debt financing generally is arranged by CHI on behalf of the
venture and is non-recourse to the Company. The Company provides all
development and management services with respect to each residence under a
standard agreement that generally provides for a development fee of $250,000
and a management fee of 5% of revenues.
SERVICES AND OPERATIONS
SERVICES PROVIDED
Seventy-five percent of Karrington residents are females and the average
age of all residents is 83. Most Karrington residents have some disability
associated with aging, such as dementia, Alzheimer's disease, arthritis,
nutritional problems, incontinence, strokes or other disorders, and need
assistance with two or more activities of daily living. Residents needs
generally fall into one or more of the following categories: (i) requiring
physical support or assistance with activities of daily living; (ii)
requiring assistance, reminders and cuing due to some cognitive impairment;
and (iii) requiring socialization and interaction with others.
Residents generally pay a daily suite rental rate under a resident
agreement which is renewable annually and cancelable with 30 days notice. The
daily suite rental rate ranges from $34 to $137 per day, depending on unit
size, location, number of occupants and level of care required. Approximately
70% of Karrington's residents live in private suites. While the Company's
average basic daily suite rental rate is approximately $85, the wide range of
rates offered by the Company allows the Company to accommodate persons of
varying financial resources. Medication administration and various levels of
extended care services, which depend on the degree of frailty, add to the
basic care rate. Additional charges may be incurred for other services such
as hair care and special diets. Currently, approximately 93% of all resident
revenues are from private pay sources.
The Company's basic care program is provided to all residents at no
additional cost and includes: assistance with daily living, such as eating,
bathing, grooming, dressing and personal hygiene; three meals per day served
in a common dining room; 24-hour security; emergency call systems in each
unit and living area; transportation to offices, stores and community
services; assistance with arranging outside services such as physician care,
various therapy programs and other medical services; personal laundry
services; housekeeping services; and social and recreational activities.
In addition to the basic care program, residents may be included in the
extended care program, which assists residents who require more frequent or
more intensive assistance or care. Prior to entering a Karrington residence,
and periodically during their stay, individuals' needs are assessed to
determine the level of extended care services required, and an individual
care plan is designed. The Company's experience is that approximately 90% of
its residents require some extended care services or require medication
administration.
The Company's Alzheimer's and other cognitive disorder programs are
provided in each prototype residence on a designated "special care" floor or
wing. The Company also develops residences designed specifically for
Alzheimer's disease care. Trained staff provide special care programs for
cognitively impaired residents, and each is charged additional daily fees for
this added support. Programs include added assistance, stimulation, special
activities, intervention and therapeutic programs that are developed and
supported by physicians specializing in dementia care that consult with the
Company.
STAFFING
Each residence has an Administrator and a seven-person management team.
This management team includes the Resident Care Director (who supervises all
resident support staff and care plans), a Registered Nurse/Wellness Director
(responsible for all wellness programs, as well as medication programs), the
Director of Administration (responsible for general administrative duties)
and the Marketing Director. The Activities Director, Chef and Environmental
Services Director complete the management team. Residence management teams
report to a Regional Director responsible for the operation of several
residences. Regional directors provide support, oversight and mentoring to
each residence's staff.
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Staffing models are used to determine appropriate personnel levels.
Screening is used to help select staff with "care providing" characteristics.
For each residence, services are typically provided by a staff of
approximately 28 full-time equivalents. The largest staff component is
"Resident Assistants," who include licensed practical nurses and other
trained staff members who are responsible for administering services to
residents.
The Company maintains competitive compensation programs, including
incentives and quarterly profit sharing, which it believes help attract and
retain excellent employees. The Company believes that the combination of
proper interviewing, selection methods and review, training and appropriate
incentives significantly reduces hiring and retraining costs and allows for a
more stable, long-term work force. All employees participate in a recruitment
and development program called the Predictive Index-Registered Trademark-, a
third-party program which is focused on determining key criteria and personal
attributes which the Company believes are important to the proper placement
of staff and management.
TRAINING AND QUALITY ASSURANCE
The Company provides its personnel with an extensive and innovative
training program. This training covers all aspects of Karrington's operation.
At the end of a 90-day probationary period, each new employee is evaluated
for permanent placement. Additionally, the Company has an extensive
administrator-in-training ("AIT") program which provides classroom and
on-the-job training to develop future Karrington administrators. The Company
believes investment in the AIT program is vital to its continued growth,
quality control and consistency of service delivery.
The Company has structured a comprehensive quality assurance ("QA")
program intended to maintain standards of care established for each
residence. Under the Company's QA program, the care and services provided at
each residence are monitored by the professional services staff which reports
directly to the Company's senior management. The QA team works with residence
management teams to assure that all staff members are trained, that clinical
policies and procedures are followed, and that all state and federal
standards are met while achieving the stringent requirements of the Company.
The Company's QA program helps support compliance with federal and state
regulations and requirements for licensing. Karrington has also developed a
Quality of Service program which includes periodic surveys and follow-up with
all current and former residents and responsible parties.
DEVELOPMENT
The Company's development personnel research and identify potential
markets, primarily in major metropolitan areas and their surrounding suburban
communities, and select sites for development within such markets. In
evaluating a market, the Company considers a number of factors, including
population, income and age demographics, traffic count, site visibility,
residential and commercial characteristics, probability of obtaining zoning
approvals, proximity of various competitors, estimated market demand and the
potential to achieve economies of scale in a specific market by concentration
of its development and operating activities.
The principal stages in the development process are (i) strategic market
selection and assessment (ii) site selection and contract signing, (iii)
zoning and site plan approval, (iv) architectural planning and design, (v)
contractor selection and (vi) construction and licensure. Once a market has
been identified, site selection and contract signing typically take three
months. Zoning and site plan approval generally take three to nine months and
are typically the most difficult step in the development process as a result
of the Company's selection of sites in established communities which
frequently require site rezoning. Architectural planning and design and
contractor selection often occur during the zoning process but can prolong
the start of construction. Residence construction generally takes 12 months.
After a residence receives a certificate of occupancy and appropriate
licenses, residents usually begin to move in immediately. The Company's
experience indicates that new residences typically reach a stable level of
occupancy of over 90% within 12 months, but there can be no assurance that
these results will be achieved in new markets. The Company estimates that
total capitalized cost to develop, construct and open a K1 or K2 Karrington
model residence, including land acquisition and construction costs, ranges
from approximately $5.0 million to $11.0 million, an average cost per unit of
approximately $110,000. The cost of any particular residence may vary
considerably based on a variety of site-specific factors.
The Company's development activities are coordinated by its 18-person
development staff, which has extensive real estate acquisition, design,
engineering, zoning, general construction and project management experience.
Architectural design and hands-on construction functions are usually
contracted to experienced outside architects and contractors.
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The Company's construction strategies include the development of
national purchasing contracts for major building components and the retention
of several regional contractors engaged to construct its residences. The
Company believes these approaches will help reduce construction costs or
mitigate the rate of cost increases due to inflation, increase product
quality, and shorten construction periods that result from increased
familiarity with the architectural, engineering and construction design of
the Company's prototype residences.
ARCHITECTURAL DESIGNS
The K1 or Karrington model residence is a freestanding, mansion-style
building with a designed capacity of 75 to 85 residents in any of a variety
of exterior styles. The K1 prototype averages 72 units and approximately
50,000 square feet and is generally built on a 2.5 to 4 acre site. The K2 or
Karrington Place model residence averages 48 units with a designed capacity
of 61 residences. The KC or Karrington Cottage prototype model is 20 units
with 36 beds. Approximately 45-50% of the buildings are devoted to common
areas and amenities. The Company's three basic building plan designs provide
it with flexibility in adapting the model to a particular site and local
zoning requirements. The building is usually two or three stories of concrete
and steel frame construction built to institutional health care standards but
residential in appearance. The interior design promotes a home-like
environment while permitting the effective provision of resident care
programs and promoting resident independence.
The individual resident suites are clustered on each floor to resemble a
neighborhood, with a variety of suite floor plans of one or two rooms and
varying square footage. Each floor has a quiet area resembling a library or
den and an active area designed to support activity programs and interaction
among residents, staff and families. The main floor usually includes the main
dining room, private dining rooms, administrative offices, a library, a
living or family room, an ice cream parlor and a year-round sun porch. Also
included are public restrooms, outside porches, a foyer and a formal entryway
with grand staircase and central elevator. On other floors in each residence
are located a resident laundry room, a wellness center, a bathing spa area,
employee break rooms, a beauty salon and activity areas. The special care
floor also includes a separate resident kitchen and dining area.
Recently, the Company opened its third stand-alone Alzheimer's care
residence in Columbus, Ohio designed specifically for residents with
Alzheimer's disease. The Karrington Cottage or KC model residences are
constructed using a special design concept intended to provide the atmosphere
and physical environment believed by the Company to be most effective in
assisting residents in the later stages of Alzheimer's disease. The Company
intends to develop additional KC models in many of the markets it enters.
The architectural and interior design of the Karrington prototypes
incorporate Karrington's philosophy of dedication to excellence in preserving
and enhancing personal dignity, independence, individuality and quality of
life. The Company believes that its residential environments accomplish other
objectives as well, including: (i) lowering the stress and disruption of the
resident and their family that occurs because of a move; (ii) providing a
secure environment that is easily traveled by residents with a wide variety
of ambulation disabilities; (iii) making available a comfortable home-like
environment that welcomes visitation by family and friends; and (iv)
supporting the Company's special activities programs that promote
inter-generational activities and events to bring together elderly residents
with younger persons in the community.
MARKETING
The Company's marketing approach emphasizes consumer education and
awareness directed to potential residents and family members. The adult
children of residents tend to be significant decision-makers in the selection
of the assisted living option. Other significant referral sources include
hospital discharge planners, physicians, churches, social service agencies
focused on the elderly, nursing facilities in the area, home health agencies,
social workers, legal advisors, other health care providers and families of
existing residents. Telephone directory advertising, media products and
informal "networking" are directed by the Company toward educating
decision-makers and other referral sources in a community. The marketing
personnel in the Company's corporate office develop the overall strategy in
each market as well as media materials, databases, direct mail, signage and
community outreach activities. Each residence has a marketing director
responsible for generating and following-up leads, coordinating referral
activities and providing tours, counseling and caregiving advice for
potential residents and their families with respect to the Company's
residences and services.
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Marketing activities begin during the development stage of a residence,
after the Company has obtained site control, and continue with increased
emphasis when an information center opens for a specific residence
approximately six to nine months prior to opening.
REGULATION
The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities, which requirements vary from state to state. These
requirements address, among other things: personnel education, training and
records; facility services, including administration of medication and
limited nursing services; physical plant specifications; furnishing of
residents' units; food and housekeeping services; emergency evacuation plans;
and residents' rights and responsibilities. In several states in which the
Company operates or intends to operate, assisted living residences also
require a certificate of need before the residences can be opened. In most
states, assisted living residences are subject to state or local fire and
building codes and food service licensure requirements. Like other health
care residences, assisted living residences are subject to periodic survey or
inspection by governmental authorities. From time to time in the ordinary
course of business, the Company receives survey reports. The Company reviews
such reports and takes appropriate corrective action if deficiencies are
noted. Inspection deficiencies are resolved through a plan of correction,
although the reviewing agency typically is authorized to take action against
a licensed facility where deficiencies are noted in the survey process. Such
action may include imposition of fines, imposition of a provisional or
conditional license or suspension or revocation of a license or other
sanctions.
Health care is an area of extensive and frequent regulatory change. The
assisted living model for long-term care is relatively new, and, accordingly,
the manner and extent to which it is regulated at the federal and state
levels is evolving. Changes in the laws or new interpretations of existing
laws may have a significant effect on methods and costs of doing business.
The Company is actively involved in monitoring regulatory and legislative
changes affecting the assisted living industry and participates with industry
organizations to encourage improvements to existing laws and regulations.
The success of the Company will depend in part upon its ability to
satisfy applicable regulations and requirements and to procure and maintain
required licenses as the regulatory environment for assisted living evolves.
The Company's operations could also be adversely affected by, among other
things, future regulatory developments such as mandatory increases in the
scope and quality of care to be offered to residents and revisions to
licensing and certification standards.
The Company currently is not a Medicare provider. Under some state
licensure laws, and for the convenience of its residents, some of the
Company's assisted living residences maintain contracts with certain health
care providers and practitioners, including pharmacies, visiting nurses,
social service and home health organizations, through which health care
providers make their health care products or services available to residents.
Some of the services furnished by these contract parties may be covered by
the Medicare programs.
COMPETITION
The long-term care industry is highly competitive. The Company believes
the assisted living sector of long-term care, in which it operates, will
become even more competitive in the future. The Company competes with
numerous other companies providing similar long-term care alternatives such
as home health care agencies, community-based service programs, retirement
communities and convalescent centers, and other assisted living providers.
The Company expects that, as the providers of assisted living services
receive increased attention and the number of states providing reimbursement
for assisted living rises, competition will intensify as a result of new
market entrants. The Company also competes with skilled nursing facilities
that provide long-term care services. In implementing its growth strategy the
Company expects increased competition in its efforts to develop, construct
and operate assisted living communities. Some of the Company's present and
potential competitors are significantly larger and have, or may obtain,
greater financial resources than those of the Company.
PROPRIETARY INFORMATION
The Company is the registered owner of the service mark "Karrington
Communities-Registered Trademark-." The Company believes this mark is of
material importance to its business.
8
<PAGE>
EMPLOYEES
As of March 13, 1998, the Company had approximately 1,300 employees,
including approximately 275 employed by the Company's joint ventures. None of
the Company's employees are represented by a union or covered by a collective
bargaining agreement. The Company has experienced no work stoppages and
considers its relationship with its employees to be good.
ITEM 2. PROPERTIES
Information required by this Item 2 is contained on page 32 of the
Company's Annual Report to Shareholders for the year ended December 31, 1997
and is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of its fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Information required by the first sentence of Item 5(a) is contained on
page 30 of the Company's Annual Report to Shareholders for the year ended
December 31, 1997 and is incorporated herein by reference. The remaining
portion of Item 5(a) and Item 5(b) are not applicable.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this Item 6 is contained on page 29 of the
Company's Annual Report to Shareholders for the year ended December 31, 1997 and
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required by this Item 7 is contained on pages 14 through 16
of the Company's Annual Report to Shareholders for the year ended December
31, 1997 and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and Report of Independent Auditors required by
this Item 8 are set forth as indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
9
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item 10 is contained under the captions
"Election of Directors", "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement
relating to its 1998 annual meeting of Shareholders and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is contained under the captions
"Executive Compensation" and "Election of Directors - Compensation of
Directors" in the Company's definitive Proxy Statement relating to its 1998
annual meeting of Shareholders and is incorporated herein by reference.
Neither the report of the Compensation Committee of the Registrant's Board of
Directors on executive compensation nor the performance graph included in the
Registrant's definitive Proxy Statement relating to the annual meeting of
Shareholders shall be deemed to be incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is contained under the caption
"Beneficial Ownership of Company Securities" in the Company's definitive
Proxy Statement relating to its 1998 annual meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is contained under the caption
"Certain Relationships and Related Party Transactions" in the Company's
definitive Proxy Statement relating to its 1998 annual meeting of
Shareholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)&(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See index to financial statements and financial statement schedules at
page F-1.
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------
<C> <S> <C>
2.1 Stock Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Kensington Cottages Corporation of
Minnesota and the individual shareholders
of Kensington Cottages Corporation of
Minnesota. (2)
2.2 Agreement and Plan of Merger dated April
24, 1997 by and among Karrington Health,
Inc., Kensington Mergeco, Inc., Kensington
Management Group, Inc. and Jon D. Rappaport. (2)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------
<C> <S> <C>
2.3 Asset Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Buffalo Hills Residence and Jon D.
Rappaport. (2)
2.4 Asset Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Centex-Kensington (Mankato I)
Partnership, Centex Senior Services
Corporation, Centex Life Solutions, Inc.,
Kensington Cottages Corporation of Mankato
and Jon D. Rappaport. (2)
2.5 Asset Purchase agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Kensington Cottages Corporation of
North Dakota and the individual
shareholders of Kensington Cottages
Corporation of North Dakota. (2)
2.6 Asset Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Kensington Cottages Corporation of
Rochester and Jon D. Rappaport. (2)
2.7 Asset Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Kensington Cottages Corporation of
Iowa and the individual shareholders of
Kensington Cottages Corporation of Iowa. (2)
2.8 Asset Purchase Agreement dated April 24,
1997 by and among Kensington Cottages
Corporation of America, Karrington Health,
Inc., Bismarck Investors, Kensington Living
Centers, Inc. and Jon D. Rappaport. (2)
3.1 Form of Amended Articles of Incorporation
of the Company (1)
3.2 Form of Code of Regulations of the Company (1)
10.1 1996 Incentive Stock Plan * (1)
10.4 Registration Rights Agreement dated May 8,
1996, by and among the Company and the
Investors (as defined therein) (1)
10.5 Reorganization Agreement dated May 8, 1996,
by and among the Company and the Investors
(as defined therein) (1)
10.6 Letter of Intent Dated April 29, 1996, by
and between the Company and Sisters of
Charity Health Care Systems, Inc. (1)
13 Annual Report to Shareholders (3)
21 Subsidiaries of the Registrant (3)
23.1 Consent of Ernst & Young LLP (3)
24.1 Power of Attorney - Richard R. Slager (3)
24.2 Power of Attorney - Pete A. Klisares (3)
24.3 Power of Attorney - Thomas J. Klimback (3)
24.4 Power of Attorney - Mark N. Mace (3)
24.5 Power of Attorney - Charles S. McCreary (3)
24.6 Power of Attorney - John S. Christie (3)
24.7 Power of Attorney - Bernadine P. Healy (3)
24.8 Power of Attorney - David H. Hoag (3)
24.9 Power of Attorney - John H. McConnell (3)
24.10 Power of Attorney - James V. Pickett (3)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------
<C> <S> <C>
24.11 Power of Attorney - Harold A. Poling (3)
24.12 Power of Attorney - Michael H. Thomas (3)
24.13 Power of Attorney - Robert D. Walter (3)
27 Financial Data Schedule (4) (3)
</TABLE>
- ---------------
(1) Included as an exhibit by the same number in the Company's
Registration Statement on Form S-1 (File No. 333-03491) and
incorporated herein by reference.
(2) Included as an exhibit by the same number in the Company's Form
8-K/A filed on May 21, 1997 and incorporated herein by reference.
(3) Filed herewith.
(4) No restated Financial Data Schedules are required to be filed.
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on May 15, 1997 (as amended May 21, 1997 and July
14, 1997) reported under Item 2, Acquisition or Disposition of Assets,
the acquisition of Kensington Management Group, Inc. and affiliated
entities ("Kensington"), including audited financial statements of
Kensington for the years ended December 31, 1996 and 1995 and the
unaudited financial statements for the three month period ended March
31, 1997 and proforma financial information.
(c) EXHIBITS
Exhibits filed with this Annual Report on Form 10-K are attached hereto.
For a list of such exhibits, see Item 14(a)(3).
(d) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules filed with this Annual Report on Form 10-K
are attached hereto. For a list of such schedules, see Item 14(a)(2).
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Karrington Health, Inc.
By: /s/ RICHARD R. SLAGER
----------------------
Richard R. Slager
Chairman of the Board
Date: March 31, 1998
Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RICHARD R. SLAGER Chairman of the Board and March 31, 1998
- ------------------------------- Chief Executive Officer (Principal Executive Officer)
Richard R. Slager
/s/ PETE A. KLISARES President, Chief Operating Officer and Director March 31, 1998
- -------------------------------
Pete A. Klisares
/s/ THOMAS J. KLIMBACK Executive Vice President, Chief Financial Officer March 31, 1998
- ------------------------------- (Principal Financial Officer)
Thomas J. Klimback
/s/ MARK N. MACE Senior Vice President, Finance and Treasurer March 31, 1998
- ------------------------------- (Principal Accounting Officer)
Mark N. Mace
/s/ CHARLES H. MCCREARY Secretary and Director March 31, 1998
- -------------------------------
Charles H. McCreary
/s/ JOHN S. CHRISTIE Director March 31, 1998
- -------------------------------
John S. Christie
/s/ BERNADINE P. HEALY, M.D. Director March 31, 1998
- -------------------------------
Bernadine P. Healy, M.D.
/s/ DAVID H. HOAG Director March 31, 1998
- -------------------------------
David H. Hoag
/s/ JOHN H. MCCONNELL Director March 31, 1998
- -------------------------------
John H. McConnell
/s/ JAMES V. PICKETT Director March 31, 1998
- -------------------------------
James V. Pickett
/s/ HAROLD A. POLING Director March 31, 1998
- -------------------------------
Harold A. Poling
/s/ MICHAEL H. THOMAS Director March 31, 1998
- -------------------------------
Michael H. Thomas
/s/ ROBERT D. WALTER Director March 31, 1998
- -------------------------------
Robert D. Walter
</TABLE>
13
<PAGE>
KARRINGTON HEALTH, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(ITEMS 14(a)(1) AND (2))
1. DESCRIPTION OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
The following are incorporated by reference PAGE(S) IN 1997
in this Annual Report on Form 10-K ANNUAL REPORT TO
for the year ended December 31, 1997 SHAREHOLDERS
----------------
<S> <C>
Report of Independent Auditors 17
Consolidated Balance Sheets 18
Consolidated Statements of Operations 19
Consolidated Statements of Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22-28
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Schedule II - Valuation and Qualifying Accounts F-2
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
F-1
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------
DESCRIPTION BALANCE AT ADDITIONS DEDUCTIONS - BALANCE AT
BEGINNING ------------------------ DESCRIBE END
OF PERIOD (1) (2) OF PERIOD
CHARGED TO CHARGED TO
COSTS AND OTHER
EXPENSES ACCOUNTS -
DESCRIBE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for
Terminated Projects
- -------------------
Year Ended
- -------------------
December 31, 1997 $ 0 1,191,909 - (1,161,909) (1) $ 30,000
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
December 31, 1996 $ 0 - - - $ 0
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
December 31, 1995 $ 0 - - - $ 0
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
</TABLE>
- ---------------
(1) The deduction resulted from the Company's decision to abandon certain
projects. At the time a project is abandoned, all previously
capitalized costs are charged against the reserve.
F-2
<PAGE>
KARRINGTON HEALTH, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------
<S> <C> <C>
2.1 Stock Purchase Agreement dated April 24, 1997 by
and among Kensington Cottages Corporation of
America, Karrington Health, Inc., Kensington
Cottages Corporation of Minnesota and the
individual shareholders of Kensington Cottages
Corporation of Minnesota. (2)
2.2 Agreement and Plan of Merger dated April 24, 1997 by
and among Karrington Health, Inc., Kensington
Mergeco, Inc., Kensington Management Group, Inc. and
Jon D. Rappaport. (2)
2.3 Asset Purchase Agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Buffalo Hills Residence and
Jon D. Rappaport. (2)
2.4 Asset Purchase Agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Centex-Kensington (Mankato
I) Partnership, Centex Senior Services Corporation,
Centex Life Solutions, Inc., Kensington Cottages
Corporation of Mankato and Jon D. Rappaport. (2)
2.5 Asset Purchase agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Kensington Cottages Corporation
of North Dakota and the individual shareholders of
Kensington Cottages Corporation of North Dakota. (2)
2.6 Asset Purchase Agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Kensington Cottages
Corporation of Rochester and Jon D. Rappaport. (2)
2.7 Asset Purchase Agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Kensington Cottages
Corporation of Iowa and the individual shareholders
of Kensington Cottages Corporation of Iowa. (2)
2.8 Asset Purchase Agreement dated April 24, 1997 by and
among Kensington Cottages Corporation of America,
Karrington Health, Inc., Bismarck Investors,
Kensington Living Centers, Inc. and Jon D.
Rappaport. (2)
3.1 Form of Amended Articles of Incorporation of the
Company (1)
3.2 Form of Code of Regulations of the Company (1)
10.1 1996 Incentive Stock Plan * (1)
10.4 Registration Rights Agreement dated May 8, 1996, by
and among the Company and the Investors (as defined
therein) (1)
10.5 Reorganization Agreement dated May 8, 1996, by and
among the Company and the Investors (as defined
therein) (1)
10.6 Letter of Intent Dated April 29, 1996, by and
between the Company and Sisters of Charity Health
Care Systems, Inc. (1)
13 Annual Report to Shareholders (3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION REFERENCE
- -------------- ----------- ---------
<S> <C> <C>
21 Subsidiaries of the Registrant (3)
23.1 Consent of Ernst & Young LLP (3)
24.1 Power of Attorney - Richard R. Slager (3)
24.2 Power of Attorney - Pete A. Klisares (3)
24.3 Power of Attorney - Thomas J. Klimback (3)
24.4 Power of Attorney - Mark N. Mace (3)
24.5 Power of Attorney - Charles S. McCreary (3)
24.6 Power of Attorney - John S. Christie (3)
24.7 Power of Attorney - Bernadine P. Healy (3)
24.8 Power of Attorney - David H. Hoag (3)
24.9 Power of Attorney - John H. McConnell (3)
24.10 Power of Attorney - James V. Pickett (3)
24.11 Power of Attorney - Harold A. Poling (3)
24.12 Power of Attorney - Michael H. Thomas (3)
24.13 Power of Attorney - Robert D. Walter (3)
27 Financial Data Schedule (4) (3)
</TABLE>
- ---------------
(1) Included as an exhibit by the same number in the Company's
Registration Statement on Form S-1 (File No. 333-03491) and
incorporated herein by reference.
(2) Included as an exhibit by the same number in the Company's Form
8-K/A filed on May 21, 1997 and incorporated herein by reference.
(3) Filed herewith.
(4) No restated Financial Data Schedules are required to be filed.
* Management contract or compensatory plan or arrangement.
<PAGE>
KARRINGTON
KARRINGTON HEALTH
INCORPORATED
1997 ANNUAL
REPORT
1997
GROWING TO MEET
THE NEEDS OF OUR
RESIDENTS, ASSOCIATES
AND SHAREHOLDERS
[PHOTO: Female resident reading in a chair]
<PAGE>
FROM DAY ONE, SHE WATCHED OVER YOU WITH UNCONDITIONAL LOVE AND SUPPORT. NOW
THAT SHE NEEDS SPECIAL CARE, TAKE COMFORT IN THE KNOWLEDGE THAT THE SKILLED
PROFESSIONALS AT KARRINGTON WILL GIVE YOUR LOVED ONE THE INDIVIDUAL ATTENTION
YOU YOURSELF WOULD PROVIDE.
[PHOTO: Female resident with female caregiver on couch.]
CORPORATE PROFILE
Founded in 1989, Columbus, Ohio-based Karrington Health, Inc. develops,
owns and operates private-pay assisted living residences for physically frail
and cognitively impaired seniors, as well as individuals with Alzheimer's
Disease and related disorders.
Operating three standard residential models in targeted markets,
Karrington provides high-quality, high-acuity programs and services for
seniors -- full-time and day residents -- who need assistance with activities
of daily living (ADLs), including eating, bathing, personal hygiene,
dressing, grooming and walking.
With the 1997 acquisition of Kensington Management Group, Inc., a
multi-state operator of assisted living Alzheimer's care residences with ties
to the Mayo Clinic, Karrington expanded its residence network and
relationships with major health care systems. Karrington's network includes
residences owned solely by the Company and strategic joint ventures with
major health care systems, including Catholic Health Initiatives (CHI), a
national, $4.7 billion, 67-hospital operation.
At year-end 1997, Karrington had 27 residences open, with plans to
nearly double the number of open residences by December 1998. As of March
23, 1998, the Company was well on its way to achieving that goal, with 32
residences open and 14 under construction.
Since opening its first residence in 1992, Karrington has maintained a
pattern of steady, system-wide revenue growth. In 1997, the Company
generated $25 million from its network of Karrington-operated residences and
joint ventures. That reflects a 107% increase over the $12 million posted in
1996, the year in which Karrington went public, raising $28.4 million from
the sale of 2.4 million common shares.
Part of what distinguishes Karrington from other assisted living
providers is the Company's board of directors, recognized as among the
industry's strongest. Outside directors include prominent business leaders
and health care professionals such as Dr. Bernadine P. Healy, Dean of The
Ohio State University Medical School and former director of the National
Institutes of Health; David H. Hoag, Chairman and CEO of LTV Corp.; John H.
McConnell, founder and Chairman Emeritus of Worthington Industries; James V.
Pickett, Managing Director of Banc One Capital Corporation; Harold A. Poling,
retired Chairman of Ford; and Robert D. Walter, Chairman and CEO of Cardinal
Health.
Committed to providing a supportive residential environment that enables
residents to age-in-place, the Company's management and directors embody
Karrington's Mission Statement: DEDICATED TO EXCELLENCE IN PRESERVING AND
ENHANCING PERSONAL DIGNITY, INDIVIDUALITY, INDEPENDENCE AND QUALITY OF LIFE
FOR OUR RESIDENTS AND EMPLOYEES WHILE MAXIMIZING SHAREHOLDER VALUE.
<PAGE>
FINANCIAL
HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
TOTAL REVENUES . . . . . . . . . . . $19,220,000 $9,596,000 $6,744,000
RESIDENCES (end of year)(1):
Open . . . . . . . . . . . . . . . 27 9 5
Under construction . . . . . . . . 19 17 5
Under contract . . . . . . . . . . 20 10 8
NUMBER OF UNITS (end of year)(1):
Open . . . . . . . . . . . . . . . 1,124 454 272
Under construction . . . . . . . . 1,019 1,010 243
Under contract . . . . . . . . . . 1,390 742 509
NUMBER OF BEDS (end of year)(1):
Open . . . . . . . . . . . . . . . 1,371 534 316
Under construction . . . . . . . . 1,242 1,185 289
Under contract . . . . . . . . . . 1,612 861 583
AVERAGE OCCUPANCY PERCENTAGE(1) . . 91.3 % 94.3% 96.4 %
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes residences jointly-owned by the Company. Average occupancy
percentage includes residences open for more than one year at the
beginning of the year presented.
[GRAPH: Karrington's total revenues for 1993, 1994, 1995, 1996 and 1997.]
<TABLE>
<CAPTION>
TOTAL REVENUES*
($ THOUSANDS)
<S> <C>
97 24,689
96 11,943
95 8,613
94 5,513
93 2,306
</TABLE>
*INCLUDES JOINT VENTURES
[GRAPH: Karrington's total assets for 1993, 1994, 1995, 1996 and 1997.]
<TABLE>
<CAPTION>
TOTAL ASSETS
($ MILLIONS)
<S> <C>
97 141,316
96 69,550
95 26,676
94 16,292
93 14,883
</TABLE>
[GRAPH: Karrington's units open for 1993, 1994, 1995, 1996 and 1997.]
<TABLE>
<CAPTION>
KARRINGTON HEALTH, INC.
UNITS OPEN*
<S> <C>
97 1,124
96 454
95 272
94 213
93 160
</TABLE>
*INCLUDES JOINT VENTURES
- --------------------------------------------------------------------------------
The forward-looking statements in this report are subject to certain risks
and uncertainties that could cause actual results to differ materially from
expectations. These include without limitation licensing, permitting,
construction delays, cost increases on new developments, business conditions,
adverse changes in general economic conditions, meeting all closing
requirements, including licensure, and the availability of financing for
these developments. These and other risks are set forth in the reports filed
by the Company with the Securities & Exchange Commission.
- ----------------------------------------
- ----------------------------------------
CONTENTS
LETTER FROM THE 2
CHAIRMAN
- ----------------------------------------
GROWING TO MEET 4
THE NEEDS
- ----------------------------------------
MANAGEMENT'S DISCUSSION 14
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS
- ----------------------------------------
MANAGEMENT'S STATEMENT 17
OF FINANCIAL RESPONSIBILITY
- ----------------------------------------
REPORT OF INDEPENDENT 17
AUDITORS
- ----------------------------------------
CONSOLIDATED 18
FINANCIAL REPORTS
- ----------------------------------------
COMMON SHARE 30
INFORMATION
- ----------------------------------------
SHAREHOLDER 30
INFORMATION
- ----------------------------------------
DIRECTORS & OFFICERS 31
- ----------------------------------------
LISTING OF KARRINGTON 32
PROPERTIES
- ----------------------------------------
KARRINGTON 33
MARKET AREAS
- ----------------------------------------
1
<PAGE>
LETTER FROM
THE CHAIRMAN
- --------------------------------------------------------------------------------
[PHOTO: Richard R. Slager, Chairman and CEO]
RICHARD R. SLAGER
CHAIRMAN AND CEO
For Karrington, 1997 was a year of tremendous growth and change.
Tripling the number of Karrington homes in operation, we grew from nine open
residences at year-end 1996 to 27 residences in operation at December 31,
1997, achieving record year-end revenues in the process.
Not content to rest on our success, your Company ended the year with an
additional 19 Karrington residences under construction and 20 sites under
contract. By year-end 1998 we expect to nearly double the number of
Karrington homes open and beds filled.
The face of Karrington's management team changed significantly over the
past 12 months, reflective of our evolution and growth. With the leadership
of President Pete Klisares, who joined Karrington during the third quarter,
we brought together a team of sophisticated, experienced business
professionals charged with focusing on Karrington's managed growth and
profitability. The financial acumen of newly appointed CFO Tom Klimback,
coupled with the industry expertise of Executive Vice President of Operations
John Knutson and the real estate and construction experience of Development
Executive Vice President Robin Holderman helps position Karrington for
continued growth within the rapidly expanding assisted living industry.
System-wide revenues, including jointly owned residences, increased 107%
to $24.7 million in 1997, from $11.9 million in 1996. Year-end 1997 revenues
for Karrington-owned and operated residences rose 100% to $19.2 million from
$9.6 million in 1996.
Excluding unusual and one-time charges of $.20 per share in 1997 and
$.17 per share in 1996, our 1997 net loss was $4.3 million, or $.63 per
share, compared to a loss of $1.7 million, or $.31 per share in 1996.
Per share results reflect losses consistent with multiple start-ups and
our initial strategic commitment to own rather than lease properties.
At year end, Karrington had investment-grade, short-term securities
totaling $4.4 million; long-term debt of $97.5 million; and shareholders'
equity of $26.5 million.
Karrington's operating model, growth strategy and ownership philosophy
remain consistent with our goal of delivering long-term sustainable value to
our shareholders. Mindful that start-up losses will impact earnings
negatively in our early years, we are evaluating financial structures
designed to improve your Company's earnings' picture over the next several
years, while we continue to take advantage of growth opportunities.
Working with fewer, larger strategic financing partners assures us of
meeting our capital needs well into the future. Abandoning one-off
financing, which in the past placed a time-consuming burden on Karrington and
hindered our growth, we now are in the process of identifying lenders who
offer pools of debt and equity financing at more favorable rates, enabling us
to develop multiple homes with fewer financial institutions.
In addition, we are reviewing off-balance sheet financing vehicles with
the potential for a positive impact on earnings. Off-balance-sheet financing
would allow your Company to continue growing toward stabilization, with less
of the first-year $.10 per share pre-tax start-up loss we now experience with
the opening of each new home. We are working hard at this financing
engineering option, knowing that it will significantly improve the immediate
EPS picture for the Company as we continue our controlled growth plans.
Reflective of your Company's continued growth, the year saw the opening
of three new joint venture homes with Catholic Health Initiative (CHI), a
$4.7 billion acute-care operator of more than 67 hospitals in 22 states.
This brings to six the total number of open Karrington/CHI joint venture
homes, with three more in various stages of development.
2
<PAGE>
Five new homes are slated to open in the second quarter on our
Karrington Cottage campus in Rochester, Minnesota. The success of that
campus will continue to benefit greatly from the support and advice of Mayo
Clinic physicians who are actively involved with the care plans and progress
of the residents as well as education and training of staff. We will
continue to pursue synergistic relationships with leading acute care
providers, as we work to position your Company to benefit fully from health
care reform and industry consolidation.
On the Operating side, renown assisted living industry expert John
Knutson celebrated his first full year at Karrington by enhancing our
pace-setting quality assurance programs. Karrington's commitment to
state-of-the-art quality assurance programs, expanded in 1997, results in
regular deficiency-free reviews from state licensing authorities, as well as
consistent praise from residents for our product and service delivery
programs. Unsurpassed quality assurance helped improve operating income
margin for stabilized residences to 35% in 1997 from 33% in 1996, excluding
depreciation and amortization.
Tripling our size over the past 12 months strained the personnel ranks
at existing homes, as experienced staff members were called upon to fill
positions in new residences, leaving some holes in the stable homes, which we
believe we now have filled. As a result, we experienced a slight drop in
stable home occupancies in late 1997. Enhanced and accelerated recruiting,
marketing and training programs were instituted and have improved 1998
occupancy rates. The result: Today our homes are operating more
efficiently and effectively than ever, and we expect occupancy of stable
homes to reach and exceed projected levels for the year.
Karrington's high-acuity, aging-in-place residential model results in a
longer length of stay, with potential add-on revenues as the health care
needs of aging residents increase. Revenues for stabilized residences
increased 1% in 1997, a reflection of our ability to improve same-residence
results by capturing incremental services' revenue through our aging-in-place
approach to assisted living.
In 1997 we implemented significant new revenue-generating programs,
including Day Respite, Pharmacy and outreach of local services. These
programs have received high marks from residents and families, and are
expected to have a positive impact on our future census, community
relationships and bottom line. At the same time, we discontinued the
consulting and third-party management programs that were distracting from
your Company's own rapid internal growth.
To achieve our goal of bringing to market the highest quality product at
the lowest possible cost, we sharpened our Construction and Development focus
this year, concentrating on fewer, more efficient and cost-effective plans
while implementing the principles of standardization, value engineering and
quality initiatives. Continuing efforts to outsource selective development
and construction activities will further Karrington's ability to focus on our
core mission and business, and enable us to achieve our aggressive growth
goals in a timely cost-effective manner.
As part of that initiative, we refined and settled on three standard
models of residence -- Karrington's K1, K2 and KC assisted living models -- a
strategic evolution of your Company's original prototype residence. The
72-unit, mansion-style K1 residence is located in established, upper-income
communities, where land is expensive and scarce, and price of service is not
a significant determinant.
The one-story, 48-unit K2 model enables your Company to enter smaller,
rural county seat communities, where sites are readily available and cost
issues have more impact on decision-making.
The Karrington Cottage, KC, model is a 20-unit, residential model
located on campus-like environments. Future plans call for the clustering of
satellite KC residences in communities with existing K1 and K2 models,
enabling us to continue meeting the growing and diversified needs of aging
residents.
The past four quarters were an exciting period of strategic transition
and rapid growth for your Company, reflected in an increased number of open
homes, generation of record revenues, enhanced management team, and expansion
of the products, services and care we offer our residents.
The refining of operational, development, construction and financing
systems in 1997 better positions your Company to move forward as a leading
provider of high-quality, high-acuity assisted living care and services in a
timely, profitable manner.
We appreciate your continued confidence and support, and we value your
contribution as part of the Karrington family. We remain focused on
delivering unsurpassed care and services to our residents, career
satisfaction to our associates, and value to our shareholders. We look with
enthusiasm toward the new year and the twenty-first century, a century that
holds tremendous promise for your Company and the entire assisted living
industry.
Sincerely,
/s/ Richard R. Slager
RICHARD R. SLAGER
Chairman and Chief Executive Officer
3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GROWING TO MEET THE NEEDS OF OUR
RESIDENTS, ASSOCIATES AND SHAREHOLDERS
- --------------------------------------------------------------------------------
[PHOTO: Four female residents seated with standing female caregiver.]
[PHOTO: Male resident with nurse taking blood pressure.]
AT THE HEART OF KARRINGTON ARE NATIONALLY RECOGNIZED ASSISTED LIVING
PROFESSIONALS AND THOROUGHLY TRAINED STAFF WHO ARE COMMITTED TO HELPING YOUR
LOVED ONE ENJOY QUALITY OF LIFE AS SHE OR HE AGES IN PLACE WITH DIGNITY AND
GRACE.
For Karrington Health, Inc. 1997 was a year of strategic transition and
rapid growth. Marking its first full year as a public company and
celebrating five years since the opening of its first residence, Karrington
in 1997 furthered its evolution from a leading provider of high-quality
assisted living to a forward-looking company charting a strategic course for
expansion, profitability and shareholder value.
What Karrington developed over the past 12 months -- through strong
internal growth, an expanded approach to assisted living, and a strategic
acquisition -- is a company that is ideally positioned for continued growth.
Growth in the number of residences open -- a 400% increase since Karrington
went public in 1996. Growth in system-wide revenues -- up 107% from $12
million in 1996 to $24.7 million for the year ended December 1997. Growth in
the scope of products and services available and the overall quality of care
provided to Karrington residents. Growth in the assisted living industry, an
industry expected to generate $30 billion annually by the year 2000, double
the current $15 billion.
THE KARRINGTON TEAM:
BUILDING A QUALITY BUSINESS
The challenge facing the elderly and their families, as well as
shareholders and the investment community, is to identify well-managed,
high-quality, professional assisted living providers --such as Karrington --
that are positioned to survive inevitable industry consolidation and thrive
in the new century.
Karrington -- guided by Company Co-founder, Chairman and Chief Executive
Officer Richard R. Slager, an assisted living industry pioneer who served as
the second Chairman of the Assisted Living Federation of America
(ALFA)--spent the past 12 months fine-tuning the internal operations and
external relationships necessary to achieve planned and profitable growth on
a timely basis, without losing sight of the Company's focus: Create and
deliver unsurpassed products and services that enable seniors to age-in-place
with grace and dignity.
In 1997 management took steps to further the Company's overall
performance, resulting in an increased number of residences open and the
generation of record revenues. Developing three standard residential models
and streamlining operations enabled the Company to reduce the time it takes
to get its product to market, from site selection through zoning and
construction. By systematically implementing the principles of value
engineering, preventive maintenance and construction management outsourcing,
Karrington lowered real estate, architecture, construction and start-up costs.
As Karrington grew and its high-quality, high-acuity product evolved,
the management team expanded to meet the Company's changing needs. President
and Chief Operating Officer Pete A. Klisares joined Karrington in August
1997, bringing on board senior-level finance and marketing experts to
supplement the talents and strengths of Karrington's real estate and
development specialists, and the assisted living professionals who work with
John Knutson, the former ALFA director and renown industry expert who serves
as Karrington's Executive Vice President of Operations.
Supporting the Karrington management team is a board of directors that
is arguably the strongest in the assisted living industry, combining health
care know-how with acquisition expertise and experience growing public
companies into national industry leaders.
Unrivaled health care expertise guided by hands-on management... That's
doing business THE KARRINGTON WAY.
[GRAPH: Karrington employees for 1993 and 1994, including joint ventures.]
<TABLE>
<S> <C>
Year 1994 230
Year 1993 170
</TABLE>
- --------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
KARRINGTON'S GROWING MANAGEMENT TEAM--GUIDED BY CHAIRMAN AND CEO RICHARD R.
SLAGER (SEATED) AND PRESIDENT PETE A. KLISARES (STANDING)--REFLECTS THE
EVOLUTION OF THE COMPANY'S HIGH-QUALITY, HIGH-ACUITY PRODUCT. COMBINING
UNRIVALED HEALTH CARE KNOW-HOW WITH HANDS-ON BUSINESS EXPERIENCE, KARRINGTON
MANAGEMENT IS CHARTING THE COURSE FOR CONTINUED GROWTH WITHIN THE RAPIDLY
EXPANDING ASSISTED LIVING INDUSTRY.
[PHOTO: Two senior Karrington officers, including Richard R. Slager and Pete A.
Klisares.]
PEOPLE
[GRAPH: Karrington employees for 1995, 1996 and 1997, including joint ventures.]
Karrington
Employees
(Including
Joint
Ventures)
<TABLE>
<S> <C>
Year 1997 1,100
Year 1996 525
Year 1995 290
</TABLE>
5
<PAGE>
GROWING TO MEET THE NEEDS OF OUR
RESIDENTS, ASSOCIATES AND SHAREHOLDERS
- --------------------------------------------------------------------------------
KARRINGTON'S K1 AND K2 MODELS ARE DESIGNED TO ACCOMMODATE VARYING ACUITY AND
INCOME LEVELS. WHETHER YOU CHOOSE THE MANSION-STYLE K1 RESIDENCE OR THE
SMALL-TOWN K2 HOME, YOUR LOVED ONE WILL HAVE ACCESS TO THE SKILLED AND CARING
PROFESSIONALS, UNIQUE PRO-DUCTS AND SERVICES, AND DIGNIFIED ENVIRONMENTS THAT
HELP DIFFERENTIATE KARRINGTON FROM OTHER ASSISTED LIVING PROVIDERS.
[PHOTO: Karrington K1 model prototype.]
[PHOTO: Karrington K2 model prototype.]
KARRINGTON GROWTH: APPROACHING
STABILITY, ANTICIPATING PROFITABILITY
Karrington tripled its size over the past 12 months, growing from nine
open homes in 1996 to 27 assisted living residences in operation at December
31, 1997. Management expects to nearly double the number of homes open in
the new year. By December 1999, Karrington should reach a critical mass of
46 stable homes and the point at which the Company is operating enough stable
residences to support focused, profitable growth.
To help bridge the gap between rapid growth and profitability,
Karrington in 1997 underwent financial restructuring, establishing strategic
financing partnerships with fewer financial institutions, secur-ing more
favorable interest rates, and adopting some off-balance-sheet strategies of
financing new residences. The result: Karrington will reduce the start-up
losses typically associated with opening new assisted living residences.
Opening the right models in the right markets at the right time, without
depleting cash reserves or negatively impacting earnings... That's achieving
stability and profitability THE KARRINGTON WAY.
THE KARRINGTON MODEL:
CHANGING THE WAY PEOPLE
VIEW ASSISTED LIVING
As the population ages, health care needs increase. According to the US
Census Bureau, 7 million people over age 65 and 50% of people over 85 need
help with at least one activity of daily living (ADL), such as eating,
bathing, personal hygiene, dressing, grooming and walking. By the year
2020, the number of over-65 seniors requiring ADL assistance will double,
creating tremendous opportunities for the assisted living industry and
Karrington.
Recognizing that not all seniors share the same acuity at various income
levels, Karrington has created three standard models of residence, an
evolution of the Company's original prototype mansion-style residence. While
standardization will enable the Company to get its product to market faster,
Karrington's commitment to its residents remains intact.
Along with creating three standard models, the Company has branded, or
named, its residential products to help build Karrington's national
identity. Karrington's original mansion-style residence, now known as K1 or
the Karrington model, was upgraded and enhanced in 1997. Located in
established upper-income communities, the K1 is a 72-unit model that replaces
the original 53-unit prototype.
Karrington Place, or K2, is the Company's one-story, small-town solution
to high-quality assisted living. Karrington Place offers residents of
smaller and rural communities access to the skilled and caring professionals,
unique products and services, and dignified environments that enable
Karrington residents to age-in-place gracefully.
The Company's third residential model is the outgrowth of Karrington's
May 1997 acquisition of Kensington Management Group, Inc. of Golden Valley,
Minnesota. Operating innovative Alzheimer's care communities, now known as
Karrington Cottages or KC, the Company provides residential Alzheimer's care
and other programs under the medical direction of geriatric and dementia
specialists.
At the time of the acquisition, Kensington operated or had under
construction 12 assisted living residences in three states. The early 1998
completion of a nine-Cottage campus in Rochester, Minnesota will further
Karrington's relationship with the physicians of the world-famous Mayo Clinic.
The Company expects to develop future Karrington Cottages in conjunction
[GRAPH: Number of Karrington residences open for 1993 and 1994, including joint
ventures.]
<TABLE>
<S> <C>
Year 1994 4 Residences
Year 1993 3 Residences
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE>
[PHOTO: Karrington of Oakwood residence.]
TRIPLING THE NUMBER OF KARRINGTON HOMES IN OPERATION OVER THE PAST 12 MONTHS,
THE COMPANY GREW TO 27 OPEN RESIDENCES AT YEAR-END 1997. KARRINGTON'S
HIGH-ACUITY, AGING-IN-PLACE MODEL PROVIDES EACH AGING RESIDENT WITH THE EXTRA
CARE NEEDED TO MAKE KARRINGTON HIS OR HER FINAL HOME--A COMFORT TO RESIDENTS
AND THEIR FAMILIES.
POSITIONING
[GRAPH: Number of Karrington residences open for 1995, 1996 and 1997, including
joint ventures.]
Number Of Karrington
Residences
(Including
Joint
Ventures)
<TABLE>
<S> <C>
Year 1997 27 Residences
Year 1996 9 Residences
Year 1995 5 Residences
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE>
GROWING TO MEET THE NEEDS OF OUR
RESIDENTS, ASSOCIATES AND SHAREHOLDERS
- --------------------------------------------------------------------------------
[PHOTO: Rochester, Minnesota campus of nine Kensington Cottages.]
PROVIDING RESIDENTIAL ALZHEIMER'S CARE AND OTHER HIGH-ACUITY PROGRAMS, THE
COMPANY'S KARRINGTON COTTAGES OR KC MODEL OFFERS COGNITIVELY IMPAIRED
RESIDENTS SPECIAL CARE UNTIL THE END OF THEIR LIVES, OFTEN PRECLUDING THE
NEED FOR HOSPITALIZATION OR NURSING CARE. WHETHER YOUR LOVED ONE LIVES IN A
KC, K1 OR K2 MODEL, KARRINGTON HELPS SET THE PACE FOR ALZHEIMER'S CARE, WHILE
ENHANCING DIGNITY, PROMOTING INDIVIDUALITY AND ENCOURAGING INDEPENDENCE.
with other regional health care systems throughout the Midwest.
With the addition of Karrington Cottages to the Company's product mix,
management plans to broaden the way high-acuity care and assisted living in
general are viewed by the health care industry and the public. Residential
care for persons with Alzheimer's Disease and other forms of dementia will
continue to be the focus of Karrington Cottages. In addition, some
residential Cottages on each campus will be devoted to other physical and
cognitive conditions, based on the needs or specialties of the regional
health care providers associated with Karrington.
Providing high-acuity, broad-based, lower-cost, 24-hour care in a
dignified, non-hospital, non-nursing-facility setting...That's broadening the
scope of assisted living THE KARRINGTON WAY.
THE KARRINGTON ADVANTAGE: AGING-IN-
PLACE WITH DIGNITY, INDEPENDENCE AND
QUALITY OF LIFE
At the heart of Karrington are the dedicated professionals, proven
products and services, and supportive environments that enable Karrington
residents to enjoy quality of life as they age-in-place. The Company delivers
unsurpassed care at each of its residences, including innovative Alzheimer's
and related special care programs that help differentiate Karrington from
other assisted living companies.
According to the Alzheimer's Association, dementia affects 4 million
Americans, a number that will increase to 14 million by the year 2040. In the
past, persons suffering from Alzheimer's Disease would have been
institutionalized in hospitals or nursing facilities for the balance of their
lives, which could last 20 years from the onset of symptoms.
Karrington residents who are cognitively impaired or have Alzheimer's
Disease benefit from unique, safe and inviting residences that look and feel
like hometown neighborhoods, complete with cheerful common areas and secure
outdoor walking paths. Caregivers are specially trained to assist residents
facing the challenges of communication, nutrition, wandering and sleep.
Sensory therapy rooms, standard in new models, help set the pace for
long-term Alzheimer's care, while enhancing dignity, promoting individuality
and encouraging independence.
Karrington's residential alternative to institutionalization has proven
so successful at delivering high-quality, high-acuity care that the Company
plans to open several more free-standing Alzheimer's residences. Providing
each aging resident with the extra care needed to make Karrington his or her
final home...That's aging-in-place THE KARRINGTON WAY.
KARRINGTON'S COMMUNITY CONCEPT:
CLUSTERING PRODUCTS, CAPTURING MARKET SHARE
In 1997 Karrington focused its marketing efforts more sharply, making
the strategic decision to concentrate most future development east of the
Mississippi. The Karrington priority market stretches from Rochester,
Minnesota
[GRAPH: Karrington revenues for 1993 and 1994 (thousands of dollars).]
<TABLE>
<S> <C>
Year 1994 $5,264
Year 1993 $2,306
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
FOR OVERBURDENED CAREGIVERS NOT QUITE READY FOR FULL-TIME ASSISTED LIVING,
KARRINGTON'S DAY RESIDENT PROGRAM IS THE IDEAL SOLUTION. WITH FLEXIBLE
SERVICE AND STAY OPTIONS, INCLUDING DAY-CARE FOR LOVED ONES WITH ALZHEIMER'S
DISEASE, THE DAY RESIDENT PROGRAM GIVES FAMILY MEMBERS A BRIEF RESPITE FROM
CARE-GIVING DUTIES AND A HANDS-ON INTRODUCTION TO KARRINGTON'S PEOPLE,
PRODUCTS AND SERVICES.
[PHOTO: Female resident and female caregiver walking down stairs.]
PROFITABILITY
[GRAPH: Karrington revenues for 1995, 1996 and 1997 (thousands of dollars).]
Karrington
Revenues
(Thousands
Of Dollars)
<TABLE>
<S> <C>
Year 1997 $19,220
Year 1996 $ 9,596
Year 1995 $ 6,744
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
GROWING TO MEET THE NEEDS OF OUR
RESIDENTS, ASSOCIATES AND SHAREHOLDERS
- --------------------------------------------------------------------------------
[PHOTO: Two female residents with young child.]
[PHOTO: Male resident with young children.]
KARRINGTON IS COMMITTED TO HELPING RESIDENTS--75% OF WHOM ARE WOMEN WITH AN
AVERAGE AGE OF 83--LIVE THE BALANCE OF THEIR LIVES WITH PERSONAL DIGNITY,
INDIVIDUALITY, INDEPENDENCE AND QUALITY OF LIFE. FEW ASSISTED LIVING
OPERATORS PROVIDE THE COMPREHENSIVE RANGE OF HIGH-QUALITY CARE--FROM SOCIAL
ACTIVITIES SUCH AS INTER-GENERATIONAL PROGRAMS AND AEROBICS, TO SPECIAL CARE
AND ALZHEIMER'S PROGRAMS--THAT KARRINGTON DELIVERS.
- -- site of the newest Karrington Cottages campus -- to New York in the
Northeast and Florida in the South. At the geographic center of Karrington's
development and marketing activity is the Company's Columbus, Ohio
headquarters.
The Karrington Total Community Plan serves as the foundation for the
Company's marketing efforts. Designed to enhance market penetration and
increase occupancy, the Total Community Plan calls for the clustering of two
or more residential models in each of the Company's targeted communities.
Once established in a market, the Company will integrate ancillary products
and innovative services, designed to generate revenue while introducing
prospective residents and their families to Karrington.
The Day Resident Program is a prime example of successful vertical
integration. Expanded in 1997, the Day Resident Program gives family members
the opportunity to experience Karrington, while enjoying temporary relief
from caregiving duties. The Program offers flexible service and stay
options, including a secure day-care environment for people with Alzheimer's
Disease and other cognitive disorders. A hit with overburdened caregivers,
The Day Resident Program grew substantially in 1997, increasing from 12 hours
of weekly utilization early in the year to 400 hours at year end. Management
expects many Day Resident Program participants will become full-time
residents in 1998.
Also successful was the 1997 introduction of the Live Well Program, a
joint effort of Karrington and NCS Pharmacy, providing quality, on-site
pharmaceutical services. An optional service enjoyed by 99% of residents,
Live Well offers convenience and competitive pricing, while simplifying the
tracking of medication. Pioneered by Karrington, the successful Live Well
Program is now being imitated by competitors.
Creating innovative programs to introduce staff and services to
caregivers and seniors who may one day choose assisted living, capture
incremental revenue, and support the Company's aging-in-place
philosophy...That's marketing THE KARRINGTON WAY.
KARRINGTON PEOPLE, PRODUCTS AND SERVICES:
MAINTAINING QUALITY WHILE ENHANCING LIFE
Karrington's goal in developing new products and services is to enhance
the quality of residents' lives, for the duration of their lives. Few
assisted living operators provide the comprehensive range of high-quality
care -- including Alzheimer's programs and other special services -- that
Karrington delivers.
Encouraged to stay active, Karrington residents have access to aerobics,
transportation, inter-generational programs, aviaries, mobile x-ray,
laboratory and rehabilitation services, and other activities, services and
programs designed to enhance the quality of life, as opposed to the
institutional, isolating approach of nursing facilities.
Karrington's ability to provide high-quality, innovative products and
services is directly linked to the Company's nationally recognized assisted
living professionals and thoroughly trained staff.
Karrington Kollege, a mandatory, week-long training program for
administrators, helps ensure consistent delivery of quality care. During the
intense five-day session, operations are reviewed, training manuals are
distributed, and Karrington's commitment to helping its 1,000 residents
age-in-place with dignity and grace is stressed.
[GRAPH: U.S. population 85 years and older for 1990 and 2000.]
<TABLE>
<S> <C>
Year 2000 4.3 Million
Year 1990 3.2 Million
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE>
AS THE BABY BOOMER GENERATION AGES, THE DEMAND FOR HIGH-QUALITY ASSISTED
LIVING RESIDENCES WILL EXPLODE. BY THE YEAR 2030, THE SENIOR POPULATION
SHOULD REACH 60 MILLION, WITH NEARLY A QUARTER AFFECTED BY ALZHEIMER'S
DISEASE. IN LIGHT OF CHANGING DEMOGRAPHICS AND GOVERNMENT ESTIMATES THAT HALF
THE NATION'S CURRENT 1.6 MILLION NURSING FACILITY
[PHOTO: Female resident with young child.]
RESIDENTS WOULD BE WELL SERVED BY ASSISTED LIVING, ALFA PREDICTS THE NEED FOR
NEW ASSISTED LIVING UNITS WILL HIT 50,000 ANNUALLY WITHIN A DOZEN YEARS.
KARRINGTON IS POSITIONING ITSELF TODAY TO ACCOMMODATE INTERNAL AND
INDUSTRY-WIDE GROWTH TOMORROW.
POTENTIAL
[GRAPH: U.S. population 85 years and older for 2010, 2020 and 2030.]
Population
85 Years
And Older
<TABLE>
<S> <C>
Year 2030 8.0 Million
Year 2020 6.3 Million
Year 2010 6.0 Million
</TABLE>
11
<PAGE>
GROWING TO MEET THE NEEDS OF OUR
RESIDENTS, ASSOCIATES AND SHAREHOLDERS
- --------------------------------------------------------------------------------
[PHOTO: Three administrators and an instructor in classroom.]
[PHOTO: One administrator and an instructor.]
RESIDENTS' NEEDS ARE KARRINGTON'S NUMBER-ONE PRIORITY, AND NO JOB THAT
BENEFITS RESIDENTS IS TOO SMALL FOR KARRINGTON'S ASSOCIATES. THAT IS THE
UNDERLYING PHILOSOPHY OF KARRINGTON KOLLEGE, A WEEK-LONG, INTENSIVE TRAINING
PROGRAM FOR ADMINISTRATORS AND DEPARTMENT SUPERVISORS. ENTERING ITS THIRD
YEAR, KARRINGTON KOLLEGE HELPS ENSURE THAT EACH KARRINGTON HOME OPERATES AS A
CENTER OF QUALITY LIVING FOR RESIDENTS AND A SOURCE OF SUPPORT FOR CAREGIVERS.
In 1997 staff education included training teams assigned to visit new
residences to ensure that human resources, marketing, wellness and
hospitality support the Company's aging-in-place philosophy and make each
Karrington residence a center of quality living.
Karrington's commitment to quality assurance -- recognized by state
inspectors and competitors as among the best in the assisted living industry
- -- pays tremendous dividends to residents and the Company. Quality assurance
survey scores -- historically high -- increased significantly in 1997, as did
resident satisfaction surveys. In a competitive environment in which food
service and health care programs help distinguish providers, Karrington
consistently impresses residents. To ensure continued quality, the Company
this year added quality assurance and training professionals to its highly
respected operations team.
Superior high-acuity care, a commitment to training and quality, and
innovative product delivery...That's assisted living THE KARRINGTON WAY.
KARRINGTON'S FUTURE...CREATING QUALITY
RESIDENCES, DELIVERING SHAREHOLDER VALUE
The elderly are the nation's fastest growing population segment, with
the number of individuals age 65-plus expected to double to 60 million by the
year 2030, according to US Census Bureau figures.
Changing demographics, coupled with the fact that the elderly are often
incapable of independent living, have created tremendous opportunities for
Karrington and the entire assisted living industry.
In the past, female family members usually provided assistance for the
elderly. With 57% of women now working outside the home, however, their
ability to fill the traditional caregiver role has declined. Single parents,
growing numbers of Americans living alone, and a transient society have
further reduced the number of adult children able to care for elderly parents
and relatives.
With 30% of seniors currently living alone and the over-85 population
expected to double to 5.6 million by the year 2010, ALFA predicts the demand
for new assisted living units will grow to 50,000 a year within a dozen
years. Couple that with the US Department of Health and Human Services'
estimate that about half of the nation's 1.6 million nursing facility
residents are viable assisted living candidates, and it's no surprise that
the industry is expected to soar to $30 billion by the year 2000.
Karrington is positioning itself today to accommodate certain growth
tomorrow. Management's decision to take the Company public in July 1996
provided Karrington with capital to support its immediate growth goals,
leading to 27 open residences by year-end 1997, including the strategic
acquisition of Kensington Management Group.
Short-term, Karrington's goal is to increase residences and beds by
nearly 100% over the next 12 months, operating enough stable residences to
support profitable growth by year-end 1999.
Long-term, the Company plans to continue developing and operating
superior-quality residences that provide quality of life for residents,
deliver career satisfaction for employees, and perform favorably for
shareholders.
Poised to meet the needs and challenges of the growing assisted living
industry...That's visionary thinking THE KARRINGTON WAY.
- --------------------------------------------------------------------------------
12
<PAGE>
KARRINGTON
HEALTH, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL CONTENTS
- ----------------------------------------
<S> <C>
MANAGEMENT'S DISCUSSION 14
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS
- ----------------------------------------
MANAGEMENT'S STATEMENT 17
OF FINANCIAL RESPONSIBILITY
- ----------------------------------------
REPORT OF INDEPENDENT 17
AUDITORS
- ----------------------------------------
CONSOLIDATED BALANCE 18
SHEETS
- ----------------------------------------
CONSOLIDATED STATEMENTS 19
OF OPERATIONS
- ----------------------------------------
CONSOLIDATED STATEMENTS 20
OF EQUITY
- ----------------------------------------
CONSOLIDATED STATEMENTS 21
OF CASH FLOWS
- ----------------------------------------
NOTES TO CONSOLIDATED 22
FINANCIAL STATEMENTS
- ----------------------------------------
SELECTED CONSOLIDATED 29
FINANCIAL DATA
- ----------------------------------------
</TABLE>
FINANCIALS
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 are
paid monthly by residents, their families or other responsible parties and,
prior to the Kensington acquisition, were derived 100% from private pay
sources. Currently, approximately 93% of resident fees are derived from
private pay sources. Resident fees include revenue derived from basic
assisted living care, community fees, extended and special needs care,
Alzheimer's care and other sources. Community fees are one-time fees
generally payable by a resident upon admission, and extended care and
Alzheimer's care fees are paid by residents who require personal care in
excess of services provided under the basic care program. Development fees
and management services income, which accounts for the remaining revenues,
consists of development fees recognized over the development and construction
period and management fees which are a percentage of a managed residence's
total operating revenues and are recognized as services are performed.
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 such as marketing,
accounting and other administrative expenses; (iii) depreciation and
amortization; and (iv) rent expense. In anticipation of its growth plans, the
Company made significant investments in the number of management and staff at
its headquarters in 1996 and 1997.
- --------------------------------------------------------------------------------
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>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Total revenues . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Expenses:
Residence operations . . . . . . . . . 71.2 67.6 64.3
General and administrative . . . . . . 23.1 28.9 25.3
Depreciation and amortization. . . . . 14.0 14.4 14.5
Rent expense . . . . . . . . . . . . . 1.3 0.9 0.7
Unusual charges. . . . . . . . . . . . 7.2 -- 7.3
----- ----- -----
Total expenses . . . . . . . . . . . 116.8 111.8 112.1
----- ----- -----
Operating income (loss) . . . . . . . . (16.8)% (11.8)% (12.1)%
----- ----- -----
----- ----- -----
End of year(1):
Number of residences . . . . . . . . . 21 6 4
Number of units. . . . . . . . . . . . 803 312 219
</TABLE>
- --------------------------------------------------------------------------------
(1) Excludes residences jointly-owned by the Company accounted for by the
equity method.
14
<PAGE>
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 COMPARED
TO YEAR ENDED DECEMBER 31, 1996
Total revenue increased $9.6 million, or 100%, to $19.2 million in 1997
from $9.6 million in 1996 primarily due to the growth in resident revenues.
Resident revenues increased $9.6 million, or 107%, primarily due to the
acquisition of Kensington Management Group, Inc. and affiliates
("Kensington") on April 30, 1997 ($5.2 million), opening of new residences in
1997 ($1.3 million) and a full year of operations of residences opened or in
fill-up in 1996.
Residence operations expense increased $7.2 million, or 111%, to $13.7
million in 1997 from $6.5 million in 1996. As a percentage of residence
operating revenues, residence operations expense increased to 73.8% in 1997
from 72.4% in 1996. This increase is primarily attributable to an increase in
the number of residences in the fill-up phase as operations expenses are
historically higher as a percent of operating revenues during the first year
of operation of a residence.
General and administrative expenses increased $1.6 million, or 59.9%, to
$4.4 million in 1997 from $2.8 million in 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 as a result of
the Company's growth plans. The Company expects the rate of increase in its
general and administrative expenses will decrease as new personnel 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.
Depreciation and amortization increased $1.3 million, or 94.6%, to $2.7
million in 1997 from $1.4 million in 1996 primarily due to the opening of
new residences in 1997 and 1996.
See Note 2 to Consolidated Financial Statements for discussion on the
unusual charges in 1997 and 1995.
Interest expense increased $1.4 million, or 116%, to $2.7 million in
1997 from $1.3 million in 1996 primarily due to the opening of new residences
in 1997 and 1996.
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 COMPARED
TO YEAR ENDED DECEMBER 31, 1995
Total revenue increased $2.9 million, or 42.3%, to $9.6 million in 1996
from $6.7 million in 1995, primarily due to the growth in resident revenues.
Resident revenues increased $2.7 million, or 43.9%, primarily due to the
opening of two new residences during 1996 and a full year of operations for
1995 residence openings (total of $2.4 million) and to the increase in the
average daily resident rate.
Development and project management fees increased $118,000, or 22.6%, to
$643,000 in 1996 from $524,000 in 1995, primarily due to development and
management fees associated with the increased number of projects open or in
process under the relationship with CHI.
Residence operations expenses increased $2.2 million, or 49.6%, to $6.5
million in 1996 from $4.3 million in 1995. As a percentage of residence
operating revenues, residence operations expense increased from 69.7% in 1995
to 72.4% in 1996. This increase is primarily attributable to the opening of a
new residence in October 1995 and two residences in 1996, as operations
expenses are historically higher as a percent of operating revenues during
the first year of operation of a residence. Excluding these three residences,
operations expenses were 64.7% of residence operating revenues in 1996
compared to 65.6% in 1995.
General and administrative expenses increased $1.1 million, or 62.7%, to
$2.8 million in 1996 from $1.7 million in 1995, primarily due to increased
compensation, payroll taxes and related benefits of $800,000 as a result of
hiring additional management and staff at the Company's headquarters in
anticipation of the Company's growth plans and the addition of a
manager-in-training program initiated in the Spring of 1995.
Depreciation and amortization increased $399,000, or 40.7%, to $1.4
million in 1996 from $1.0 million in 1995, primarily due to the opening of
two new residences in 1996 and a full year of operations for 1995 residence
openings.
Interest expense increased $249,000, or 24.4%, to $1.3 million in 1996
from $1.0 million in 1995, primarily due to the opening of two new residences
in 1996 and a full year of operations for 1995 residence openings.
Interest income resulted primarily from the investment of the Company's
net proceeds from its initial public offering in July 1996.
The increase in deferred income taxes resulted primarily from the
Company's reorganization in July 1996. A deferred tax provision of $938,000
was recorded for the differences in the basis for tax purposes and for
financial accounting purposes of recorded assets and liabilities as of July
18, 1996. This provision was offset by a $255,000 benefit recorded for the
financial reporting loss for the period from July 18, 1996 to December 31,
1996.
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its initial growth through a combination of
mortgage financing, sale/leasebacks, subordinated borrowings from JMAC and
its affiliates, equity contributions and proceeds from the initial public
offering in 1996. The Company's mortgage and construction mortgage
financings mature in the next three to thirteen years, bear interest at
various fixed and fluctuating rates (ranging from 8.5% to 10.0% at December
31, 1997), and are secured by substantially all of the assets of the Company.
The Company expects to refinance such amounts as they mature. In addition,
one of the Company's residences is financed with a residential rental
development revenue bond which provides for annual principal repayments
beginning in 1998 through 2021 and bears interest at a fluctuating weekly
rate (3.83% at December 31, 1997).
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).
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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). To date, the Company has completed
mortgage agreements for four residences and six lease transactions totaling
$68.5 million.
In February 1997, the Company entered into a $3 million revolving credit
agreement expiring on March 31, 1998. The Company is currently negotiating
an extension and increase in the committment which it expects to accomplish
in April 1998. In March 1997, the Company entered into a $5 million line of
credit expiring in May 1999. At December 31, 1997, there was $6 million
outstanding under these agreements.
On April 30, 1997, the Company entered into a $27.6 million promissory
note in conjunction with its acquisition of Kensington Management Group, Inc.
and affiliates ("Kensington") and the build out of nine Kensington cottages
on the Rochester, Minnesota campus. The amount outstanding under the
agreement was approximately $19.9 million as of December 31, 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 $7.5 million promissory
note with JMAC, Inc., a 34% shareholder of the Company. The note expires on
January 2, 2000. At December 31, 1997, $7.5 million was outstanding under
this agreement.
In October 1997, the Company entered a $14 million construction loan
agreement for the development and construction of four assisted living
residences. In October 1999, the Company may elect, at its option, to convert
the construction loan into a term loan maturing in October 2004. As of
December 31, 1997, there was $4.6 million outstanding under this agreement.
At December 31, 1997, the Company had $98.5 million of outstanding debt
(at a weighted average interest rate of 9.1%). At that date, the Company had
equity of $26.5 million, which resulted from inception-to-date net capital
contributions of $39.1 million (including $27.5 million in net proceeds from
the July 1996 public offering) and net operating losses of $12.6 million. The
working capital deficiency at December 31, 1997 was $6.7 million.
During the years ended December 31, 1997, 1996 and 1995, the Company
used $57.4 million, $28.5 million, and $10.7 million, respectively, in cash
to acquire property and equipment and other assets, and received $49.6
million, $40.8 million and $10.9 million, respectively, in cash from
financing activities.
In 1998 and 1999, the Company plans to open approximately 47 new Company
and jointly-owned residences. To date, the Company has opened 5 of these
residences, has 14 residences under construction, has obtained zoning
approval for an additional 13 residences and has entered into contracts to
purchase 7 additional sites. The Company has been, and will continue to be,
dependent on third-party financing for its acquisition and development
program. The Company estimates that newly developed residences will generally
range in cost from $5.0 to $11.0 million, with the development cycle taking up
to 24 months from site identification to residence opening. There can be no
assurance that financing for the Company's acquisition and 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. Residences typically reach a
stable level of occupancy of over 90% within 12 months and generate
break-even cash flows, after debt service, within approximately eight months.
Additional financing will be required to complete the Company's growth
plans and to refinance certain existing indebtedness. As of March 13, 1998,
the Company had unused commitments of approximately $35 million from existing
debt and lease agreements which have not been specifically committed to a
residence. The Company is currently evaluating and negotiating with various
lenders with respect to traditional mortgages, sale/leaseback transactions
and other forms of off-balance-sheet financing. The Company has existing
loans or leases in place for the 14 residences currently under construction
and expected to open in 1998. In addition to financing ongoing development
and construction costs, the Company will require capital resources to meet
its operating and working capital needs incurred through the start-up losses
associated with the opening of new residences.
The Company believes its existing financing commitments, together with
additional financing the Company anticipates will be available, will be
sufficient to fund its development, construction and working capital needs
through 1998.
- --------------------------------------------------------------------------------
IMPACT OF YEAR 2000
The impact of the year 2000 to the Company varies, and from our initial
investigation, ranges from insignificant matters to a probable failure of the
current accounting system. The Company's computer programs were written
using two digits rather than four to define the applicable year. As a
result, those computer programs have time-sensitive software that recognize a
date using "00" as the year 1900 rather than the year 2000. This could cause
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Further assessment is necessary to determine the cost of eliminating the
year 2000 issue. The Company will have to replace portions of its software
so that its computer systems will function properly with respect to dates in
the year 2000 and thereafter. All vendors of integrated hardware and
software systems must be contacted to ensure that their product is year 2000
compliant. The Company expects to replace its current accounting system in
1998.
16
<PAGE>
MANAGEMENT'S STATEMENT OF
FINANCIAL RESPONSIBILITY
- --------------------------------------------------------------------------------
The management of Karrington Health, Inc. is responsible for the
preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles appropriate in the
circumstances. Management is also responsible for the determination of
estimates and judgments used in the financial statements, and the preparation
of other financial information included in this annual report to
shareholders. The financial statements have been audited by independent
auditors.
The management of the Company has established and maintains an
accounting system and related internal controls that it believes are
sufficient to provide reasonable assurance that assets are safeguarded
against unauthorized acquisition, use or disposition, that transactions are
executed and recorded in accordance with management's authorization and that
the financial records are reliable for preparing financial statements. The
concept of reasonable assurance is based on the recognition that the cost of
a system of internal control must be related to the benefits derived and that
the balancing of the factors requires estimates and judgments. Management
considers the recommendations of the independent certified public accountants
concerning the Company's system of internal control and takes appropriate
actions which are cost effective in the circumstances.
The Board of Directors has an Audit Committee of Directors who are not
members of management. The Audit Committee meets periodically with the
Company's management and independent certified public accountants to review
matters relating to financial reporting, auditing and internal control. To
ensure auditor independence, the independent certified public accountants
have full and free access to the Audit Committee.
/s/ Richard R. Slager /s/ Pete A. Klisares /s/ Thomas J. Klimback
RICHARD R. SLAGER PETE A. KLISARES THOMAS J. KLIMBACK
Chairman and Chief President and Chief Executive Vice President,
Executive Officer Operating Officer and Chief Financial Officer
REPORT OF
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS OF KARRINGTON HEALTH, INC.
We have audited the accompanying consolidated balance sheets of
Karrington Health, Inc. and its subsidiaries (the "Company") as of December
31, 1997 and 1996, and the related consolidated statements of operations,
equity, and cash flows for each of the three years in the period ended
December 31, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Karrington Health, Inc. and its subsidiaries as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Columbus, Ohio
March 6, 1998
17
<PAGE>
CONSOLIDATED BALANCE
SHEETS
- --------------------------------------------------------------------------------
K A R R I N G T O N H E A L T H, I N C. A N D S U B S I D I A R I E S
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 4,370,488 $12,283,185
Receivables:
Trade. . . . . . . . . . . . . . . . . . . . . 482,597 105,315
Due from REIT. . . . . . . . . . . . . . . . . 4.330,981 --
Affiliates . . . . . . . . . . . . . . . . . . 649,172 678,893
Prepaid expenses . . . . . . . . . . . . . . . . 281,722 170,254
------------ -----------
Total current assets. . . . . . . . . . . . . 10,114,960 13,237,647
Property and equipment -net (Note 2) . . . . . . . 115,983,043 52,011,748
Cost in excess of net assets
acquired - net (Note 3). . . . . . . . . . . . . 8,231,073 --
Other assets -net (Note 4) . . . . . . . . . . . . 6,986,724 4,300,546
------------ -----------
Total assets. . . . . . . . . . . . . . . . . $141,315,800 $69,549,941
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . . $ 2,535,969 $ 788,981
Construction payables. . . . . . . . . . . . . . 4,717,230 3,181,560
Notes payable - banks. . . . . . . . . . . . . . 6,000,000 --
Payroll and related taxes. . . . . . . . . . . . 1,080,884 735,337
Unearned resident fees . . . . . . . . . . . . . 861,266 325,111
Interest payable . . . . . . . . . . . . . . . . 614,919 158,103
Current portion of long-term obligations . . . . 998,523 242,211
------------ -----------
Total current liabilities . . . . . . . . . . 16,808,791 5,431,303
Long-term obligations (Note 6) . . . . . . . . . . 97,507,467 32,758,692
Deferred income taxes. . . . . . . . . . . . . . . 493,000 683,000
Shareholders' equity (Note 9):
Common shares, without par value . . . . . . . . 33,484,712 31,984,712
Accumulated deficit. . . . . . . . . . . . . . . (6,978,170) (1,307,766)
------------ -----------
Total shareholders' equity. . . . . . . . . . 26,506,542 30,676,946
------------ -----------
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . . . . $141,315,800 $69,549,941
------------ -----------
------------ -----------
</TABLE>
See accompanying notes.
18
<PAGE>
CONSOLIDATED STATEMENTS
OF OPERATIONS
- --------------------------------------------------------------------------------
K A R R I N G T O N H E A L T H, I N C. A N D S U B S I D I A R I E S
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Residence operations . . . . . . . . . . . . . . $ 18,538,832 $ 8,952,759 $ 6,219,465
Development and project management fees. . . . . 681,051 642,803 524,391
------------ ------------ ------------
Total revenues . . . . . . . . . . . . . . . . 19,219,883 9,595,562 6,743,856
Expenses:
Residence operations . . . . . . . . . . . . . . 13,683,245 6,485,837 4,335,792
General and administrative . . . . . . . . . . . 4,432,635 2,772,727 1,704,694
Depreciation and amortization. . . . . . . . . . 2,684,297 1,379,060 979,797
Rent expense . . . . . . . . . . . . . . . . . . 259,114 89,121 44,520
Unusual charges (Note 2) . . . . . . . . . . . . 1,380,000 -- 492,288
------------ ------------ ------------
Total expenses . . . . . . . . . . . . . . . . 22,439,291 10,726,745 7,557,091
------------ ------------ ------------
Operating income (loss). . . . . . . . . . . . . . (3,219,408) (1,131,183) (813,235)
Interest expense . . . . . . . . . . . . . . . . . (2,743,353) (1,271,561) (1,022,516)
Interest income. . . . . . . . . . . . . . . . . . 348,711 470,065 --
Equity in net loss of unconsolidated
entities (Note 7). . . . . . . . . . . . . . . . (246,354) (7,157) (105,529)
------------ ------------ ------------
Loss before income taxes . . . . . . . . . . . . . (5,860,404) (1,939,836) (1,941,280)
Deferred income tax benefit (provision). . . . . . 190,000 (683,000) --
------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . $ (5,670,404) $ (2,622,836) $ (1,941,280)
------------ ------------ ------------
------------ ------------ ------------
Net loss per common share - basic and diluted:
Actual . . . . . . . . . . . . . . . . . . . . . $ (.83) -- --
Proforma . . . . . . . . . . . . . . . . . . . . -- $ (.48) $ (.45)
Weighted average number of common shares outstanding:
Actual . . . . . . . . . . . . . . . . . . . . . 6,792,200 -- --
Proforma . . . . . . . . . . . . . . . . . . . . -- 5,415,800 4,350,000
</TABLE>
See accompanying notes.
19
<PAGE>
CONSOLIDATED STATEMENTS
OF EQUITY
- --------------------------------------------------------------------------------
K A R R I N G T O N H E A L T H, I N C. A N D S U B S I D I A R I E S
<TABLE>
<CAPTION>
COMMON SHARES
-------------------------- ACCUMULATED PARTNERS'
SHARES AMOUNT DEFICIT EQUITY TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 . . . . . . . . . . $(1,763,271) $(1,763,271)
Conversion of long-term
obligations and
accrued interest to
partners' equity . . . . . . . . . . . . . 5,330,458 5,330,458
Cash capital contributions . . . . . . . . . 5,000,000 5,000,000
Capital distributions. . . . . . . . . . . . (785,000) (785,000)
Net loss . . . . . . . . . . . . . . . . . . (1,941,280) (1,941,280)
----------- -----------
Balance at December 31, 1995 . . . . . . . . . . 5,840,907 5,840,907
Net loss . . . . . . . . . . . . . . . . . . $(1,307,766) (1,315,070) (2,622,836)
Reorganization
transaction (Note 9) . . . . . . . . . . . 4,350,000 $ 4,525,837 -- (4,525,837) --
Net proceeds from
public offering. . . . . . . . . . . . . . 2,350,000 27,458,875 -- -- 27,458,875
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 . . . . . . . . . . 6,700,000 31,984,712 (1,307,766) 0 30,676,946
Net loss . . . . . . . . . . . . . . . . . . (5,670,404) (5,670,404)
Common shares issued . . . . . . . . . . . . 137,363 1,500,000 -- -- 1,500,000
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 . . . . . . . . . . 6,837,363 $33,484,712 $(6,978,170) $ 0 $26,506,542
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
20
<PAGE>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
- --------------------------------------------------------------------------------
K A R R I N G T O N H E A L T H, I N C. A N D S U B S I D I A R I E S
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . $ (5,670,404) $ (2,622,836) $ (1,941,280)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Provision for terminated projects
and unusual charges. . . . . . . . . . . . . . 1,191,909 -- 587,288
Depreciation and amortization. . . . . . . . . . 2,684,297 1,379,060 979,797
Deferred income taxes. . . . . . . . . . . . . . (190,000) 683,000 --
Loss on disposal of assets . . . . . . . . . . . -- 10,060 6,938
Equity in net loss of unconsolidated entities. . 246,354 7,157 105,529
Change in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . (4,370,716) (17,016) (659,317)
Prepaid expenses. . . . . . . . . . . . . . . 15,167 (71,433) 22,197
Accounts payable and accrued liabilities. . . 5,445,275 174,268 198,573
Other liabilities . . . . . . . . . . . . . . 485,794 263,441 451,231
------------ ------------ ------------
Net cash provided by (used in)
operating activities. . . . . . . . . . . . . (162,324) (194,299) (249,044)
INVESTING ACTIVITIES
Purchases of property and equipment. . . . . . . . (56,234,016) (25,670,838) (10,023,395)
Decrease (increase) in escrow balances . . . . . . 587,811 (1,146,004) (239,000)
Equity contributions to unconsolidated entities. . -- (1,347,753) --
Distributions from unconsolidated entity . . . . . 225,000 339,767 --
Acquisition of Kensington - net of cash acquired . (4,182,733) -- --
Proceeds from sale of assets . . . . . . . . . . . 6,010,832 101,202 --
Payments of pre-opening costs. . . . . . . . . . . (1,316,495) (639,908) (314,592)
Payments for prepaid rent and other. . . . . . . . (2,461,648) (96,571) (50,320)
------------ ------------ ------------
Net cash used in investing activities. . . . . . (57,371,249) (28,460,105) (10,627,307)
FINANCING ACTIVITIES
Net proceeds from public offering. . . . . . . . . -- 27,458,875 --
Proceeds from notes payable - banks. . . . . . . . 6,000,000 -- --
Proceeds from mortgages. . . . . . . . . . . . . . 37,516,826 21,744,390 14,336,639
Repayment of mortgages . . . . . . . . . . . . . . (1,258,852) (7,165,025) (7,491,258)
Proceeds from affiliated entity. . . . . . . . . . 7,500,000 5,501,535 40,855
Repayment of amounts due affiliated entity . . . . -- (5,535,375) --
Payments of financing fees . . . . . . . . . . . . (137,098) (1,211,644) (217,114)
Proceeds from partner's capital contribution . . . -- -- 5,000,000
Payment of partner distributions . . . . . . . . . -- -- (785,000)
------------ ------------ ------------
Net cash provided by financing activities. . . . 49,620,876 40,792,756 10,884,122
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . . (7,912,697) 12,138,352 7,771
Cash and cash equivalents at
beginning of year. . . . . . . . . . . . . . . . 12,283,185 144,833 137,062
------------ ------------ ------------
Cash and cash equivalents at end of year . . . . . $ 4,370,488 $ 12,283,185 $ 144,833
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosure of cash flow information
Cash paid for interest . . . . . . . . . . . . . . $ 4,653,534 $ 2,280,810 $ 1,399,347
</TABLE>
See accompanying notes.
21
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE BUSINESS
The Company is a developer, owner and operator of licensed, assisted
living residences which provides quality professional, personal and
health-care services, including an emphasis on Alzheimer's care, for
individuals needing assistance with activities of daily living. These
activities include bathing, dressing, meal preparation, housekeeping, taking
medications, transportation, and other activities that, because of the
resident's condition, are difficult for residents to accomplish in an
independent living setting. The Company offers its customers a dignified
residential environment focused on quality of life. The Company also provides
development, support and management services to its joint ventures and others
in the long-term care industry. As of December 31, 1997, the Company,
including joint ventures, had 27 residences open in Ohio, Pennsylvania,
Indiana, Minnesota, North Dakota, Iowa, Colorado and New Mexico and 19
residences under construction in Ohio, Indiana, Minnesota, Pennsylvania,
North Carolina and Illinois.
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 registration statement (see Note 9).
Hereinafter, all references to the "Company" encompass Karrington Operating
and Karrington Health, Inc. Karrington Operating was an Ohio General
Partnership founded in 1991 by DevelopMed Associates, Inc. (Associates) and
JMAC Properties, Inc., a private investment company, the principal
shareholder of which is JMAC, Inc. (JMAC). Effective December 31, 1996, the
net assets of Karrington Operating and three other related partnerships were
distributed to new subsidiary corporations of Karrington Health, Inc. The
trade name "Karrington Communities," a Registered Trademark, is the operating
name of all residences owned and operated by the Company.
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements reflect the operations and
development activities of the Company and all wholly-owned subsidiaries.
Significant intercompany transactions and accounts are eliminated in
consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported 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.
INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company uses the equity method of accounting for its investments in
its 19.9%-50% jointly-owned ventures, which were formed to operate assisted
living residences (see Note 7).
REVENUE RECOGNITION
The Company recognizes assisted living service fee revenue in the period
in which it is earned. Payments received in advance are reflected as unearned
resident fees in the accompanying consolidated financial statements.
Community fees are payments received from residents at move in and may be
refundable ratably over three months from the date of admission if the
resident moves out. Community fees are recognized as revenue when received
less an estimate of the amount that may be refunded. The Company performs
development and project management consulting services for its joint ventures
and others and recognizes revenue for these fees as the services are
provided.
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 pre-acquisition costs are allocated to
projects and also are capitalized. Depreciation is computed when assets are
placed in service, using the straight-line method over the respective useful
lives of each class of asset which generally are as follows:
<TABLE>
<S> <C>
- -----------------------------------------------
Land improvements 15 years
- -----------------------------------------------
Buildings 40 years
- -----------------------------------------------
Furnishings and equipment 3 - 10 years
- -----------------------------------------------
</TABLE>
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Land and land improvements . . . . . . . . . $ 7,346,278 $ 2,927,878
Buildings. . . . . . . . . . . . . . . . . . 56,038,464 23,242,775
Furnishings and equipment. . . . . . . . . . 7,099,275 3,862,650
Construction-in-progress . . . . . . . . . . 49,425,405 24,147,397
------------ -------------
Total . . . . . . . . . . . . . . . . . . 119,909,422 54,180,700
Accumulated depreciation . . . . . . . . . . (3,926,379) (2,168,952)
------------ -------------
Property and equipment - net . . . . . . . . $115,983,043 $ 52,011,748
------------ -------------
------------ -------------
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
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
previously capitalized costs are expensed. The remaining charges primarily
relate to severance costs associated with third quarter resignations.
In the fourth quarter of 1995 a charge of $492,288 was recorded to
write-off an intangible asset referred to as the Karrington Concept as it was
determined the asset had no future benefit. The Karrington Concept
represented an amount allocated to an intangible asset contributed to the
Company in connection with its organization by Associates.
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. Prior to 1995, costs incurred in connection with preparing the
residence for opening and initial occupancy were capitalized and amortized
over three years, commencing with the opening of the residence. In the first
quarter of 1995, the Company changed the amortization period for pre-opening
costs from three years to one to be more consistent with prevailing industry
practice. The effect of this change was to increase amortization expense by
$92,000 in 1995.
DEFERRED FINANCING COSTS
Financing costs are capitalized and amortized using the interest method
over the term of the related financing.
ORGANIZATION COSTS
Organization costs are amortized using the straight-line method over
five years.
ADVERTISING EXPENSE
Prior to 1995, the Company capitalized advertising expenditures as part
of pre-opening costs. In the first quarter of 1995, the Company adopted the
provisions of AICPA SOP 93-7, "Reporting on Advertising Costs," expensing
advertising expenditures as incurred. The effect of this change was to
increase the net loss by $129,000 for 1995. Advertising expenditures were
approximately $709,000, $424,000 and $276,000 for 1997, 1996 and 1995,
respectively.
INCOME TAXES
Partnership taxable income and losses were allocated to the partners for
inclusion in their respective income tax returns. Accordingly, no provision
or benefit for income taxes was recorded prior to July 18, 1996 (see Note 8).
NET LOSS PER COMMON SHARE
In February 1997, the FASB issued Statement No. 128, "Earnings Per
Share," which eliminates the presentation of primary earnings per share (EPS)
and requires the presentation of basic EPS (the principal difference being
that common stock equivalents are not considered in the computation of basic
EPS). It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures. The Company was required to adopt Statement No. 128 for its year
ended December 31, 1997.
Net loss per common share - basic and diluted for 1997 is computed based
on the weighted average number of shares outstanding during the period as the
effect of including any common share equivalents would be antidilutive.
Common share equivalents are comprised of outstanding stock options. For
1996 and 1995, a proforma net loss per share calculation is presented. The
proforma net loss per share - basic and diluted is computed based on the
weighted average number of shares outstanding during 1996 and 1995 based on
4,350,000 common shares outstanding following the reorganization (described
in Note 9) and the 2,350,000 common shares issued as a result of the
Company's initial public offering in July 1996.
- --------------------------------------------------------------------------------
3. 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 December 31, 1997, Kensington had
11 residences open and five residences under construction for a total of 515
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
$22 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.
As a result of the Kensington acquisition, certain accounts in the
December 31, 1997 consolidated balance sheet increased significantly as
compared to December 31, 1996. These increases included approximately $23
million in property and equipment, other asset increases of approximately
$8.7 million related to costs
23
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
in excess of net assets acquired and deferred financing costs, increases in
long-term obligations of approximately $25 million and the issuance of $1.5
million of common shares of the Company. Goodwill related to the acquisition
is being amortized using the straight-line method over 40 years.
The following unaudited proforma consolidated results of operations for
the years ended December 31, 1997 and 1996 reflect the proforma effects of
the Kensington acquisition as if such transaction had occurred at the
beginning of the years 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 years presented below, or that may be expected to occur
in the future.
<TABLE>
<CAPTION>
1997 1996
--------------- ------------
<S> <C> <C>
Revenues . . . . . . . . . $ 21,916,000 $ 16,230,000
--------------- ------------
Net loss . . . . . . . . . $ (6,426,000) $ (3,884,000)
--------------- ------------
Net loss per share -
basic and diluted. . . . $ (0.94) $ (0.70)
--------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
4. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
Pre-opening costs, less accumulated
amortization of $428,390 and
$180,663 at December 31,
1997 and 1996, respectively . . . . . $ 1,194,496 $ 497,298
Deferred financing costs, less
accumulated amortization of
$225,967 and $114,845 at
December 31, 1997 and 1996,
respectively . . . . . . . . . . . . 1,959,407 1,430,096
Organization costs and
other, less accumulated
amortization of $111,506 and
$169,236 at December 31,
1997 and 1996, respectively . . . . 113,001 46,509
Prepaid rent . . . . . . . . . . . . . 2,432,500 --
Escrow balance (see Note 6) . . . . . . 797,193 1,385,004
Equity in joint ventures
(see Note 7) . . . . . . . . . . . . . 384,141 852,503
Deposits and other . . . . . . . . . . 105,986 89,136
-------------- --------------
$ 6,986,724 $ 4,300,546
-------------- --------------
-------------- --------------
</TABLE>
5. LEASE COMMITMENTS
The Company has entered into operating lease arrangements expiring in
2010 to 2026 for six residences that are expected to open in 1998 with
Meditrust (see Note 6) and two additional land leases related to other
residences. These leases provide for renewal periods. Additional lease
payments for certain leases are based on increased revenues during specified
periods. Certain lessors require the respective residences to maintain
specific debt service coverage ratios and consolidated minimum current ratios
and net worth requirements. The Company is responsible for the payment of
real estate taxes, site maintenance, and access road maintenance. The Company
also leases vehicles and certain office equipment for periods up to five
years. Future minimum lease payments under noncancellable operating leases
are as follows:
<TABLE>
<S> <C>
1998 . . . . . . . . $ 5,265,758
1999 . . . . . . . . 5,143,117
2000 . . . . . . . . 5,092,937
2001 . . . . . . . . 4,999,889
2002 . . . . . . . . 4,920,323
THEREAFTER . . . . . 44,730,623
-----------
TOTAL . . . . . . . $70,152,647
-----------
-----------
</TABLE>
Total rental costs incurred were $423,000, $221,000 and $104,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
In February 1997, the Company entered into a $3 million revolving credit
agreement expiring on March 31, 1998. The Company is currently negotiating
an extension and increase in the committment which it expects to accomplish
in April 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 million line of credit expiring in May 1999. Interest is payable monthly
and, at the Company's option, accrues at the bank's prime rate or LIBOR rate
plus .75%. At December 31, 1997, there was $6 million outstanding under
these agreements. The weighted average interest rate for these agreements
was 7.8% for 1997.
24
<PAGE>
- --------------------------------------------------------------------------------
Long-term obligations consist of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ -------------
<S> <C> <C>
$67,735,000 mortgages payable, due from 2001 through 2006; interest rates ranging from
8.9% to 10.0% at December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,056,901 $ 18,360,794
$5,800,000 residential rental development revenue bonds due in annual principal
payments ranging from $100,000 to $300,000 beginning in 1998 through 2021.
Interest is determined weekly (3.8% at December 31, 1997) . . . . . . . . . . . . . . . . . 5,800,000 5,800,000
$45,460,000 construction mortgages payable, interest fluctuates from LIBOR plus 2.75%
to prime plus 1.25% (8.5% to 9.75% at December 31, 1997). . . . . . . . . . . . . . . . . . 26,449,498 8,751,835
$7,500,000 promissory note payable to JMAC, Inc.; interest at prime
(8.5% at December 31, 1997). Balance due in January 2000. . . . . . . . . . . . . . . . . . 7,500,000 --
Other long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 699,591 88,274
------------ ------------
Total long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,505,990 33,000,903
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (998,523) (242,211)
------------ ------------
Long term obligations, less current position . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,507,467 $ 32,758,692
------------ ------------
------------ ------------
</TABLE>
The mortgage and construction mortgage loans are collateralized by
substantially all the assets of each residence. Certain of the mortgage
agreements require the respective residences to maintain specified debt
service coverage ratios and consolidated minimum current ratios and net worth
requirements. Certain lenders also require escrow balances to be held by the
lenders which are included in other assets in the Company's consolidated
balance sheets.
In May 1996, 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 the ten-year U.S. Treasury notes.
Additional interest or lease payments are contingent on increased revenues of
a financed residence during specified periods. To date, the Company has
completed mortgage agreements for four residences totaling $22.4 million and
six operating lease transactions for residences expected to open in 1998
totaling $46.2 million.
On April 30, 1997, the Company entered into a $27.6 million promissory
note in conjunction with its acquisition of Kensington (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 December 31, 1997. The
remaining amount will be disbursed in two phases at such time that the nine
cottages achieve certain debt service coverage ratios.
In October 1997, the Company entered a $14 million con-struction loan
agreement for the development and construction of four assisted living
residences. Interest is payable monthly and accrues at the bank's prime rate
plus 11/2% 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 11/2% 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.
At December 31, 1997, the company was in violation of certain covenants which
the lender has waived through the end of 1998. As of December 31, 1997,
there was $4.6 million outstanding under this agreement.
In December 1997, the Company entered into construction loan agreements
totaling $19 million. Interest is payable monthly and accrues at LIBOR plus
2.75% or prime plus 1/2%. In December 2000, the Company may elect, at its
option, to extend the agreements up to two additional years. Principal and
interest payments under the extension periods would be based on 25-year
amortization schedules with interest accruing at variable rates on the debt
service coverage ratio with respect to the individual residences.
In September 1997, the Company entered into a $7.5 million promissory
note with JMAC, Inc., a 34% shareholder of the Company. Interest is payable
monthly and accrues at a bank's prime rate.
25
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Interest costs incurred were $5,110,000, $2,309,000 and $1,433,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. Of these
amounts $2,367,000, $1,038,000 and $411,000 were capitalized to
construction-in-progress in the respective periods. Interest cost incurred
includes amounts due under obligations to JMAC and amounted to $190,000 and
$175,000 in 1997 and 1996, respectively. No such amounts were incurred for
1995.
The carrying amounts of long-term obligations approximate fair value as
the interest rates are self-adjusting or are comparable to rates currently
available.
As of December 31, 1997, the long-term obligations mature as follows:
<TABLE>
<S> <C>
1998 . . . . . . . . $ 998,523
1999 . . . . . . . . 3,458,080
2000 . . . . . . . . 29,023,319
2001 . . . . . . . . 4,740,407
2002 . . . . . . . . 960,981
Thereafter . . . . . 59,324,680
-------------
Total . . . . . . . $ 98,505,990
-------------
-------------
</TABLE>
Effective January 1, 1995, the Company's partners entered into a
recapitalization agreement whereby subordinated debentures and accrued
interest totaling $5,330,458 were converted to partners' equity. In December
1995, the Company entered into a loan agreement with JMAC to provide up to
$8,000,000 in subordinated loans to the Company. Interest accrued at 15% per
annum. The total amount outstanding of $5,710,000, including accrued
interest, was repaid in July 1996 with proceeds from the public offering at
which time the agreement terminated.
In January 1998, the Company entered into two additional construction
mortgages totaling $13.6 million at a variable interest rate of LIBOR plus
2.75%.
- --------------------------------------------------------------------------------
7. INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company and Sisters of Charity Health Care Systems, Inc. of
Cincinnati, Ohio (a founding system of Catholic Health Initiatives ("CHI")),
have entered into five joint venture agreements to develop, own and operate
six assisted living residences in Ohio, New Mexico and Colorado. Each
project is jointly owned by the Company and CHI, with the Company typically
owning approximately 20% of the equity of the project. Construction and
permanent debt financing generally is to be arranged by CHI on behalf of the
venture and is to be non-recourse to the Company. As of December 31, 1997,
the Company has guaranteed $1 million of joint venture debt financing. The
Company provides all development and management services with respect to each
residence under a standard agreement that generally provides for a
development fee of $250,000 per project and a management fee of 5% of
revenues.
Under the agreements with CHI, the Company earned and recorded as
revenue development fees of $241,000, $464,000 and $363,000 in 1997, 1996 and
1995, respectively. The Company serves as manager for each of the residences
and receives management fees upon commencement of operations. Management
fees of $305,000, $149,000 and $112,000 have been recorded as revenues for
the years ended December 31, 1997, 1996 and 1995, respectively.
As of December 31, 1997, 1996 and 1995, six, three and one residences
were open, respectively. Summarized unaudited financial information of joint
ventures is presented below.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
BALANCE SHEETS
Current assets . . . . . . . . . . . . . . . . . . $ 1,269,109 $ 1,386,751
Property . . . . . . . . . . . . . . . . . . . . . 29,140,618 20,173,572
Other assets . . . . . . . . . . . . . . . . . . . 946,972 656,715
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . $31,356,699 $22,217,038
----------- -----------
----------- -----------
Current liabilities . . . . . . . . . . . . . . . $ 1,919,471 $ 2,489,313
Long-term obligations. . . . . . . . . . . . . . . 26,662,372 15,364,102
Joint venture equity . . . . . . . . . . . . . . . 2,774,856 4,363,623
----------- -----------
Total liabilities and joint
venture equity. . . . . . . . . . . . . . . . . $31,356,699 $22,217,038
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
STATEMENTS
OF OPERATIONS
Residence
revenues . . . . . . . . . . . . . $ 5,468,781 $ 2,347,278 $ 1,868,618
Operating
expenses . . . . . . . . . . . . . . 4,690,309 1,809,886 1,333,203
Depreciation and
amortization
expense. . . . . . . . . . . . . . . 979,746 308,589 281,684
Interest
expense. . . . . . . . . . . . . . . 977,490 436,646 464,788
----------- ----------- -----------
Total
expenses . . . . . . . . . . . . 6,647,545 2,555,121 2,079,675
----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . $(1,178,764) $(207,843) $ (211,057)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company's equity in net loss of unconsolidated entities included in
its accumulated deficit at December 31, 1997 was $270,000.
26
<PAGE>
- --------------------------------------------------------------------------------
8. INCOME TAXES
As a partnership, Karrington Operating recorded no provision for income
taxes. Partnership income and losses were allocated to JMAC Properties, Inc.
and Associates for inclusion in their respective income tax returns. As a
result of the reorganization (described in Note 9), the Company applied the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" subsequent to July 18, 1996. Deferred income
taxes were provided for differences in the basis for tax purposes and for
financial accounting purposes of recorded assets and liabilities as of July
18, 1996. Accordingly, a tax provision and a net deferred income tax
liability of $938,000 was recorded in the 1996 balance sheet and statement of
operations. The Company recorded a deferred tax benefit of $255,000 related
to its financial reporting loss before taxes of $625,000 for the period from
July 18, 1996 to December 31, 1996.
Significant components of income tax expense for the year ended December
31, 1997 and for the period from July 18, 1996 to December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Current:
Federal. . . . . . . . . . . . . . . . . . . $ -- $ --
State. . . . . . . . . . . . . . . . . . . . -- --
----------- ----------
Total current. . . . . . . . . . . . . -- --
----------- ----------
Deferred:
Federal. . . . . . . . . . . . . . . . . . . (1,977,000) 580,000
State. . . . . . . . . . . . . . . . . . . . (343,000) 103,000
Increase in valuation
allowance . . . . . . . . . . . . . . . . 2,130,000 --
----------- ----------
Total deferred . . . . . . . . . . . . (190,000) 683,000
----------- ----------
Total provision (benefit). . . . . . . . . . . . . $ (190,000) $ 683,000
----------- ----------
----------- ----------
</TABLE>
A reconciliation of the recorded benefit based on the Federal statutory
income tax rate to the Company's income tax provision for 1997 and the period
from July 18, 1996 to December 31, 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Benefit at Federal statutory rate. . . . . . . . . (34.0)% (34.0)%
State income taxes, net of
Federal benefit . . . . . . . . . . . . . . . . (5.9) (5.9)
Nondeductible expenses . . . . . . . . . . . . . . 0.3 0.9
Valuation allowance. . . . . . . . . . . . . . . . 36.4 --
Other . . . . . . . . . . . . . . . . . . . . . . -- (1.8)
----------- ----------
Effective income tax rate . . . . . . . . . . . (3.2)% (40.8)%
----------- ----------
----------- ----------
</TABLE>
Deferred income taxes arise from temporary differences between financial
reporting and tax reporting bases of assets and liabilities, and operating
loss carryforwards for tax purposes.
The components of the deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
Deferred income tax assets:
Accrued liabilities . . . . . . . . . . . . . $ 58,000 $ 38,000
Asset amortization. . . . . . . . . . . . . . 327,000 216,000
Operating loss
carryforwards . . . . . . . . . . . . . . . 2,778,000 322,000
Other . . . . . . . . . . . . . . . . . . . . 10,000 20,000
------------ ----------
Total deferred income
tax assets. . . . . . . . . . . . . . . . . . 3,173,000 596,000
Valuation allowance . . . . . . . . . . . . . . (2,130,000) --
------------ ----------
Net deferred income tax assets. . . . . . . . . 1,043,000 596,000
------------ ----------
Deferred income tax liabilities:
Property related. . . . . . . . . . . . . . . (1,534,000) (1,262,000)
Other . . . . . . . . . . . . . . . . . . . . (2,000) (17,000)
------------ ----------
Total deferred income
tax liabilities . . . . . . . . . . . . . . . (1,536,000) (1,279,000)
------------ ----------
Net deferred income
tax liabilities . . . . . . . . . . . . . . . $ (493,000) $ (683,000)
------------ ----------
------------ ----------
</TABLE>
Net deferred income tax assets, including net operating loss
carry-forwards, represent the amounts of tax assets that the company could
realize if certain tax planning strategies were employed. No valuation
allowance for deferred tax assets was recorded at December 31, 1996 as all
tax assets could be realized via tax planning strategies. The Company's net
operating loss carryforwards of $6.9 million expire from 2011 through 2012.
- --------------------------------------------------------------------------------
9. EQUITY
At December 31, 1997, the Company's authorized capital shares consisted
of (a) 28,000,000 common shares, without par value, of which 6,837,363 were
issued and outstanding and (b) 2,000,000 non-voting preferred shares without
par value, none of which have been issued. The Company's Board of Directors
has the authority to issue preferred shares in one or more series and to fix
the designations, the number of shares in such series, liquidation
preferences, dividend rates, conversion rights and redemption provisions of
the shares constituting any series, without any further vote or action by the
Company's shareholders. Any series of preferred shares so issued could have
priority over the common shares with respect to dividend or liquidation
rights or both.
On July 18, 1996, 3,000,000 of the Company's common shares were sold
pursuant to its initial public offering. Of the total shares sold, 2,350,000
common shares were sold by the Company and 650,000 common shares were sold by
JMAC. The net proceeds to the Company were approximately $27.5 million of
which $5.7 million was used to repay indebtedness due JMAC. The balance of
the net proceeds was used to finance the develop-
27
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ment and acquisition of additional assisted living residences and for working
capital and general corporate purposes.
Immediately prior to July 18, 1996, the shareholders of JMAC Properties,
Inc. and Associates contributed the stock in their respective companies for
stock in the Company. The shareholder of JMAC Properties, Inc. received 66
2/3% of the pre-offering outstanding common shares of the Company while the
shareholders of Associates received the remaining 33 1/3% (a total of
4,350,000 shares). Following the reorganization, JMAC Properties, Inc. and
Associates became wholly-owned subsidiaries of the Company. As a result, the
Company owned 100% of the equity interests of Karrington Operating.
As part of the consideration for the Kensington acquisition (see Note 3)
the Company issued 137,363 common shares on April 30, 1997.
- --------------------------------------------------------------------------------
10. INCENTIVE STOCK AND 401(k) PLANS
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. 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.
The Company has granted non-qualified options to certain officers, key
employees and non-employee directors. The employee 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. Non-employee director options are
exercisable beginning six months after the effective date of grant with a
ten-year term. Each continuing non-employee director will receive on the day
after each annual meeting of shareholders, a grant of a non-qualified stock
option to purchase 2,000 common shares of the Company at an exercise price
equal to the fair market value of the shares on the date of grant.
Stock option activity for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RANGE OF
EXERCISE EXERCISE
SHARES PRICE PRICES
-------- -------- ------------
<S> <C> <C> <C>
Balance December 31, 1995. . . . . . . . --
Granted. . . . . . . . . . . . . . . . 169,000 $13.00 $13.00
-------- ------ -------------
Balance December 31, 1996. . . . . . . . 169,000 13.00 13.00
Granted. . . . . . . . . . . . . . . . 215,500 12.25 $ 11.00-12.88
Forfeited. . . . . . . . . . . . . . . (27,000) 13.00 13.00
-------- ------ -------------
Balance December 31, 1997. . . . . . . . 357,500 12.55 11.00-13.00
-------- ------ -------------
-------- ------ -------------
</TABLE>
At December 31, 1997, the average remaining contractual life was 9.2
years and 72,000 non-employee director options were exercisable at a weighted
average exercise price of $12.88.
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." The Statement
allows for a fair value-based method of accounting for employee stock options
and similar equity instruments. In accordance with the provisions of SFAS
No. 123, the Company has elected to account for options granted under the
Plan in accordance with APB Opinion 25, "Accounting for Stock Issued to
Employees" and related interpretations. If the Company had elected to
recognize compensation cost based on the fair value of options at the grant
date as prescribed by SFAS No. 123, net loss and net loss per common share -
basic and diluted would have increased by $295,000 and $.04, respectively,
for 1997 and $291,000 and $.05, respectively, for 1996. The fair value for
these options was estimated at the date of grant using the Black-Scholes
option pricing model. The assumptions used in the model included an expected
dividend yield of 0%, an expected stock price volatility of .47 in 1997 and
.34 in 1996, a risk-free interest rate of 6.0% in 1997 and 6.5% in 1996, and
an expected life of the options of 2 or 7 years in 1997 and 10 years in 1996.
The financial effects of applying SFAS No. 123 are not likely to be
representative of the effects on reported results of operations for future
years.
In 1997, the Company established the Karrington Health, Inc. and
Affiliates 401(k) Plan (the "401(k) Plan") for the benefit of eligible
full-time employees of the Company and its joint ventures. Eligible
participants may contribute up to 10% of their compensation to the 401(k)
Plan and self-direct such contributions. The Company may, in its discretion,
make annual matching and/or discretionary contributions on behalf of each
eligible participant which vest over a six year period. No Company matching
or discretionary contributions were expensed in 1997.
- --------------------------------------------------------------------------------
11. COMMITMENTS
The Company has commitments totaling approximately $10,926,000 at
December 31, 1997 for various land purchase contracts and $38,284,000 for
various construction contracts.
- --------------------------------------------------------------------------------
12. SUPPLEMENTAL PROFORMA LOSS PER SHARE
Supplemental proforma net loss and net loss per share (basic and
diluted) for the year ended December 31, 1996 would have been $2,535,000 and
$.44, respectively, had the retirement of the JMAC debt taken place at
January 1, 1996. Supplemental net loss per share (basic and diluted) was
based on the weighted average number of shares of common stock outstanding
during the period plus the estimated number of shares to be issued to repay
the JMAC debt.
28
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL DATA
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT OTHER OPERATING DATA AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Residence operations . . . . . . . . . . . . . $ 18,539 $ 8,953 $ 6,220 $ 4,977 $ 2,288
Development and project
management fees. . . . . . . . . . . . . . . 681 643 524 287 18
-------- -------- -------- --------- --------
Total. . . . . . . . . . . . . . . . . . . 19,220 9,596 6,744 5,264 2,306
Expenses:
Residence operations . . . . . . . . . . . . . 13,683 6,486 4,335 3,409 1,908
General and administrative . . . . . . . . . . 4,433 2,773 1,705 634 170
Depreciation and amortization. . . . . . . . . 2,684 1,379 980 844 505
Rent expense . . . . . . . . . . . . . . . . . 259 89 45 45 --
Unusual charges. . . . . . . . . . . . . . . . 1,380 -- 492 -- --
-------- -------- -------- --------- --------
Total. . . . . . . . . . . . . . . . . . . 22,439 10,727 7,557 4,932 2,583
-------- -------- -------- --------- --------
Operating income (loss). . . . . . . . . . . . . (3,219) (1,131) (813) 332 (277)
Interest expense . . . . . . . . . . . . . . . . (2,743) (1,272) (1,023) (1,350) (707)
Interest income. . . . . . . . . . . . . . . . . 349 470 -- -- --
Equity in net loss of unconsolidated entities. . (247) (7) (105) (17) --
-------- -------- -------- --------- --------
Loss before income taxes . . . . . . . . . . . . (5,860) (1,940) (1,941) (1,035) (984)
Deferred income tax benefit (provision). . . . . 190 (683) -- -- --
-------- -------- -------- --------- --------
Net loss . . . . . . . . . . . . . . . . . . . $ (5,670) $ (2,623) $ (1,941) $ (1,035) $ (984)
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
Net loss per common share - basic and diluted:
Actual . . . . . . . . . . . . . . . . . . . . $ (.83) -- -- -- --
Proforma . . . . . . . . . . . . . . . . . . . -- $ (.48) $ (.45) $ (.24) $ (.23)
Weighted average number of common shares outstanding:
Actual . . . . . . . . . . . . . . . . . . . . 6,792 -- -- -- --
Proforma . . . . . . . . . . . . . . . . . . . -- 5,416 4,350 4,350 4,350
OTHER OPERATING DATA:
Residences (end of year) (1):
Open . . . . . . . . . . . . . . . . . . . . 27 9 5 4 3
Under construction . . . . . . . . . . . . . . 19 17 5 1 1
Under contract . . . . . . . . . . . . . . . . 20 10 8 2 1
Number of units (end of year) (1):
Open . . . . . . . . . . . . . . . . . . . . 1,124 454 272 213 160
Under construction . . . . . . . . . . . . . . 1,019 1,010 243 59 53
Under contract . . . . . . . . . . . . . . . . 1,390 742 509 128 59
BALANCE SHEET DATA:
Working capital (deficit). . . . . . . . . . . . . $ (6,694) $ 7,806 $ (1,575) $ (911) $ (702)
Total assets . . . . . . . . . . . . . . . . . . . 141,316 69,550 26,676 16,292 14,883
Long-term obligations, less current portion. . . . 97,507 32,759 18,250 16,778 14,472
Equity (deficit) . . . . . . . . . . . . . . . . . 26,507 30,677 5,841 (1,763) (728)
</TABLE>
(1) Includes residences jointly-owned by the Company and CHI.
29
<PAGE>
COMMON SHARE
INFORMATION
- --------------------------------------------------------------------------------
The Company's common shares, without par value, are quoted on the Nasdaq
National Market System under the symbol KARR. The following table reflects
the range of the reported high and low closing prices of the common shares as
reported on the Nasdaq National Market System, from the effective date of the
IPO (July 18, 1996) to March 16, 1998.
According to the records of the Company's transfer agent, the Company
had 102 shareholders of record as of March 13, 1998. The Company believes a
substantially larger number of beneficial owners hold such shares in
depository or nominee form.
The Company does not pay dividends on its common shares and does not
anticipate that it will pay dividends in the foreseeable future. However,
the payment and amount of future dividends remain within the discretion of
the Company's Board of Directors and will depend upon the Company's results
of operations, financial condition, capital requirements, restrictions
imposed by financing arrangements and other relevant factors.
<TABLE>
<CAPTION>
HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C>
1996: Quarter Ended
September 30, 1996 (beginning July 19, 1996). . . $13.50 $12.25
December 31, 1996 . . . . . . . . . . . . . . . . 16.00 12.25
- --------------------------------------------------------------------------------
1997: Quarter Ended
March 31, 1997. . . . . . . . . . . . . . . . . . $12.75 $10.50
June 30, 1997 . . . . . . . . . . . . . . . . . . 16.00 10.25
September 30, 1997. . . . . . . . . . . . . . . . 16.50 11.50
December 31, 1997 . . . . . . . . . . . . . . . . 14.50 10.50
- --------------------------------------------------------------------------------
1998: Through March 16, 1998 . . . . . . . . . . . . . $13.63 $11.00
- --------------------------------------------------------------------------------
</TABLE>
SHAREHOLDER
INFORMATION
- --------------------------------------------------------------------------------
CORPORATE OFFICE
Karrington Health, Inc.
919 Old Henderson Road
Columbus, OH 43220
Phone: (614) 451-5151
http://www.karrington.com
COMMON STOCK
The common stock of Karrington Health, Inc. is traded on the Nasdaq
National Market System under the symbol "KARR".
TRANSFER AGENT &
REGISTRAR
Shareholders with inquiries regarding address corrections, lost certificates,
changes in registration, and other shareholder matters should contact
Karrington's stock transfer agent listed as follows:
National City Bank
Corporate Trust Operations
P.O. Box 92301
Cleveland, OH 44193-0900
1-800-622-6757
INVESTOR RELATIONS
CONTACT
Richard R. Slager, Chairman and CEO, (614) 451-5151
FINANCIAL INFORMATION
Requests for published information about Karrington Health, Inc. may
be sent to the Company's Corporate Office or telephoned in to the Company's
Investor Relations Contact at (614) 451-5151.
RESEARCH COVERAGE
J. C. Bradford & Co.
Salomon Smith Barney Inc.
ANNUAL MEETING
The 1998 Annual Meeting of Shareholders will be held at 11:00 a.m. (EST)
Tuesday, May 12, 1998 at the Wyndham Dublin Hotel. Shareholders are cordially
invited to attend.
FORM 10-K
The Company's Annual Report on Form 10-K will be sent free of charge to
shareholders upon written request to the Investor Relations Department at
Karrington Health, Inc.'s Corporate Office.
[LOGO]
30
<PAGE>
DIRECTORS AND
OFFICERS
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
JOHN S. CHRISTIE
President, JMAC, Inc.
JOHN H. MCCONNELL
Founder and Chairman
Emeritus, Worthington
Industries, Inc.
HAROLD A. POLING
Retired, former Chairman,
Ford Motor Company
DAVID H. HOAG
Chairman, President and
Chief Executive Officer,
The LTV Corporation
CHARLES H. MCCREARY, III
Partner, Bricker & Eckler
MICHAEL H. THOMAS
Executive Vice President
and Treasurer, JMAC, Inc.
BERNADINE P. HEALY, M.D.
Dean, College of Medicine,
The Ohio State University
JAMES V. PICKETT
Vice Chairman,
Banc One Capital Corporation
ROBERT D. WALTER
Chairman and Chief Executive
Officer, Cardinal Health, Inc.
CORPORATE OFFICERS
- --------------------------------------------------------------------------------
RICHARD R. SLAGER
Chairman and Chief
Executive Officer
PETE A. KLISARES
President and Chief
Operating Officer
THOMAS J. KLIMBACK
Executive Vice President and
Chief Financial Officer
ROBIN V. HOLDERMAN
Executive Vice President of
Corporate Development
JOHN K. KNUTSON
Executive Vice President
of Operations
MARK N. MACE
Senior Vice President of
Finance, Treasurer, Principal
Accounting Officer
STEPHEN LEWIS
Senior Vice President of
Development, General Counsel
and Assistant Secretary
31
<PAGE>
LISTING OF KARRINGTON PROPERTIES
(AS OF MARCH 23, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TYPE OF METRO OPENED OR NUMBER NUMBER
OWNERSHIP LOCATION ACQUIRED OF UNITS OF BEDS
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPEN RESIDENCES
- -----------------------------------------------------------------------------------------
Karrington of Bexley O Columbus, OH 10/92 53 62
- -----------------------------------------------------------------------------------------
Karrington on the Scioto O Columbus, OH 3/93 53 63
- -----------------------------------------------------------------------------------------
Karrington at Tucker Creek O Columbus, OH 12/93 54 62
- -----------------------------------------------------------------------------------------
Karrington of Oakwood J Dayton, OH 11/94 53 62
- -----------------------------------------------------------------------------------------
Karrington of
Shaker Heights O Cleveland, OH 10/95 59 67
- -----------------------------------------------------------------------------------------
Karrington Place
(Alz. Residence) O Columbus, OH 2/96 26 31
- -----------------------------------------------------------------------------------------
Karrington of South Hills O Pittsburgh, PA 8/96 67 81
- -----------------------------------------------------------------------------------------
Karrington of Albuquerque J Albuquerque, NM 10/96 61 74
- -----------------------------------------------------------------------------------------
St. Francis Place
(Alz. Residence) J Albuquerque, NM 10/96 28 32
- -----------------------------------------------------------------------------------------
Karrington at Fall Creek O Indianapolis, IN 3/97 61 71
- -----------------------------------------------------------------------------------------
Karrington Commons of
Buffalo O Buffalo, MN 5/97 72 75
- -----------------------------------------------------------------------------------------
Karrington Commons of
Bismarck O Bismarck, ND 5/97 72 81
- -----------------------------------------------------------------------------------------
Karrington Cottages of
Bismarck O Bismarck, ND 5/97 12 20
- -----------------------------------------------------------------------------------------
Karrington Cottages of
Waterloo O Waterloo, IA 5/97 12 20
- -----------------------------------------------------------------------------------------
Karrington Cottages of
Mankato O Mankato, MN 5/97 12 20
- -----------------------------------------------------------------------------------------
Karrington Cottages of
Rochester I O Rochester, MN 5/97 12 20
- -----------------------------------------------------------------------------------------
Karrington Cottages of
Rochester II O Rochester, MN 5/97 12 20
- -----------------------------------------------------------------------------------------
Karrington Cottages of
Rochester III O Rochester, MN 5/97 16 28
- -----------------------------------------------------------------------------------------
Karrington Cottages of
Rochester IV O Rochester, MN 5/97 16 28
- -----------------------------------------------------------------------------------------
Karrington of Kenwood J Cincinnati, OH 6/97 67 77
- -----------------------------------------------------------------------------------------
Karrington Cottages of
Buffalo I O Buffalo, MN 7/97 12 20
- -----------------------------------------------------------------------------------------
Karrington Cottages of
Buffalo II O Buffalo, MN 7/97 12 20
- -----------------------------------------------------------------------------------------
Karrington of Willow Lake O Indianapolis, IN 8/97 61 72
- -----------------------------------------------------------------------------------------
Karrington of Fort Wayne O Fort Wayne, IN 8/97 61 72
- -----------------------------------------------------------------------------------------
Karrington of Englewood J Dayton, OH 9/97 48 61
- -----------------------------------------------------------------------------------------
Karrington of Colorado
Colorado Springs J Springs, CO 12/97 64 71
- -----------------------------------------------------------------------------------------
Karrington of Findlay O Findlay, OH 12/97 48 61
- -----------------------------------------------------------------------------------------
Karrington of Fremont O Fremont, OH 2/98 48 61
- -----------------------------------------------------------------------------------------
Karrington of Wooster O Wooster, OH 2/98 48 61
- -----------------------------------------------------------------------------------------
Karrington of Bath L Akron, OH 2/98 67 75
- -----------------------------------------------------------------------------------------
Karrington of Gahanna
(Alz. Residence) L Columbus, OH 2/98 50 54
- -----------------------------------------------------------------------------------------
Karrington of Carmel L Indianapolis, IN 3/98 57 72
- -----------------------------------------------------------------------------------------
TOTAL 1,394 1,694
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
KEY:
- --------------------------------------------------------------------------------
O = OWNED I = IN ZONING
- --------------------------------------------------------------------------------
L = LEASED J = JOINTLY OWNED
- --------------------------------------------------------------------------------
M = MAJORITY OWNED Z = ZONED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TYPE OF METRO PLANNED PLANNED PLANNED
OWNERSHIP LOCATION OPENING UNITS BEDS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESIDENCES UNDER CONSTRUCTION
- --------------------------------------------------------------------------------------------
Karrington Cottages of
Rochester V O Rochester, MN 4/98 16 28
- --------------------------------------------------------------------------------------------
Karrington Cottages of
Rochester VI O Rochester, MN 4/98 20 36
- --------------------------------------------------------------------------------------------
Karrington of Rocky River O Cleveland, OH 4/98 64 72
- --------------------------------------------------------------------------------------------
Karrington of
South Charlotte O Charlotte, NC 4/98 74 84
- --------------------------------------------------------------------------------------------
Karrington Cottages of
Rochester VII O Rochester, MN 4/98 20 36
- --------------------------------------------------------------------------------------------
Karrington Cottages of
Rochester VIII O Rochester, MN 4/98 20 36
- --------------------------------------------------------------------------------------------
Karrington of
Presque Isle Bay O Erie, PA 5/98 69 80
- --------------------------------------------------------------------------------------------
Karrington Cottages of
Rochester IX O Rochester, MN 5/98 15 27
- --------------------------------------------------------------------------------------------
Karrington of Ann Arbor L Ann Arbor, MI 6/98 67 75
- --------------------------------------------------------------------------------------------
Karrington of Poland L Youngstown, OH 7/98 67 75
- --------------------------------------------------------------------------------------------
Karrington of Eastover L Charlotte, NC 8/98 88 100
- --------------------------------------------------------------------------------------------
Karrington of Park Ridge M Chicago, IL 8/98 111 132
- --------------------------------------------------------------------------------------------
Karrington at The Shawhan O Tiffin, OH 9/98 54 66
- --------------------------------------------------------------------------------------------
Karrington of Monroeville O Pittsburgh, PA 9/98 64 72
- --------------------------------------------------------------------------------------------
TOTAL 749 919
</TABLE>
<TABLE>
<CAPTION>
STAGE OF METRO PLANNED PLANNED PLANNED
DEVELOPMENT LOCATION OPENING UNITS BEDS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESIDENCES IN DEVELOPMENT
Karrington at the
Highlands Z Mobile, AL 2Q, 1999 68 77
- --------------------------------------------------------------------------------------------
Karrington of
Northpointe Z Jackson, MS 2Q, 1999 68 77
- --------------------------------------------------------------------------------------------
Karrington of Northwood Z Dallas, TX 2Q, 1999 68 78
- --------------------------------------------------------------------------------------------
Karrington of Hamilton Z Hamilton, OH 2Q, 1999 48 61
- --------------------------------------------------------------------------------------------
Karrington of Finneytown Z Cincinnati, OH 2Q, 1999 67 75
- --------------------------------------------------------------------------------------------
Karrington of
Pleasant Valley Z Cleveland, OH 2Q, 1999 72 82
- --------------------------------------------------------------------------------------------
Karrington of
Farmington Hills Z Detroit, MI 2Q, 1999 72 83
- --------------------------------------------------------------------------------------------
Karrington of Millcreek Z Erie, PA 3Q, 1999 48 61
- --------------------------------------------------------------------------------------------
Karrington of Edina Z Minneapolis, MN 3Q, 1999 93 105
- --------------------------------------------------------------------------------------------
Karrington of Naperville I Chicago, IL 3Q, 1999 93 105
- --------------------------------------------------------------------------------------------
Karrington of Kearney Z Kearney, NE 3Q, 1999 48 61
- --------------------------------------------------------------------------------------------
Karrington of Mansfield I Mansfield, OH 3Q, 1999 48 61
- --------------------------------------------------------------------------------------------
Karrington of Tacoma Z Tacoma, WA 4Q, 1999 72 83
- --------------------------------------------------------------------------------------------
Karrington of Grand Rapids I Grand Rapids, MI 4Q, 1999 72 83
- --------------------------------------------------------------------------------------------
Karrington of Forest Acres I Columbia, SC 4Q, 1999 72 83
- --------------------------------------------------------------------------------------------
Karrington of
Cuyahoga Falls I Akron, OH 4Q, 1999 72 83
- --------------------------------------------------------------------------------------------
Karrington of
Audobon Park I Memphis, TN 4Q, 1999 93 105
- --------------------------------------------------------------------------------------------
Karrington of Bethel Park I Pittsburgh, PA 4Q, 1999 72 83
- --------------------------------------------------------------------------------------------
Karrington of Santa Rosa Z Santa Rosa, CA 1Q, 2000 72 83
- --------------------------------------------------------------------------------------------
Karrington of Novato Z Novato, CA 1Q, 2000 72 83
- --------------------------------------------------------------------------------------------
TOTAL 1,390 1,612
</TABLE>
32
<PAGE>
KARRINGTON MARKET AREAS*
KARRINGTON
RESIDENCES WHICH
ARE CURRENTLY OPEN
(TOTAL 32)
- - OPEN RESIDENCES
KARRINGTON
RESIDENCES WHICH
ARE CURRENTLY OPEN OR
UNDER CONSTRUCTION
(TOTAL 46)
- - RESIDENCES UNDER CONSTRCTION
KARRINGTON
RESIDENCES WHICH
ARE CURRENTLY OPEN,
UNDER CONSTRUCTION
OR UNDER CONTRACT
(TOTAL 66)
- - RESIDENCES IN DEVELOPMENT
*INFORMATION IS CURRENT AS OF MARCH 23, 1998
[MAP: Three maps of United States showing (1) Karrington locations open, (2)
Karrington locations open or under construction and (3) Karrington locations
open, under construction or under contract.]
33
<PAGE>
KARRINGTON HEALTH, INC.
919 OLD HENDERSON ROAD
COLUMBUS, OHIO 43220
TEL: 614.451.5151
FAX: 614.451.5199
http://www.karrington.com
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Karrington Health, Inc. ("KHI")
- - DevelopMed Associates, Inc. ("DMA") (an Ohio corporation owned 100% by KHI)
- - JMAC Properties, Inc. ("JMAC") (an Ohio corporation owned 100% by KHI)
- - Karrington Operating Company, Inc. ("KOC") (an Ohio corporation owned 100% by
KHI) (dba Karrington Communities)
- Karrington Acquisition, Inc. (An Ohio corporation owned 100% by
KOC)
- Karrington Acquisition II, Inc. (An Ohio corporation owned 100% by
KOC)
- Karrington of Park Ridge LLC (an Ohio LLC owned 80% by KOC)
- Karrington of Millcreek LLC (an Ohio LLC owned 80% by KOC)
- Kensington Cottages Corporation of America ("KCCA") (a Minnesota
corporation owned 100% by KOC)
- Kensington Cottages Corporation of Minnesota (a Minnesota
corporation owned 100% by KCCA)
- Kensington Management Group, Inc. (a Minnesota
corporation owned 100% by KCCA)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Karrington Health, Inc. of our report dated March 6, 1998, included
in the 1997 Annual Report to Shareholders of Karrington Health, Inc.
Our audit also included the financial statement schedule of Karrington
Health, Inc. listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We also 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 March 6, 1998, with respect to the consolidated
financial statements incorporated herein by reference, and our report
included in the preceding paragraph with respect to the financial statement
schedule included in this Annual Report (Form 10-K) of Karrington Health, Inc.
Ernst & Young LLP
Columbus, Ohio
March 30, 1998
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director of the Company and to execute
any and all instruments for me and in my name in the capacity indicated
above, which said attorneys or agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder, in connection with the filing
requirements of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K"), including specifically but
without limitation, power and authority to sign for me in my name, in the
capacity indicated above, the 1997 Form 10-K and any and all amendments to
such 1997 Form 10-K; and I do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or either of them,
shall do or cause to be done by virtue hereof.
/s/ RICHARD R. SLAGER
Richard R. Slager
Chairman of the Board and
Chief Executive Officer
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director and/or officer of the Company
and to execute any and all instruments for me and in my name in the capacity
indicated above, which said attorneys or agents, or either of them, may deem
necessary or advisable to enable the Company to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission thereunder, in connection with the
filing requirements of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including
specifically but without limitation, power and authority to sign for me in my
name, in the capacity indicated above, the 1997 Form 10-K and any and all
amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all
that the said attorneys and agents, or their substitute or substitutes, or
either of them, shall do or cause to be done by virtue hereof.
/s/ PETE A. KLISARES
Pete A. Klisares
President and Chief Operating Officer
<PAGE>
EXHIBIT 24.3
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Pete A.
Klisares, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director and/or officer of the Company
and to execute any and all instruments for me and in my name in the capacity
indicated above, which said attorneys or agents, or either of them, may deem
necessary or advisable to enable the Company to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission thereunder, in connection with the
filing requirements of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including
specifically but without limitation, power and authority to sign for me in my
name, in the capacity indicated above, the 1997 Form 10-K and any and all
amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all
that the said attorneys and agents, or their substitute or substitutes, or
either of them, shall do or cause to be done by virtue hereof.
/s/ THOMAS J. KLIMBACK
Thomas J. Klimback
Executive Vice President,
Chief Financial Officer
<PAGE>
EXHIBIT 24.4
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director and/or officer of the Company
and to execute any and all instruments for me and in my name in the capacity
indicated above, which said attorneys or agents, or either of them, may deem
necessary or advisable to enable the Company to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission thereunder, in connection with the
filing requirements of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including
specifically but without limitation, power and authority to sign for me in my
name, in the capacity indicated above, the 1997 Form 10-K and any and all
amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all
that the said attorneys and agents, or their substitute or substitutes, or
either of them, shall do or cause to be done by virtue hereof.
/s/ MARK N. MACE
Mark N. Mace
Senior Vice President,
Finance and Treasurer
<PAGE>
EXHIBIT 24.5
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director of the Company and to execute
any and all instruments for me and in my name in the capacity indicated
above, which said attorneys or agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder, in connection with the filing
requirements of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K"), including specifically but
without limitation, power and authority to sign for me in my name, in the
capacity indicated above, the 1997 Form 10-K and any and all amendments to
such 1997 Form 10-K; and I do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or either of them,
shall do or cause to be done by virtue hereof.
/s/ CHARLES H. MCCREARY
Charles H. McCreary
Director and Secretary
<PAGE>
EXHIBIT 24.6
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director of the Company and to execute
any and all instruments for me and in my name in the capacity indicated
above, which said attorneys or agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder, in connection with the filing
requirements of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K"), including specifically but
without limitation, power and authority to sign for me in my name, in the
capacity indicated above, the 1997 Form 10-K and any and all amendments to
such 1997 Form 10-K; and I do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or either of them,
shall do or cause to be done by virtue hereof.
/s/ JOHN S. CHRISTIE
John S. Christie
Director
<PAGE>
EXHIBIT 24.7
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director of the Company and to execute
any and all instruments for me and in my name in the capacity indicated
above, which said attorneys or agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder, in connection with the filing
requirements of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K"), including specifically but
without limitation, power and authority to sign for me in my name, in the
capacity indicated above, the 1997 Form 10-K and any and all amendments to
such 1997 Form 10-K; and I do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or either of them,
shall do or cause to be done by virtue hereof.
/s/ BERNADINE P. HEALY
Bernadine P. Healy
Director
<PAGE>
EXHIBIT 24.8
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director of the Company and to execute
any and all instruments for me and in my name in the capacity indicated
above, which said attorneys or agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder, in connection with the filing
requirements of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K"), including specifically but
without limitation, power and authority to sign for me in my name, in the
capacity indicated above, the 1997 Form 10-K and any and all amendments to
such 1997 Form 10-K; and I do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or either of them,
shall do or cause to be done by virtue hereof.
/s/ DAVID H. HOAG
David H. Hoag
Director
<PAGE>
EXHIBIT 24.9
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director of the Company and to execute
any and all instruments for me and in my name in the capacity indicated
above, which said attorneys or agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder, in connection with the filing
requirements of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K"), including specifically but
without limitation, power and authority to sign for me in my name, in the
capacity indicated above, the 1997 Form 10-K and any and all amendments to
such 1997 Form 10-K; and I do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or either of them,
shall do or cause to be done by virtue hereof.
/s/ JOHN H. MCCONNELL
John H. McConnell
Director
<PAGE>
EXHIBIT 24.10
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director of the Company and to execute
any and all instruments for me and in my name in the capacity indicated
above, which said attorneys or agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder, in connection with the filing
requirements of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K"), including specifically but
without limitation, power and authority to sign for me in my name, in the
capacity indicated above, the 1997 Form 10-K and any and all amendments to
such 1997 Form 10-K; and I do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or either of them,
shall do or cause to be done by virtue hereof.
/s/ JAMES V. PICKETT
James V. Pickett
Director
<PAGE>
EXHIBIT 24.11
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director of the Company and to execute
any and all instruments for me and in my name in the capacity indicated
above, which said attorneys or agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder, in connection with the filing
requirements of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K"), including specifically but
without limitation, power and authority to sign for me in my name, in the
capacity indicated above, the 1997 Form 10-K and any and all amendments to
such 1997 Form 10-K; and I do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or either of them,
shall do or cause to be done by virtue hereof.
/s/ HAROLD A. POLING
Harold A. Poling
Director
<PAGE>
EXHIBIT 24.12
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director of the Company and to execute
any and all instruments for me and in my name in the capacity indicated
above, which said attorneys or agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder, in connection with the filing
requirements of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K"), including specifically but
without limitation, power and authority to sign for me in my name, in the
capacity indicated above, the 1997 Form 10-K and any and all amendments to
such 1997 Form 10-K; and I do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or either of them,
shall do or cause to be done by virtue hereof.
/s/ MICHAEL H. THOMAS
Michael H. Thomas
Director
<PAGE>
EXHIBIT 24.13
POWER OF ATTORNEY
The undersigned director and/or officer of Karrington Health, Inc. (the
"Company"), does hereby constitute and appoint Richard R. Slager and Thomas
J. Klimback, or either of them, my true and lawful attorneys and agents, each
with full power of substitution, to do any and all acts and things in my name
and on my behalf in my capacity as a director of the Company and to execute
any and all instruments for me and in my name in the capacity indicated
above, which said attorneys or agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission thereunder, in connection with the filing
requirements of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 (the "1997 Form 10-K"), including specifically but
without limitation, power and authority to sign for me in my name, in the
capacity indicated above, the 1997 Form 10-K and any and all amendments to
such 1997 Form 10-K; and I do hereby ratify and confirm all that the said
attorneys and agents, or their substitute or substitutes, or either of them,
shall do or cause to be done by virtue hereof.
/s/ ROBERT D. WALTER
Robert D. Walter
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Karrington Health, Inc. Annual Report to Shareholders for the year ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,370,488
<SECURITIES> 0
<RECEIVABLES> 5,462,750
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,114,960
<PP&E> 119,909,422
<DEPRECIATION> 3,926,379
<TOTAL-ASSETS> 141,315,800
<CURRENT-LIABILITIES> 16,808,791
<BONDS> 0
0
0
<COMMON> 33,484,712
<OTHER-SE> (6,978,170)
<TOTAL-LIABILITY-AND-EQUITY> 141,315,800
<SALES> 0
<TOTAL-REVENUES> 19,219,883
<CGS> 0
<TOTAL-COSTS> 13,683,245
<OTHER-EXPENSES> 7,273,689
<LOSS-PROVISION> 1,380,000
<INTEREST-EXPENSE> 2,743,353
<INCOME-PRETAX> (5,860,404)
<INCOME-TAX> 190,000
<INCOME-CONTINUING> (5,670,404)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,670,404)
<EPS-PRIMARY> (.83)
<EPS-DILUTED> (.83)
</TABLE>
