-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ghe4FB8lm1r509m855TXWBTOqI47HgMW0hthGeBH25BacUJkPAjpE1qIituc5oWp NFewz2LWarEGq8HJ3fhGdA== 0000912057-97-011194.txt : 19970401 0000912057-97-011194.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011194 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KARRINGTON HEALTH INC CENTRAL INDEX KEY: 0001012710 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 311461482 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11795 FILM NUMBER: 97569506 BUSINESS ADDRESS: STREET 1: 919 OLD HENDERSON ROAD CITY: COLUMBUS STATE: OH ZIP: 43220 BUSINESS PHONE: 6144515151 MAIL ADDRESS: STREET 1: 919 OLD HENDERSON ROAD CITY: COLUMBUS STATE: OH ZIP: 43220 10-K405 1 10-K405 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, 1996 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 24,1997 was 6,700,000. As of March 24, 1997, the aggregate market value of the voting stock held by non-affiliates of the registrant was $35,519,000. Documents Incorporated By Reference The information required by Part II, Items 5 through 8, of Form 10K is incorporated herein by reference to the registrant's Annual Report to Shareholders for the year ended December 31, 1996. The information required by Part III of Form 10K is incorporated herein by reference to the registrant's definitive Proxy Statement relating to its 1997 Annual Meeting of Stockholders to be held on May 13, 1997. ---------------------------------------- ---------------------------------------- 1 PART I ITEM 1. BUSINESS The Company develops, owns and operates private pay, 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 President, and Alan B. Satterwhite, the Company's 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 20, 1997, the Company has developed 26 residences in its target markets, 10 of which are open and 16 of which are under construction and scheduled to open in 1997 or by April of 1998. These 26 residences are located in Ohio, Pennsylvania, Indiana, Colorado, North Carolina, Michigan and New Mexico. As part of its nationwide expansion strategy, the Company has sites for 14 residences under contract in these states, as well as in Illinois, New York and California. The prototypical Karrington assisted living model, which has been developed and refined by the Company since its first residence was opened in 1992, is a mansion-style residence which houses 60 to 80 residents. Each residence is typically located in a middle- to upper-income community which has a well-established population of individuals 75 years of age and older. The Karrington model combines quality housing, personal care and support services to provide a cost-effective alternative for individuals with physical frailties or cognitive disorders, such as Alzheimer's disease, who do not require the regular skilled medical services provided by nursing facilities. The Karrington model allows the Company to control development costs, maintain consistent quality and improve operational effectiveness, while also creating "brand" awareness in the Company's markets. The Company has been successful in implementing the Karrington model, with residences open for one year or more having an average occupancy rate of 94.3% and 96.4% for the 12 months ended December 31, 1996 and 1995, respectively. 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 a joint development relationship with 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 61 hospitals and 50 long-term care facilities in 20 states and has revenues exceeding $4 billion. The Company and CHI currently intend to develop and operate assisted living residences with CHI's health care system. See "Relationship with CHI." By the end of 1999, the Company plans to have open approximately 77 Company-owned residences. As part of this plan, the Company will develop and operate Karrington Place residences, which are assisted living residences specifically designed for individuals with Alzheimer's disease and other cognitive disorders, in a substantial portion of its markets. In addition, the Company intends to develop and open 12 jointly-owned residences. 2 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 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 payor sources have adopted cost containment measures that have encouraged reduced lengths of stay in hospitals. A result of this trend is an 3 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 model 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 acquisition strategy (discussed below) and its 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 CHI, pursuant to which the Company expects to develop and operate, and jointly own with CHI, assisted living residences in communities where CHI or its 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. ACQUIRE RESIDENCES FOR CONVERSION TO THE KARRINGTON MODEL. The Company intends to acquire assisted living residences or other properties that can be effectively converted to the Karrington model of operation. These acquisitions will depend on location, financial feasibility, suitability for conversion and consistency with other standards and requirements. The Company also intends to pursue long-term management contracts where opportunities exist to expand the Company's operations or to facilitate the acquisition of residences. RELATIONSHIP WITH CHI In addition to its own residence development activities, the Company and Catholic Health Initiatives contemplate the joint development of a significant number of assisted living residences, three of which are open at the end of 1996. 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 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 are currently under construction in Cincinnati and Dayton, Ohio and Colorado Springs, Colorado. 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. 4 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 $123 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 daily suite rental rate is approximately $77, 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 rate. Additional charges may be incurred for other services such as hair care and special diets. Currently, all residents are private pay. 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. The Company also develops Karrington Place 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 four-person management team. This management team includes the Resident Care Director (who supervises all resident support staff and care plans), a Registered Nurse (responsible for all wellness programs, as well as medication programs), the Director of Administration (responsible for general administrative duties, including housekeeping, and all food service and dietary needs) and the Associate Administrator (involved in operations and marketing). 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. 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, 5 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 manager-in-training ("MIT") program which provides classroom and on-the-job training to develop future Karrington administrators and managers. The Company believes investment in the MIT 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) site selection and contract signing, (ii) zoning and site plan approval, (iii) architectural planning and design, (iv) contractor selection and (v) 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 Karrington model residence, including land acquisition and construction costs, ranges from approximately $6.0 million to $7.5 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 16-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. 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. 6 ARCHITECTURAL DESIGNS The Karrington model residence is a freestanding, mansion-style building with a designed capacity of 60 to 80 residents in any of a variety of exterior styles. The prototype averages 64 units and approximately 45,000 square feet and is generally built on a 1.5 to 2 acre site. Approximately 50% of the building is devoted to common areas and amenities. The Company has five basic building plan designs, which provide it with flexibility in adapting the model to a particular site and local zoning requirements. The building is usually 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 two stand-alone Alzheimer's care residences in Columbus, Ohio and Albuquerque, New Mexico designed specifically for residents with Alzheimer's disease. The "Karrington Place" residences were 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 Karrington Place models in many of the markets it enters. The architectural and interior design of the Karrington prototype incorporates 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. 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 eight months prior to opening. Historically, new residences have achieved deposits on approximately 30% of the units in a residence prior to opening, and residences have generally reached stable occupancy in approximately 12 months. 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 7 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 or Medicaid 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 and acquire 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. EMPLOYEES As of March 14, 1997, the Company had approximately 430 employees. 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. 8 ITEM 2. PROPERTIES The following table sets forth certain information regarding Karrington residences as of March 20, 1997:
Open Residences Ownership Metro Location Commenced Operations Units - --------------- --------- -------------- -------------------- ----- Karrington of Bexley Owned Columbus, OH October 1992 53 Karrington on the Scioto Owned Columbus, OH March 1993 53 Karrington at Tucker Creek Owned Columbus, OH December 1993 54 Karrington of Oakwood (1) Jointly Owned Dayton, OH November 1994 53 Karrington of Shaker Heights Owned Cleveland, OH October 1995 59 Karrington Place (Alzheimer's Residence) Owned Columbus, OH February 1996 26 Karrington of South Hills Owned Pittsburgh, PA August 1996 67 Karrington of Albuquerque (1) Jointly Owned Albuquerque, NM October 1996 61 St. Francis Place (Alzheimer's Residence) (1) Jointly Owned Albuquerque, NM October 1996 28 Karrington at Fall Creek Owned Indianapolis, IN March 1997 61 Total units 515 --- --- Residences Planned Under Construction Ownership Metro Location Planned Opening Date Units - ------------------ ----------- -------------- -------------------- ----- Karrington of Kenwood (1) Jointly Own Cincinnati, OH 2Q, 1997 67 Karrington at Willow Lake Own Indianapolis, IN 3Q, 1997 61 Karrington of Englewood (1) Jointly Own Dayton, OH 3Q, 1997 48 Karrington of Colorado Springs (1) Jointly Own Colorado Springs, CO 3Q, 1997 64 Karrington of Fort Wayne Own Fort Wayne, IN 3Q, 1997 61 Karrington of Fremont Own Fremont, OH 4Q, 1997 48 Karrington of Wooster Own Wooster, OH 4Q, 1997 48 Karrington of Rocky River Lease Cleveland, OH 4Q, 1997 64 Karrington of Bath Lease Akron, OH 4Q, 1997 67 Karrington of Carmel Lease Indianapolis, IN 4Q, 1997 58 Karrington of Gahanna (Alzheimer's Residence) Lease Columbus, OH 4Q, 1997 50 Karrington at the Shawhan Own Tiffin, OH 4Q, 1997 55 Karrington of Findlay Own Findlay, OH 4Q, 1997 48 Karrington of Piper Glen Own Charlotte, NC 1Q, 1998 74 Karrington of Ann Arbor Lease Ann Arbor, MI 2Q, 1998 67 Karrington of Presque Isle Bay Own Erie, PA 2Q, 1998 69 Total units 949 --- --- Planned Sites Under Contract Development Stage Metro Location Planned Opening Date Units - -------------------- ----------------- -------------- -------------------- ----- Karrington of Eastover Zoned Charlotte, NC 2Q, 1998 88 Karrington of Monroeville Zoned Pittsburgh, PA 2Q, 1998 64 Karrington of Park Ridge Zoned Chicago, IL 2Q, 1998 111 Karrington of Poland Zoned Youngstown, OH 2Q, 1998 67 Karrington of Millcreek (Alzheimer's Residence) In Zoning Erie, PA 2Q, 1998 50 Karrington of Santa Rosa In Zoning Santa Rosa, CA 3Q, 1998 80 Karrington of Novato In Zoning Novato, CA 3Q, 1998 80 Karrington of Cincinnati (1) In Zoning Cincinnati, OH 3Q, 1998 67 Karrington of Parma In Zoning Cleveland, OH 3Q, 1998 67 Karrington of Mt. Lookout (1) Zoned Cincinnati, OH 4Q, 1998 70 Karrington of Williamsville In Zoning Buffalo, NY 4Q, 1998 67 Karrington of Winston-Salem In Zoning Winston-Salem, NC 4Q, 1998 67 Karrington of Upper St. Clair In Zoning Pittsburgh, PA 4Q, 1998 67 Karrington of Farmington Hills In Zoning Detroit, MI 4Q, 1998 67 Total units 1,012 ----- ----- (1) Joint venture with CHI.
9 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, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Information required by this Item 5 is contained on page 27 of the Company's Annual Report to Shareholders for the year ended December 31, 1996 and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Information required by this Item 6 is contained on page 26 of the Company's Annual Report to Shareholders for the year ended December 31, 1996 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 9 through 12 of the Company's Annual Report to Shareholders for the year ended December 31, 1996 and is incorporated herein by reference. 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. 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 1997 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 1997 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 10 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 1997 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 1997 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 EXHIBIT NUMBER DESCRIPTION REFERENCE - -------------- ----------- ------------ 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) 10.2 Loan Agreement between the Company and JMAC dated December 29, 1995 (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 (2) 21 Subsidiaries of the Registrant (1) 23.1 Consent of Ernst & Young LLP (2) 23.2 Consent of Deloitte & Touche LLP (2) 24.1 Power of Attorney - Richard R. Slager (2) 24.2 Power of Attorney - Alan B. Satterwhite (2) 24.3 Power of Attorney - Mark N. Mace (2) 24.4 Power of Attorney - Charles S. McCreary (2) 11 24.5 Power of Attorney - John S. Christie (2) 24.6 Power of Attorney - Bernadine P. Healy (2) 24.7 Power of Attorney - David H. Hoag (2) 24.8 Power of Attorney - John P. McConnell (2) 24.9 Power of Attorney - James V. Pickett (2) 24.10 Power of Attorney - Harold A. Poling (2) 24.11 Power of Attorney - Michael H. Thomas (2) 24.12 Power of Attorney - Robert D. Walter (2) 27 Financial Data Schedule (2) _______________ (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) Filed Herewith. * 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 November 12, 1996 reported under Item 5, a press release dated the same date and included as an exhibit to the 8K, announcing the execution of a letter of intent to acquire the business of Kensington Management Group, Inc. (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 No financial statement schedules are required because the required information to be set forth therein is not applicable. 12 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 28, 1997 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.
SIGNATURE TITLE DATE /S/ RICHARD R. SLAGER Chairman of the Board, President March 28, 1997 - ------------------------------ and Chief Executive Officer Richard R. Slager (Principal Executive Officer) /S/ ALAN B. SATTERWHITE Chief Operating Officer, Chief March 28, 1997 - ------------------------------ Financial Officer and Director Alan B. Satterwhite (Principal Financial Officer) /S/ MARK N. MACE Senior Vice President, Finance March 28, 1997 - ------------------------------ and Treasurer (Principal Mark N. Mace Accounting Officer) /S/ CHARLES H. MCCREARY Secretary and Director March 28, 1997 - ------------------------------ Charles H. McCreary /S/ JOHN S. CHRISTIE Director March 28, 1997 - ------------------------------ John S. Christie /S/ BERNADINE P. HEALY, M.D. Director March 28, 1997 - ------------------------------ BERNADINE P. HEALY, M.D. /S/ DAVID H. HOAG Director March 28, 1997 - ------------------------------ David H. Hoag /S/ JOHN H. MCCONNELL Director March 28, 1997 - ------------------------------ John H. McConnell /S/ JAMES V. PICKETT Director March 28, 1997 - ------------------------------ James V. Pickett /S/ HAROLD A. POLING Director March 28, 1997 - ------------------------------ Harold A. Poling /S/ MICHAEL H. THOMAS Director March 28, 1997 - ------------------------------ Michael H. Thomas /S/ ROBERT D. WALTER Director March 28, 1997 - ------------------------------- Robert D. Walter
13 KARRINGTON HEALTH, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEMS 14 (a) (1) AND (2) ) 1. DESCRIPTION OF FINANCIAL STATEMENTS --------------------------------------------------- The following are incorporated by reference in this Page(s) in 1996 Annual Report on Form 10-K for the year ended Annual Report to December 31, 1996 Shareholders ------------------- Report of Independent Auditors (Ernst & Young LLP) 13 Consolidated Balance Sheets 14 Consolidated Statements of Operations 15 Consolidated Statements of Equity 16 Consolidated Statements of Cash Flows 17 Notes to Consolidated Financial Statements 18-25 Page -------- Independent Auditors' Report (Deloitte & Touche LLP) F-2 2. FINANCIAL STATEMENT SCHEDULES No financial statement schedules are required because the required information to be set forth therein is not applicable. F-1 INDEPENDENT AUDITORS' REPORT To the Owners of Karrington Operating Company: We have audited the consolidated balance sheet of Karrington Operating Company and affiliates as of December 31, 1994 (not incorporated in this Form 10-K), and the related consolidated statements of operations, owners' equity (deficiency), and cash flows for the year then ended (incorporated herein). 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 audit. We conducted our audit 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 my management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Karrington Operating Company and affiliates at December 31, 1994, and the results of their operations and their cash flows, for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Columbus, Ohio January 24, 1995 F-2 KARRINGTON HEALTH, INC. INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION REFERENCE - -------------- ----------- --------- 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) 10.2 Loan Agreement between the Company and JMAC dated December 29, 1995 (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 (2) 21 Subsidiaries of the Registrant (1) 23.1 Consent of Ernst & Young LLP (2) 23.2 Consent of Deloitte & Touche LLP (2) 24.1 Power of Attorney - Richard R. Slager (2) 24.2 Power of Attorney - Alan B. Satterwhite (2) 24.3 Power of Attorney - Mark N. Mace (2) 24.4 Power of Attorney - Charles S. McCreary (2) 24.5 Power of Attorney - John S. Christie (2) 24.6 Power of Attorney - Bernadine P. Healy (2) 24.7 Power of Attorney - David H. Hoag (2) 24.8 Power of Attorney - John P. McConnell (2) 24.9 Power of Attorney - James V. Pickett (2) 24.10 Power of Attorney - Harold A. Poling (2) 24.11 Power of Attorney - Michael H. Thomas (2) 24.12 Power of Attorney - Robert D. Walter (2) 27 Financial Data Schedule (2) - ---------------- (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) Filed Herewith. * Management contract or compensatory plan or arrangement. EX-13 2 EXHIBIT 13 KARRINGTON HEALTH, INC. PUTTING MORE LIFE IN ASSISTED LIVING [PHOTO: Male resident with two young children.] [PHOTO: Female resident with caregiver.] [PHOTO: Karrington of South Hills residence.] 1996 ANNUAL REPORT - ------------------------------------------------------------------------------ TABLE OF CONTENTS 9 Management's Discussion and 17 Consolidated Statements Analysis of Financial Condition of Cash Flows and Results of Operations 18 Notes to Consolidated 13 Management's Statement of Financial Statements Financial Responsibility 26 Selected Consolidated 13 Report of Independent Financial Data Auditors 27 Common Share Information 14 Consolidated Balance Sheets 27 Shareholder Information 15 Consolidated Statements of Operations 28 Directors & Officers 16 Consolidated Statements of Equity 29 Karrington Market Areas REVENUES (Thousands of dollars) [GRAPH: Karrington's 1994, 1995 and 1996 revenues.] - --------------------------------------------------------------------------- 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 dedicated Karrington Place residences for individuals with Alzheimer's Disease and related disorders. At residences across the country, Karrington provides high quality programs and services for seniors who need assistance with activities of daily living, such as eating, bathing and personal hygiene, dressing and grooming, and walking. At year-end 1996, Karrington had nine residences open and 17 under construction. Karrington's network includes residences owned solely by the Company and joint ventures with a major national health care system, Catholic Health Initiatives, a $4 billion, 61-hospital operation. Karrington expects to expand its residence network and relationships with major health care systems in 1997 with the purchase of Kensington Management Group, Inc., a multi-state operator of assisted living Alzheimer's care residences with ties to the Mayo Clinic. Plans for 1997 call for opening 19 more residences--11 Karrington-owned, 3 joint ventures, and 5 Kensington Alzheimer's care residences. In 1998, the Company expects to open 27 new Karrington, joint venture, and Kensington residences--3 of which are now under construction. By December 1999, the goal is 89 residences--77 owned by Karrington and 12 with joint venture partners. Karrington founders and principals Richard R. Slager and Alan B. Satterwhite in 1991 entered into a partnership with JMAC, Inc., an investment company owned by John H. McConnell and John P. McConnell of Worthington Industries, Inc. The objective of the partnership: position Karrington for aggressive growth in the rapidly expanding $15 billion assisted living industry. Since opening its first residence in 1992, Karrington has more than quadrupled its annual revenues, generating approximately $12 million in 1996 from its network of Karrington-operated residences and joint ventures. In July 1996, Karrington became a public company, raising approximately $28.4 million from the sale of 2.4 million common shares. The Company's access to capital in a very capital-intensive industry supports Karrington's growth goals. Committed to providing a supportive residential environment, enabling residents to age-in-place, Company management, employees, and directors embody Karrington'S MISSION STATEMENT: DEDICATED TO EXCELLENCE IN PRESERVING AND ENHANCING PERSONAL DIGNITY, INDIVIDUALITY, INDEPENDENCE AND QUALITY OF LIFE. 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. - ------------------------------------------------------------------------------- KARRINGTON HEALTH INC. 1996 ANNUAL REPORT - -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1996 1995 1994 ---------------- ---------------- ---------------- Total revenues $9,596,000 $6,744,000 $5,264,000 Residences (end of year) (1): Open......................... 9 5 4 Under construction........... 17 5 1 Under contract............... 10 8 2 Number of units (end of year) (1) Open......................... 454 272 213 Under construction........... 1,010 243 59 Under contract............... 742 509 128 Occupancy rate (1)................ 94.3% 96.4% 98.9% Resident days (1)................. 111,165 86,557 58,400 - --------------------------------------- (1) Includes residences jointly-owned by the Company and CHI. Occupancy rate includes residences open for more than one year at the beginning of the year presented. - ------------------------------------------------------------------------------------------------------
LETTER FROM THE CHAIRMAN The year ended December 31, 1996 was one of tremendous growth and strategic transition for your Company, as we successfully completed our initial public offering of 3 million shares on July 18. Since then, Karrington has experienced strong growth in revenues, while filling our development and construction pipeline to meet projected growth. For the full year 1996, revenues rose 42% to $9.6 million from $6.7 million in 1995. Excluding a one-time tax charge of $.17 per share, the 1996 net loss was $1.7 million, or $.31 per share, compared to a loss of $1.9 million, or $.45 per share in 1995. System-wide revenues, including jointly owned residences, increased 40% to $12 million in 1996, from $8.6 million in 1995. Per share results were at break-even for the final quarter of the year, the same period in which construction started on 11 new residences. Our operating model and growth strategy are supported by the positive financial results of the entire year and the fourth quarter of 1996. Revenues for stabilized residences increased 4% in 1996, reflecting our ability to improve same-residence results by capturing incremental services revenue through our "aging-in-place" approach to assisted living. Your Company's philosophy of operating a higher-acuity, customer- focused, aging-in-place model results in a longer length of stay, with the potential for increased per-resident revenues as health care needs increase. Thanks to state-of-the-art quality assurance programs, expanded in 1996, your Company regularly receives deficiency- free reviews from state licensing authorities, while maintaining 95% occupancy rates in our stabilized residences. This--along with the above-mentioned strategies--improved the Company's operating income margin for stabilized residences to 35% in 1996 from 32% in 1995, excluding depreciation and amortization. System revenue growth resulted from a full year of operations for residences opened in 1995, as well as the 1996 opening of new residences in Pittsburgh, Pennsylvania; Columbus, Ohio; and Albuquerque, New Mexico. Operating results include costs associated with corporate staff additions to manage Karrington's steadily growing operating base. At year end, Karrington had investment-grade, short- term securities totaling $12.3 million; $32.8 million of long-term debt; more than $300 million in available project financing; and shareholders' equity of $30.7 million. Today, your Company has 17 new Karrington assisted living residences under construction in six states, with 14 openings scheduled for 1997. The Company has 14 sites under contract and has 1 - ------------------------------------------------------------------------------- [PHOTO: Richard R. Slager, Chairman and CEO.] identified and is negotiating the acquisition of more than 20 additional sites. More than half of those are in existing markets, reflecting our strategy of achieving economies of scale and improving operating efficiencies through regionalization. Your Company's joint venture with Catholic Health Initiatives (CHI), a $4 billion acute-care operator of 61 hospitals in 20 states, continues to expand. Karrington and CHI plan a total of 12 residences in 10 markets. Three residences are in operation, three are under construction, and two sites are under contract. Our planned acquisition of Kensington Management Group, Inc. is expected to close in April 1997. Kensington has 12 residences open or under construction, totaling 406 beds in three states. A specialty Alzheimer's care company, headed by industry pioneer Jon Rappaport, Kensington will add to Karrington's high-acuity niche, while providing your Company with a smaller model, ideal for many new markets. We anticipate Kensington will develop 15 new residences, or cottages, to serve more than 420 seniors over the next three years. The Kensington acquisition brings us additional benefits. Given its established relationship with the Mayo Clinic in Rochester, Minnesota, Kensington enhances your Company's strategic ventures with internationally recognized acute-care health systems. It also opens the door for potential development opportunities to continue Alzheimer's research with the Mayo Clinic in Florida and Arizona. As an extension of Karrington's services, your Company in 1996 instituted a neighborhood outreach program, providing meals, transportation and other assisted living services to community residents who are not quite ready to move to Karrington. We believe this program will add to the Company's earnings in the years ahead, through fee-for-service revenues and market referrals. Karrington is also in the process of implementing an adult day care program which will expand its outreach to the community while adding to each residences' bottom line. 1996 also saw the introduction of Karrington Advisory Services (KAS), the Company's newly formed consulting arm. KAS is poised to profit from management and consulting opportunities your Company encounters as a leader in assisted living development, construction, marketing, financing, and operations. Our people, development strategy, construction expertise, operational experience and consulting know-how are respected and valued in the industry. On a personal note, we welcome new associates and shareholders to the Karrington family. A true blending of talents, friendships, and experiences, your Company remains committed to achieving the Karrington Mission: DEDICATED TO EXCELLENCE IN PRESERVING AND ENHANCING PERSONAL DIGNITY, INDIVIDUALITY INDEPENDENCE AND QUALITY OF LIFE Ours is a Mission founded on the principles of dignity, respect, love and service. A Mission intended to enrich the lives of our residents and their loved ones. A Mission rooted in the family. A Mission that values our customers, employees and shareholders. We greatly appreciate your confidence in and support of the Karrington family. Sincerely, /s/ RICHARD R SLAGER RICHARD R SLAGER Chairman and CEO 2 [PHOTO: Six senior officers of Karrington Health, Inc. including Stephen Lewis, Anthony DiBlasi, Richard R. Slager, Robin V. Holderman, Alan B. Satterwhite and Mark N. Mace.] - ------------------------------------------------------------------------------- KARRINGTON HEALTH INC. 1996 ANNUAL REPORT The American family is reinventing itself... and the way it cares for its elderly. Americans are living longer--and have greater financial stability--than at any time in history. The elderly are the nation's fastest growing population segment, with the number of individuals age 85-plus expected to reach 4.3 million by the turn of the century. Adults over 65 currently number 30 million, a figure the U.S. Census Bureau expects will double by the year 2030. [PHOTO: Female resident with medical staff RN taking blood pressure.] Changing demographics, coupled with the fact that the elderly often are incapable of independent living, have created tremendous opportunities for Karrington Health, Inc. and the entire assisted living industry. The Census Bureau reports that 50% of people over age 85 need help with at least one activity of daily living (ADL), such as eating, bathing and personal hygiene, dressing and grooming, and walking. Another 7 million individuals over age 65 need ADL assistance, and this number will double by 2020. In the past, assistance usually was provided by a female family member. But with the percentage of women working outside the home up from 38% in 1960 to 57% today, their availability to fill the traditional caregiver role has declined. Single parents, growing numbers of Americans living alone and our transient society have further reduced the number of adult children able to care for elderly parents and relatives. Consequently, the number of seniors living alone has more than quadrupled since 1960, growing from 7% to 30% of the population. Fortunately, when living alone is no longer an option, most older Americans can afford to move to an assisted living residence. According to the demographics firm Claritas, Inc., more than 53% of seniors over age 80 have incomes of $15,000 or more, with 35% reporting at least $25,000. In addition, the U.S. Bureau of Labor and Statistics puts the median net worth of the age-75-and-older family at $87,000. The Assisted Living Federation of America (ALFA) predicts that, with the over-85 population doubling to more than 5.6 million by the year 2010, there could be a demand for more than 50,000 new assisted living units annually. Couple that with the U.S. Department of Health and Human Services' estimate that about half a million of the nation's 1.6 million nursing home residents are viable assisted living candidates, and it is no surprise that the $15 billion assisted living industry is expected to grow to $30 billion by the year 2000. Wall Street has taken notice of the rapidly expanding market for assisted living as the number of publicly traded assisted living companies has increased more than six-fold--from two to 13--between 1994 and year-end 1996. The challenge facing the elderly and their families, as well as shareholders and the investment community, is to identify well-managed, professional assisted living providers--such as Karrington--that are positioned to survive inevitable industry consolidation and thrive in the new century. THE KARRINGTON ADVANTAGE: CAPITAL, CARE AND CREDIBILITY Karrington became a public company in July 1996, raising approximately $28.4 million from the sale of 2.4 million common shares. Karrington's access to capital in a very capital-intensive industry supports the Company's growth goals. 3 [PHOTO: Male resident with residence staff member.] LIFE In addition to having the wherewithal for on-going development and potential acquisitions, what differentiates Karrington from other assisted living companies--public and private--are its unique competitive advantages: HIGH-ACUITY PRODUCTS AND SERVICES: At the heart of Karrington are the skilled and caring people, unique products and services, and dignified environments that enable Karrington residents to age-in-place gracefully. Among the high-acuity services the Company offers are Alzheimer's and related special care programs, including dedicated Karrington Place residences, opened in 1996. Unique product and service offerings--designed to enhance quality of life and respect individuality--include personalized wellness assessment programs and restaurant-style menus. Innovative community service activities introduced by Karrington over the past 12 months include the Neighbors Program and Adult Day Respite care, which are designed to relieve caregivers, while building relationships with area seniors who may someday need assisted living. PROTOTYPE MANSION-STYLE RESIDENCES: Karrington residents age-in-place in mansion-style communities, housing 60 to 80 seniors who need assistance with several activities of daily living, but do not require nursing home care. Karrington offers a flexible, price-sensitive rate and service structure, charging residents only for the care they need and the size of residential suite and roommate options they choose. Each residence is managed by an administrator and four-person supervisory team, overseeing approximately 28 full-time employees. All resident services are provided by licensed nurses (RNs and LPNs) and trained resident assistants. Karrington was among the first assisted living companies to have full-time nurses on staff 24 hours, to meet the health care needs of physically frail and cognitively impaired residents. STRATEGIC PARTNERSHIPS: Karrington's development partnership with the $4 billion, 61-hospital Catholic Health Initiatives (CHI) brings Karrington the benefits of capital, credibility, and customer referral. Karrington's planned acquisition of Kensington Management Group, Inc., with ties to the world-renown Mayo Clinic, will enhance the Company's participation in Alzheimer's research, while creating new development opportunities. Management plans to continue expansion of relationships with nationally respected acute health care systems to further broaden Karrington's position as an industry leader. DEVELOPMENT STRENGTH: Karrington's 16-member development team has extensive real estate acquisition, design, engineering, zoning, general construction and project management experience. Responsible for all development to date--nine open Karrington residences and 17 under construction--the department in 1996 entered into outsourcing agreements to facilitate site selection and ease entry into new markets, including additional states and major metropolitan areas. These developers are working with Karrington to identify assisted living sites in California, New York, Connecticut, the Chicago area and the Mid-South. These development partnerships, coupled with over $300 million in project financing, led by the $100 million financing package Karrington secured from Meditrust in 1996, will assist - ------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 4 1996 ANNUAL REPORT the Company in meeting its development goals through 1999 and beyond. PEOPLE: Karrington's management team and employees embody the Company's mission statement. The Company has a thoroughly trained staff of 430 administrative, health, and residential care professionals--a number that is expected to more than triple in 1997, as new residences open. Karrington's experienced management team includes senior executives who helped pioneer the industry's national trade association, ALFA. Management is supported by what is arguably the strongest board of directors in the assisted living industry. With the 1996 formation of the Karrington Advisory Services consultation and management services division, the Company is making its expertise available to others in the assisted living industry. THE KARRINGTON MODEL FOR STRATEGIC GROWTH In 1996, Karrington opened four new residences, bringing to nine the total number of residences the Company has open. Two of the four residences opened last year were part of a joint development with Catholic Health Initiatives, one of the nation's leading health care providers. CHI offers tremendous benefits to Karrington, including community and industry-wide name recognition; credibility; capital; access to prime locations; and referral of prospective residents. Karrington/CHI's 1996 residences are located in Albuquerque, New Mexico, a new market for the Company. They include a 61-unit assisted living residence and an adjacent 28-suite specialty Alzheimer's and cognitive disorders residence. Plans for 1997 call for the opening of 19 additional residences--11 Karrington-owned, three joint ventures, and five Kensington Alzheimer's care residences. Management's goal for year-end 1998 is to open 27 new Karrington, joint venture, and Kensington residences, three of which are currently under construction. By December 31, 1999, the goal is 89 residences--77 owned by Karrington and 12 with joint venture partners. Projected growth in the Karrington residence network will result in substantial increases in annual revenues, strengthening the Company's position as an industry leader. Karrington takes a location-sensitive approach to development--identifying, acquiring, and developing the best site in each market. While competitors may build more buildings quicker, Karrington's goal is always to out-position other assisted living providers. The fact that residents and their families appreciate the combination of individualized care and quality staffing and services, coupled with the convenient locations, quality construction, and functional beauty of Karrington homes, is reflected in the over 90% occupancy rate consistently achieved within a new residence's first year. Over the next 12 months, the Company will continue its aggressive exploration of additional markets, with 1997 construction planned for the San Francisco Bay region; Chicago area; Memphis, Knoxville, and Nashville, Tennessee; Upstate New York; Connecticut; and Washington, D.C. To help reach its 1999 goals, the Company will apply its standard portfolio of residence prototypes, while [PHOTO: Female resident being helped down stairs by caregiver.] Karrington is dedicated to Excellence in Preserving and Enhancing Personal Dignity, Individuality, Independence, and Quality of Life for its Residents. 5 LIVING establishing regional relationships with architects, engineers and contractors. The objective is to take advantage of suppliers' learned knowledge of Karrington's unique models to construct high-quality residences faster, reducing management time and cost, and reflecting the architecture of each community. AGING-IN-PLACE: HIGH-QUALITY HEALTH CARE PLUS HANDS-ON HOSPITALITY Few assisted living operators provide the comprehensive range of care--such as Alzheimer's programs and other special care services--that Karrington delivers. Karrington is committed to helping its 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. Most Karrington residents have age-related disabilities and need assistance with three or more activities of daily living. Unlike assisted living operators that discharge to nursing homes high-acuity residents, such as individuals who are incontinent, utilize a wheelchair or walker or have Alzheimer's Disease, Karrington has the people and services in place to provide residents with the extra care they need as they age. Karrington's goal is to allow each resident to age-in-place at Karrington, ideally making Karrington his or her final home. [PHOTO: Female resident in wheelchair with a visitor.] Fifty percent of people over age 85 suffer from some stage of Alzheimer's Disease. Karrington has developed products to allow the Company to care for most residents with cognitive disorders until the end of their lives, often precluding the need for hospitalization or nursing care. Since its inception, Karrington has provided a residential alternative--the Company's special care program--to care for individuals who suffer from dementia. In the past, these individuals would have been institutionalized in a hospital or nursing facility. In addition, all employees are cross-trained and undergo in-depth, special care training to assist them in identifying, monitoring and serving residents, beginning with the earliest signs of dementia. Over the past 12 months, the Company opened two Karrington Place assisted living residences, dedicated solely to serving the special needs of residents with Alzheimer's Disease and related disorders. Karrington Place is a unique, safe, and inviting residence that looks and feels like a hometown neighborhood, complete with cheerful common areas and secure outdoor walking paths. Karrington Place caregivers are specially trained to assist residents facing the challenges of communication, nutrition, wandering and sleep. Setting a new standard for the long-term care of residents with dementia, Karrington Place enhances dignity, promotes individuality and encourages independence. Additional Karrington Place residences are planned for 1997 and beyond. Karrington's scope of Alzheimer's care will expand in 1997 as the Company completes its acquisition of Kensington Management Group, Inc., a provider of multi-state assisted living Alzheimer's care residences. With a letter of intent signed in November 1996, management targets April 1997 for - ------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 6 1996 ANNUAL REPORT completion of the transaction. At the time of the acquisition, Kensington's annualized revenues will approximate $10 million, and it will have 12 residences open or under construction, with 406 licensed beds in three states. Development is in progress for the establishment of new campus communities in Jacksonville, Florida and Phoenix, Arizona. Kensington operates Alzheimer's care communities under the name Kensington Cottages, and intends to further develop its Alzheimer's care programs using medical directors with geriatric and dementia specialties similar to its relationship with the Mayo Clinic in Rochester, Minnesota. An innovative, nonresidential program Karrington is marketing is its Neighbors Program, started in 1996 and targeted for expansion in 1997. The Neighbors Program takes Karrington's personnel and programs out into the communities in which it operates residences. Through the Neighbors Program, Karrington makes select services-including transportation, meal preparation and delivery, light cleaning and laundry service, prescription and grocery delivery, and companionship-available for a fee to elderly individuals. The Neighbors Program gives caregivers a needed break, and grants Karrington the opportunity to introduce staff and services to seniors who may someday choose assisted living. [PHOTO: Male resident with two young children.] Plans for 1997 include the rollout of an Adult Day Respite program to enable seniors to spend part of a day and/or a night at a Karrington residence. In addition, management over the next year will continue to develop hospice programs--the final phase of aging-in-place. As Karrington and the elderly population grow, the Company will keep looking to the community, residents and caregivers for programming needs and solutions. KARRINGTON PROFESSIONALS: HEALTH CARE EXPERTISE WITH BUSINESS SAVVY Karrington's ability to provide innovative assisted living products is directly linked to the Company's skilled staff, experienced management and strong board of directors. Karrington deeply values employee education. All residence staff undergo an extensive and innovative training program, covering all aspects of Karrington's operation and philosophy. Mentoring with a registered nurse--to help staff identify and monitor residents' health care needs, including the early stages of dementia--is followed by on-going, year-round education. "Karrington Kollege," established in 1996, is a week-long, intensive training program, which is held at the home office and is mandatory for administrators and department supervisors. Operations are reviewed, and the Karrington corporate philosophy toward its residents is stressed: The residents' needs are the Company's number-one priority. If it benefits the residents, no job is too small for a Karrington associate. Under the direction of Operations Senior Vice President John Knutson--a former ALFA director and well-known industry expert who joined Karrington in 1996--the Company has established a comprehensive quality assurance (QA) program to monitor and maintain established standards of care. Karrington's QA team works with residence management to ensure staff is trained, clinical policies and procedures are followed, and state and federal licensing requirements are met. Karrington's staff is supported by senior executives who helped pioneer the assisted living industry. Chairman and Chief Executive Officer Richard R. Slager is co-founder of the Company and immediate past-chairman of ALFA. Chief Financial Officer Alan B. Satterwhite, co-founder of Karrington, chaired the 1996 ALFA Overview Task Force Committee. A testament to Karrington's management strength is the Company's board of directors. Recognized by the assisted living industry and the investment community as probably the strongest board in the industry, the Karrington board is an unusually influential group for a young, growing company. Combining health care know-how with acquisition expertise and experience growing public companies into national industry leaders, Karrington's 11-person board of directors works with senior management to position the Company as a leader in the burgeoning assisted living industry. Outside directors include John S. Christie, President of JMAC, Inc., an investment company and principal Karrington shareholder; Dr. Bernadine P. Healy, Dean of The Ohio State University 7 KARRINGTON 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; Charles H. McCreary, partner of the law firm Bricker & Eckler; James V. Pickett, Chairman of Pickett Realty Advisors and Managing Director of the real estate investment group of Banc One Capital Corporation; Harold A. Poling, retired Chairman of Ford; Michael H. Thomas, [PHOTO: Female resident being served coffee by a caregiver.] Executive Vice President and Treasurer of JMAC, Inc.; and Robert D. Walter, Chairman and CEO of Cardinal Health. Given Karrington's talent pool and depth of management experience, it is no surprise that organizations considering entry into the assisted living industry look to Karrington for counsel. In 1996, in response to growing requests for consulting services, the Company formed the Karrington Advisory Services division. Located in Cleveland, Ohio, KAS is Karrington's full-service consulting arm. KAS' target market includes organizations, such as hospitals, apartment developers, nursing home operators and health care systems, seeking expertise in the assisted living industry. Management expects KAS to experience steady growth throughout 1997 and beyond. KARRINGTON: Positioned For Leadership In The Next Century Since opening its first residence in 1992, Karrington has more than quadrupled its annual revenues, generating approximately $12 million in 1996 from the Company's network of Karrington-operated residences and joint ventures. Over the past four years, the number of residences open, under construction, or in contract to the Company has grown from five to 36, with residential suites increasing from 160 in 1992 to 454 at year-end 1996. Karrington's future growth will come from developing, opening and operating residences in current markets, new communities and [PHOTO: Female resident with young child.] additional states; expanding joint venture relationships with major U.S. health care systems; continuing to provide broad-based services that allow high-acuity residents to age-in-place; and strategically acquiring residences for conversion to the Karrington model. The Company made significant capital investments--time and money--in 1996, building what it believes is the finest, most experienced management team and staff in the assisted living industry. In addition, much of the Company's focus over the past 12 months has been on standardizing internal operations, such as employee training, resident assessment, quality assurance and outsourcing relationships. BY STREAMLINING PROCESSES, STANDARDIZING PROCEDURES AND ENSURING QUALITY, THE COMPANY HAS SUCCEEDED IN POSITIONING KARRINGTON AS THE ASSISTED LIVING PROVIDER OF CHOICE FOR PHYSICALLY FRAIL AND COGNITIVELY CHALLENGED AMERICANS. - ------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 8 1996 ANNUAL REPORT - ------------------------------------------------------------------------------- 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. The Company's revenue is derived principally from resident fees, which in 1996 comprised 93% of total revenues (92% in 1995 and 95% in 1994). Resident fees are paid monthly by residents, their families or other responsible parties and historically have been derived 100% from private pay sources. Resident fees include revenue 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 percentage of 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 promotion 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; and (iii) depreciation and amortization. In anticipation of its growth plans, the Company made significant investments in the number of management and staff at its headquarters in 1996 and 1995. RESULTS OF OPERATIONS The following table sets forth certain data from the respective consolidated statements of operations as a percentage of total revenues: YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 -------- -------- -------- Total revenues .......................... 100.0% 100.0% 100.0% Expenses: Residence operations .................... 68.5 65.0 65.6 General and administrative .............. 28.9 25.3 12.0 Depreciation and amortization ........... 14.4 14.5 16.1 Write-off of intangible asset ........... - 7.3 - -------- -------- -------- Total expenses .......................... 111.8 112.1 93.7 -------- -------- -------- Operating income (loss) ................. (11.8)% (12.1)% 6.3% ======== ======== ======== Resident days (2) ....................... 87,974 67,256 57,213 Average occupancy percentage (1) ........ 93.4% 96.4% 98.9% End of year (2): Number of residences open ............... 6 4 3 Number of units ......................... 312 219 160
(1) Average occupancy percentage represents the average occupancy of the Company-owned residences open for one year or more at the beginning of the year presented. (2) Excludes residences jointly-owned by the Company and CHI accounted for by the equity method. 9 - ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. The average daily resident rate increased 7.1% to $93.05 in 1996 compared to $86.90 in 1995, primarily due to an increase in the average daily basic care rate of $7.12. 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 development under the relationship with CHI. Residence operations expenses increased $2.2 million, or 50.1%, to $6.6 million in 1996 from $4.4 million in 1995. As a percentage of total revenues, residence operations expenses increased from 65.0% in 1995 to 68.5% 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 total revenues during the first year of operation of a residence. Excluding these three residences, operations expenses were 60.7% of total revenues in 1996 compared to 63.2% 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. 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 $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. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Total revenue increased $1.5 million, or 28.1%, to $6.7 million in 1995 from $5.3 million in 1994 primarily due to the growth in resident revenues. Resident revenues increased $1.2 million, or 25.0%, primarily due to the increase in resident revenues of $531,000 from the residence which opened in late December 1993, an increase of $433,000 resulting from higher average daily resident rates and the opening of a residence in late October 1995. The average daily resident rate increased 9.5%, to $86.90, in 1995 from $79.33 in 1994, primarily due to an increase in the average daily basic care rate of $5.32. Development and project management fees increased $237,000, or 82.3%, to $524,000 in 1995 from $287,000 in 1994, primarily due to the increased number of projects in development under the relationship with CHI. Residence operations expenses increased $926,000, or 26.8%, to $4.4 million in 1995 from $3.5 million in 1994, primarily due to a 17.6% increase in resident days and the Company's adoption of the provisions of AICPA SOP 93-7, the effect of which was an increase in marketing - ------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 10 1996 ANNUAL REPORT - ------------------------------------------------------------------------------- expenses of $199,000. As a percentage of total revenues, residence operations expenses decreased from 65.6% in 1994 to 62.0% in 1995 (excluding the effects of AICPA SOP 93-7). This decrease is primarily attributable to the second full year of operations at a residence where the average occupancy percentage increased to 93.7% in 1995 from 63.2% in 1994. General and administrative expenses increased $1.1 million, or 169%, to $1.7 million in 1995 from $634,000 in 1994, primarily due to increased compensation, payroll taxes and related benefits of $714,000 as a result of hiring additional management and staff at the Company's headquarters (from 20 at the end of 1994 to 40 at the end of 1995) in anticipation of the Company's growth plans, including the addition of a manager-in-training program in the Spring of 1995, increased incentive compensation and compensation increases for existing staff and management. Depreciation and amortization increased $136,000, or 16.0%, to $980,000 in 1995 from $844,000 in 1994 primarily due to a change in estimate relating to pre-opening costs ($92,000), the opening of a new residence ($48,000), and the Company's move to its new headquarters in July 1995. These increases were offset by a decrease of $70,000 as a result of the adoption of AICPA SOP 93-7 described above. See Note 3 to Consolidated Financial Statements for discussion on the write-off of the intangible asset. Interest expense decreased $328,000, or 24.2%, to $1.0 million in 1995 from $1.4 million in 1994, primarily due to the subordinated debentures converted to equity effective January 1, 1995. LIQUIDITY AND CAPITAL RESOURCES The Company financed its initial growth through a combination of mortgage financing, subordinated borrowings from JMAC, Inc. (JMAC) and its affiliates and equity contributions. The Company's mortgage and construction mortgage financings provide for principal repayments in the next three to 14 years, bear interest at various rates (ranging from 8.25% to 10.25% at December 31, 1996), 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 (4.4% at December 31, 1996). The Company has entered into non-binding financing commitment letters with Meditrust Mortgage Investments, Inc. ("MMI"), an affiliate of Meditrust (a large health care REIT). Under the letters, MMI is to provide up to approximately $100 million in financing for one existing and approximately 13 new residences, subject to various terms and conditions. The financings, which may be mortgage or lease financings, are to be entered into on a residence-by-residence basis, and are to be for terms of up to 14 years (with two additional five-year extension periods for the lease transactions). Interest during construction is to float 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 one existing and three new residences totalling $22 million. In December 1995, the Company entered into a loan agreement with JMAC pursuant to which JMAC agreed to provide up to $8.0 million in loans to the Company. Interest on the borrowings 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 was terminated. Effective January 1, 1995, the partners of Karrington Operating Company entered into a recapitalization agreement pursuant to which subordinated debentures and accrued interest totaling $5.3 million were converted to equity. In addition, JMAC Properties, Inc. invested $5.0 million in equity during 1995. At December 31, 1996, the Company had $33.0 million of outstanding debt (at a weighted average interest rate of 8.9%). At that date, the Company had equity of $30.7 million, which resulted from inception-to-date net capital contributions of $37.6 million (including $27.5 million in net proceeds from the July 1996 public 11 - ------------------------------------------------------------------------------- offering) and net operating losses of $6.9 million. Working capital at December 31, 1996 was $7.8 million. During the years ended December 31, 1996, 1995 and 1994, the Company used $28.8 million, $10.7 million and $2.1 million, respectively, in cash to acquire property and equipment and other assets, and received $41.1 million, $10.9 million and $1.5 million, respectively, in cash from financing activities. In 1997 through 1999, the Company plans to open or acquire approximately 71 new Company-owned residences and 9 jointly-owned residences bringing the total number of residences to 89. To date, the Company has 17 of the 71 residences open or under construction and is expected to acquire 12 residences in April 1997. The Company has 14 additional sites under contract. 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 $6.0 to $7.5 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 seven months. In February and March 1997, the Company entered into one year revolving credit agreements totaling $8,000,000. Interest is payable monthly and accrues at either the bank's prime rate, the bank's eurodollar rate or LIBOR plus 2% if certain financial ratios are met. The net proceeds from the Company's initial public offering, together with existing financing commitments and additional financing the Company anticipates will be available, will be sufficient to fund its development and acquisition programs for at least the next 12 months. Additional financing will be required to complete the Company's growth plans through 1999 and to refinance certain existing indebtedness. PENDING BUSINESS ACQUISITION The Company's acquisition of Kensington Management Group, Inc. (Kensington) is scheduled to be completed in April 1997. At the time of acquisition, Kensington will have open or under construction 12 residences with 406 licensed beds in three states. Unaudited revenues in 1996 were approximately $6,500,000. Kensington operates Alzheimer's care communities under the name Kensington Cottages. The purchase price is expected to approximate $28 million. The Company will issue approximately 130,000 common shares, assume debt of approximately $1.7 million, incur new debt of approximately $21.7 million and make cash payments of approximately $3.1 million. The Company has entered into a non-binding financing commitment with a lender for the $21.7 million of new debt plus an amount for four new cottages to build out a campus setting in Rochester, Minnesota. - ------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 12 1996 ANNUAL REPORT - ------------------------------------------------------------------------------- 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/Alan B. Satterwhite /s/ Mark N. Mace Richard R. Slager Alan B. Satterwhite Mark N. Mace Chairman and Chief Chief Financial Officer Senior Vice President, Executive Officer and Chief Operating Officer Finance and Treasurer - -------------------------------------------------------------------------------- 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"), formerly Karrington Operating Company (a partnership), as of December 31, 1996 and 1995, and the related consolidated statements of operations, equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Karrington Operating Company for the year ended December 31, 1994, were audited by other auditors whose report dated January 24, 1995, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1996 and 1995 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, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Columbus, Ohio February 14, 1997 13 - ------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31, -------------------------- 1996 1995 ----------- ----------- Current assets: Cash and cash equivalents .................. $12,283,185 $ 144,833 Accounts receivable......................... 105,315 243,914 Amounts due from affiliates................. 678,893 523,278 Prepaid expenses............................ 170,254 98,821 ----------- ----------- Total current assets.................. 13,237,647 1,010,846 Property and equipment - net (Note 2)............ 52,011,748 24,879,363 Other assets - net (Note 3)...................... 4,300,546 786,233 ----------- ----------- Total assets.......................... $69,549,941 $26,676,442 ----------- ----------- ----------- ----------- LIABILITIES AND EQUITY Current liabilities: Accounts payable and accrued liabilities.... $ 788,981 $ 614,713 Construction payables....................... 3,181,560 810,334 Payroll and related taxes................... 735,337 410,590 Unearned resident fees...................... 325,111 414,821 Interest payable............................ 158,103 129,699 Current portion of long-term obligations.... 242,211 205,485 ----------- ----------- Total current liabilities............. 5,431,303 2,585,642 Long-term obligations (Notes 5 and 6)............ 32,758,692 18,249,893 Deferred income taxes............................ 683,000 - Equity (Note 9): Common shares, without par value............ 31,984,712 - Accumulated deficit......................... (1,307,766) - Partners' equity............................ - 5,840,907 ----------- ----------- Total equity................................ 30,676,946 5,840,907 ----------- ----------- Total liabilities and equity................ $69,549,941 $26,676,442 ----------- ----------- ----------- ----------- See accompanying notes. - ------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 14 - ------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Revenues: Residence operations.............. $ 8,952,759 $ 6,219,465 $ 4,976,787 Development and project management fees.............. 642,803 524,391 287,683 ----------- ----------- ----------- Total revenues............. 9,595,562 6,743,856 5,264,470 Expenses: Residence operations................... 6,574,958 4,380,312 3,453,690 General and administrative............. 2,772,727 1,704,694 634,016 Depreciation and amortization.......... 1,379,060 979,797 844,420 Write-off of intangible asset (Note 3). - 492,288 - ----------- ----------- ----------- Total expenses............. 10,726,745 7,557,091 4,932,126 ----------- ----------- ----------- Operating income (loss)................ (1,131,183) (813,235) 332,344 Interest expense....................... (1,271,561) (1,022,516) (1,349,827) Interest income........................ 470,065 - - Equity in net loss of unconsolidated entities (Note 7)................. (7,157) (105,529) (17,470) ----------- ----------- ----------- Loss before income taxes............... (1,939,836) (1,941,280) (1,034,953) Deferred income taxes.................. (683,000) - - ----------- ----------- ----------- Net loss............................... $(2,622,836) $(1,941,280) $(1,034,953) ----------- ----------- ----------- ----------- ----------- ----------- Proforma (Note 2): Net loss per common share......... $ (.48) $ (.45) Weighted average number of common shares outstanding.... 5,415,800 4,350,000 See accompanying notes. 15 - ------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. AND SUBSIDIARIES Consolidated Statements of Equity
COMMON SHARES ------------------ ACCUMULATED PARTNERS' SHARES AMOUNT DEFICIT EQUITY TOTAL ------- ------- ----------- -------- -------- BALANCE AT DECEMBER 31, 1993..... $ (728,318) $ (728,318) NET LOSS.................... (1,034,953) (1,034,953) ----------- ----------- 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 --------- ---------- ------------ ----------- ----------- --------- ---------- ------------ ----------- -----------
- -------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 16
1996 ANNUAL REPORT - -------------------------------------------------------------------------------- KARRINGTON HEALTH, INC.AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 ------------ ------------- -------------- OPERATING ACTIVITIES Net loss............................. $(2,622,836) $ (1,941,280) $ (1,034,953) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Write-off of intangible assets.. - 587,288 - Depreciation and amortization... 1,379,060 979,797 844,420 Deferred income taxes........... 683,000 - - Loss on disposal of assets...... 10,060 6,938 - Straight-line rent expense...... 16,563 12,520 19,520 Equity in net loss of unconsolidated entities....... 7,157 105,529 17,470 Change in operating assets and liabilities: Accounts receivable...... (17,016) (659,317) (50,777) Prepaid expenses......... (71,433) 22,197 (36,081) Accounts payable and accrued liabilities...... 174,268 198,573 66,752 Other liabilities 263,441 451,231 522,018 ------------ ------------- --------------- Net cash provided by (used in) operating activities......... (177,736) (236,524) 348,369 INVESTING ACTIVITIES Increase in escrow balances.......... (1,146,004) (239,000) Purchases of property and equipment.. (25,670,838) (10,023,395) (2,043,109) Equity contributions to unconsolidated entities............ (1,347,753) - - Distributions from unconsolidated entity............................. 339,767 - - Proceeds from sale of assets......... 101,202 - - Payments of pre-opening costs........ (639,908) (314,592) (27,881) Payments for organization costs and other.............................. (96,571) (50,320) 16,923 ------------ ------------- --------------- Net cash used in investing activities.............. (28,460,105) (10,627,307) (2,054,067) FINANCING ACTIVITIES Net proceeds from public offering.... 27,458,875 - - Proceeds from mortgages.............. 21,727,827 14,324,119 4,468,654 Repayment of mortgages............... (7,165,025) (7,491,258) (3,813,759) Proceeds from debentures due partner. 5,501,535 40,855 1,051,000 Repayment of debentures due partner.. (5,535,375) - - Payments of financing fees........... (1,211,644) (217,114) (158,180) Proceeds from partners capital contribution.............. - 5,000,000 - Payment of partner distributions..... - (785,000) ------------ ------------- --------------- Net cash provided by financing activities 40,776,193 10,871,602 1,547,715 ------------ ------------- --------------- Increase (decrease) in cash and cash equivalents................ 12,138,352 7,771 (157,983) Cash and cash equivalents at beginning of year............... 144,833 137,062 295,045 ------------ ------------- --------------- Cash and cash equivalents at end of year............... $12,283,185 $ 144,833 $ 137,062 ------------ ------------- --------------- ------------ ------------- --------------- Supplemental disclosure of cash flow information Cash paid for interest............... $ 2,280,810 $ 1,399,347 $ 981,412 See accompanying notes.
17 - ----------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. DESCRIPTION OF THE BUSINESS 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 July 18, 1996 (see Note 9). Hereinafter, all references to the "Company" encompass Karrington Operating and Karrington Health, Inc. Karrington Operating is 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). The trade name "Karrington Communities," a Registered Trademark, is the operating name of all residences owned and operated by the Company. 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 health-care providers in the long-term care industry. As of December 31, 1996, the Company, including joint ventures, had residences open in Ohio, Pennsylvania and New Mexico and residences under construction in Ohio, Indiana, Michigan, Pennsylvania, Colorado and North Carolina. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements reflect the operations and development activities of the Company and its 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 Karrington of Oakwood, LLC, a 50%-owned joint venture, Karrington of Albuquerque, LLC, Karrington of Englewood, LLC, and Karrington of Colorado Springs, LLC, 19.9%-owned joint ventures, and Karrington of Kenwood, LLC, a 35%-owned joint venture (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 others in the assisted living industry and recognizes these fees as the services are provided. - -------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 18 1996 ANNUAL REPORT - ------------------------------------------------------------------------------- CASH EQUIVALENTS The Company considers all liquid investments purchased with a maturity of three months or less to be cash equivalents. At December 31, 1996, the Company's cash and cash equivalents are invested primarily in AAA rated insured auction securities, the largest single issue of which is $3 million. 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 also allocated to projects and capitalized. Depreciation, which includes amortization of capital leases, 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: Land improvements .................. 15 years Buildings .......................... 40 years Furnishings and equipment .......... 3 - 10 years Property and equipment consists of the following: DECEMBER 31, -------------------------------- 1996 1995 ------------ ------------- Land and land improvements .............. $ 2,927,878 $ 2,913,731 Buildings ............................... 23,242,775 15,277,629 Furnishings and equipment ............... 3,862,650 2,902,584 Construction-in-progress ................ 24,147,397 5,100,340 ------------- ------------- Total ............................... 54,180,700 26,194,284 Accumulated depreciation and amortization ...................... (2,168,952) (1,314,921) -------------- ------------- Property and equipment - net $ 52,011,748 $ 24,879,363 -------------- ------------- -------------- ------------- 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 $424,000, $276,000 and $250,000 for 1996, 1995 and 1994, respectively. Of these amounts, $16,000 was capitalized in 1994. 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). PROFORMA NET LOSS PER COMMON SHARE Proforma net loss per common share is computed based on the weighted average number of shares outstanding during the period based on 4,350,000 common shares outstanding following the 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. 19 - ------------------------------------------------------------------------------- 3. OTHER ASSETS Other assets consist of the following: DECEMBER 31, ------------------------------ 1996 1995 ---------- ---------- Pre-opening costs, less accumulated amortization of $180,663 and $47,475 at December 31, 1996 and 1995, respectively................. $ 497,298 $ 291,770 Deferred financing costs, less accumulated amortization of $114,845 and $46,098 at December 31, 1996 and 1995, respectively.......................... 1,430,096 329,199 Organization costs and other, less accumulated amortization of $169,236 and $125,925 at December 31, 1996 and 1995, respectively............... 46,509 48,264 Escrow balances (see Note 6)........... 1,385,004 239,000 Equity (deficiency) in unconsolidated entities (see Note 7).......................... 852,503 (122,000) Deposits and other..................... 89,136 - ---------- ---------- $4,300,546 $ 786,233 ---------- ---------- ---------- ---------- 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. The intangible asset was being amortized using the straight-line method over a period from the commencement of construction of each residence to December 2001, with the intent that the total Karrington Concept cost would be amortized over a period not to exceed ten years. 4. CONSULTING AGREEMENT The Company had a consulting agreement with a limited partner that provided for fees based on a percentage of revenues. Under the agreement, the Company paid $141,000 and $100,000 in such fees in 1995 and 1994, respectively. In 1995, the Company elected to terminate the agreement effective March 1996 and a $50,000 termination fee was accrued at December 31, 1995. Effective March 1996, the Company exercised, for the account of JMAC Properties, Inc., a $45,000 buyout option of the limited partner, which amount was accrued in accounts payable as a capital distribution at December 31, 1995. 5. LEASE COMMITMENTS Three of the Company's properties are on leased land. The initial lease terms extend to 2026 and include additional renewal periods up to 50 years. The Company is responsible for the payment of real estate taxes, site maintenance and access road maintenance. Future minimum lease payments under noncancellable operating leases, which primarily relate to the land leases, are as follows: 1997 ................................................. $ 337,157 1998 ................................................. 306,904 1999 ................................................. 287,301 2000 ................................................. 277,825 2001 ................................................. 247,466 THEREAFTER ........................................... 8,270,619 ----------- TOTAL ................................................ $ 9,727,272 ----------- ----------- Total rental expense incurred was $221,000, $104,000 and $93,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Of these amounts, $8,000, $20,000 and $23,000 were capitalized to construction-in-progress and pre-opening costs in the respective years. - -------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 20 1996 ANNUAL REPORT - ------------------------------------------------------------------------------- 6. LONG-TERM OBLIGATIONS Long-term obligations consist of the following:
DECEMBER 31, ------------------------------ 1996 1995 ----------- ----------- $475,000 mortgage due in monthly principal installments of $1,979 plus interest at prime plus .75% (9.0% at December 31, 1996). Balance due in 2001.............................. $ 435,418 $ 457,187 $4,000,000 mortgage due in monthly principal and interest installments of $33,412 with interest at LIBOR plus 3.73% adjusted semi-annually (9.42% at December 31, 1996). Balance due in 2001.................................................. 3,947,115 3,974,283 $9,400,000 of mortgages due in monthly principal and interest installments of $79,128. Interest is accrued at 8.9% to 9.1%. Balances are due in 2000............................ 9,260,656 9,371,396 $4,724,867 mortgage due in monthly principal and interest installments of $42,636. Interest accrues at 9.91%. Balance due in 2006.................................................. 4,717,605 -- $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 (4.4% at December 31,1996)........................ 5,800,000 -- $19,835,145 construction mortgages. Interest is payable monthly at prime to prime plus 2% (8.25% to 10.25% at December 31, 1996). Principal converts to term loans in 1997........................................................ 8,751,835 -- 1995 construction mortgages refinanced in 1996......................... -- 4,449,122 Other long-term obligations............................................ 88,274 203,390 ----------- ----------- Total long-term obligations............................................ 33,000,903 18,455,378 Less current portion................................................... (242,211) (205,485) ----------- ----------- Long-term obligations, less current portion............................ $32,758,692 $18,249,893 ----------- ----------- ----------- -----------
The mortgage loans are collateralized by substantially all the assets of each residence. The Company is required to maintain minimum tangible net worth and current ratio amounts and debt service coverage ratios with respect to certain individual residences. 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. 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 is to float 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 one existing and three new residences totalling $22 million. 21 - ------------------------------------------------------------------------------- Interest costs incurred were $2,309,000, $1,433,000 and $1,426,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Of these amounts $1,038,000, $411,000 and $76,000 were capitalized as construction-in-progress in the respective periods. Interest cost incurred includes amounts due under obligations to JMAC and amounted to $175,000 and $462,000 in 1996 and 1994, respectively. No such amounts were incurred for 1995. The carrying amounts of long-term obligations approximate fair value as the interest rates are self-adjusting or are comparable to rates currently available. As of December 31, 1996, the long-term obligations (including capital leases)mature as follows: 1997..............$ 242,211 1998.............. 476,035 1999.............. 936,591 2000.............. 9,420,410 2001.............. 4,333,836 Thereafter........ 17,591,820 ----------- Total.............$33,000,903 ----------- ----------- 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. 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 owned jointly 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. At December 31, 1996, 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 $464,000, $363,000 and $175,000 in 1996, 1995 and 1994, respectively. The Company serves as manager for each of the residences and receives management fees upon commencement of operations. Management fees of $149,000, $112,000 and $34,000 have been recorded as revenues for the years ended December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, three residences were open, three residences were under construction, and five other sites were under development. One residence was open at December 31, 1995. Summarized financial information of joint ventures is presented below. DECEMBER 31, -------------------------------- 1996 1995 ------------ ----------- BALANCE SHEETS Current assets.......... $ 1,386,751 $ 526,636 Property................ 20,173,572 4,786,285 Other assets............ 656,715 22,466 ------------ ----------- Total assets...... $ 22,217,038 $ 5,335,387 ------------ ----------- ------------ ----------- Current liabilities..... $ 2,489,313 $ 626,587 Long-term obligations... 15,364,102 4,013,799 Joint venture equity.... 4,363,623 695,001 ------------ ----------- Total liabilities and joint venture equity... $ 22,217,038 $ 5,335,387 ------------ ----------- ------------ ----------- STATEMENTS OF OPERATIONS Residence revenues...... $ 2,347,278 $ 1,868,618 Operating expenses...... 1,809,886 1,333,203 Depreciation and amortization expense... 308,589 281,684 Interest expense........ 436,646 464,788 ------------ ----------- Total expenses..... 2,555,121 2,079,675 ------------ ----------- Net loss................ $ (207,843) $ (211,057) ------------ ----------- ------------ ----------- - -------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 22 1996 ANNUAL REPORT - ------------------------------------------------------------------------------- During the first quarter of 1995, the joint venture changed the amortization period for pre-opening costs from three years to one. The effect of this change on the joint venture was to increase amortization expense by $133,000 in 1995. The Company's equity in net loss of unconsolidated entities reflects its 50% share of the effect of this change. 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 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. A reconciliation of the recorded benefit based on the Federal statutory income tax rate to the Company's income tax provision for the period from July 18, 1996 to December 31, 1996 is as follows: Benefit at Federal statutory rate. . . . . . . . (34.0)% State income taxes, net of Federal benefit . . . (5.9) Nondeductible expenses . . . . . . . . . . . . . .9 Other. . . . . . . . . . . . . . . . . . . . . . (1.8) ------- Effective income tax rate. . . . . . . . . . . . (40.8)% ------- ------- Deferred income taxes arise from temporary differences between financial reporting and tax reporting basis of assets and liabilities, and operating loss carryforwards for tax purposes. The components of the deferred income tax assets and liabilities are as follows: December 31, 1996 ------------ Deferred income tax assets: Accrued liabilities. . . . . . . . . . . $ 38,000 Asset amortization . . . . . . . . . . . 216,000 Net operating loss carryforwards . . . . 322,000 Other. . . . . . . . . . . . . . . . . . 20,000 ------------ Total deferred income tax assets. . . . . . . 596,000 Valuation allowance for deferred income tax assets. . . . . . . . . . . . 0 ------------ Net deferred income tax assets. . . . . . . . 596,000 ------------ Deferred income tax liabilities: Property related. . . . . . . . . . . . (1,262,000) Other . . . . . . . . . . . . . . . . . (17,000) ------------ Total deferred income tax liabilities . . . . (1,279,000) ------------ Net deferred income tax liabilities . . . . . $ (683,000) ------------ ------------ Deferred tax assets, including the net operating loss carryforward, can be realized by offset to existing taxable temporary differences that will reverse in the carryforward period. Accordingly, no valuation allowance for deferred tax assets was recorded at December 31, 1996. The Company's net operating loss carryforwards expire in 2011. 9. EQUITY At December 1996, the Company's authorized capital shares consisted of (a) 28,000,000 common shares, without par value, of which 6,700,000 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 23 - ------------------------------------------------------------------------------- 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 is being used to finance the development and acquisition of additional assisted living residences and for working capital and general corporate purposes. Immediately prior to July 18, 1996, the share-holders 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 now owns 100% of the equity interests of Karrington Operating. 10. INCENTIVE STOCK PLAN The Company has adopted the 1996 Incentive Stock Plan (the "Plan"). The Plan provides for the grant of incentive and non-qualified stock options, stock appreciation rights, restricted stock, performance shares and unrestricted common shares. 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. In June 1996, the Company granted non-qualified options to certain officers, key employees and non-employee directors to acquire 169,000 common shares. These options became effective July 19, 1996 with an exercise price equal to the initial public offering price of $13.00 per share. The 115,000 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 directors received grants of non-qualified options to purchase an aggregate of 54,000 common shares which are exercisable beginning six months after the effective date of grant with a ten-year term. In addition, 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. No shares were exercisable as of December 31, 1996. 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 proforma net loss per share would have increased by $291,000 and $.05, respectively. 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 .34, a risk-free interest rate of 6.5% and an expected life of the options of 10 years. 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. 11. COMMITMENTS The Company has commitments totaling approximately $9,347,000 at December 31, 1996 for various land purchase contracts and $54,757,000 for various construction contracts. - -------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 24 1996 ANNUAL REPORT - ------------------------------------------------------------------------------- 12. SUPPLEMENTAL PROFORMA LOSS PER SHARE Supplemental proforma net loss and net loss per share 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 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. 13. SUBSEQUENT EVENTS KENSINGTON ACQUISITION The Company's acquisition of Kensington Management Group, Inc. (Kensington) is scheduled to be completed in April 1997. At the time of acquisition, Kensington will have open or under construction 12 residences with 406 licensed beds in three states. Unaudited revenues in 1996 were approximately $6,500,000. Kensington operates Alzheimer's care communities under the name Kensington Cottages. The purchase price is expected to approximate $28 million. The Company will issue approximately 130,000 common shares, assume debt of $1.7 million, incur new debt of approximately $21.7 million and make cash payments of approximately $3.1 million. REVOLVING CREDIT AGREEMENT In February 1997, the Company entered into a $3,000,000 revolving credit agreement expiring at March 31, 1998. Interest is payable monthly and accrues at the bank's prime rate or LIBOR plus 2% if certain financial ratios are met. The Company is required to pay a commitment fee of .25% on the unused portion of the total credit allowed under the agreement and is required to maintain minimum net worth and current ratio amounts. 25 - ------------------------------------------------------------------------------- SELECTED CONSOLIDATED FINANCIAL DATA (Amounts in thousands, except other operating data and per share data)
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues: Residence operations................................ $ 8,953 $ 6,220 $ 4,977 $ 2,288 $ 216 Development and project management fees................................. 643 524 287 18 - -------- -------- -------- -------- -------- Total........................................... 9,596 6,744 5,264 2,306 216 Expenses: Residence operations................................ 6,575 4,380 3,454 1,908 221 General and administrative.......................... 2,773 1,705 634 170 84 Depreciation and amortization....................... 1,379 980 844 505 95 Write-off of intangible asset....................... 492 -------- -------- -------- -------- -------- Total........................................... 10,727 7,557 4,932 2,583 400 -------- -------- -------- -------- -------- Operating income (loss).................................. (1,131) (813) 332 (277) (184) Interest expense......................................... (1,272) (1,023) (1,350) (707) (102) Interest income.......................................... 470 - - - - Equity in net loss of unconsolidated entities............ (7) (105) (17) - - -------- -------- -------- -------- -------- Loss before income taxes................................. (1,940) (1,941) (1,035) (984) (286) Deferred income taxes.................................... (683) - - - - -------- -------- -------- -------- -------- Net loss................................................. $ (2,623) $ (1,941) $ (1,035) $ (984) $ (286) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Proforma: Net loss per common share........................... $ (.48) $ (.45) Weighted average number of common shares outstanding................................ 5,416 4,350 OTHER OPERATING DATA: Residences (end of year) (1): Open................................................ 9 5 4 3 1 Under construction.................................. 17 5 1 1 1 Under contract...................................... 10 8 2 1 1 Number of units (end of year) (1): Open................................................ 454 272 213 160 53 Under construction.................................. 1,010 243 59 53 53 Under contract...................................... 742 509 128 59 54 BALANCE SHEET DATA: Working capital (deficit)................................ $ 7,806 $ (1,575) $ (911) $ (702) $ (637) Total assets............................................. 69,550 26,676 16,292 14,883 9,938 Long-term obligations, less current portion.............. 32,759 18,250 16,778 14,472 8,753 Equity (deficit)......................................... 30,677 5,841 (1,763) (728) 256 (1) Includes residences jointly-owned by the Company and CHI.
- -------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 26 1996 ANNUAL REPORT - -------------------------------------------------------------------------------- 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 14, 1997. According to the records of the Company's transfer agent, the Company had forty-two shareholders of record as of March 13, 1997. 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.
HIGH LOW - ---------------------------------------------------------------------------- 1996: Quarter Ended September 30, 1996 (beginning July 19, 1996)........ $13.50 $12.25 December 31, 1996................................... 16.00 12.25 - ---------------------------------------------------------------------------- 1997: Through March 14, 1997.............................. $12.75 $10.50 - ----------------------------------------------------------------------------
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 below: National City Bank Corporate Trust Division P.O. Box 94915 Cleveland, OH 44101-4915 (216) 575-2000 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. Smith Barney Inc. ANNUAL MEETING The 1997 Annual Meeting of Shareholders will be held at 11:00 a.m. (EST) Tuesday, May 13, 1997 at the Da Vinci Ristorante. 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. FOUNDING MEMBER ALFA ASSISTED LIVING FOUNDATION OF AMERICA 27 - ------------------------------------------------------------------------------- DIRECTORS AND OFFICERS
BOARD OF DIRECTORS - -------------------------------------------------------------------------------------------------------- JOHN S. CHRISTIE DAVID H. HOAG BERNADINE P. HEALY, M.D. President, JMAC, Inc. Chairman, President and Dean, College of Medicine, Chief Executive Officer, The Ohio State University JOHN H. MCCONNELL The LTV Corporation Founder and Chairman JAMES V. PICKETT Emeritus, Worthington CHARLES H. MCCREARY, III Managing Director, Industries, Inc. Partner, Bricker & Eckler Banc One Capital Corporation HAROLD A. POLING MICHAEL H. THOMAS ROBERT D. WALTER Retired, former Chairman, Executive Vice President Chairman and Chief Executive Ford Motor Company and Treasurer, JMAC, Inc. Officer, Cardinal Health, Inc. CORPORATE OFFICERS - -------------------------------------------------------------------------------------------------------- RICHARD R. SLAGER ROBIN V. HOLDERMAN ANTHONY E. DIBLASI Chairman, President and Chief Executive Vice President of Senior Vice President of Executive Officer Corporate Development Construction ALAN B. SATTERWHITE MARK N. MACE STEPHEN LEWIS Chief Financial Officer, Senior Vice President of Senior Vice President of Chief Operating Officer and Finance, Treasurer, Principal Development, General Director Accounting Officer Counsel and Assistant Secretary JOHN K. KNUTSON Senior Vice President of Operations
28 - -------------------------------------------------------------------------------- KARRINGTON HEALTH, INC. 1996 ANNUAL REPORT KARRINGTON MARKET AREAS [MAP: United States and the State of Ohio showing Karrington locations open (10 residences), residences under construction (16 residences), sites under contract (14 sites) and the pending acquisition locations (12 residences).] [LOGO] KARRINGTON HEALTH, INC. 919 Old Henderson Rd. Columbus, Ohio 43220 614.451.5151 Fax: 614.451.5199 http://www.karrington.com EX-23.1 3 EXHIBIT 23.1 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 February 14, 1997, included in the 1996 Annual Report to Shareholders of Karrington Health, Inc. 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 February 14, 1997, with respect to the consolidated financial statements incorporated herein by reference. Ernst & Young LLP Columbus, Ohio March 27, 1997 EX-23.2 4 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-16971 of Karrington Health, Inc. on Form S-8 of our report on Karrington Operating Company (a partnership) dated January 24, 1995, appearing in the Annual Report on Form 10-K of Karrington Health, Inc. for the year ended December 31, 1996. DELOITTE & TOUCHE LLP Columbus, Ohio March 27, 1997 EX-24.1 5 EXHIBIT 24.1 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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, President and Chief Executive Officer EX-24.2 6 EXHIBIT 24.2 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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/ ALAN B. SATTERWHITE -------------------------- Alan B. Satterwhite Chief Operating Officer, Chief Financial Officer and Director EX-24.3 7 EXHIBIT 24.3 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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 EX-24.4 8 EXHIBIT 24.4 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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 EX-24.5 9 EXHIBIT 24.5 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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 EX-24.6 10 EXHIBIT 24.6 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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 EX-24.7 11 EXHIBIT 24.7 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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 EX-24.8 12 EXHIBIT 24.8 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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 EX-24.9 13 EXHIBIT 24.9 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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 EX-24.10 14 EXHIBIT 24.10 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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 EX-24.11 15 EXHIBIT 24.11 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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 EX-24.12 16 EXHIBIT 24.12 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 Alan B. Satterwhite, 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, 1996 (the "1996 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1996 Form 10-K and any and all amendments to such 1996 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 EX-27.1 17 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE KARRINGTON HEALTH, INC. ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 12,283,185 0 784,208 0 0 13,237,647 54,180,700 2,168,952 69,549,941 5,431,303 0 0 0 31,984,712 (1,307,766) 69,549,941 0 9,595,562 0 6,574,958 4,158,944 0 801,496 (1,939,836) 683,000 (2,622,836) 0 0 0 (2,622,836) (.48) (.48)
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