-----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, RMuFXW4ycnrEL3e2WJFs1I7IMntMhWXjPXXOVEUiBQ1sCqka1XwwQBEX9jjqWFxK sAE+dRsOZP7PH1nFnz5aWQ== 0001047469-98-012779.txt : 19980401 0001047469-98-012779.hdr.sgml : 19980401 ACCESSION NUMBER: 0001047469-98-012779 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 001-11795 FILM NUMBER: 98581046 BUSINESS ADDRESS: STREET 1: 919 OLD HENDERSON RD CITY: COLUMBUS STATE: OH ZIP: 43220 BUSINESS PHONE: 6144515151 MAIL ADDRESS: STREET 1: 919 OLD HENDERSON RD 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ______ to ______. Commission file number 0-28656 KARRINGTON HEALTH, INC. (Exact name of registrant as specified in its charter) OHIO 31-1461482 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 919 OLD HENDERSON ROAD COLUMBUS, OH 43220 (614) 451-5151 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: [X] Shares of registrant's common shares, without par value, outstanding at March 13,1998 was 6,837,363. As of March 13, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant was $45,887,000. Documents Incorporated By Reference The information required by Part I, Item 2 and Part II, Items 5(a), 6, 7 and 8, of Form 10K is incorporated herein by reference to the registrant's Annual Report to Shareholders for the year ended December 31, 1997. The information required by Part III of Form 10K is incorporated herein by reference to the registrant's definitive Proxy Statement relating to its 1998 Annual Meeting of Stockholders to be held on May 12, 1998. - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- 1 PART I ITEM 1. BUSINESS The Company develops, owns and operates licensed assisted living residences. Assisted living residences provide housing and care for elderly or frail individuals who, although generally ambulatory, need assistance with one or more activities of daily living, such as bathing, grooming, dressing, eating or personal hygiene. In 1990, Richard R. Slager, the Company's Chief Executive Officer, and the Company's former Chief Operating Officer and Chief Financial Officer, formed DevelopMed Associates, Inc., an Ohio corporation ("DMA"), for the purpose of developing an assisted living residence business. In 1991, DMA entered into a strategic alliance with JMAC, Inc. ("JMAC"), an investment company owned by John H. McConnell and John P. McConnell, the founder and the Chairman, respectively, of Worthington Industries, Inc., pursuant to which alliance DMA and JMAC Properties, Inc., an Ohio corporation ("JMAC Properties"), which is a wholly-owned subsidiary of JMAC, formed the Company's predecessor, Karrington Operating Company, an Ohio general partnership ("Karrington Operating"). Prior to the consummation of the reorganization transactions (as described below), JMAC Properties owned a two-thirds equity interest in Karrington Operating, and DMA owned a one-third equity interest. Immediately prior to the Company's initial public offering in July 1996, JMAC transferred to the Company all of its shares of JMAC Properties in exchange for two-thirds of the pre-offering outstanding common shares of the Company and the shareholders of DMA transferred all of their shares of DMA to the Company in exchange for one-third of the pre-offering outstanding common shares of the Company. As of March 23, 1998, the Company has developed 46 residences in its target markets, 32 of which are open and 14 of which are under construction and scheduled to open in 1998. These 46 residences are located in Ohio, Pennsylvania, Illinois, Minnesota, North Dakota, Iowa, Indiana, Colorado, North Carolina, Michigan and New Mexico. As part of its nationwide expansion strategy, the Company has sites for an additional 20 residences under contract in these states, as well as in Alabama, Mississippi, Texas, Nebraska, Washington, California and Tennessee. Recognizing that not all seniors share the same acuity at various income levels, Karrington has created three standard models of residence, an evolution of the Company's original prototype mansion-style residence. While standardization to the three models will enable the Company to get its product to market faster, Karrington's commitment to its residents remains intact. Along with creating three standard models, the Company has branded, or named, its residential products to help build Karrington's national identity. Karrington's original mansion-style residence, now known as K1 or the Karrington model, was upgraded and enhanced in 1997. Located in established upper-income communities, the K1 is a 72-unit model that replaces the original 53-unit prototype. Karrington Place, or K2, is the Company's one-story, small-town solution to high-quality assisted living. Karrington Place offers residents of smaller and rural communities access to the skilled and caring professionals, unique products and services, and dignified environments that enable Karrington residents to age-in-place gracefully. The Company's third residential model is the outgrowth of Karrington's May 1997 acquisition of Kensington Management Group, Inc. of Golden Valley, Minnesota. Operating innovative Alzheimer's care communities, now known as Karrington Cottages or KC, the Company provides residential Alzheimer's care and other programs under the medical direction of geriatric and dementia specialists. The early 1998 completion of a nine-Cottage campus in Rochester, Minnesota will further Karrington's relationship with geriatric physicians of the world-famous Mayo Clinic. The Company expects to develop future Karrington Cottages in conjunction with other regional health care systems throughout the Midwest. With the addition of Karrington Cottages to the Company's product mix, management plans to broaden the way high-acuity care and assisted living in general are viewed by the health care industry and the public. Residential care for persons with Alzheimer's Disease and other forms of dementia will continue to be the focus of Karrington Cottages. In addition, some 2 residential Cottages on each campus will be devoted to other physical and cognitive conditions, based on the needs or specialties of the regional health care providers associated with Karrington. Karrington residences typically are staffed with licensed nurses on a 24-hour basis and are designed to permit residents to "age in place" within the residence as they develop further physical or cognitive frailties. The Company believes that it is able to care for individuals with higher acuity levels (i.e., those needing greater assistance with activities of daily living) than is typical in the assisted living industry. In addition to its own development activities, the Company has entered into joint development relationships with health care providers, including Sisters of Charity Health Care Systems, Inc. ("SCHCS"), a not-for-profit corporation of which the sole member is Catholic Health Initiatives ("CHI"). CHI is a large, not-for-profit health organization formed by the recent consolidation of Catholic Health Corporation, SCHCS and Franciscan Health Systems. CHI operates 67 hospitals and 48 long-term care facilities in 22 states and has revenues of $4.7 billion. The Company and CHI currently intend to develop and operate assisted living residences with CHI's health care system. See "Relationship with CHI." THE ASSISTED LIVING INDUSTRY The assisted living industry has developed over the past decade to provide a cost-effective residential alternative for elderly individuals who do not require the intensive medical attention provided by a skilled nursing facility but who cannot, or choose not to, live independently due to physical frailty or cognitive disorders. It is estimated that the assisted living industry has annual revenues of $15 billion. Assisted living represents a combination of housing and 24-hour a day personal support services designed to aid elderly residents with activities of daily living, such as bathing, grooming, dressing, eating and personal hygiene. Assisted living residences provide assistance to residents with limited medical needs and may provide higher levels of personal assistance for special need residents, such as incontinent residents or residents with Alzheimer's disease or other forms of cognitive disorders. The assisted living industry is fragmented and, to date, is characterized by many small operators. The scope of assisted living services varies substantially among operators, ranging from basic "board and care" services to full service assisted living residences such as those operated by the Company. Many smaller assisted living providers do not operate in residences designed specifically for assisted living, do not have professionally trained staffs and may provide only limited assistance with low-level care activities. The Company believes there are few assisted living operators in its markets who provide the same comprehensive range of assisted living services, such as Alzheimer's care and other special care programs, as the Company. The Company believes that the following factors should continue to positively affect the assisted living industry: CONSUMER PREFERENCES. The Company believes assisted living is increasingly the alternative preferred by prospective residents and their families in providing care for the frail elderly. Assisted living residents have greater independence, and assisted living services allow them to "age in place" in a residential setting. The Company believes these factors result in a higher quality of life than that experienced in the more institutional or clinical settings, such as skilled nursing facilities. POSITIVE DEMOGRAPHIC CHANGES. According to the U.S. Bureau of Census, the number of individuals in the United States 85 years and older is expected to increase by approximately 43% during the 1990s, from 3.0 million in 1990 to an estimated 4.3 million in 2000, as compared to total U.S. population growth of approximately 11% during the same period. It is further estimated that approximately 57% of the population of seniors over age 85 currently need assistance with activities of daily living and that more than one-half of seniors are likely to develop Alzheimer's disease or other cognitive disorders by age 85. ASSISTED LIVING DEMAND EXCEEDS SUPPLY. The supply of long-term care beds per 1,000 individuals 85 years of age and older declined from 686 beds per thousand to 604 beds per thousand between 1980 and 1991, according to the U.S. Bureau of Census, and the Company expects this trend to continue. The Company believes this decline is attributable to several factors. The majority of states in the United States have adopted certificate of need ("CON") or similar statutes which generally require that, prior to the addition of new beds, the addition of new services or the making of certain capital expenditures, a state agency must determine that a need exists for the new beds or the proposed activities. The Company believes that this CON process tends to restrict the supply and availability of licensed nursing facility beds. High construction costs, limitations on government reimbursement for the full costs of construction and start-up expenses also act to constrain growth in the supply of such facilities and beds. At the same time, nursing facility operators are focusing on patients requiring higher levels of nursing care 3 which results in fewer nursing beds being available to patients with lower acuity levels. COST ADVANTAGES. The Company believes that the assisted living industry can provide comparable services for significantly less than the cost of such services to private pay residents in nursing facilities. The Company's market research indicates that the Company provides services at a cost of 25% to 35% less than the cost of comparable services provided by private intermediate care nursing facilities in the same market. CHANGES IN FAMILY COMPOSITION. As a result of the increasing number of two-income families, the high divorce rate and the number of single-parent households, as well as the increasing geographic dispersion of families, many adult children are not available to care in their own homes for elderly parents. Two-income families are, however, often better able to provide financial support for elderly parents. COST CONTAINMENT PRESSURES. Responding to rising health care costs, governmental and private pay or sources have adopted cost containment measures that have encouraged reduced lengths of stay in hospitals. A result of this trend is an increase in the number of individuals receiving nursing facility care as compared to hospitalization. That, in turn, causes nursing facility operators to focus on improving occupancy and increasing services to residents requiring high levels of nursing care. As the level of care for nursing facility residents rises and the supply of nursing facility space is filled by residents having more acute needs, the Company believes that there will be greater demand for assisted living residences to provide for residents requiring less nursing care than generally will be provided to residents in nursing facilities. STRATEGY The principal components of the Company's strategy are to: DEVELOP KARRINGTON MODEL RESIDENCES IN CURRENTLY-SERVED AND NEW COMMUNITIES. The Company's plans call for rapid development of the Karrington models in the communities it currently serves, as well as expansion into additional communities. The Company targets middle-to upper-income metropolitan markets which have well-established populations of persons 75 years of age and older. This development activity, in conjunction with the Company's relationship with CHI, is intended to result in regional concentrations of assisted living residences. The Company's ultimate objective is to develop a nationwide network of assisted living residences which will be utilized by managed care companies. EXPAND JOINT DEVELOPMENT RELATIONSHIPS WITH MAJOR HEALTH CARE SYSTEMS ACROSS THE UNITED STATES. The Company believes that it will continue to benefit from its relationship with major health care systems, including CHI, pursuant to which the Company expects to develop and operate, and jointly own assisted living residences in communities where these providers or their affiliates have a major presence as a health care provider. In addition, the Company believes its relationship with CHI provides a significant source of referrals and the opportunity to leverage the Company's expertise by developing similar relationships with other large, primarily not-for-profit, health care systems throughout the country. CONTINUE ITS FOCUS ON PROVIDING A BROAD RANGE OF SERVICES TO HIGHER-ACUITY RESIDENTS. The Company believes it provides a higher acuity level of care to its residents than is typically available at assisted living facilities, including care for individuals with Alzheimer's disease and other cognitive disorders. The Company is able to provide these services by building its residences to higher standards and specifications, hiring licensed professionals, providing advanced training to its staff and complying with relevant regulations. In addition to providing care to residents with more complex medical conditions, the Company seeks to offer a broad range of services to meet the varied needs of all of its residents. In the future, these services are expected to include physical, occupational, speech and other rehabilitation therapy programs and other resident services. By providing a higher level of care and a broader spectrum of services, the Company is able to allow its residents to "age in place." The Company also is able to provide these services at rates which are substantially less than the cost of similar services provided by nursing care facilities. RELATIONSHIP WITH CHI In addition to its own residence development activities, the Company and Catholic Health Initiatives have entered into five joint venture agreements to develop, own and operate six assisted living residences, all of which are open at the end of 1997. The genesis of the CHI relationship was the joint development by the Company and SCHCS of Karrington of Oakwood, a 53-unit assisted living residence located in the Dayton, Ohio area which opened in November 1994. Following the success of the Karrington of Oakwood residence, the Company and CHI determined to expand their relationship and in 1995, entered into 4 a letter of intent relating to the joint development of six additional projects over a three-year period. The first of the six projects consists of a 61-unit assisted living residence and an adjacent 28-unit Alzheimer's and cognitive disorder residence located in Albuquerque, New Mexico, which opened in October 1996. Three additional residences located in Cincinnati and Dayton, Ohio and Colorado Springs, Colorado opened in 1997. Each project is owned jointly by the Company and CHI, with CHI typically owning approximately 80% of the equity of the project. Construction and permanent debt financing generally is arranged by CHI on behalf of the venture and is non-recourse to the Company. The Company provides all development and management services with respect to each residence under a standard agreement that generally provides for a development fee of $250,000 and a management fee of 5% of revenues. SERVICES AND OPERATIONS SERVICES PROVIDED Seventy-five percent of Karrington residents are females and the average age of all residents is 83. Most Karrington residents have some disability associated with aging, such as dementia, Alzheimer's disease, arthritis, nutritional problems, incontinence, strokes or other disorders, and need assistance with two or more activities of daily living. Residents needs generally fall into one or more of the following categories: (i) requiring physical support or assistance with activities of daily living; (ii) requiring assistance, reminders and cuing due to some cognitive impairment; and (iii) requiring socialization and interaction with others. Residents generally pay a daily suite rental rate under a resident agreement which is renewable annually and cancelable with 30 days notice. The daily suite rental rate ranges from $34 to $137 per day, depending on unit size, location, number of occupants and level of care required. Approximately 70% of Karrington's residents live in private suites. While the Company's average basic daily suite rental rate is approximately $85, the wide range of rates offered by the Company allows the Company to accommodate persons of varying financial resources. Medication administration and various levels of extended care services, which depend on the degree of frailty, add to the basic care rate. Additional charges may be incurred for other services such as hair care and special diets. Currently, approximately 93% of all resident revenues are from private pay sources. The Company's basic care program is provided to all residents at no additional cost and includes: assistance with daily living, such as eating, bathing, grooming, dressing and personal hygiene; three meals per day served in a common dining room; 24-hour security; emergency call systems in each unit and living area; transportation to offices, stores and community services; assistance with arranging outside services such as physician care, various therapy programs and other medical services; personal laundry services; housekeeping services; and social and recreational activities. In addition to the basic care program, residents may be included in the extended care program, which assists residents who require more frequent or more intensive assistance or care. Prior to entering a Karrington residence, and periodically during their stay, individuals' needs are assessed to determine the level of extended care services required, and an individual care plan is designed. The Company's experience is that approximately 90% of its residents require some extended care services or require medication administration. The Company's Alzheimer's and other cognitive disorder programs are provided in each prototype residence on a designated "special care" floor or wing. The Company also develops residences designed specifically for Alzheimer's disease care. Trained staff provide special care programs for cognitively impaired residents, and each is charged additional daily fees for this added support. Programs include added assistance, stimulation, special activities, intervention and therapeutic programs that are developed and supported by physicians specializing in dementia care that consult with the Company. STAFFING Each residence has an Administrator and a seven-person management team. This management team includes the Resident Care Director (who supervises all resident support staff and care plans), a Registered Nurse/Wellness Director (responsible for all wellness programs, as well as medication programs), the Director of Administration (responsible for general administrative duties) and the Marketing Director. The Activities Director, Chef and Environmental Services Director complete the management team. Residence management teams report to a Regional Director responsible for the operation of several residences. Regional directors provide support, oversight and mentoring to each residence's staff. 5 Staffing models are used to determine appropriate personnel levels. Screening is used to help select staff with "care providing" characteristics. For each residence, services are typically provided by a staff of approximately 28 full-time equivalents. The largest staff component is "Resident Assistants," who include licensed practical nurses and other trained staff members who are responsible for administering services to residents. The Company maintains competitive compensation programs, including incentives and quarterly profit sharing, which it believes help attract and retain excellent employees. The Company believes that the combination of proper interviewing, selection methods and review, training and appropriate incentives significantly reduces hiring and retraining costs and allows for a more stable, long-term work force. All employees participate in a recruitment and development program called the Predictive Index-Registered Trademark-, a third-party program which is focused on determining key criteria and personal attributes which the Company believes are important to the proper placement of staff and management. TRAINING AND QUALITY ASSURANCE The Company provides its personnel with an extensive and innovative training program. This training covers all aspects of Karrington's operation. At the end of a 90-day probationary period, each new employee is evaluated for permanent placement. Additionally, the Company has an extensive administrator-in-training ("AIT") program which provides classroom and on-the-job training to develop future Karrington administrators. The Company believes investment in the AIT program is vital to its continued growth, quality control and consistency of service delivery. The Company has structured a comprehensive quality assurance ("QA") program intended to maintain standards of care established for each residence. Under the Company's QA program, the care and services provided at each residence are monitored by the professional services staff which reports directly to the Company's senior management. The QA team works with residence management teams to assure that all staff members are trained, that clinical policies and procedures are followed, and that all state and federal standards are met while achieving the stringent requirements of the Company. The Company's QA program helps support compliance with federal and state regulations and requirements for licensing. Karrington has also developed a Quality of Service program which includes periodic surveys and follow-up with all current and former residents and responsible parties. DEVELOPMENT The Company's development personnel research and identify potential markets, primarily in major metropolitan areas and their surrounding suburban communities, and select sites for development within such markets. In evaluating a market, the Company considers a number of factors, including population, income and age demographics, traffic count, site visibility, residential and commercial characteristics, probability of obtaining zoning approvals, proximity of various competitors, estimated market demand and the potential to achieve economies of scale in a specific market by concentration of its development and operating activities. The principal stages in the development process are (i) strategic market selection and assessment (ii) site selection and contract signing, (iii) zoning and site plan approval, (iv) architectural planning and design, (v) contractor selection and (vi) construction and licensure. Once a market has been identified, site selection and contract signing typically take three months. Zoning and site plan approval generally take three to nine months and are typically the most difficult step in the development process as a result of the Company's selection of sites in established communities which frequently require site rezoning. Architectural planning and design and contractor selection often occur during the zoning process but can prolong the start of construction. Residence construction generally takes 12 months. After a residence receives a certificate of occupancy and appropriate licenses, residents usually begin to move in immediately. The Company's experience indicates that new residences typically reach a stable level of occupancy of over 90% within 12 months, but there can be no assurance that these results will be achieved in new markets. The Company estimates that total capitalized cost to develop, construct and open a K1 or K2 Karrington model residence, including land acquisition and construction costs, ranges from approximately $5.0 million to $11.0 million, an average cost per unit of approximately $110,000. The cost of any particular residence may vary considerably based on a variety of site-specific factors. The Company's development activities are coordinated by its 18-person development staff, which has extensive real estate acquisition, design, engineering, zoning, general construction and project management experience. Architectural design and hands-on construction functions are usually contracted to experienced outside architects and contractors. 6 The Company's construction strategies include the development of national purchasing contracts for major building components and the retention of several regional contractors engaged to construct its residences. The Company believes these approaches will help reduce construction costs or mitigate the rate of cost increases due to inflation, increase product quality, and shorten construction periods that result from increased familiarity with the architectural, engineering and construction design of the Company's prototype residences. ARCHITECTURAL DESIGNS The K1 or Karrington model residence is a freestanding, mansion-style building with a designed capacity of 75 to 85 residents in any of a variety of exterior styles. The K1 prototype averages 72 units and approximately 50,000 square feet and is generally built on a 2.5 to 4 acre site. The K2 or Karrington Place model residence averages 48 units with a designed capacity of 61 residences. The KC or Karrington Cottage prototype model is 20 units with 36 beds. Approximately 45-50% of the buildings are devoted to common areas and amenities. The Company's three basic building plan designs provide it with flexibility in adapting the model to a particular site and local zoning requirements. The building is usually two or three stories of concrete and steel frame construction built to institutional health care standards but residential in appearance. The interior design promotes a home-like environment while permitting the effective provision of resident care programs and promoting resident independence. The individual resident suites are clustered on each floor to resemble a neighborhood, with a variety of suite floor plans of one or two rooms and varying square footage. Each floor has a quiet area resembling a library or den and an active area designed to support activity programs and interaction among residents, staff and families. The main floor usually includes the main dining room, private dining rooms, administrative offices, a library, a living or family room, an ice cream parlor and a year-round sun porch. Also included are public restrooms, outside porches, a foyer and a formal entryway with grand staircase and central elevator. On other floors in each residence are located a resident laundry room, a wellness center, a bathing spa area, employee break rooms, a beauty salon and activity areas. The special care floor also includes a separate resident kitchen and dining area. Recently, the Company opened its third stand-alone Alzheimer's care residence in Columbus, Ohio designed specifically for residents with Alzheimer's disease. The Karrington Cottage or KC model residences are constructed using a special design concept intended to provide the atmosphere and physical environment believed by the Company to be most effective in assisting residents in the later stages of Alzheimer's disease. The Company intends to develop additional KC models in many of the markets it enters. The architectural and interior design of the Karrington prototypes incorporate Karrington's philosophy of dedication to excellence in preserving and enhancing personal dignity, independence, individuality and quality of life. The Company believes that its residential environments accomplish other objectives as well, including: (i) lowering the stress and disruption of the resident and their family that occurs because of a move; (ii) providing a secure environment that is easily traveled by residents with a wide variety of ambulation disabilities; (iii) making available a comfortable home-like environment that welcomes visitation by family and friends; and (iv) supporting the Company's special activities programs that promote inter-generational activities and events to bring together elderly residents with younger persons in the community. MARKETING The Company's marketing approach emphasizes consumer education and awareness directed to potential residents and family members. The adult children of residents tend to be significant decision-makers in the selection of the assisted living option. Other significant referral sources include hospital discharge planners, physicians, churches, social service agencies focused on the elderly, nursing facilities in the area, home health agencies, social workers, legal advisors, other health care providers and families of existing residents. Telephone directory advertising, media products and informal "networking" are directed by the Company toward educating decision-makers and other referral sources in a community. The marketing personnel in the Company's corporate office develop the overall strategy in each market as well as media materials, databases, direct mail, signage and community outreach activities. Each residence has a marketing director responsible for generating and following-up leads, coordinating referral activities and providing tours, counseling and caregiving advice for potential residents and their families with respect to the Company's residences and services. 7 Marketing activities begin during the development stage of a residence, after the Company has obtained site control, and continue with increased emphasis when an information center opens for a specific residence approximately six to nine months prior to opening. REGULATION The Company's assisted living residences are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities, which requirements vary from state to state. These requirements address, among other things: personnel education, training and records; facility services, including administration of medication and limited nursing services; physical plant specifications; furnishing of residents' units; food and housekeeping services; emergency evacuation plans; and residents' rights and responsibilities. In several states in which the Company operates or intends to operate, assisted living residences also require a certificate of need before the residences can be opened. In most states, assisted living residences are subject to state or local fire and building codes and food service licensure requirements. Like other health care residences, assisted living residences are subject to periodic survey or inspection by governmental authorities. From time to time in the ordinary course of business, the Company receives survey reports. The Company reviews such reports and takes appropriate corrective action if deficiencies are noted. Inspection deficiencies are resolved through a plan of correction, although the reviewing agency typically is authorized to take action against a licensed facility where deficiencies are noted in the survey process. Such action may include imposition of fines, imposition of a provisional or conditional license or suspension or revocation of a license or other sanctions. Health care is an area of extensive and frequent regulatory change. The assisted living model for long-term care is relatively new, and, accordingly, the manner and extent to which it is regulated at the federal and state levels is evolving. Changes in the laws or new interpretations of existing laws may have a significant effect on methods and costs of doing business. The Company is actively involved in monitoring regulatory and legislative changes affecting the assisted living industry and participates with industry organizations to encourage improvements to existing laws and regulations. The success of the Company will depend in part upon its ability to satisfy applicable regulations and requirements and to procure and maintain required licenses as the regulatory environment for assisted living evolves. The Company's operations could also be adversely affected by, among other things, future regulatory developments such as mandatory increases in the scope and quality of care to be offered to residents and revisions to licensing and certification standards. The Company currently is not a Medicare provider. Under some state licensure laws, and for the convenience of its residents, some of the Company's assisted living residences maintain contracts with certain health care providers and practitioners, including pharmacies, visiting nurses, social service and home health organizations, through which health care providers make their health care products or services available to residents. Some of the services furnished by these contract parties may be covered by the Medicare programs. COMPETITION The long-term care industry is highly competitive. The Company believes the assisted living sector of long-term care, in which it operates, will become even more competitive in the future. The Company competes with numerous other companies providing similar long-term care alternatives such as home health care agencies, community-based service programs, retirement communities and convalescent centers, and other assisted living providers. The Company expects that, as the providers of assisted living services receive increased attention and the number of states providing reimbursement for assisted living rises, competition will intensify as a result of new market entrants. The Company also competes with skilled nursing facilities that provide long-term care services. In implementing its growth strategy the Company expects increased competition in its efforts to develop, construct and operate assisted living communities. Some of the Company's present and potential competitors are significantly larger and have, or may obtain, greater financial resources than those of the Company. PROPRIETARY INFORMATION The Company is the registered owner of the service mark "Karrington Communities-Registered Trademark-." The Company believes this mark is of material importance to its business. 8 EMPLOYEES As of March 13, 1998, the Company had approximately 1,300 employees, including approximately 275 employed by the Company's joint ventures. None of the Company's employees are represented by a union or covered by a collective bargaining agreement. The Company has experienced no work stoppages and considers its relationship with its employees to be good. ITEM 2. PROPERTIES Information required by this Item 2 is contained on page 32 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 and is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS There are no pending material legal proceedings involving the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter to a vote of its security holders during the fourth quarter of its fiscal year ended December 31, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Information required by the first sentence of Item 5(a) is contained on page 30 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 and is incorporated herein by reference. The remaining portion of Item 5(a) and Item 5(b) are not applicable. ITEM 6. SELECTED FINANCIAL DATA Information required by this Item 6 is contained on page 29 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this Item 7 is contained on pages 14 through 16 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and Report of Independent Auditors required by this Item 8 are set forth as indicated in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item 10 is contained under the captions "Election of Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement relating to its 1998 annual meeting of Shareholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item 11 is contained under the captions "Executive Compensation" and "Election of Directors - Compensation of Directors" in the Company's definitive Proxy Statement relating to its 1998 annual meeting of Shareholders and is incorporated herein by reference. Neither the report of the Compensation Committee of the Registrant's Board of Directors on executive compensation nor the performance graph included in the Registrant's definitive Proxy Statement relating to the annual meeting of Shareholders shall be deemed to be incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item 12 is contained under the caption "Beneficial Ownership of Company Securities" in the Company's definitive Proxy Statement relating to its 1998 annual meeting of Shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item 13 is contained under the caption "Certain Relationships and Related Party Transactions" in the Company's definitive Proxy Statement relating to its 1998 annual meeting of Shareholders and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1)&(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES See index to financial statements and financial statement schedules at page F-1. (3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION REFERENCE - -------------- ----------- --------- 2.1 Stock Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Kensington Cottages Corporation of Minnesota and the individual shareholders of Kensington Cottages Corporation of Minnesota. (2) 2.2 Agreement and Plan of Merger dated April 24, 1997 by and among Karrington Health, Inc., Kensington Mergeco, Inc., Kensington Management Group, Inc. and Jon D. Rappaport. (2)
10
EXHIBIT NUMBER DESCRIPTION REFERENCE - -------------- ----------- --------- 2.3 Asset Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Buffalo Hills Residence and Jon D. Rappaport. (2) 2.4 Asset Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Centex-Kensington (Mankato I) Partnership, Centex Senior Services Corporation, Centex Life Solutions, Inc., Kensington Cottages Corporation of Mankato and Jon D. Rappaport. (2) 2.5 Asset Purchase agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Kensington Cottages Corporation of North Dakota and the individual shareholders of Kensington Cottages Corporation of North Dakota. (2) 2.6 Asset Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Kensington Cottages Corporation of Rochester and Jon D. Rappaport. (2) 2.7 Asset Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Kensington Cottages Corporation of Iowa and the individual shareholders of Kensington Cottages Corporation of Iowa. (2) 2.8 Asset Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Bismarck Investors, Kensington Living Centers, Inc. and Jon D. Rappaport. (2) 3.1 Form of Amended Articles of Incorporation of the Company (1) 3.2 Form of Code of Regulations of the Company (1) 10.1 1996 Incentive Stock Plan * (1) 10.4 Registration Rights Agreement dated May 8, 1996, by and among the Company and the Investors (as defined therein) (1) 10.5 Reorganization Agreement dated May 8, 1996, by and among the Company and the Investors (as defined therein) (1) 10.6 Letter of Intent Dated April 29, 1996, by and between the Company and Sisters of Charity Health Care Systems, Inc. (1) 13 Annual Report to Shareholders (3) 21 Subsidiaries of the Registrant (3) 23.1 Consent of Ernst & Young LLP (3) 24.1 Power of Attorney - Richard R. Slager (3) 24.2 Power of Attorney - Pete A. Klisares (3) 24.3 Power of Attorney - Thomas J. Klimback (3) 24.4 Power of Attorney - Mark N. Mace (3) 24.5 Power of Attorney - Charles S. McCreary (3) 24.6 Power of Attorney - John S. Christie (3) 24.7 Power of Attorney - Bernadine P. Healy (3) 24.8 Power of Attorney - David H. Hoag (3) 24.9 Power of Attorney - John H. McConnell (3) 24.10 Power of Attorney - James V. Pickett (3)
11
EXHIBIT NUMBER DESCRIPTION REFERENCE - -------------- ----------- --------- 24.11 Power of Attorney - Harold A. Poling (3) 24.12 Power of Attorney - Michael H. Thomas (3) 24.13 Power of Attorney - Robert D. Walter (3) 27 Financial Data Schedule (4) (3)
- --------------- (1) Included as an exhibit by the same number in the Company's Registration Statement on Form S-1 (File No. 333-03491) and incorporated herein by reference. (2) Included as an exhibit by the same number in the Company's Form 8-K/A filed on May 21, 1997 and incorporated herein by reference. (3) Filed herewith. (4) No restated Financial Data Schedules are required to be filed. * Management contract or compensatory plan or arrangement. (b) REPORTS ON FORM 8-K The Company's current report on Form 8-K filed with the Securities and Exchange Commission on May 15, 1997 (as amended May 21, 1997 and July 14, 1997) reported under Item 2, Acquisition or Disposition of Assets, the acquisition of Kensington Management Group, Inc. and affiliated entities ("Kensington"), including audited financial statements of Kensington for the years ended December 31, 1996 and 1995 and the unaudited financial statements for the three month period ended March 31, 1997 and proforma financial information. (c) EXHIBITS Exhibits filed with this Annual Report on Form 10-K are attached hereto. For a list of such exhibits, see Item 14(a)(3). (d) FINANCIAL STATEMENT SCHEDULES Financial statement schedules filed with this Annual Report on Form 10-K are attached hereto. For a list of such schedules, see Item 14(a)(2). 12 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Karrington Health, Inc. By: /s/ RICHARD R. SLAGER ---------------------- Richard R. Slager Chairman of the Board Date: March 31, 1998 Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RICHARD R. SLAGER Chairman of the Board and March 31, 1998 - ------------------------------- Chief Executive Officer (Principal Executive Officer) Richard R. Slager /s/ PETE A. KLISARES President, Chief Operating Officer and Director March 31, 1998 - ------------------------------- Pete A. Klisares /s/ THOMAS J. KLIMBACK Executive Vice President, Chief Financial Officer March 31, 1998 - ------------------------------- (Principal Financial Officer) Thomas J. Klimback /s/ MARK N. MACE Senior Vice President, Finance and Treasurer March 31, 1998 - ------------------------------- (Principal Accounting Officer) Mark N. Mace /s/ CHARLES H. MCCREARY Secretary and Director March 31, 1998 - ------------------------------- Charles H. McCreary /s/ JOHN S. CHRISTIE Director March 31, 1998 - ------------------------------- John S. Christie /s/ BERNADINE P. HEALY, M.D. Director March 31, 1998 - ------------------------------- Bernadine P. Healy, M.D. /s/ DAVID H. HOAG Director March 31, 1998 - ------------------------------- David H. Hoag /s/ JOHN H. MCCONNELL Director March 31, 1998 - ------------------------------- John H. McConnell /s/ JAMES V. PICKETT Director March 31, 1998 - ------------------------------- James V. Pickett /s/ HAROLD A. POLING Director March 31, 1998 - ------------------------------- Harold A. Poling /s/ MICHAEL H. THOMAS Director March 31, 1998 - ------------------------------- Michael H. Thomas /s/ ROBERT D. WALTER Director March 31, 1998 - ------------------------------- Robert D. Walter
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 PAGE(S) IN 1997 in this Annual Report on Form 10-K ANNUAL REPORT TO for the year ended December 31, 1997 SHAREHOLDERS ---------------- Report of Independent Auditors 17 Consolidated Balance Sheets 18 Consolidated Statements of Operations 19 Consolidated Statements of Equity 20 Consolidated Statements of Cash Flows 21 Notes to Consolidated Financial Statements 22-28
2. FINANCIAL STATEMENT SCHEDULES
PAGE ---------------- Schedule II - Valuation and Qualifying Accounts F-2
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. F-1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------ DESCRIPTION BALANCE AT ADDITIONS DEDUCTIONS - BALANCE AT BEGINNING ------------------------ DESCRIBE END OF PERIOD (1) (2) OF PERIOD CHARGED TO CHARGED TO COSTS AND OTHER EXPENSES ACCOUNTS - DESCRIBE - ------------------------------------------------------------------------------------------ Reserve for Terminated Projects - ------------------- Year Ended - ------------------- December 31, 1997 $ 0 1,191,909 - (1,161,909) (1) $ 30,000 --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- December 31, 1996 $ 0 - - - $ 0 --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- December 31, 1995 $ 0 - - - $ 0 --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
- --------------- (1) The deduction resulted from the Company's decision to abandon certain projects. At the time a project is abandoned, all previously capitalized costs are charged against the reserve. F-2 KARRINGTON HEALTH, INC. INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION REFERENCE - -------------- ----------- --------- 2.1 Stock Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Kensington Cottages Corporation of Minnesota and the individual shareholders of Kensington Cottages Corporation of Minnesota. (2) 2.2 Agreement and Plan of Merger dated April 24, 1997 by and among Karrington Health, Inc., Kensington Mergeco, Inc., Kensington Management Group, Inc. and Jon D. Rappaport. (2) 2.3 Asset Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Buffalo Hills Residence and Jon D. Rappaport. (2) 2.4 Asset Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Centex-Kensington (Mankato I) Partnership, Centex Senior Services Corporation, Centex Life Solutions, Inc., Kensington Cottages Corporation of Mankato and Jon D. Rappaport. (2) 2.5 Asset Purchase agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Kensington Cottages Corporation of North Dakota and the individual shareholders of Kensington Cottages Corporation of North Dakota. (2) 2.6 Asset Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Kensington Cottages Corporation of Rochester and Jon D. Rappaport. (2) 2.7 Asset Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Kensington Cottages Corporation of Iowa and the individual shareholders of Kensington Cottages Corporation of Iowa. (2) 2.8 Asset Purchase Agreement dated April 24, 1997 by and among Kensington Cottages Corporation of America, Karrington Health, Inc., Bismarck Investors, Kensington Living Centers, Inc. and Jon D. Rappaport. (2) 3.1 Form of Amended Articles of Incorporation of the Company (1) 3.2 Form of Code of Regulations of the Company (1) 10.1 1996 Incentive Stock Plan * (1) 10.4 Registration Rights Agreement dated May 8, 1996, by and among the Company and the Investors (as defined therein) (1) 10.5 Reorganization Agreement dated May 8, 1996, by and among the Company and the Investors (as defined therein) (1) 10.6 Letter of Intent Dated April 29, 1996, by and between the Company and Sisters of Charity Health Care Systems, Inc. (1) 13 Annual Report to Shareholders (3)
EXHIBIT NUMBER DESCRIPTION REFERENCE - -------------- ----------- --------- 21 Subsidiaries of the Registrant (3) 23.1 Consent of Ernst & Young LLP (3) 24.1 Power of Attorney - Richard R. Slager (3) 24.2 Power of Attorney - Pete A. Klisares (3) 24.3 Power of Attorney - Thomas J. Klimback (3) 24.4 Power of Attorney - Mark N. Mace (3) 24.5 Power of Attorney - Charles S. McCreary (3) 24.6 Power of Attorney - John S. Christie (3) 24.7 Power of Attorney - Bernadine P. Healy (3) 24.8 Power of Attorney - David H. Hoag (3) 24.9 Power of Attorney - John H. McConnell (3) 24.10 Power of Attorney - James V. Pickett (3) 24.11 Power of Attorney - Harold A. Poling (3) 24.12 Power of Attorney - Michael H. Thomas (3) 24.13 Power of Attorney - Robert D. Walter (3) 27 Financial Data Schedule (4) (3)
- --------------- (1) Included as an exhibit by the same number in the Company's Registration Statement on Form S-1 (File No. 333-03491) and incorporated herein by reference. (2) Included as an exhibit by the same number in the Company's Form 8-K/A filed on May 21, 1997 and incorporated herein by reference. (3) Filed herewith. (4) No restated Financial Data Schedules are required to be filed. * Management contract or compensatory plan or arrangement. EX-13 2 EXHIBIT 13 KARRINGTON KARRINGTON HEALTH INCORPORATED 1997 ANNUAL REPORT 1997 GROWING TO MEET THE NEEDS OF OUR RESIDENTS, ASSOCIATES AND SHAREHOLDERS [PHOTO: Female resident reading in a chair] FROM DAY ONE, SHE WATCHED OVER YOU WITH UNCONDITIONAL LOVE AND SUPPORT. NOW THAT SHE NEEDS SPECIAL CARE, TAKE COMFORT IN THE KNOWLEDGE THAT THE SKILLED PROFESSIONALS AT KARRINGTON WILL GIVE YOUR LOVED ONE THE INDIVIDUAL ATTENTION YOU YOURSELF WOULD PROVIDE. [PHOTO: Female resident with female caregiver on couch.] CORPORATE PROFILE Founded in 1989, Columbus, Ohio-based Karrington Health, Inc. develops, owns and operates private-pay assisted living residences for physically frail and cognitively impaired seniors, as well as individuals with Alzheimer's Disease and related disorders. Operating three standard residential models in targeted markets, Karrington provides high-quality, high-acuity programs and services for seniors -- full-time and day residents -- who need assistance with activities of daily living (ADLs), including eating, bathing, personal hygiene, dressing, grooming and walking. With the 1997 acquisition of Kensington Management Group, Inc., a multi-state operator of assisted living Alzheimer's care residences with ties to the Mayo Clinic, Karrington expanded its residence network and relationships with major health care systems. Karrington's network includes residences owned solely by the Company and strategic joint ventures with major health care systems, including Catholic Health Initiatives (CHI), a national, $4.7 billion, 67-hospital operation. At year-end 1997, Karrington had 27 residences open, with plans to nearly double the number of open residences by December 1998. As of March 23, 1998, the Company was well on its way to achieving that goal, with 32 residences open and 14 under construction. Since opening its first residence in 1992, Karrington has maintained a pattern of steady, system-wide revenue growth. In 1997, the Company generated $25 million from its network of Karrington-operated residences and joint ventures. That reflects a 107% increase over the $12 million posted in 1996, the year in which Karrington went public, raising $28.4 million from the sale of 2.4 million common shares. Part of what distinguishes Karrington from other assisted living providers is the Company's board of directors, recognized as among the industry's strongest. Outside directors include prominent business leaders and health care professionals such as Dr. Bernadine P. Healy, Dean of The Ohio State University Medical School and former director of the National Institutes of Health; David H. Hoag, Chairman and CEO of LTV Corp.; John H. McConnell, founder and Chairman Emeritus of Worthington Industries; James V. Pickett, Managing Director of Banc One Capital Corporation; Harold A. Poling, retired Chairman of Ford; and Robert D. Walter, Chairman and CEO of Cardinal Health. Committed to providing a supportive residential environment that enables residents to age-in-place, the Company's management and directors embody Karrington's Mission Statement: DEDICATED TO EXCELLENCE IN PRESERVING AND ENHANCING PERSONAL DIGNITY, INDIVIDUALITY, INDEPENDENCE AND QUALITY OF LIFE FOR OUR RESIDENTS AND EMPLOYEES WHILE MAXIMIZING SHAREHOLDER VALUE. FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, - -------------------------------------------------------------------------------- 1997 1996 1995 ----------- ---------- ----------- TOTAL REVENUES . . . . . . . . . . . $19,220,000 $9,596,000 $6,744,000 RESIDENCES (end of year)(1): Open . . . . . . . . . . . . . . . 27 9 5 Under construction . . . . . . . . 19 17 5 Under contract . . . . . . . . . . 20 10 8 NUMBER OF UNITS (end of year)(1): Open . . . . . . . . . . . . . . . 1,124 454 272 Under construction . . . . . . . . 1,019 1,010 243 Under contract . . . . . . . . . . 1,390 742 509 NUMBER OF BEDS (end of year)(1): Open . . . . . . . . . . . . . . . 1,371 534 316 Under construction . . . . . . . . 1,242 1,185 289 Under contract . . . . . . . . . . 1,612 861 583 AVERAGE OCCUPANCY PERCENTAGE(1) . . 91.3 % 94.3% 96.4 %
- -------------------------------------------------------------------------------- (1) Includes residences jointly-owned by the Company. Average occupancy percentage includes residences open for more than one year at the beginning of the year presented. [GRAPH: Karrington's total revenues for 1993, 1994, 1995, 1996 and 1997.]
TOTAL REVENUES* ($ THOUSANDS) 97 24,689 96 11,943 95 8,613 94 5,513 93 2,306
*INCLUDES JOINT VENTURES [GRAPH: Karrington's total assets for 1993, 1994, 1995, 1996 and 1997.]
TOTAL ASSETS ($ MILLIONS) 97 141,316 96 69,550 95 26,676 94 16,292 93 14,883
[GRAPH: Karrington's units open for 1993, 1994, 1995, 1996 and 1997.]
KARRINGTON HEALTH, INC. UNITS OPEN* 97 1,124 96 454 95 272 94 213 93 160
*INCLUDES JOINT VENTURES - -------------------------------------------------------------------------------- The forward-looking statements in this report are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These include without limitation licensing, permitting, construction delays, cost increases on new developments, business conditions, adverse changes in general economic conditions, meeting all closing requirements, including licensure, and the availability of financing for these developments. These and other risks are set forth in the reports filed by the Company with the Securities & Exchange Commission. - ---------------------------------------- - ---------------------------------------- CONTENTS LETTER FROM THE 2 CHAIRMAN - ---------------------------------------- GROWING TO MEET 4 THE NEEDS - ---------------------------------------- MANAGEMENT'S DISCUSSION 14 AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ---------------------------------------- MANAGEMENT'S STATEMENT 17 OF FINANCIAL RESPONSIBILITY - ---------------------------------------- REPORT OF INDEPENDENT 17 AUDITORS - ---------------------------------------- CONSOLIDATED 18 FINANCIAL REPORTS - ---------------------------------------- COMMON SHARE 30 INFORMATION - ---------------------------------------- SHAREHOLDER 30 INFORMATION - ---------------------------------------- DIRECTORS & OFFICERS 31 - ---------------------------------------- LISTING OF KARRINGTON 32 PROPERTIES - ---------------------------------------- KARRINGTON 33 MARKET AREAS - ---------------------------------------- 1 LETTER FROM THE CHAIRMAN - -------------------------------------------------------------------------------- [PHOTO: Richard R. Slager, Chairman and CEO] RICHARD R. SLAGER CHAIRMAN AND CEO For Karrington, 1997 was a year of tremendous growth and change. Tripling the number of Karrington homes in operation, we grew from nine open residences at year-end 1996 to 27 residences in operation at December 31, 1997, achieving record year-end revenues in the process. Not content to rest on our success, your Company ended the year with an additional 19 Karrington residences under construction and 20 sites under contract. By year-end 1998 we expect to nearly double the number of Karrington homes open and beds filled. The face of Karrington's management team changed significantly over the past 12 months, reflective of our evolution and growth. With the leadership of President Pete Klisares, who joined Karrington during the third quarter, we brought together a team of sophisticated, experienced business professionals charged with focusing on Karrington's managed growth and profitability. The financial acumen of newly appointed CFO Tom Klimback, coupled with the industry expertise of Executive Vice President of Operations John Knutson and the real estate and construction experience of Development Executive Vice President Robin Holderman helps position Karrington for continued growth within the rapidly expanding assisted living industry. System-wide revenues, including jointly owned residences, increased 107% to $24.7 million in 1997, from $11.9 million in 1996. Year-end 1997 revenues for Karrington-owned and operated residences rose 100% to $19.2 million from $9.6 million in 1996. Excluding unusual and one-time charges of $.20 per share in 1997 and $.17 per share in 1996, our 1997 net loss was $4.3 million, or $.63 per share, compared to a loss of $1.7 million, or $.31 per share in 1996. Per share results reflect losses consistent with multiple start-ups and our initial strategic commitment to own rather than lease properties. At year end, Karrington had investment-grade, short-term securities totaling $4.4 million; long-term debt of $97.5 million; and shareholders' equity of $26.5 million. Karrington's operating model, growth strategy and ownership philosophy remain consistent with our goal of delivering long-term sustainable value to our shareholders. Mindful that start-up losses will impact earnings negatively in our early years, we are evaluating financial structures designed to improve your Company's earnings' picture over the next several years, while we continue to take advantage of growth opportunities. Working with fewer, larger strategic financing partners assures us of meeting our capital needs well into the future. Abandoning one-off financing, which in the past placed a time-consuming burden on Karrington and hindered our growth, we now are in the process of identifying lenders who offer pools of debt and equity financing at more favorable rates, enabling us to develop multiple homes with fewer financial institutions. In addition, we are reviewing off-balance sheet financing vehicles with the potential for a positive impact on earnings. Off-balance-sheet financing would allow your Company to continue growing toward stabilization, with less of the first-year $.10 per share pre-tax start-up loss we now experience with the opening of each new home. We are working hard at this financing engineering option, knowing that it will significantly improve the immediate EPS picture for the Company as we continue our controlled growth plans. Reflective of your Company's continued growth, the year saw the opening of three new joint venture homes with Catholic Health Initiative (CHI), a $4.7 billion acute-care operator of more than 67 hospitals in 22 states. This brings to six the total number of open Karrington/CHI joint venture homes, with three more in various stages of development. 2 Five new homes are slated to open in the second quarter on our Karrington Cottage campus in Rochester, Minnesota. The success of that campus will continue to benefit greatly from the support and advice of Mayo Clinic physicians who are actively involved with the care plans and progress of the residents as well as education and training of staff. We will continue to pursue synergistic relationships with leading acute care providers, as we work to position your Company to benefit fully from health care reform and industry consolidation. On the Operating side, renown assisted living industry expert John Knutson celebrated his first full year at Karrington by enhancing our pace-setting quality assurance programs. Karrington's commitment to state-of-the-art quality assurance programs, expanded in 1997, results in regular deficiency-free reviews from state licensing authorities, as well as consistent praise from residents for our product and service delivery programs. Unsurpassed quality assurance helped improve operating income margin for stabilized residences to 35% in 1997 from 33% in 1996, excluding depreciation and amortization. Tripling our size over the past 12 months strained the personnel ranks at existing homes, as experienced staff members were called upon to fill positions in new residences, leaving some holes in the stable homes, which we believe we now have filled. As a result, we experienced a slight drop in stable home occupancies in late 1997. Enhanced and accelerated recruiting, marketing and training programs were instituted and have improved 1998 occupancy rates. The result: Today our homes are operating more efficiently and effectively than ever, and we expect occupancy of stable homes to reach and exceed projected levels for the year. Karrington's high-acuity, aging-in-place residential model results in a longer length of stay, with potential add-on revenues as the health care needs of aging residents increase. Revenues for stabilized residences increased 1% in 1997, a reflection of our ability to improve same-residence results by capturing incremental services' revenue through our aging-in-place approach to assisted living. In 1997 we implemented significant new revenue-generating programs, including Day Respite, Pharmacy and outreach of local services. These programs have received high marks from residents and families, and are expected to have a positive impact on our future census, community relationships and bottom line. At the same time, we discontinued the consulting and third-party management programs that were distracting from your Company's own rapid internal growth. To achieve our goal of bringing to market the highest quality product at the lowest possible cost, we sharpened our Construction and Development focus this year, concentrating on fewer, more efficient and cost-effective plans while implementing the principles of standardization, value engineering and quality initiatives. Continuing efforts to outsource selective development and construction activities will further Karrington's ability to focus on our core mission and business, and enable us to achieve our aggressive growth goals in a timely cost-effective manner. As part of that initiative, we refined and settled on three standard models of residence -- Karrington's K1, K2 and KC assisted living models -- a strategic evolution of your Company's original prototype residence. The 72-unit, mansion-style K1 residence is located in established, upper-income communities, where land is expensive and scarce, and price of service is not a significant determinant. The one-story, 48-unit K2 model enables your Company to enter smaller, rural county seat communities, where sites are readily available and cost issues have more impact on decision-making. The Karrington Cottage, KC, model is a 20-unit, residential model located on campus-like environments. Future plans call for the clustering of satellite KC residences in communities with existing K1 and K2 models, enabling us to continue meeting the growing and diversified needs of aging residents. The past four quarters were an exciting period of strategic transition and rapid growth for your Company, reflected in an increased number of open homes, generation of record revenues, enhanced management team, and expansion of the products, services and care we offer our residents. The refining of operational, development, construction and financing systems in 1997 better positions your Company to move forward as a leading provider of high-quality, high-acuity assisted living care and services in a timely, profitable manner. We appreciate your continued confidence and support, and we value your contribution as part of the Karrington family. We remain focused on delivering unsurpassed care and services to our residents, career satisfaction to our associates, and value to our shareholders. We look with enthusiasm toward the new year and the twenty-first century, a century that holds tremendous promise for your Company and the entire assisted living industry. Sincerely, /s/ Richard R. Slager RICHARD R. SLAGER Chairman and Chief Executive Officer 3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GROWING TO MEET THE NEEDS OF OUR RESIDENTS, ASSOCIATES AND SHAREHOLDERS - -------------------------------------------------------------------------------- [PHOTO: Four female residents seated with standing female caregiver.] [PHOTO: Male resident with nurse taking blood pressure.] AT THE HEART OF KARRINGTON ARE NATIONALLY RECOGNIZED ASSISTED LIVING PROFESSIONALS AND THOROUGHLY TRAINED STAFF WHO ARE COMMITTED TO HELPING YOUR LOVED ONE ENJOY QUALITY OF LIFE AS SHE OR HE AGES IN PLACE WITH DIGNITY AND GRACE. For Karrington Health, Inc. 1997 was a year of strategic transition and rapid growth. Marking its first full year as a public company and celebrating five years since the opening of its first residence, Karrington in 1997 furthered its evolution from a leading provider of high-quality assisted living to a forward-looking company charting a strategic course for expansion, profitability and shareholder value. What Karrington developed over the past 12 months -- through strong internal growth, an expanded approach to assisted living, and a strategic acquisition -- is a company that is ideally positioned for continued growth. Growth in the number of residences open -- a 400% increase since Karrington went public in 1996. Growth in system-wide revenues -- up 107% from $12 million in 1996 to $24.7 million for the year ended December 1997. Growth in the scope of products and services available and the overall quality of care provided to Karrington residents. Growth in the assisted living industry, an industry expected to generate $30 billion annually by the year 2000, double the current $15 billion. THE KARRINGTON TEAM: BUILDING A QUALITY BUSINESS The challenge facing the elderly and their families, as well as shareholders and the investment community, is to identify well-managed, high-quality, professional assisted living providers --such as Karrington -- that are positioned to survive inevitable industry consolidation and thrive in the new century. Karrington -- guided by Company Co-founder, Chairman and Chief Executive Officer Richard R. Slager, an assisted living industry pioneer who served as the second Chairman of the Assisted Living Federation of America (ALFA)--spent the past 12 months fine-tuning the internal operations and external relationships necessary to achieve planned and profitable growth on a timely basis, without losing sight of the Company's focus: Create and deliver unsurpassed products and services that enable seniors to age-in-place with grace and dignity. In 1997 management took steps to further the Company's overall performance, resulting in an increased number of residences open and the generation of record revenues. Developing three standard residential models and streamlining operations enabled the Company to reduce the time it takes to get its product to market, from site selection through zoning and construction. By systematically implementing the principles of value engineering, preventive maintenance and construction management outsourcing, Karrington lowered real estate, architecture, construction and start-up costs. As Karrington grew and its high-quality, high-acuity product evolved, the management team expanded to meet the Company's changing needs. President and Chief Operating Officer Pete A. Klisares joined Karrington in August 1997, bringing on board senior-level finance and marketing experts to supplement the talents and strengths of Karrington's real estate and development specialists, and the assisted living professionals who work with John Knutson, the former ALFA director and renown industry expert who serves as Karrington's Executive Vice President of Operations. Supporting the Karrington management team is a board of directors that is arguably the strongest in the assisted living industry, combining health care know-how with acquisition expertise and experience growing public companies into national industry leaders. Unrivaled health care expertise guided by hands-on management... That's doing business THE KARRINGTON WAY. [GRAPH: Karrington employees for 1993 and 1994, including joint ventures.] Year 1994 230 Year 1993 170
- -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- KARRINGTON'S GROWING MANAGEMENT TEAM--GUIDED BY CHAIRMAN AND CEO RICHARD R. SLAGER (SEATED) AND PRESIDENT PETE A. KLISARES (STANDING)--REFLECTS THE EVOLUTION OF THE COMPANY'S HIGH-QUALITY, HIGH-ACUITY PRODUCT. COMBINING UNRIVALED HEALTH CARE KNOW-HOW WITH HANDS-ON BUSINESS EXPERIENCE, KARRINGTON MANAGEMENT IS CHARTING THE COURSE FOR CONTINUED GROWTH WITHIN THE RAPIDLY EXPANDING ASSISTED LIVING INDUSTRY. [PHOTO: Two senior Karrington officers, including Richard R. Slager and Pete A. Klisares.] PEOPLE [GRAPH: Karrington employees for 1995, 1996 and 1997, including joint ventures.] Karrington Employees (Including Joint Ventures) Year 1997 1,100 Year 1996 525 Year 1995 290
5 GROWING TO MEET THE NEEDS OF OUR RESIDENTS, ASSOCIATES AND SHAREHOLDERS - -------------------------------------------------------------------------------- KARRINGTON'S K1 AND K2 MODELS ARE DESIGNED TO ACCOMMODATE VARYING ACUITY AND INCOME LEVELS. WHETHER YOU CHOOSE THE MANSION-STYLE K1 RESIDENCE OR THE SMALL-TOWN K2 HOME, YOUR LOVED ONE WILL HAVE ACCESS TO THE SKILLED AND CARING PROFESSIONALS, UNIQUE PRO-DUCTS AND SERVICES, AND DIGNIFIED ENVIRONMENTS THAT HELP DIFFERENTIATE KARRINGTON FROM OTHER ASSISTED LIVING PROVIDERS. [PHOTO: Karrington K1 model prototype.] [PHOTO: Karrington K2 model prototype.] KARRINGTON GROWTH: APPROACHING STABILITY, ANTICIPATING PROFITABILITY Karrington tripled its size over the past 12 months, growing from nine open homes in 1996 to 27 assisted living residences in operation at December 31, 1997. Management expects to nearly double the number of homes open in the new year. By December 1999, Karrington should reach a critical mass of 46 stable homes and the point at which the Company is operating enough stable residences to support focused, profitable growth. To help bridge the gap between rapid growth and profitability, Karrington in 1997 underwent financial restructuring, establishing strategic financing partnerships with fewer financial institutions, secur-ing more favorable interest rates, and adopting some off-balance-sheet strategies of financing new residences. The result: Karrington will reduce the start-up losses typically associated with opening new assisted living residences. Opening the right models in the right markets at the right time, without depleting cash reserves or negatively impacting earnings... That's achieving stability and profitability THE KARRINGTON WAY. THE KARRINGTON MODEL: CHANGING THE WAY PEOPLE VIEW ASSISTED LIVING As the population ages, health care needs increase. According to the US Census Bureau, 7 million people over age 65 and 50% of people over 85 need help with at least one activity of daily living (ADL), such as eating, bathing, personal hygiene, dressing, grooming and walking. By the year 2020, the number of over-65 seniors requiring ADL assistance will double, creating tremendous opportunities for the assisted living industry and Karrington. Recognizing that not all seniors share the same acuity at various income levels, Karrington has created three standard models of residence, an evolution of the Company's original prototype mansion-style residence. While standardization will enable the Company to get its product to market faster, Karrington's commitment to its residents remains intact. Along with creating three standard models, the Company has branded, or named, its residential products to help build Karrington's national identity. Karrington's original mansion-style residence, now known as K1 or the Karrington model, was upgraded and enhanced in 1997. Located in established upper-income communities, the K1 is a 72-unit model that replaces the original 53-unit prototype. Karrington Place, or K2, is the Company's one-story, small-town solution to high-quality assisted living. Karrington Place offers residents of smaller and rural communities access to the skilled and caring professionals, unique products and services, and dignified environments that enable Karrington residents to age-in-place gracefully. The Company's third residential model is the outgrowth of Karrington's May 1997 acquisition of Kensington Management Group, Inc. of Golden Valley, Minnesota. Operating innovative Alzheimer's care communities, now known as Karrington Cottages or KC, the Company provides residential Alzheimer's care and other programs under the medical direction of geriatric and dementia specialists. At the time of the acquisition, Kensington operated or had under construction 12 assisted living residences in three states. The early 1998 completion of a nine-Cottage campus in Rochester, Minnesota will further Karrington's relationship with the physicians of the world-famous Mayo Clinic. The Company expects to develop future Karrington Cottages in conjunction [GRAPH: Number of Karrington residences open for 1993 and 1994, including joint ventures.] Year 1994 4 Residences Year 1993 3 Residences
- -------------------------------------------------------------------------------- 6 [PHOTO: Karrington of Oakwood residence.] TRIPLING THE NUMBER OF KARRINGTON HOMES IN OPERATION OVER THE PAST 12 MONTHS, THE COMPANY GREW TO 27 OPEN RESIDENCES AT YEAR-END 1997. KARRINGTON'S HIGH-ACUITY, AGING-IN-PLACE MODEL PROVIDES EACH AGING RESIDENT WITH THE EXTRA CARE NEEDED TO MAKE KARRINGTON HIS OR HER FINAL HOME--A COMFORT TO RESIDENTS AND THEIR FAMILIES. POSITIONING [GRAPH: Number of Karrington residences open for 1995, 1996 and 1997, including joint ventures.] Number Of Karrington Residences (Including Joint Ventures) Year 1997 27 Residences Year 1996 9 Residences Year 1995 5 Residences
- -------------------------------------------------------------------------------- 7 GROWING TO MEET THE NEEDS OF OUR RESIDENTS, ASSOCIATES AND SHAREHOLDERS - -------------------------------------------------------------------------------- [PHOTO: Rochester, Minnesota campus of nine Kensington Cottages.] PROVIDING RESIDENTIAL ALZHEIMER'S CARE AND OTHER HIGH-ACUITY PROGRAMS, THE COMPANY'S KARRINGTON COTTAGES OR KC MODEL OFFERS COGNITIVELY IMPAIRED RESIDENTS SPECIAL CARE UNTIL THE END OF THEIR LIVES, OFTEN PRECLUDING THE NEED FOR HOSPITALIZATION OR NURSING CARE. WHETHER YOUR LOVED ONE LIVES IN A KC, K1 OR K2 MODEL, KARRINGTON HELPS SET THE PACE FOR ALZHEIMER'S CARE, WHILE ENHANCING DIGNITY, PROMOTING INDIVIDUALITY AND ENCOURAGING INDEPENDENCE. with other regional health care systems throughout the Midwest. With the addition of Karrington Cottages to the Company's product mix, management plans to broaden the way high-acuity care and assisted living in general are viewed by the health care industry and the public. Residential care for persons with Alzheimer's Disease and other forms of dementia will continue to be the focus of Karrington Cottages. In addition, some residential Cottages on each campus will be devoted to other physical and cognitive conditions, based on the needs or specialties of the regional health care providers associated with Karrington. Providing high-acuity, broad-based, lower-cost, 24-hour care in a dignified, non-hospital, non-nursing-facility setting...That's broadening the scope of assisted living THE KARRINGTON WAY. THE KARRINGTON ADVANTAGE: AGING-IN- PLACE WITH DIGNITY, INDEPENDENCE AND QUALITY OF LIFE At the heart of Karrington are the dedicated professionals, proven products and services, and supportive environments that enable Karrington residents to enjoy quality of life as they age-in-place. The Company delivers unsurpassed care at each of its residences, including innovative Alzheimer's and related special care programs that help differentiate Karrington from other assisted living companies. According to the Alzheimer's Association, dementia affects 4 million Americans, a number that will increase to 14 million by the year 2040. In the past, persons suffering from Alzheimer's Disease would have been institutionalized in hospitals or nursing facilities for the balance of their lives, which could last 20 years from the onset of symptoms. Karrington residents who are cognitively impaired or have Alzheimer's Disease benefit from unique, safe and inviting residences that look and feel like hometown neighborhoods, complete with cheerful common areas and secure outdoor walking paths. Caregivers are specially trained to assist residents facing the challenges of communication, nutrition, wandering and sleep. Sensory therapy rooms, standard in new models, help set the pace for long-term Alzheimer's care, while enhancing dignity, promoting individuality and encouraging independence. Karrington's residential alternative to institutionalization has proven so successful at delivering high-quality, high-acuity care that the Company plans to open several more free-standing Alzheimer's residences. Providing each aging resident with the extra care needed to make Karrington his or her final home...That's aging-in-place THE KARRINGTON WAY. KARRINGTON'S COMMUNITY CONCEPT: CLUSTERING PRODUCTS, CAPTURING MARKET SHARE In 1997 Karrington focused its marketing efforts more sharply, making the strategic decision to concentrate most future development east of the Mississippi. The Karrington priority market stretches from Rochester, Minnesota [GRAPH: Karrington revenues for 1993 and 1994 (thousands of dollars).] Year 1994 $5,264 Year 1993 $2,306
- -------------------------------------------------------------------------------- 8 - -------------------------------------------------------------------------------- FOR OVERBURDENED CAREGIVERS NOT QUITE READY FOR FULL-TIME ASSISTED LIVING, KARRINGTON'S DAY RESIDENT PROGRAM IS THE IDEAL SOLUTION. WITH FLEXIBLE SERVICE AND STAY OPTIONS, INCLUDING DAY-CARE FOR LOVED ONES WITH ALZHEIMER'S DISEASE, THE DAY RESIDENT PROGRAM GIVES FAMILY MEMBERS A BRIEF RESPITE FROM CARE-GIVING DUTIES AND A HANDS-ON INTRODUCTION TO KARRINGTON'S PEOPLE, PRODUCTS AND SERVICES. [PHOTO: Female resident and female caregiver walking down stairs.] PROFITABILITY [GRAPH: Karrington revenues for 1995, 1996 and 1997 (thousands of dollars).] Karrington Revenues (Thousands Of Dollars) Year 1997 $19,220 Year 1996 $ 9,596 Year 1995 $ 6,744
- -------------------------------------------------------------------------------- 9 GROWING TO MEET THE NEEDS OF OUR RESIDENTS, ASSOCIATES AND SHAREHOLDERS - -------------------------------------------------------------------------------- [PHOTO: Two female residents with young child.] [PHOTO: Male resident with young children.] KARRINGTON IS COMMITTED TO HELPING RESIDENTS--75% OF WHOM ARE WOMEN WITH AN AVERAGE AGE OF 83--LIVE THE BALANCE OF THEIR LIVES WITH PERSONAL DIGNITY, INDIVIDUALITY, INDEPENDENCE AND QUALITY OF LIFE. FEW ASSISTED LIVING OPERATORS PROVIDE THE COMPREHENSIVE RANGE OF HIGH-QUALITY CARE--FROM SOCIAL ACTIVITIES SUCH AS INTER-GENERATIONAL PROGRAMS AND AEROBICS, TO SPECIAL CARE AND ALZHEIMER'S PROGRAMS--THAT KARRINGTON DELIVERS. - -- site of the newest Karrington Cottages campus -- to New York in the Northeast and Florida in the South. At the geographic center of Karrington's development and marketing activity is the Company's Columbus, Ohio headquarters. The Karrington Total Community Plan serves as the foundation for the Company's marketing efforts. Designed to enhance market penetration and increase occupancy, the Total Community Plan calls for the clustering of two or more residential models in each of the Company's targeted communities. Once established in a market, the Company will integrate ancillary products and innovative services, designed to generate revenue while introducing prospective residents and their families to Karrington. The Day Resident Program is a prime example of successful vertical integration. Expanded in 1997, the Day Resident Program gives family members the opportunity to experience Karrington, while enjoying temporary relief from caregiving duties. The Program offers flexible service and stay options, including a secure day-care environment for people with Alzheimer's Disease and other cognitive disorders. A hit with overburdened caregivers, The Day Resident Program grew substantially in 1997, increasing from 12 hours of weekly utilization early in the year to 400 hours at year end. Management expects many Day Resident Program participants will become full-time residents in 1998. Also successful was the 1997 introduction of the Live Well Program, a joint effort of Karrington and NCS Pharmacy, providing quality, on-site pharmaceutical services. An optional service enjoyed by 99% of residents, Live Well offers convenience and competitive pricing, while simplifying the tracking of medication. Pioneered by Karrington, the successful Live Well Program is now being imitated by competitors. Creating innovative programs to introduce staff and services to caregivers and seniors who may one day choose assisted living, capture incremental revenue, and support the Company's aging-in-place philosophy...That's marketing THE KARRINGTON WAY. KARRINGTON PEOPLE, PRODUCTS AND SERVICES: MAINTAINING QUALITY WHILE ENHANCING LIFE Karrington's goal in developing new products and services is to enhance the quality of residents' lives, for the duration of their lives. Few assisted living operators provide the comprehensive range of high-quality care -- including Alzheimer's programs and other special services -- that Karrington delivers. Encouraged to stay active, Karrington residents have access to aerobics, transportation, inter-generational programs, aviaries, mobile x-ray, laboratory and rehabilitation services, and other activities, services and programs designed to enhance the quality of life, as opposed to the institutional, isolating approach of nursing facilities. Karrington's ability to provide high-quality, innovative products and services is directly linked to the Company's nationally recognized assisted living professionals and thoroughly trained staff. Karrington Kollege, a mandatory, week-long training program for administrators, helps ensure consistent delivery of quality care. During the intense five-day session, operations are reviewed, training manuals are distributed, and Karrington's commitment to helping its 1,000 residents age-in-place with dignity and grace is stressed. [GRAPH: U.S. population 85 years and older for 1990 and 2000.] Year 2000 4.3 Million Year 1990 3.2 Million
- -------------------------------------------------------------------------------- 10 AS THE BABY BOOMER GENERATION AGES, THE DEMAND FOR HIGH-QUALITY ASSISTED LIVING RESIDENCES WILL EXPLODE. BY THE YEAR 2030, THE SENIOR POPULATION SHOULD REACH 60 MILLION, WITH NEARLY A QUARTER AFFECTED BY ALZHEIMER'S DISEASE. IN LIGHT OF CHANGING DEMOGRAPHICS AND GOVERNMENT ESTIMATES THAT HALF THE NATION'S CURRENT 1.6 MILLION NURSING FACILITY [PHOTO: Female resident with young child.] RESIDENTS WOULD BE WELL SERVED BY ASSISTED LIVING, ALFA PREDICTS THE NEED FOR NEW ASSISTED LIVING UNITS WILL HIT 50,000 ANNUALLY WITHIN A DOZEN YEARS. KARRINGTON IS POSITIONING ITSELF TODAY TO ACCOMMODATE INTERNAL AND INDUSTRY-WIDE GROWTH TOMORROW. POTENTIAL [GRAPH: U.S. population 85 years and older for 2010, 2020 and 2030.] Population 85 Years And Older Year 2030 8.0 Million Year 2020 6.3 Million Year 2010 6.0 Million
11 GROWING TO MEET THE NEEDS OF OUR RESIDENTS, ASSOCIATES AND SHAREHOLDERS - -------------------------------------------------------------------------------- [PHOTO: Three administrators and an instructor in classroom.] [PHOTO: One administrator and an instructor.] RESIDENTS' NEEDS ARE KARRINGTON'S NUMBER-ONE PRIORITY, AND NO JOB THAT BENEFITS RESIDENTS IS TOO SMALL FOR KARRINGTON'S ASSOCIATES. THAT IS THE UNDERLYING PHILOSOPHY OF KARRINGTON KOLLEGE, A WEEK-LONG, INTENSIVE TRAINING PROGRAM FOR ADMINISTRATORS AND DEPARTMENT SUPERVISORS. ENTERING ITS THIRD YEAR, KARRINGTON KOLLEGE HELPS ENSURE THAT EACH KARRINGTON HOME OPERATES AS A CENTER OF QUALITY LIVING FOR RESIDENTS AND A SOURCE OF SUPPORT FOR CAREGIVERS. In 1997 staff education included training teams assigned to visit new residences to ensure that human resources, marketing, wellness and hospitality support the Company's aging-in-place philosophy and make each Karrington residence a center of quality living. Karrington's commitment to quality assurance -- recognized by state inspectors and competitors as among the best in the assisted living industry - -- pays tremendous dividends to residents and the Company. Quality assurance survey scores -- historically high -- increased significantly in 1997, as did resident satisfaction surveys. In a competitive environment in which food service and health care programs help distinguish providers, Karrington consistently impresses residents. To ensure continued quality, the Company this year added quality assurance and training professionals to its highly respected operations team. Superior high-acuity care, a commitment to training and quality, and innovative product delivery...That's assisted living THE KARRINGTON WAY. KARRINGTON'S FUTURE...CREATING QUALITY RESIDENCES, DELIVERING SHAREHOLDER VALUE The elderly are the nation's fastest growing population segment, with the number of individuals age 65-plus expected to double to 60 million by the year 2030, according to US Census Bureau figures. Changing demographics, coupled with the fact that the elderly are often incapable of independent living, have created tremendous opportunities for Karrington and the entire assisted living industry. In the past, female family members usually provided assistance for the elderly. With 57% of women now working outside the home, however, their ability to fill the traditional caregiver role has declined. Single parents, growing numbers of Americans living alone, and a transient society have further reduced the number of adult children able to care for elderly parents and relatives. With 30% of seniors currently living alone and the over-85 population expected to double to 5.6 million by the year 2010, ALFA predicts the demand for new assisted living units will grow to 50,000 a year within a dozen years. Couple that with the US Department of Health and Human Services' estimate that about half of the nation's 1.6 million nursing facility residents are viable assisted living candidates, and it's no surprise that the industry is expected to soar to $30 billion by the year 2000. Karrington is positioning itself today to accommodate certain growth tomorrow. Management's decision to take the Company public in July 1996 provided Karrington with capital to support its immediate growth goals, leading to 27 open residences by year-end 1997, including the strategic acquisition of Kensington Management Group. Short-term, Karrington's goal is to increase residences and beds by nearly 100% over the next 12 months, operating enough stable residences to support profitable growth by year-end 1999. Long-term, the Company plans to continue developing and operating superior-quality residences that provide quality of life for residents, deliver career satisfaction for employees, and perform favorably for shareholders. Poised to meet the needs and challenges of the growing assisted living industry...That's visionary thinking THE KARRINGTON WAY. - -------------------------------------------------------------------------------- 12 KARRINGTON HEALTH, INC. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
FINANCIAL CONTENTS - ---------------------------------------- MANAGEMENT'S DISCUSSION 14 AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ---------------------------------------- MANAGEMENT'S STATEMENT 17 OF FINANCIAL RESPONSIBILITY - ---------------------------------------- REPORT OF INDEPENDENT 17 AUDITORS - ---------------------------------------- CONSOLIDATED BALANCE 18 SHEETS - ---------------------------------------- CONSOLIDATED STATEMENTS 19 OF OPERATIONS - ---------------------------------------- CONSOLIDATED STATEMENTS 20 OF EQUITY - ---------------------------------------- CONSOLIDATED STATEMENTS 21 OF CASH FLOWS - ---------------------------------------- NOTES TO CONSOLIDATED 22 FINANCIAL STATEMENTS - ---------------------------------------- SELECTED CONSOLIDATED 29 FINANCIAL DATA - ----------------------------------------
FINANCIALS 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- OVERVIEW The Company derives its revenues from two primary sources: (i) resident fees for the delivery of assisted living services and (ii) development fees and management services income for development and management of residences in which the Company does not own a controlling interest. Resident fees are paid monthly by residents, their families or other responsible parties and, prior to the Kensington acquisition, were derived 100% from private pay sources. Currently, approximately 93% of resident fees are derived from private pay sources. Resident fees include revenue derived from basic assisted living care, community fees, extended and special needs care, Alzheimer's care and other sources. Community fees are one-time fees generally payable by a resident upon admission, and extended care and Alzheimer's care fees are paid by residents who require personal care in excess of services provided under the basic care program. Development fees and management services income, which accounts for the remaining revenues, consists of development fees recognized over the development and construction period and management fees which are a percentage of a managed residence's total operating revenues and are recognized as services are performed. The Company categorizes its operating expenses as follows: (i) residence operations, which includes labor, food, media advertising and promotions and other direct general operating expenses; (ii) general and administrative expenses, consisting of corporate and support functions such as marketing, accounting and other administrative expenses; (iii) depreciation and amortization; and (iv) rent expense. In anticipation of its growth plans, the Company made significant investments in the number of management and staff at its headquarters in 1996 and 1997. - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS The following table sets forth certain data from the respective consolidated statements of operations as a percentage of total revenues:
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ------ ------ ------ Total revenues . . . . . . . . . . . . . 100.0% 100.0% 100.0% Expenses: Residence operations . . . . . . . . . 71.2 67.6 64.3 General and administrative . . . . . . 23.1 28.9 25.3 Depreciation and amortization. . . . . 14.0 14.4 14.5 Rent expense . . . . . . . . . . . . . 1.3 0.9 0.7 Unusual charges. . . . . . . . . . . . 7.2 -- 7.3 ----- ----- ----- Total expenses . . . . . . . . . . . 116.8 111.8 112.1 ----- ----- ----- Operating income (loss) . . . . . . . . (16.8)% (11.8)% (12.1)% ----- ----- ----- ----- ----- ----- End of year(1): Number of residences . . . . . . . . . 21 6 4 Number of units. . . . . . . . . . . . 803 312 219
- -------------------------------------------------------------------------------- (1) Excludes residences jointly-owned by the Company accounted for by the equity method. 14 - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Total revenue increased $9.6 million, or 100%, to $19.2 million in 1997 from $9.6 million in 1996 primarily due to the growth in resident revenues. Resident revenues increased $9.6 million, or 107%, primarily due to the acquisition of Kensington Management Group, Inc. and affiliates ("Kensington") on April 30, 1997 ($5.2 million), opening of new residences in 1997 ($1.3 million) and a full year of operations of residences opened or in fill-up in 1996. Residence operations expense increased $7.2 million, or 111%, to $13.7 million in 1997 from $6.5 million in 1996. As a percentage of residence operating revenues, residence operations expense increased to 73.8% in 1997 from 72.4% in 1996. This increase is primarily attributable to an increase in the number of residences in the fill-up phase as operations expenses are historically higher as a percent of operating revenues during the first year of operation of a residence. General and administrative expenses increased $1.6 million, or 59.9%, to $4.4 million in 1997 from $2.8 million in 1996, primarily due to increased compensation, payroll taxes and related benefits as a result of hiring additional management and staff at the Company's headquarters as a result of the Company's growth plans. The Company expects the rate of increase in its general and administrative expenses will decrease as new personnel needs have been reduced by recent hires. In addition, the Company expects its general and administrative expenses will decrease as a percentage of its total operating revenues due to anticipated economies of scale resulting from the Company's development program. Depreciation and amortization increased $1.3 million, or 94.6%, to $2.7 million in 1997 from $1.4 million in 1996 primarily due to the opening of new residences in 1997 and 1996. See Note 2 to Consolidated Financial Statements for discussion on the unusual charges in 1997 and 1995. Interest expense increased $1.4 million, or 116%, to $2.7 million in 1997 from $1.3 million in 1996 primarily due to the opening of new residences in 1997 and 1996. - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Total revenue increased $2.9 million, or 42.3%, to $9.6 million in 1996 from $6.7 million in 1995, primarily due to the growth in resident revenues. Resident revenues increased $2.7 million, or 43.9%, primarily due to the opening of two new residences during 1996 and a full year of operations for 1995 residence openings (total of $2.4 million) and to the increase in the average daily resident rate. Development and project management fees increased $118,000, or 22.6%, to $643,000 in 1996 from $524,000 in 1995, primarily due to development and management fees associated with the increased number of projects open or in process under the relationship with CHI. Residence operations expenses increased $2.2 million, or 49.6%, to $6.5 million in 1996 from $4.3 million in 1995. As a percentage of residence operating revenues, residence operations expense increased from 69.7% in 1995 to 72.4% in 1996. This increase is primarily attributable to the opening of a new residence in October 1995 and two residences in 1996, as operations expenses are historically higher as a percent of operating revenues during the first year of operation of a residence. Excluding these three residences, operations expenses were 64.7% of residence operating revenues in 1996 compared to 65.6% in 1995. General and administrative expenses increased $1.1 million, or 62.7%, to $2.8 million in 1996 from $1.7 million in 1995, primarily due to increased compensation, payroll taxes and related benefits of $800,000 as a result of hiring additional management and staff at the Company's headquarters in anticipation of the Company's growth plans and the addition of a manager-in-training program initiated in the Spring of 1995. Depreciation and amortization increased $399,000, or 40.7%, to $1.4 million in 1996 from $1.0 million in 1995, primarily due to the opening of two new residences in 1996 and a full year of operations for 1995 residence openings. Interest expense increased $249,000, or 24.4%, to $1.3 million in 1996 from $1.0 million in 1995, primarily due to the opening of two new residences in 1996 and a full year of operations for 1995 residence openings. Interest income resulted primarily from the investment of the Company's net proceeds from its initial public offering in July 1996. The increase in deferred income taxes resulted primarily from the Company's reorganization in July 1996. A deferred tax provision of $938,000 was recorded for the differences in the basis for tax purposes and for financial accounting purposes of recorded assets and liabilities as of July 18, 1996. This provision was offset by a $255,000 benefit recorded for the financial reporting loss for the period from July 18, 1996 to December 31, 1996. - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company has financed its initial growth through a combination of mortgage financing, sale/leasebacks, subordinated borrowings from JMAC and its affiliates, equity contributions and proceeds from the initial public offering in 1996. The Company's mortgage and construction mortgage financings mature in the next three to thirteen years, bear interest at various fixed and fluctuating rates (ranging from 8.5% to 10.0% at December 31, 1997), and are secured by substantially all of the assets of the Company. The Company expects to refinance such amounts as they mature. In addition, one of the Company's residences is financed with a residential rental development revenue bond which provides for annual principal repayments beginning in 1998 through 2021 and bears interest at a fluctuating weekly rate (3.83% at December 31, 1997). The Company has entered into non-binding financing commitment letters with Meditrust Mortgage Investments, Inc. ("MMI"), an affiliate of Meditrust (a large health care REIT). 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Under the letters, MMI is to provide up to approximately $100 million in financing for one existing and approximately 13 new residences, subject to various terms and conditions. The financings, which may be mortgage or lease financings, are to be entered into on a residence-by-residence basis, and are to be for terms of up to 14 years (with two additional five-year extension periods for the lease transactions). To date, the Company has completed mortgage agreements for four residences and six lease transactions totaling $68.5 million. In February 1997, the Company entered into a $3 million revolving credit agreement expiring on March 31, 1998. The Company is currently negotiating an extension and increase in the committment which it expects to accomplish in April 1998. In March 1997, the Company entered into a $5 million line of credit expiring in May 1999. At December 31, 1997, there was $6 million outstanding under these agreements. On April 30, 1997, the Company entered into a $27.6 million promissory note in conjunction with its acquisition of Kensington Management Group, Inc. and affiliates ("Kensington") and the build out of nine Kensington cottages on the Rochester, Minnesota campus. The amount outstanding under the agreement was approximately $19.9 million as of December 31, 1997. The remaining funds will be disbursed in two phases at such time that the nine cottages achieve certain debt service coverage ratios. In September 1997, the Company entered into a $7.5 million promissory note with JMAC, Inc., a 34% shareholder of the Company. The note expires on January 2, 2000. At December 31, 1997, $7.5 million was outstanding under this agreement. In October 1997, the Company entered a $14 million construction loan agreement for the development and construction of four assisted living residences. In October 1999, the Company may elect, at its option, to convert the construction loan into a term loan maturing in October 2004. As of December 31, 1997, there was $4.6 million outstanding under this agreement. At December 31, 1997, the Company had $98.5 million of outstanding debt (at a weighted average interest rate of 9.1%). At that date, the Company had equity of $26.5 million, which resulted from inception-to-date net capital contributions of $39.1 million (including $27.5 million in net proceeds from the July 1996 public offering) and net operating losses of $12.6 million. The working capital deficiency at December 31, 1997 was $6.7 million. During the years ended December 31, 1997, 1996 and 1995, the Company used $57.4 million, $28.5 million, and $10.7 million, respectively, in cash to acquire property and equipment and other assets, and received $49.6 million, $40.8 million and $10.9 million, respectively, in cash from financing activities. In 1998 and 1999, the Company plans to open approximately 47 new Company and jointly-owned residences. To date, the Company has opened 5 of these residences, has 14 residences under construction, has obtained zoning approval for an additional 13 residences and has entered into contracts to purchase 7 additional sites. The Company has been, and will continue to be, dependent on third-party financing for its acquisition and development program. The Company estimates that newly developed residences will generally range in cost from $5.0 to $11.0 million, with the development cycle taking up to 24 months from site identification to residence opening. There can be no assurance that financing for the Company's acquisition and development program will be available to the Company on acceptable terms, if at all. Moreover, to the extent the Company acquires properties that do not generate positive cash flow, the Company may be required to seek additional capital for working capital and liquidity purposes. Residences typically reach a stable level of occupancy of over 90% within 12 months and generate break-even cash flows, after debt service, within approximately eight months. Additional financing will be required to complete the Company's growth plans and to refinance certain existing indebtedness. As of March 13, 1998, the Company had unused commitments of approximately $35 million from existing debt and lease agreements which have not been specifically committed to a residence. The Company is currently evaluating and negotiating with various lenders with respect to traditional mortgages, sale/leaseback transactions and other forms of off-balance-sheet financing. The Company has existing loans or leases in place for the 14 residences currently under construction and expected to open in 1998. In addition to financing ongoing development and construction costs, the Company will require capital resources to meet its operating and working capital needs incurred through the start-up losses associated with the opening of new residences. The Company believes its existing financing commitments, together with additional financing the Company anticipates will be available, will be sufficient to fund its development, construction and working capital needs through 1998. - -------------------------------------------------------------------------------- IMPACT OF YEAR 2000 The impact of the year 2000 to the Company varies, and from our initial investigation, ranges from insignificant matters to a probable failure of the current accounting system. The Company's computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Further assessment is necessary to determine the cost of eliminating the year 2000 issue. The Company will have to replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. All vendors of integrated hardware and software systems must be contacted to ensure that their product is year 2000 compliant. The Company expects to replace its current accounting system in 1998. 16 MANAGEMENT'S STATEMENT OF FINANCIAL RESPONSIBILITY - -------------------------------------------------------------------------------- The management of Karrington Health, Inc. is responsible for the preparation of the accompanying consolidated financial statements in conformity with generally accepted accounting principles appropriate in the circumstances. Management is also responsible for the determination of estimates and judgments used in the financial statements, and the preparation of other financial information included in this annual report to shareholders. The financial statements have been audited by independent auditors. The management of the Company has established and maintains an accounting system and related internal controls that it believes are sufficient to provide reasonable assurance that assets are safeguarded against unauthorized acquisition, use or disposition, that transactions are executed and recorded in accordance with management's authorization and that the financial records are reliable for preparing financial statements. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefits derived and that the balancing of the factors requires estimates and judgments. Management considers the recommendations of the independent certified public accountants concerning the Company's system of internal control and takes appropriate actions which are cost effective in the circumstances. The Board of Directors has an Audit Committee of Directors who are not members of management. The Audit Committee meets periodically with the Company's management and independent certified public accountants to review matters relating to financial reporting, auditing and internal control. To ensure auditor independence, the independent certified public accountants have full and free access to the Audit Committee. /s/ Richard R. Slager /s/ Pete A. Klisares /s/ Thomas J. Klimback RICHARD R. SLAGER PETE A. KLISARES THOMAS J. KLIMBACK Chairman and Chief President and Chief Executive Vice President, Executive Officer Operating Officer and Chief Financial Officer REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- TO THE SHAREHOLDERS OF KARRINGTON HEALTH, INC. We have audited the accompanying consolidated balance sheets of Karrington Health, Inc. and its subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Karrington Health, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Columbus, Ohio March 6, 1998 17 CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- K A R R I N G T O N H E A L T H, I N C. A N D S U B S I D I A R I E S
ASSETS DECEMBER 31, ------------------------- 1997 1996 ------------ ----------- Current assets: Cash and cash equivalents. . . . . . . . . . . . $ 4,370,488 $12,283,185 Receivables: Trade. . . . . . . . . . . . . . . . . . . . . 482,597 105,315 Due from REIT. . . . . . . . . . . . . . . . . 4.330,981 -- Affiliates . . . . . . . . . . . . . . . . . . 649,172 678,893 Prepaid expenses . . . . . . . . . . . . . . . . 281,722 170,254 ------------ ----------- Total current assets. . . . . . . . . . . . . 10,114,960 13,237,647 Property and equipment -net (Note 2) . . . . . . . 115,983,043 52,011,748 Cost in excess of net assets acquired - net (Note 3). . . . . . . . . . . . . 8,231,073 -- Other assets -net (Note 4) . . . . . . . . . . . . 6,986,724 4,300,546 ------------ ----------- Total assets. . . . . . . . . . . . . . . . . $141,315,800 $69,549,941 ------------ ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities . . . . $ 2,535,969 $ 788,981 Construction payables. . . . . . . . . . . . . . 4,717,230 3,181,560 Notes payable - banks. . . . . . . . . . . . . . 6,000,000 -- Payroll and related taxes. . . . . . . . . . . . 1,080,884 735,337 Unearned resident fees . . . . . . . . . . . . . 861,266 325,111 Interest payable . . . . . . . . . . . . . . . . 614,919 158,103 Current portion of long-term obligations . . . . 998,523 242,211 ------------ ----------- Total current liabilities . . . . . . . . . . 16,808,791 5,431,303 Long-term obligations (Note 6) . . . . . . . . . . 97,507,467 32,758,692 Deferred income taxes. . . . . . . . . . . . . . . 493,000 683,000 Shareholders' equity (Note 9): Common shares, without par value . . . . . . . . 33,484,712 31,984,712 Accumulated deficit. . . . . . . . . . . . . . . (6,978,170) (1,307,766) ------------ ----------- Total shareholders' equity. . . . . . . . . . 26,506,542 30,676,946 ------------ ----------- Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . $141,315,800 $69,549,941 ------------ ----------- ------------ -----------
See accompanying notes. 18 CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- K A R R I N G T O N H E A L T H, I N C. A N D S U B S I D I A R I E S
YEAR ENDED DECEMBER 31, --------------------------------------------- 1997 1996 1995 ------------ ------------ ------------- Revenues: Residence operations . . . . . . . . . . . . . . $ 18,538,832 $ 8,952,759 $ 6,219,465 Development and project management fees. . . . . 681,051 642,803 524,391 ------------ ------------ ------------ Total revenues . . . . . . . . . . . . . . . . 19,219,883 9,595,562 6,743,856 Expenses: Residence operations . . . . . . . . . . . . . . 13,683,245 6,485,837 4,335,792 General and administrative . . . . . . . . . . . 4,432,635 2,772,727 1,704,694 Depreciation and amortization. . . . . . . . . . 2,684,297 1,379,060 979,797 Rent expense . . . . . . . . . . . . . . . . . . 259,114 89,121 44,520 Unusual charges (Note 2) . . . . . . . . . . . . 1,380,000 -- 492,288 ------------ ------------ ------------ Total expenses . . . . . . . . . . . . . . . . 22,439,291 10,726,745 7,557,091 ------------ ------------ ------------ Operating income (loss). . . . . . . . . . . . . . (3,219,408) (1,131,183) (813,235) Interest expense . . . . . . . . . . . . . . . . . (2,743,353) (1,271,561) (1,022,516) Interest income. . . . . . . . . . . . . . . . . . 348,711 470,065 -- Equity in net loss of unconsolidated entities (Note 7). . . . . . . . . . . . . . . . (246,354) (7,157) (105,529) ------------ ------------ ------------ Loss before income taxes . . . . . . . . . . . . . (5,860,404) (1,939,836) (1,941,280) Deferred income tax benefit (provision). . . . . . 190,000 (683,000) -- ------------ ------------ ------------ Net loss . . . . . . . . . . . . . . . . . . . . . $ (5,670,404) $ (2,622,836) $ (1,941,280) ------------ ------------ ------------ ------------ ------------ ------------ Net loss per common share - basic and diluted: Actual . . . . . . . . . . . . . . . . . . . . . $ (.83) -- -- Proforma . . . . . . . . . . . . . . . . . . . . -- $ (.48) $ (.45) Weighted average number of common shares outstanding: Actual . . . . . . . . . . . . . . . . . . . . . 6,792,200 -- -- Proforma . . . . . . . . . . . . . . . . . . . . -- 5,415,800 4,350,000
See accompanying notes. 19 CONSOLIDATED STATEMENTS OF EQUITY - -------------------------------------------------------------------------------- K A R R I N G T O N H E A L T H, I N C. A N D S U B S I D I A R I E S
COMMON SHARES -------------------------- ACCUMULATED PARTNERS' SHARES AMOUNT DEFICIT EQUITY TOTAL ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1994 . . . . . . . . . . $(1,763,271) $(1,763,271) Conversion of long-term obligations and accrued interest to partners' equity . . . . . . . . . . . . . 5,330,458 5,330,458 Cash capital contributions . . . . . . . . . 5,000,000 5,000,000 Capital distributions. . . . . . . . . . . . (785,000) (785,000) Net loss . . . . . . . . . . . . . . . . . . (1,941,280) (1,941,280) ----------- ----------- Balance at December 31, 1995 . . . . . . . . . . 5,840,907 5,840,907 Net loss . . . . . . . . . . . . . . . . . . $(1,307,766) (1,315,070) (2,622,836) Reorganization transaction (Note 9) . . . . . . . . . . . 4,350,000 $ 4,525,837 -- (4,525,837) -- Net proceeds from public offering. . . . . . . . . . . . . . 2,350,000 27,458,875 -- -- 27,458,875 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 . . . . . . . . . . 6,700,000 31,984,712 (1,307,766) 0 30,676,946 Net loss . . . . . . . . . . . . . . . . . . (5,670,404) (5,670,404) Common shares issued . . . . . . . . . . . . 137,363 1,500,000 -- -- 1,500,000 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1997 . . . . . . . . . . 6,837,363 $33,484,712 $(6,978,170) $ 0 $26,506,542 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- K A R R I N G T O N H E A L T H, I N C. A N D S U B S I D I A R I E S
YEAR ENDED DECEMBER 31, --------------------------------------------- 1997 1996 1995 ------------ ------------ ------------- OPERATING ACTIVITIES Net loss . . . . . . . . . . . . . . . . . . . . . $ (5,670,404) $ (2,622,836) $ (1,941,280) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for terminated projects and unusual charges. . . . . . . . . . . . . . 1,191,909 -- 587,288 Depreciation and amortization. . . . . . . . . . 2,684,297 1,379,060 979,797 Deferred income taxes. . . . . . . . . . . . . . (190,000) 683,000 -- Loss on disposal of assets . . . . . . . . . . . -- 10,060 6,938 Equity in net loss of unconsolidated entities. . 246,354 7,157 105,529 Change in operating assets and liabilities: Receivables . . . . . . . . . . . . . . . . . (4,370,716) (17,016) (659,317) Prepaid expenses. . . . . . . . . . . . . . . 15,167 (71,433) 22,197 Accounts payable and accrued liabilities. . . 5,445,275 174,268 198,573 Other liabilities . . . . . . . . . . . . . . 485,794 263,441 451,231 ------------ ------------ ------------ Net cash provided by (used in) operating activities. . . . . . . . . . . . . (162,324) (194,299) (249,044) INVESTING ACTIVITIES Purchases of property and equipment. . . . . . . . (56,234,016) (25,670,838) (10,023,395) Decrease (increase) in escrow balances . . . . . . 587,811 (1,146,004) (239,000) Equity contributions to unconsolidated entities. . -- (1,347,753) -- Distributions from unconsolidated entity . . . . . 225,000 339,767 -- Acquisition of Kensington - net of cash acquired . (4,182,733) -- -- Proceeds from sale of assets . . . . . . . . . . . 6,010,832 101,202 -- Payments of pre-opening costs. . . . . . . . . . . (1,316,495) (639,908) (314,592) Payments for prepaid rent and other. . . . . . . . (2,461,648) (96,571) (50,320) ------------ ------------ ------------ Net cash used in investing activities. . . . . . (57,371,249) (28,460,105) (10,627,307) FINANCING ACTIVITIES Net proceeds from public offering. . . . . . . . . -- 27,458,875 -- Proceeds from notes payable - banks. . . . . . . . 6,000,000 -- -- Proceeds from mortgages. . . . . . . . . . . . . . 37,516,826 21,744,390 14,336,639 Repayment of mortgages . . . . . . . . . . . . . . (1,258,852) (7,165,025) (7,491,258) Proceeds from affiliated entity. . . . . . . . . . 7,500,000 5,501,535 40,855 Repayment of amounts due affiliated entity . . . . -- (5,535,375) -- Payments of financing fees . . . . . . . . . . . . (137,098) (1,211,644) (217,114) Proceeds from partner's capital contribution . . . -- -- 5,000,000 Payment of partner distributions . . . . . . . . . -- -- (785,000) ------------ ------------ ------------ Net cash provided by financing activities. . . . 49,620,876 40,792,756 10,884,122 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . (7,912,697) 12,138,352 7,771 Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . 12,283,185 144,833 137,062 ------------ ------------ ------------ Cash and cash equivalents at end of year . . . . . $ 4,370,488 $ 12,283,185 $ 144,833 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosure of cash flow information Cash paid for interest . . . . . . . . . . . . . . $ 4,653,534 $ 2,280,810 $ 1,399,347
See accompanying notes. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - -------------------------------------------------------------------------------- 1. DESCRIPTION OF THE BUSINESS The Company is a developer, owner and operator of licensed, assisted living residences which provides quality professional, personal and health-care services, including an emphasis on Alzheimer's care, for individuals needing assistance with activities of daily living. These activities include bathing, dressing, meal preparation, housekeeping, taking medications, transportation, and other activities that, because of the resident's condition, are difficult for residents to accomplish in an independent living setting. The Company offers its customers a dignified residential environment focused on quality of life. The Company also provides development, support and management services to its joint ventures and others in the long-term care industry. As of December 31, 1997, the Company, including joint ventures, had 27 residences open in Ohio, Pennsylvania, Indiana, Minnesota, North Dakota, Iowa, Colorado and New Mexico and 19 residences under construction in Ohio, Indiana, Minnesota, Pennsylvania, North Carolina and Illinois. Karrington Health, Inc. was incorporated in April 1996 to become the parent of Karrington Operating Company (Karrington Operating) upon the consummation of the reorganization transactions which occurred immediately prior to the effective date of the registration statement (see Note 9). Hereinafter, all references to the "Company" encompass Karrington Operating and Karrington Health, Inc. Karrington Operating was an Ohio General Partnership founded in 1991 by DevelopMed Associates, Inc. (Associates) and JMAC Properties, Inc., a private investment company, the principal shareholder of which is JMAC, Inc. (JMAC). Effective December 31, 1996, the net assets of Karrington Operating and three other related partnerships were distributed to new subsidiary corporations of Karrington Health, Inc. The trade name "Karrington Communities," a Registered Trademark, is the operating name of all residences owned and operated by the Company. - -------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements reflect the operations and development activities of the Company and all wholly-owned subsidiaries. Significant intercompany transactions and accounts are eliminated in consolidation. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. INVESTMENT IN UNCONSOLIDATED ENTITIES The Company uses the equity method of accounting for its investments in its 19.9%-50% jointly-owned ventures, which were formed to operate assisted living residences (see Note 7). REVENUE RECOGNITION The Company recognizes assisted living service fee revenue in the period in which it is earned. Payments received in advance are reflected as unearned resident fees in the accompanying consolidated financial statements. Community fees are payments received from residents at move in and may be refundable ratably over three months from the date of admission if the resident moves out. Community fees are recognized as revenue when received less an estimate of the amount that may be refunded. The Company performs development and project management consulting services for its joint ventures and others and recognizes revenue for these fees as the services are provided. CASH EQUIVALENTS The Company considers all liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying value of cash equivalents approximates their fair value. PROPERTY Property and equipment are recorded at cost. In connection with the development of residence projects, the Company has entered into land purchase contracts, agreements with architects, financing agreements and construction contracts which are administered by the Company. All costs related to the development of residences are capitalized during the construction period. Indirect project development and pre-acquisition costs are allocated to projects and also are capitalized. Depreciation is computed when assets are placed in service, using the straight-line method over the respective useful lives of each class of asset which generally are as follows: - ----------------------------------------------- Land improvements 15 years - ----------------------------------------------- Buildings 40 years - ----------------------------------------------- Furnishings and equipment 3 - 10 years - -----------------------------------------------
Property and equipment consists of the following:
DECEMBER 31, ------------------------------- 1997 1996 ------------- ------------- Land and land improvements . . . . . . . . . $ 7,346,278 $ 2,927,878 Buildings. . . . . . . . . . . . . . . . . . 56,038,464 23,242,775 Furnishings and equipment. . . . . . . . . . 7,099,275 3,862,650 Construction-in-progress . . . . . . . . . . 49,425,405 24,147,397 ------------ ------------- Total . . . . . . . . . . . . . . . . . . 119,909,422 54,180,700 Accumulated depreciation . . . . . . . . . . (3,926,379) (2,168,952) ------------ ------------- Property and equipment - net . . . . . . . . $115,983,043 $ 52,011,748 ------------ ------------- ------------ -------------
22 - -------------------------------------------------------------------------------- UNUSUAL CHARGES During the third quarter of 1997, the Company recorded an unusual charge of approximately $1.4 million which primarily related to a $1.2 million charge as a result of a decision to abandon certain projects. The Company's property and equipment includes costs related to acquisition and development of projects in process, including capitalized costs associated with the Company's development department. At the time a project is abandoned, all previously capitalized costs are expensed. The remaining charges primarily relate to severance costs associated with third quarter resignations. In the fourth quarter of 1995 a charge of $492,288 was recorded to write-off an intangible asset referred to as the Karrington Concept as it was determined the asset had no future benefit. The Karrington Concept represented an amount allocated to an intangible asset contributed to the Company in connection with its organization by Associates. PRE-OPENING COSTS Pre-opening costs include costs to hire and train staff, costs to prepare the residence for operation and other related costs incurred prior to opening. Prior to 1995, costs incurred in connection with preparing the residence for opening and initial occupancy were capitalized and amortized over three years, commencing with the opening of the residence. In the first quarter of 1995, the Company changed the amortization period for pre-opening costs from three years to one to be more consistent with prevailing industry practice. The effect of this change was to increase amortization expense by $92,000 in 1995. DEFERRED FINANCING COSTS Financing costs are capitalized and amortized using the interest method over the term of the related financing. ORGANIZATION COSTS Organization costs are amortized using the straight-line method over five years. ADVERTISING EXPENSE Prior to 1995, the Company capitalized advertising expenditures as part of pre-opening costs. In the first quarter of 1995, the Company adopted the provisions of AICPA SOP 93-7, "Reporting on Advertising Costs," expensing advertising expenditures as incurred. The effect of this change was to increase the net loss by $129,000 for 1995. Advertising expenditures were approximately $709,000, $424,000 and $276,000 for 1997, 1996 and 1995, respectively. INCOME TAXES Partnership taxable income and losses were allocated to the partners for inclusion in their respective income tax returns. Accordingly, no provision or benefit for income taxes was recorded prior to July 18, 1996 (see Note 8). NET LOSS PER COMMON SHARE In February 1997, the FASB issued Statement No. 128, "Earnings Per Share," which eliminates the presentation of primary earnings per share (EPS) and requires the presentation of basic EPS (the principal difference being that common stock equivalents are not considered in the computation of basic EPS). It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. The Company was required to adopt Statement No. 128 for its year ended December 31, 1997. Net loss per common share - basic and diluted for 1997 is computed based on the weighted average number of shares outstanding during the period as the effect of including any common share equivalents would be antidilutive. Common share equivalents are comprised of outstanding stock options. For 1996 and 1995, a proforma net loss per share calculation is presented. The proforma net loss per share - basic and diluted is computed based on the weighted average number of shares outstanding during 1996 and 1995 based on 4,350,000 common shares outstanding following the reorganization (described in Note 9) and the 2,350,000 common shares issued as a result of the Company's initial public offering in July 1996. - -------------------------------------------------------------------------------- 3. ACQUISITION On April 30, 1997, the Company completed the acquisition, except for one entity which was completed on July 1, 1997, of Kensington Management Group, Inc. and affiliates (Kensington) of Golden Valley, Minnesota. Kensington operates innovative Alzheimer's care communities under the name Kensington Cottages which provide Alzheimer's care programs using medical directors with geriatric and dementia specialties. As of December 31, 1997, Kensington had 11 residences open and five residences under construction for a total of 515 beds in three states. The aggregate purchase price approximated $28 million, including cash, the issuance of 137,363 of the Company's common shares, and approximately $22 million in new and assumed bank debt financing. The transaction was accounted for using the purchase method of accounting. Accordingly, the Company began including the operating results of Kensington in its consolidated statement of operations subsequent to April 30, 1997 for seven of the entities and after July 1, 1997 for the remaining entity. As a result of the Kensington acquisition, certain accounts in the December 31, 1997 consolidated balance sheet increased significantly as compared to December 31, 1996. These increases included approximately $23 million in property and equipment, other asset increases of approximately $8.7 million related to costs 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- in excess of net assets acquired and deferred financing costs, increases in long-term obligations of approximately $25 million and the issuance of $1.5 million of common shares of the Company. Goodwill related to the acquisition is being amortized using the straight-line method over 40 years. The following unaudited proforma consolidated results of operations for the years ended December 31, 1997 and 1996 reflect the proforma effects of the Kensington acquisition as if such transaction had occurred at the beginning of the years presented below. The unaudited proforma information does not purport to be indicative of the Company's results of operations that actually would have occurred had the acquisition of Kensington taken place at the beginning of the years presented below, or that may be expected to occur in the future.
1997 1996 --------------- ------------ Revenues . . . . . . . . . $ 21,916,000 $ 16,230,000 --------------- ------------ Net loss . . . . . . . . . $ (6,426,000) $ (3,884,000) --------------- ------------ Net loss per share - basic and diluted. . . . $ (0.94) $ (0.70) --------------- ------------
- -------------------------------------------------------------------------------- 4. OTHER ASSETS Other assets consist of the following:
DECEMBER 31, ---------------------------------- 1997 1996 -------------- --------------- Pre-opening costs, less accumulated amortization of $428,390 and $180,663 at December 31, 1997 and 1996, respectively . . . . . $ 1,194,496 $ 497,298 Deferred financing costs, less accumulated amortization of $225,967 and $114,845 at December 31, 1997 and 1996, respectively . . . . . . . . . . . . 1,959,407 1,430,096 Organization costs and other, less accumulated amortization of $111,506 and $169,236 at December 31, 1997 and 1996, respectively . . . . 113,001 46,509 Prepaid rent . . . . . . . . . . . . . 2,432,500 -- Escrow balance (see Note 6) . . . . . . 797,193 1,385,004 Equity in joint ventures (see Note 7) . . . . . . . . . . . . . 384,141 852,503 Deposits and other . . . . . . . . . . 105,986 89,136 -------------- -------------- $ 6,986,724 $ 4,300,546 -------------- -------------- -------------- --------------
5. LEASE COMMITMENTS The Company has entered into operating lease arrangements expiring in 2010 to 2026 for six residences that are expected to open in 1998 with Meditrust (see Note 6) and two additional land leases related to other residences. These leases provide for renewal periods. Additional lease payments for certain leases are based on increased revenues during specified periods. Certain lessors require the respective residences to maintain specific debt service coverage ratios and consolidated minimum current ratios and net worth requirements. The Company is responsible for the payment of real estate taxes, site maintenance, and access road maintenance. The Company also leases vehicles and certain office equipment for periods up to five years. Future minimum lease payments under noncancellable operating leases are as follows: 1998 . . . . . . . . $ 5,265,758 1999 . . . . . . . . 5,143,117 2000 . . . . . . . . 5,092,937 2001 . . . . . . . . 4,999,889 2002 . . . . . . . . 4,920,323 THEREAFTER . . . . . 44,730,623 ----------- TOTAL . . . . . . . $70,152,647 ----------- -----------
Total rental costs incurred were $423,000, $221,000 and $104,000 for the years ended December 31, 1997, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- 6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS In February 1997, the Company entered into a $3 million revolving credit agreement expiring on March 31, 1998. The Company is currently negotiating an extension and increase in the committment which it expects to accomplish in April 1998. Interest is payable monthly and accrues at the bank's prime rate or LIBOR plus 2% if certain financial ratios are met. The Company is required to pay a commitment fee of .25% on the unused portion of the total credit allowed under the agreement and is required to maintain minimum net worth and current ratio amounts. In March 1997, the Company entered into a $5 million line of credit expiring in May 1999. Interest is payable monthly and, at the Company's option, accrues at the bank's prime rate or LIBOR rate plus .75%. At December 31, 1997, there was $6 million outstanding under these agreements. The weighted average interest rate for these agreements was 7.8% for 1997. 24 - -------------------------------------------------------------------------------- Long-term obligations consist of the following: - --------------------------------------------------------------------------------
DECEMBER 31, ---------------------------- 1997 1996 ------------ ------------- $67,735,000 mortgages payable, due from 2001 through 2006; interest rates ranging from 8.9% to 10.0% at December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,056,901 $ 18,360,794 $5,800,000 residential rental development revenue bonds due in annual principal payments ranging from $100,000 to $300,000 beginning in 1998 through 2021. Interest is determined weekly (3.8% at December 31, 1997) . . . . . . . . . . . . . . . . . 5,800,000 5,800,000 $45,460,000 construction mortgages payable, interest fluctuates from LIBOR plus 2.75% to prime plus 1.25% (8.5% to 9.75% at December 31, 1997). . . . . . . . . . . . . . . . . . 26,449,498 8,751,835 $7,500,000 promissory note payable to JMAC, Inc.; interest at prime (8.5% at December 31, 1997). Balance due in January 2000. . . . . . . . . . . . . . . . . . 7,500,000 -- Other long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 699,591 88,274 ------------ ------------ Total long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,505,990 33,000,903 Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (998,523) (242,211) ------------ ------------ Long term obligations, less current position . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,507,467 $ 32,758,692 ------------ ------------ ------------ ------------
The mortgage and construction mortgage loans are collateralized by substantially all the assets of each residence. Certain of the mortgage agreements require the respective residences to maintain specified debt service coverage ratios and consolidated minimum current ratios and net worth requirements. Certain lenders also require escrow balances to be held by the lenders which are included in other assets in the Company's consolidated balance sheets. In May 1996, the Company entered into non-binding financing commitment letters with Meditrust Mortgage Investments, Inc. ("MMI"), an affiliate of Meditrust (a large health care REIT). Under the letters, MMI is to provide up to approximately $100 million in financing for one existing and approximately 13 new residences, subject to various terms and conditions. The financings, which may be mortgage or lease financings, are to be entered into on a residence-by-residence basis, and are to be for terms of up to 14 years (with two additional five-year extension periods for the lease transactions). Interest during construction accrues at 2% above the prime rate. On completion of each residence, payments are to be set at an amount equal to 3.25% over the yield at that time on the ten-year U.S. Treasury notes. Additional interest or lease payments are contingent on increased revenues of a financed residence during specified periods. To date, the Company has completed mortgage agreements for four residences totaling $22.4 million and six operating lease transactions for residences expected to open in 1998 totaling $46.2 million. On April 30, 1997, the Company entered into a $27.6 million promissory note in conjunction with its acquisition of Kensington (see Note 3) and the build out of nine Kensington cottages on the Rochester, Minnesota campus. Interest accrues at 10% and is payable monthly. Principal and interest installments are payable monthly (based on a 25-year amortization period) beginning in September 1999 through April 2007 at which time the entire outstanding principal balance becomes due. The amount outstanding under the agreement was approximately $19.9 million as of December 31, 1997. The remaining amount will be disbursed in two phases at such time that the nine cottages achieve certain debt service coverage ratios. In October 1997, the Company entered a $14 million con-struction loan agreement for the development and construction of four assisted living residences. Interest is payable monthly and accrues at the bank's prime rate plus 11/2% during construction. In October 1999, the Company may elect, at its option, to convert the construction loan into a term loan maturing in October 2004. Principal and interest payments under the term loan would be based on a 25-year amortization schedule with interest accruing at either prime plus 11/2% or an amount equal to 3.0% over the yield at the time on five-year U.S. Treasury notes. The Company is required to maintain minimum net worth and current ratio amounts and, if the term loan is elected, to maintain debt service coverage ratios with respect to individual residences. At December 31, 1997, the company was in violation of certain covenants which the lender has waived through the end of 1998. As of December 31, 1997, there was $4.6 million outstanding under this agreement. In December 1997, the Company entered into construction loan agreements totaling $19 million. Interest is payable monthly and accrues at LIBOR plus 2.75% or prime plus 1/2%. In December 2000, the Company may elect, at its option, to extend the agreements up to two additional years. Principal and interest payments under the extension periods would be based on 25-year amortization schedules with interest accruing at variable rates on the debt service coverage ratio with respect to the individual residences. In September 1997, the Company entered into a $7.5 million promissory note with JMAC, Inc., a 34% shareholder of the Company. Interest is payable monthly and accrues at a bank's prime rate. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Interest costs incurred were $5,110,000, $2,309,000 and $1,433,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Of these amounts $2,367,000, $1,038,000 and $411,000 were capitalized to construction-in-progress in the respective periods. Interest cost incurred includes amounts due under obligations to JMAC and amounted to $190,000 and $175,000 in 1997 and 1996, respectively. No such amounts were incurred for 1995. The carrying amounts of long-term obligations approximate fair value as the interest rates are self-adjusting or are comparable to rates currently available. As of December 31, 1997, the long-term obligations mature as follows: 1998 . . . . . . . . $ 998,523 1999 . . . . . . . . 3,458,080 2000 . . . . . . . . 29,023,319 2001 . . . . . . . . 4,740,407 2002 . . . . . . . . 960,981 Thereafter . . . . . 59,324,680 ------------- Total . . . . . . . $ 98,505,990 ------------- -------------
Effective January 1, 1995, the Company's partners entered into a recapitalization agreement whereby subordinated debentures and accrued interest totaling $5,330,458 were converted to partners' equity. In December 1995, the Company entered into a loan agreement with JMAC to provide up to $8,000,000 in subordinated loans to the Company. Interest accrued at 15% per annum. The total amount outstanding of $5,710,000, including accrued interest, was repaid in July 1996 with proceeds from the public offering at which time the agreement terminated. In January 1998, the Company entered into two additional construction mortgages totaling $13.6 million at a variable interest rate of LIBOR plus 2.75%. - -------------------------------------------------------------------------------- 7. INVESTMENT IN UNCONSOLIDATED ENTITIES The Company and Sisters of Charity Health Care Systems, Inc. of Cincinnati, Ohio (a founding system of Catholic Health Initiatives ("CHI")), have entered into five joint venture agreements to develop, own and operate six assisted living residences in Ohio, New Mexico and Colorado. Each project is jointly owned by the Company and CHI, with the Company typically owning approximately 20% of the equity of the project. Construction and permanent debt financing generally is to be arranged by CHI on behalf of the venture and is to be non-recourse to the Company. As of December 31, 1997, the Company has guaranteed $1 million of joint venture debt financing. The Company provides all development and management services with respect to each residence under a standard agreement that generally provides for a development fee of $250,000 per project and a management fee of 5% of revenues. Under the agreements with CHI, the Company earned and recorded as revenue development fees of $241,000, $464,000 and $363,000 in 1997, 1996 and 1995, respectively. The Company serves as manager for each of the residences and receives management fees upon commencement of operations. Management fees of $305,000, $149,000 and $112,000 have been recorded as revenues for the years ended December 31, 1997, 1996 and 1995, respectively. As of December 31, 1997, 1996 and 1995, six, three and one residences were open, respectively. Summarized unaudited financial information of joint ventures is presented below.
DECEMBER 31, ------------------------- 1997 1996 ------------ ----------- BALANCE SHEETS Current assets . . . . . . . . . . . . . . . . . . $ 1,269,109 $ 1,386,751 Property . . . . . . . . . . . . . . . . . . . . . 29,140,618 20,173,572 Other assets . . . . . . . . . . . . . . . . . . . 946,972 656,715 ----------- ----------- Total assets . . . . . . . . . . . . . . . . . . $31,356,699 $22,217,038 ----------- ----------- ----------- ----------- Current liabilities . . . . . . . . . . . . . . . $ 1,919,471 $ 2,489,313 Long-term obligations. . . . . . . . . . . . . . . 26,662,372 15,364,102 Joint venture equity . . . . . . . . . . . . . . . 2,774,856 4,363,623 ----------- ----------- Total liabilities and joint venture equity. . . . . . . . . . . . . . . . . $31,356,699 $22,217,038 ----------- ----------- ----------- -----------
DECEMBER 31, -------------------------------------- 1997 1996 1995 ----------- ----------- ------------ STATEMENTS OF OPERATIONS Residence revenues . . . . . . . . . . . . . $ 5,468,781 $ 2,347,278 $ 1,868,618 Operating expenses . . . . . . . . . . . . . . 4,690,309 1,809,886 1,333,203 Depreciation and amortization expense. . . . . . . . . . . . . . . 979,746 308,589 281,684 Interest expense. . . . . . . . . . . . . . . 977,490 436,646 464,788 ----------- ----------- ----------- Total expenses . . . . . . . . . . . . 6,647,545 2,555,121 2,079,675 ----------- ----------- ----------- Net loss . . . . . . . . . . . . . . . $(1,178,764) $(207,843) $ (211,057) ----------- ----------- ----------- ----------- ----------- -----------
The Company's equity in net loss of unconsolidated entities included in its accumulated deficit at December 31, 1997 was $270,000. 26 - -------------------------------------------------------------------------------- 8. INCOME TAXES As a partnership, Karrington Operating recorded no provision for income taxes. Partnership income and losses were allocated to JMAC Properties, Inc. and Associates for inclusion in their respective income tax returns. As a result of the reorganization (described in Note 9), the Company applied the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" subsequent to July 18, 1996. Deferred income taxes were provided for differences in the basis for tax purposes and for financial accounting purposes of recorded assets and liabilities as of July 18, 1996. Accordingly, a tax provision and a net deferred income tax liability of $938,000 was recorded in the 1996 balance sheet and statement of operations. The Company recorded a deferred tax benefit of $255,000 related to its financial reporting loss before taxes of $625,000 for the period from July 18, 1996 to December 31, 1996. Significant components of income tax expense for the year ended December 31, 1997 and for the period from July 18, 1996 to December 31, 1996 are as follows:
1997 1996 ------------ ----------- Current: Federal. . . . . . . . . . . . . . . . . . . $ -- $ -- State. . . . . . . . . . . . . . . . . . . . -- -- ----------- ---------- Total current. . . . . . . . . . . . . -- -- ----------- ---------- Deferred: Federal. . . . . . . . . . . . . . . . . . . (1,977,000) 580,000 State. . . . . . . . . . . . . . . . . . . . (343,000) 103,000 Increase in valuation allowance . . . . . . . . . . . . . . . . 2,130,000 -- ----------- ---------- Total deferred . . . . . . . . . . . . (190,000) 683,000 ----------- ---------- Total provision (benefit). . . . . . . . . . . . . $ (190,000) $ 683,000 ----------- ---------- ----------- ----------
A reconciliation of the recorded benefit based on the Federal statutory income tax rate to the Company's income tax provision for 1997 and the period from July 18, 1996 to December 31, 1996 is as follows:
1997 1996 ------------ ----------- Benefit at Federal statutory rate. . . . . . . . . (34.0)% (34.0)% State income taxes, net of Federal benefit . . . . . . . . . . . . . . . . (5.9) (5.9) Nondeductible expenses . . . . . . . . . . . . . . 0.3 0.9 Valuation allowance. . . . . . . . . . . . . . . . 36.4 -- Other . . . . . . . . . . . . . . . . . . . . . . -- (1.8) ----------- ---------- Effective income tax rate . . . . . . . . . . . (3.2)% (40.8)% ----------- ---------- ----------- ----------
Deferred income taxes arise from temporary differences between financial reporting and tax reporting bases of assets and liabilities, and operating loss carryforwards for tax purposes. The components of the deferred income tax assets and liabilities are as follows:
DECEMBER 31, ------------------------- 1997 1996 ------------ ----------- Deferred income tax assets: Accrued liabilities . . . . . . . . . . . . . $ 58,000 $ 38,000 Asset amortization. . . . . . . . . . . . . . 327,000 216,000 Operating loss carryforwards . . . . . . . . . . . . . . . 2,778,000 322,000 Other . . . . . . . . . . . . . . . . . . . . 10,000 20,000 ------------ ---------- Total deferred income tax assets. . . . . . . . . . . . . . . . . . 3,173,000 596,000 Valuation allowance . . . . . . . . . . . . . . (2,130,000) -- ------------ ---------- Net deferred income tax assets. . . . . . . . . 1,043,000 596,000 ------------ ---------- Deferred income tax liabilities: Property related. . . . . . . . . . . . . . . (1,534,000) (1,262,000) Other . . . . . . . . . . . . . . . . . . . . (2,000) (17,000) ------------ ---------- Total deferred income tax liabilities . . . . . . . . . . . . . . . (1,536,000) (1,279,000) ------------ ---------- Net deferred income tax liabilities . . . . . . . . . . . . . . . $ (493,000) $ (683,000) ------------ ---------- ------------ ----------
Net deferred income tax assets, including net operating loss carry-forwards, represent the amounts of tax assets that the company could realize if certain tax planning strategies were employed. No valuation allowance for deferred tax assets was recorded at December 31, 1996 as all tax assets could be realized via tax planning strategies. The Company's net operating loss carryforwards of $6.9 million expire from 2011 through 2012. - -------------------------------------------------------------------------------- 9. EQUITY At December 31, 1997, the Company's authorized capital shares consisted of (a) 28,000,000 common shares, without par value, of which 6,837,363 were issued and outstanding and (b) 2,000,000 non-voting preferred shares without par value, none of which have been issued. The Company's Board of Directors has the authority to issue preferred shares in one or more series and to fix the designations, the number of shares in such series, liquidation preferences, dividend rates, conversion rights and redemption provisions of the shares constituting any series, without any further vote or action by the Company's shareholders. Any series of preferred shares so issued could have priority over the common shares with respect to dividend or liquidation rights or both. On July 18, 1996, 3,000,000 of the Company's common shares were sold pursuant to its initial public offering. Of the total shares sold, 2,350,000 common shares were sold by the Company and 650,000 common shares were sold by JMAC. The net proceeds to the Company were approximately $27.5 million of which $5.7 million was used to repay indebtedness due JMAC. The balance of the net proceeds was used to finance the develop- 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- ment and acquisition of additional assisted living residences and for working capital and general corporate purposes. Immediately prior to July 18, 1996, the shareholders of JMAC Properties, Inc. and Associates contributed the stock in their respective companies for stock in the Company. The shareholder of JMAC Properties, Inc. received 66 2/3% of the pre-offering outstanding common shares of the Company while the shareholders of Associates received the remaining 33 1/3% (a total of 4,350,000 shares). Following the reorganization, JMAC Properties, Inc. and Associates became wholly-owned subsidiaries of the Company. As a result, the Company owned 100% of the equity interests of Karrington Operating. As part of the consideration for the Kensington acquisition (see Note 3) the Company issued 137,363 common shares on April 30, 1997. - -------------------------------------------------------------------------------- 10. INCENTIVE STOCK AND 401(k) PLANS The Company has adopted the 1996 Incentive Stock Plan (the "Plan"). The Plan provides for the grant of incentive and non-qualified stock options, stock appreciation rights, restricted stock, performance shares and unrestricted common shares. The Plan also provides for the purchase of common shares through payroll deductions by employees of the Company who have satisfied certain eligibility requirements. The maximum number of shares available for issuance under the Plan is 550,000. The Company has granted non-qualified options to certain officers, key employees and non-employee directors. The employee options have a ten-year term with 25% of the options vesting on each of the second through the fifth anniversaries of the date of grant. Non-employee director options are exercisable beginning six months after the effective date of grant with a ten-year term. Each continuing non-employee director will receive on the day after each annual meeting of shareholders, a grant of a non-qualified stock option to purchase 2,000 common shares of the Company at an exercise price equal to the fair market value of the shares on the date of grant. Stock option activity for 1997 and 1996 is as follows:
WEIGHTED AVERAGE RANGE OF EXERCISE EXERCISE SHARES PRICE PRICES -------- -------- ------------ Balance December 31, 1995. . . . . . . . -- Granted. . . . . . . . . . . . . . . . 169,000 $13.00 $13.00 -------- ------ ------------- Balance December 31, 1996. . . . . . . . 169,000 13.00 13.00 Granted. . . . . . . . . . . . . . . . 215,500 12.25 $ 11.00-12.88 Forfeited. . . . . . . . . . . . . . . (27,000) 13.00 13.00 -------- ------ ------------- Balance December 31, 1997. . . . . . . . 357,500 12.55 11.00-13.00 -------- ------ ------------- -------- ------ -------------
At December 31, 1997, the average remaining contractual life was 9.2 years and 72,000 non-employee director options were exercisable at a weighted average exercise price of $12.88. In 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." The Statement allows for a fair value-based method of accounting for employee stock options and similar equity instruments. In accordance with the provisions of SFAS No. 123, the Company has elected to account for options granted under the Plan in accordance with APB Opinion 25, "Accounting for Stock Issued to Employees" and related interpretations. If the Company had elected to recognize compensation cost based on the fair value of options at the grant date as prescribed by SFAS No. 123, net loss and net loss per common share - basic and diluted would have increased by $295,000 and $.04, respectively, for 1997 and $291,000 and $.05, respectively, for 1996. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model. The assumptions used in the model included an expected dividend yield of 0%, an expected stock price volatility of .47 in 1997 and .34 in 1996, a risk-free interest rate of 6.0% in 1997 and 6.5% in 1996, and an expected life of the options of 2 or 7 years in 1997 and 10 years in 1996. The financial effects of applying SFAS No. 123 are not likely to be representative of the effects on reported results of operations for future years. In 1997, the Company established the Karrington Health, Inc. and Affiliates 401(k) Plan (the "401(k) Plan") for the benefit of eligible full-time employees of the Company and its joint ventures. Eligible participants may contribute up to 10% of their compensation to the 401(k) Plan and self-direct such contributions. The Company may, in its discretion, make annual matching and/or discretionary contributions on behalf of each eligible participant which vest over a six year period. No Company matching or discretionary contributions were expensed in 1997. - -------------------------------------------------------------------------------- 11. COMMITMENTS The Company has commitments totaling approximately $10,926,000 at December 31, 1997 for various land purchase contracts and $38,284,000 for various construction contracts. - -------------------------------------------------------------------------------- 12. SUPPLEMENTAL PROFORMA LOSS PER SHARE Supplemental proforma net loss and net loss per share (basic and diluted) for the year ended December 31, 1996 would have been $2,535,000 and $.44, respectively, had the retirement of the JMAC debt taken place at January 1, 1996. Supplemental net loss per share (basic and diluted) was based on the weighted average number of shares of common stock outstanding during the period plus the estimated number of shares to be issued to repay the JMAC debt. 28 SELECTED CONSOLIDATED FINANCIAL DATA - -------------------------------------------------------------------------------- (AMOUNTS IN THOUSANDS, EXCEPT OTHER OPERATING DATA AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- --------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues: Residence operations . . . . . . . . . . . . . $ 18,539 $ 8,953 $ 6,220 $ 4,977 $ 2,288 Development and project management fees. . . . . . . . . . . . . . . 681 643 524 287 18 -------- -------- -------- --------- -------- Total. . . . . . . . . . . . . . . . . . . 19,220 9,596 6,744 5,264 2,306 Expenses: Residence operations . . . . . . . . . . . . . 13,683 6,486 4,335 3,409 1,908 General and administrative . . . . . . . . . . 4,433 2,773 1,705 634 170 Depreciation and amortization. . . . . . . . . 2,684 1,379 980 844 505 Rent expense . . . . . . . . . . . . . . . . . 259 89 45 45 -- Unusual charges. . . . . . . . . . . . . . . . 1,380 -- 492 -- -- -------- -------- -------- --------- -------- Total. . . . . . . . . . . . . . . . . . . 22,439 10,727 7,557 4,932 2,583 -------- -------- -------- --------- -------- Operating income (loss). . . . . . . . . . . . . (3,219) (1,131) (813) 332 (277) Interest expense . . . . . . . . . . . . . . . . (2,743) (1,272) (1,023) (1,350) (707) Interest income. . . . . . . . . . . . . . . . . 349 470 -- -- -- Equity in net loss of unconsolidated entities. . (247) (7) (105) (17) -- -------- -------- -------- --------- -------- Loss before income taxes . . . . . . . . . . . . (5,860) (1,940) (1,941) (1,035) (984) Deferred income tax benefit (provision). . . . . 190 (683) -- -- -- -------- -------- -------- --------- -------- Net loss . . . . . . . . . . . . . . . . . . . $ (5,670) $ (2,623) $ (1,941) $ (1,035) $ (984) -------- -------- -------- --------- -------- -------- -------- -------- --------- -------- Net loss per common share - basic and diluted: Actual . . . . . . . . . . . . . . . . . . . . $ (.83) -- -- -- -- Proforma . . . . . . . . . . . . . . . . . . . -- $ (.48) $ (.45) $ (.24) $ (.23) Weighted average number of common shares outstanding: Actual . . . . . . . . . . . . . . . . . . . . 6,792 -- -- -- -- Proforma . . . . . . . . . . . . . . . . . . . -- 5,416 4,350 4,350 4,350 OTHER OPERATING DATA: Residences (end of year) (1): Open . . . . . . . . . . . . . . . . . . . . 27 9 5 4 3 Under construction . . . . . . . . . . . . . . 19 17 5 1 1 Under contract . . . . . . . . . . . . . . . . 20 10 8 2 1 Number of units (end of year) (1): Open . . . . . . . . . . . . . . . . . . . . 1,124 454 272 213 160 Under construction . . . . . . . . . . . . . . 1,019 1,010 243 59 53 Under contract . . . . . . . . . . . . . . . . 1,390 742 509 128 59 BALANCE SHEET DATA: Working capital (deficit). . . . . . . . . . . . . $ (6,694) $ 7,806 $ (1,575) $ (911) $ (702) Total assets . . . . . . . . . . . . . . . . . . . 141,316 69,550 26,676 16,292 14,883 Long-term obligations, less current portion. . . . 97,507 32,759 18,250 16,778 14,472 Equity (deficit) . . . . . . . . . . . . . . . . . 26,507 30,677 5,841 (1,763) (728)
(1) Includes residences jointly-owned by the Company and CHI. 29 COMMON SHARE INFORMATION - -------------------------------------------------------------------------------- The Company's common shares, without par value, are quoted on the Nasdaq National Market System under the symbol KARR. The following table reflects the range of the reported high and low closing prices of the common shares as reported on the Nasdaq National Market System, from the effective date of the IPO (July 18, 1996) to March 16, 1998. According to the records of the Company's transfer agent, the Company had 102 shareholders of record as of March 13, 1998. The Company believes a substantially larger number of beneficial owners hold such shares in depository or nominee form. The Company does not pay dividends on its common shares and does not anticipate that it will pay dividends in the foreseeable future. However, the payment and amount of future dividends remain within the discretion of the Company's Board of Directors and will depend upon the Company's results of operations, financial condition, capital requirements, restrictions imposed by financing arrangements and other relevant factors.
HIGH LOW - -------------------------------------------------------------------------------- 1996: Quarter Ended September 30, 1996 (beginning July 19, 1996). . . $13.50 $12.25 December 31, 1996 . . . . . . . . . . . . . . . . 16.00 12.25 - -------------------------------------------------------------------------------- 1997: Quarter Ended March 31, 1997. . . . . . . . . . . . . . . . . . $12.75 $10.50 June 30, 1997 . . . . . . . . . . . . . . . . . . 16.00 10.25 September 30, 1997. . . . . . . . . . . . . . . . 16.50 11.50 December 31, 1997 . . . . . . . . . . . . . . . . 14.50 10.50 - -------------------------------------------------------------------------------- 1998: Through March 16, 1998 . . . . . . . . . . . . . $13.63 $11.00 - --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION - -------------------------------------------------------------------------------- CORPORATE OFFICE Karrington Health, Inc. 919 Old Henderson Road Columbus, OH 43220 Phone: (614) 451-5151 http://www.karrington.com COMMON STOCK The common stock of Karrington Health, Inc. is traded on the Nasdaq National Market System under the symbol "KARR". TRANSFER AGENT & REGISTRAR Shareholders with inquiries regarding address corrections, lost certificates, changes in registration, and other shareholder matters should contact Karrington's stock transfer agent listed as follows: National City Bank Corporate Trust Operations P.O. Box 92301 Cleveland, OH 44193-0900 1-800-622-6757 INVESTOR RELATIONS CONTACT Richard R. Slager, Chairman and CEO, (614) 451-5151 FINANCIAL INFORMATION Requests for published information about Karrington Health, Inc. may be sent to the Company's Corporate Office or telephoned in to the Company's Investor Relations Contact at (614) 451-5151. RESEARCH COVERAGE J. C. Bradford & Co. Salomon Smith Barney Inc. ANNUAL MEETING The 1998 Annual Meeting of Shareholders will be held at 11:00 a.m. (EST) Tuesday, May 12, 1998 at the Wyndham Dublin Hotel. Shareholders are cordially invited to attend. FORM 10-K The Company's Annual Report on Form 10-K will be sent free of charge to shareholders upon written request to the Investor Relations Department at Karrington Health, Inc.'s Corporate Office. [LOGO] 30 DIRECTORS AND OFFICERS - -------------------------------------------------------------------------------- BOARD OF DIRECTORS - -------------------------------------------------------------------------------- JOHN S. CHRISTIE President, JMAC, Inc. JOHN H. MCCONNELL Founder and Chairman Emeritus, Worthington Industries, Inc. HAROLD A. POLING Retired, former Chairman, Ford Motor Company DAVID H. HOAG Chairman, President and Chief Executive Officer, The LTV Corporation CHARLES H. MCCREARY, III Partner, Bricker & Eckler MICHAEL H. THOMAS Executive Vice President and Treasurer, JMAC, Inc. BERNADINE P. HEALY, M.D. Dean, College of Medicine, The Ohio State University JAMES V. PICKETT Vice Chairman, Banc One Capital Corporation ROBERT D. WALTER Chairman and Chief Executive Officer, Cardinal Health, Inc. CORPORATE OFFICERS - -------------------------------------------------------------------------------- RICHARD R. SLAGER Chairman and Chief Executive Officer PETE A. KLISARES President and Chief Operating Officer THOMAS J. KLIMBACK Executive Vice President and Chief Financial Officer ROBIN V. HOLDERMAN Executive Vice President of Corporate Development JOHN K. KNUTSON Executive Vice President of Operations MARK N. MACE Senior Vice President of Finance, Treasurer, Principal Accounting Officer STEPHEN LEWIS Senior Vice President of Development, General Counsel and Assistant Secretary 31 LISTING OF KARRINGTON PROPERTIES (AS OF MARCH 23, 1998) - --------------------------------------------------------------------------------
TYPE OF METRO OPENED OR NUMBER NUMBER OWNERSHIP LOCATION ACQUIRED OF UNITS OF BEDS - ----------------------------------------------------------------------------------------- OPEN RESIDENCES - ----------------------------------------------------------------------------------------- Karrington of Bexley O Columbus, OH 10/92 53 62 - ----------------------------------------------------------------------------------------- Karrington on the Scioto O Columbus, OH 3/93 53 63 - ----------------------------------------------------------------------------------------- Karrington at Tucker Creek O Columbus, OH 12/93 54 62 - ----------------------------------------------------------------------------------------- Karrington of Oakwood J Dayton, OH 11/94 53 62 - ----------------------------------------------------------------------------------------- Karrington of Shaker Heights O Cleveland, OH 10/95 59 67 - ----------------------------------------------------------------------------------------- Karrington Place (Alz. Residence) O Columbus, OH 2/96 26 31 - ----------------------------------------------------------------------------------------- Karrington of South Hills O Pittsburgh, PA 8/96 67 81 - ----------------------------------------------------------------------------------------- Karrington of Albuquerque J Albuquerque, NM 10/96 61 74 - ----------------------------------------------------------------------------------------- St. Francis Place (Alz. Residence) J Albuquerque, NM 10/96 28 32 - ----------------------------------------------------------------------------------------- Karrington at Fall Creek O Indianapolis, IN 3/97 61 71 - ----------------------------------------------------------------------------------------- Karrington Commons of Buffalo O Buffalo, MN 5/97 72 75 - ----------------------------------------------------------------------------------------- Karrington Commons of Bismarck O Bismarck, ND 5/97 72 81 - ----------------------------------------------------------------------------------------- Karrington Cottages of Bismarck O Bismarck, ND 5/97 12 20 - ----------------------------------------------------------------------------------------- Karrington Cottages of Waterloo O Waterloo, IA 5/97 12 20 - ----------------------------------------------------------------------------------------- Karrington Cottages of Mankato O Mankato, MN 5/97 12 20 - ----------------------------------------------------------------------------------------- Karrington Cottages of Rochester I O Rochester, MN 5/97 12 20 - ----------------------------------------------------------------------------------------- Karrington Cottages of Rochester II O Rochester, MN 5/97 12 20 - ----------------------------------------------------------------------------------------- Karrington Cottages of Rochester III O Rochester, MN 5/97 16 28 - ----------------------------------------------------------------------------------------- Karrington Cottages of Rochester IV O Rochester, MN 5/97 16 28 - ----------------------------------------------------------------------------------------- Karrington of Kenwood J Cincinnati, OH 6/97 67 77 - ----------------------------------------------------------------------------------------- Karrington Cottages of Buffalo I O Buffalo, MN 7/97 12 20 - ----------------------------------------------------------------------------------------- Karrington Cottages of Buffalo II O Buffalo, MN 7/97 12 20 - ----------------------------------------------------------------------------------------- Karrington of Willow Lake O Indianapolis, IN 8/97 61 72 - ----------------------------------------------------------------------------------------- Karrington of Fort Wayne O Fort Wayne, IN 8/97 61 72 - ----------------------------------------------------------------------------------------- Karrington of Englewood J Dayton, OH 9/97 48 61 - ----------------------------------------------------------------------------------------- Karrington of Colorado Colorado Springs J Springs, CO 12/97 64 71 - ----------------------------------------------------------------------------------------- Karrington of Findlay O Findlay, OH 12/97 48 61 - ----------------------------------------------------------------------------------------- Karrington of Fremont O Fremont, OH 2/98 48 61 - ----------------------------------------------------------------------------------------- Karrington of Wooster O Wooster, OH 2/98 48 61 - ----------------------------------------------------------------------------------------- Karrington of Bath L Akron, OH 2/98 67 75 - ----------------------------------------------------------------------------------------- Karrington of Gahanna (Alz. Residence) L Columbus, OH 2/98 50 54 - ----------------------------------------------------------------------------------------- Karrington of Carmel L Indianapolis, IN 3/98 57 72 - ----------------------------------------------------------------------------------------- TOTAL 1,394 1,694
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- KEY: - -------------------------------------------------------------------------------- O = OWNED I = IN ZONING - -------------------------------------------------------------------------------- L = LEASED J = JOINTLY OWNED - -------------------------------------------------------------------------------- M = MAJORITY OWNED Z = ZONED - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
TYPE OF METRO PLANNED PLANNED PLANNED OWNERSHIP LOCATION OPENING UNITS BEDS - -------------------------------------------------------------------------------------------- RESIDENCES UNDER CONSTRUCTION - -------------------------------------------------------------------------------------------- Karrington Cottages of Rochester V O Rochester, MN 4/98 16 28 - -------------------------------------------------------------------------------------------- Karrington Cottages of Rochester VI O Rochester, MN 4/98 20 36 - -------------------------------------------------------------------------------------------- Karrington of Rocky River O Cleveland, OH 4/98 64 72 - -------------------------------------------------------------------------------------------- Karrington of South Charlotte O Charlotte, NC 4/98 74 84 - -------------------------------------------------------------------------------------------- Karrington Cottages of Rochester VII O Rochester, MN 4/98 20 36 - -------------------------------------------------------------------------------------------- Karrington Cottages of Rochester VIII O Rochester, MN 4/98 20 36 - -------------------------------------------------------------------------------------------- Karrington of Presque Isle Bay O Erie, PA 5/98 69 80 - -------------------------------------------------------------------------------------------- Karrington Cottages of Rochester IX O Rochester, MN 5/98 15 27 - -------------------------------------------------------------------------------------------- Karrington of Ann Arbor L Ann Arbor, MI 6/98 67 75 - -------------------------------------------------------------------------------------------- Karrington of Poland L Youngstown, OH 7/98 67 75 - -------------------------------------------------------------------------------------------- Karrington of Eastover L Charlotte, NC 8/98 88 100 - -------------------------------------------------------------------------------------------- Karrington of Park Ridge M Chicago, IL 8/98 111 132 - -------------------------------------------------------------------------------------------- Karrington at The Shawhan O Tiffin, OH 9/98 54 66 - -------------------------------------------------------------------------------------------- Karrington of Monroeville O Pittsburgh, PA 9/98 64 72 - -------------------------------------------------------------------------------------------- TOTAL 749 919
STAGE OF METRO PLANNED PLANNED PLANNED DEVELOPMENT LOCATION OPENING UNITS BEDS - -------------------------------------------------------------------------------------------- RESIDENCES IN DEVELOPMENT Karrington at the Highlands Z Mobile, AL 2Q, 1999 68 77 - -------------------------------------------------------------------------------------------- Karrington of Northpointe Z Jackson, MS 2Q, 1999 68 77 - -------------------------------------------------------------------------------------------- Karrington of Northwood Z Dallas, TX 2Q, 1999 68 78 - -------------------------------------------------------------------------------------------- Karrington of Hamilton Z Hamilton, OH 2Q, 1999 48 61 - -------------------------------------------------------------------------------------------- Karrington of Finneytown Z Cincinnati, OH 2Q, 1999 67 75 - -------------------------------------------------------------------------------------------- Karrington of Pleasant Valley Z Cleveland, OH 2Q, 1999 72 82 - -------------------------------------------------------------------------------------------- Karrington of Farmington Hills Z Detroit, MI 2Q, 1999 72 83 - -------------------------------------------------------------------------------------------- Karrington of Millcreek Z Erie, PA 3Q, 1999 48 61 - -------------------------------------------------------------------------------------------- Karrington of Edina Z Minneapolis, MN 3Q, 1999 93 105 - -------------------------------------------------------------------------------------------- Karrington of Naperville I Chicago, IL 3Q, 1999 93 105 - -------------------------------------------------------------------------------------------- Karrington of Kearney Z Kearney, NE 3Q, 1999 48 61 - -------------------------------------------------------------------------------------------- Karrington of Mansfield I Mansfield, OH 3Q, 1999 48 61 - -------------------------------------------------------------------------------------------- Karrington of Tacoma Z Tacoma, WA 4Q, 1999 72 83 - -------------------------------------------------------------------------------------------- Karrington of Grand Rapids I Grand Rapids, MI 4Q, 1999 72 83 - -------------------------------------------------------------------------------------------- Karrington of Forest Acres I Columbia, SC 4Q, 1999 72 83 - -------------------------------------------------------------------------------------------- Karrington of Cuyahoga Falls I Akron, OH 4Q, 1999 72 83 - -------------------------------------------------------------------------------------------- Karrington of Audobon Park I Memphis, TN 4Q, 1999 93 105 - -------------------------------------------------------------------------------------------- Karrington of Bethel Park I Pittsburgh, PA 4Q, 1999 72 83 - -------------------------------------------------------------------------------------------- Karrington of Santa Rosa Z Santa Rosa, CA 1Q, 2000 72 83 - -------------------------------------------------------------------------------------------- Karrington of Novato Z Novato, CA 1Q, 2000 72 83 - -------------------------------------------------------------------------------------------- TOTAL 1,390 1,612
32 KARRINGTON MARKET AREAS* KARRINGTON RESIDENCES WHICH ARE CURRENTLY OPEN (TOTAL 32) - - OPEN RESIDENCES KARRINGTON RESIDENCES WHICH ARE CURRENTLY OPEN OR UNDER CONSTRUCTION (TOTAL 46) - - RESIDENCES UNDER CONSTRCTION KARRINGTON RESIDENCES WHICH ARE CURRENTLY OPEN, UNDER CONSTRUCTION OR UNDER CONTRACT (TOTAL 66) - - RESIDENCES IN DEVELOPMENT *INFORMATION IS CURRENT AS OF MARCH 23, 1998 [MAP: Three maps of United States showing (1) Karrington locations open, (2) Karrington locations open or under construction and (3) Karrington locations open, under construction or under contract.] 33 KARRINGTON HEALTH, INC. 919 OLD HENDERSON ROAD COLUMBUS, OHIO 43220 TEL: 614.451.5151 FAX: 614.451.5199 http://www.karrington.com EX-21 3 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Karrington Health, Inc. ("KHI") - - DevelopMed Associates, Inc. ("DMA") (an Ohio corporation owned 100% by KHI) - - JMAC Properties, Inc. ("JMAC") (an Ohio corporation owned 100% by KHI) - - Karrington Operating Company, Inc. ("KOC") (an Ohio corporation owned 100% by KHI) (dba Karrington Communities) - Karrington Acquisition, Inc. (An Ohio corporation owned 100% by KOC) - Karrington Acquisition II, Inc. (An Ohio corporation owned 100% by KOC) - Karrington of Park Ridge LLC (an Ohio LLC owned 80% by KOC) - Karrington of Millcreek LLC (an Ohio LLC owned 80% by KOC) - Kensington Cottages Corporation of America ("KCCA") (a Minnesota corporation owned 100% by KOC) - Kensington Cottages Corporation of Minnesota (a Minnesota corporation owned 100% by KCCA) - Kensington Management Group, Inc. (a Minnesota corporation owned 100% by KCCA) EX-23.1 4 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 March 6, 1998, included in the 1997 Annual Report to Shareholders of Karrington Health, Inc. Our audit also included the financial statement schedule of Karrington Health, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-16971) pertaining to the 1996 Incentive Stock Plan of our report dated March 6, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Karrington Health, Inc. Ernst & Young LLP Columbus, Ohio March 30, 1998 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ RICHARD R. SLAGER Richard R. Slager Chairman of the Board and Chief Executive Officer 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director and/or officer of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ PETE A. KLISARES Pete A. Klisares President and Chief Operating Officer 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 Pete A. Klisares, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director and/or officer of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ THOMAS J. KLIMBACK Thomas J. Klimback Executive Vice President, Chief Financial Officer 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director and/or officer of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ MARK N. MACE Mark N. Mace Senior Vice President, Finance and Treasurer 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ CHARLES H. MCCREARY Charles H. McCreary Director and Secretary 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ JOHN S. CHRISTIE John S. Christie Director 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ BERNADINE P. HEALY Bernadine P. Healy Director 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ DAVID H. HOAG David H. Hoag Director 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ JOHN H. MCCONNELL John H. McConnell Director 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ JAMES V. PICKETT James V. Pickett Director 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ HAROLD A. POLING Harold A. Poling Director 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 Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ MICHAEL H. THOMAS Michael H. Thomas Director EX-24.13 17 EXHIBIT 24.13 EXHIBIT 24.13 POWER OF ATTORNEY The undersigned director and/or officer of Karrington Health, Inc. (the "Company"), does hereby constitute and appoint Richard R. Slager and Thomas J. Klimback, or either of them, my true and lawful attorneys and agents, each with full power of substitution, to do any and all acts and things in my name and on my behalf in my capacity as a director of the Company and to execute any and all instruments for me and in my name in the capacity indicated above, which said attorneys or agents, or either of them, may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission thereunder, in connection with the filing requirements of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"), including specifically but without limitation, power and authority to sign for me in my name, in the capacity indicated above, the 1997 Form 10-K and any and all amendments to such 1997 Form 10-K; and I do hereby ratify and confirm all that the said attorneys and agents, or their substitute or substitutes, or either of them, shall do or cause to be done by virtue hereof. /s/ ROBERT D. WALTER Robert D. Walter Director EX-27 18 EXHIBIT 27
5 This schedule contains summary financial information extracted from the Karrington Health, Inc. Annual Report to Shareholders for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1997 DEC-31-1997 4,370,488 0 5,462,750 0 0 10,114,960 119,909,422 3,926,379 141,315,800 16,808,791 0 0 0 33,484,712 (6,978,170) 141,315,800 0 19,219,883 0 13,683,245 7,273,689 1,380,000 2,743,353 (5,860,404) 190,000 (5,670,404) 0 0 0 (5,670,404) (.83) (.83)
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