EXHIBIT 99.3
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. Karrington
Health, Inc. desires to take advantage of the "safe harbor" provisions of the
Act. Certain information, particularly information regarding future economic
performance and finances and plans and objectives of management, contained in
Karrington's Annual Report on Form 10-K for fiscal year 1998 is forward-looking.
In some cases, information regarding certain important factors that could cause
actual results of operations or outcomes of other events to differ materially
from any such forward-looking statement appears together with such statement. In
addition, forward-looking statements are subject to other risks and
uncertainties affecting the assisted living industry, including, but not limited
to, the following:
FAILURE TO CLOSE THE PROPOSED MERGER WITH SUNRISE
Karrington has agreed to be acquired by Sunrise Assisted Living, Inc.,
which transaction is expected to close during the second quarter of 1999. In
order to facilitate the post-merger integration of Karrington's operations,
Karrington has reduced the number of its corporate office administrative and
operating personnel. Also, effective January 1, 1999, Karrington entered into
agreements with Sunrise to manage Karrington's assisted living residences and to
develop three new assisted living properties.
If the proposed merger were not completed, it might take Karrington
several months to undo the integration activities, rehire corporate office
administrative and operations positions and resume full effective control of
day-to-day operations. Restoring Karrington to its pre-integration status could
be a substantial disruption of Karrington's business and could adversely impact
cash flow from operations during the interim period.
KARRINGTON WILL NEED ADDITIONAL FINANCING TO FUND DEVELOPMENT ACTIVITIES
Karrington currently has plans to open approximately 16 additional
residences before the summer of 2000. Karrington has existing financing in place
in the form of loans or leases for seven of these residences. Additional
financing will be required for the nine remaining residences, three of which are
currently under construction, and to refinance certain existing indebtedness.
The proposed merger of Karrington and Sunrise, which is currently expected to
close in the second quarter of 1999, will resolve these financing needs.
If the proposed merger is delayed or fails to close, Karrington will
need to obtain additional financing to fund its development and construction
activities and to meet operating expenses for the remainder of 1999. In addition
to financing available under existing credit facilities, Karrington will seek
mortgage loans covering specific facilities. In the past, Karrington has not
experienced problems in obtaining mortgage loans. If Karrington is not able to
obtain additional financing on favorable terms, however, it may have to delay or
eliminate all or some of its development projects, which could adversely affect
its revenues and results of operations.
HISTORY OF OPERATING LOSSES
Karrington was organized in 1990 and has incurred net losses during
each year since its formation. Over the last three years, Karrington incurred
cumulative losses of approximately $23.8 million. These net losses are primarily
the result of expenses incurred in developing new residences and start up losses
that occur from the time that residences are opened until the occupancy rates of
the residences have stabilized. If a sufficient number of facilities currently
in the fill-up phase
achieve stabilization early enough in 1999, Karrington believes cash flow from
operations will turn positive later in 1999. Karrington has undertaken
aggressive marketing initiatives in the first quarter of 1999 in an effort to
accelerate stabilization of residences in the fill-up phase. Although these
initiatives are expensive, if successful, they are expected to benefit
Karrington by achieving stabilization sooner than it would otherwise occur. If
facilities currently in the fill-up phase do not achieve stabilization soon
enough, however, Karrington will continue to incur operating losses during 1999.
ANY DELAYS EXPERIENCED IN DEVELOPING NEW FACILITIES COULD ADVERSELY AFFECT
KARRINGTON'S REVENUES AND RESULTS OF OPERATIONS FOLLOWING THE MERGER
Karrington's growth objectives include the development of a significant
number of new assisted living facilities. Whether or not the merger with Sunrise
is completed, achieving these development plans will depend upon a variety of
factors, many of which will be outside our control. These factors include, among
others:
- obtaining zoning, land use, building, occupancy, licensing and
other required governmental permits for the construction of
new facilities without experiencing significant delays;
- completing construction of new facilities on budget and on
schedule;
- the ability to work with third-party contractors and
subcontractors who construct the facilities;
- shortages of labor or materials that could delay projects or
make them more expensive;
- adverse weather conditions that could delay projects;
- finding suitable sites for future development activities at
acceptable prices; and
- addressing changes in laws and regulations or how existing
laws and regulations are applied.
We cannot assure you that we will not experience delays in completing
facilities under construction or in development or that we will be able to
identify suitable sites at acceptable prices for future development activities.
If we fail to achieve our development plans, our growth could slow, which would
adversely impact our revenues and results of operations.
POSSIBLE ADVERSE CONSEQUENCES OF USE OF INDEBTEDNESS TO FUND EXISTING AND FUTURE
GROWTH
At December 31, 1998, Karrington had mortgage, construction and other
indebtedness totaling $96.1 million. Unused lines of credit were $11.2 million
at that date. Karrington intends to continue financing its properties through
mortgage financing, operating leases or other financing vehicles, including
lines of credit. Karrington expects the amount of mortgage indebtedness and
other debt and debt related payments to increase substantially as it pursues
its growth strategy. As a result, an increasing portion of cash flow will be
devoted to debt service and related payments. There can be no assurance that
Karrington will generate sufficient cash flow from operations to cover required
interest, principal and operating lease payments.
ANY FAILURE BY KARRINGTON TO COMPLY WITH FINANCIAL COVENANTS CONTAINED IN DEBT
INSTRUMENTS COULD RESULT IN THE ACCELERATION OF THE RELATED DEBT
There are various financial covenants and other restrictions in
Karrington's debt and lease instruments, including provisions which:
- require it to meet specified financial tests;
- require consent for changes in management or control of
Karrington;
- restrict the ability of Karrington to borrow additional funds,
dispose of assets or engage in mergers or other business
combinations without lender consent.
If Karrington fails to comply with any of these requirements, then the
related indebtedness could become due and payable prior to its stated due date.
Any payment or other default could cause the lender to foreclose upon the
facilities securing such indebtedness or, in the case of an operating lease,
could terminate the lease, with a consequent loss of income and asset value to
Karrington.
INTEREST RATE INCREASES COULD ADVERSELY AFFECT EARNINGS DUE TO FLOATING-RATE
DEBT
At December 31, 1998, Karrington had approximately $52.3 million of
floating-rate debt. Debt incurred in the future also may bear interest at
floating rates. Therefore, increases in prevailing interest rates could increase
Karrington's interest payment obligations and, thereby, negatively impact
earnings.
INCREASING COMPETITION IN THE ASSISTED LIVING INDUSTRY COULD ADVERSELY AFFECT
THE REVENUES OF KARRINGTON
The long-term care industry is highly competitive and the assisted
living segment is becoming increasingly competitive. Karrington competes with
numerous other companies that provide similar long-term care alternatives, such
as home health care agencies, facility-based service programs, retirement
communities, convalescent centers and other assisted living providers. In
general, regulatory and other barriers to competitive entry in the assisted
living industry are not substantial. In pursuing its growth strategies,
Karrington has experienced and expects to continue to experience increased
competition in its efforts to develop assisted living facilities. Some of the
present and potential competitors of Karrington, particularly nursing home
operators, are significantly larger and have, or may obtain, greater financial
resources than Karrington. Consequently, we cannot assure you that we will not
encounter increased competition that could limit our ability to attract
residents or expand our business, which could have a material adverse effect on
the revenues and earnings of Karrington.
AN UNEXPECTEDLY HIGH RESIDENT TURNOVER RATE COULD ADVERSELY AFFECT OUR REVENUES
AND EARNINGS
The resident agreements signed by Karrington allow residents to
terminate their agreement on 30 days' notice. Karrington cannot contract with
residents to stay for longer periods of time, unlike typical apartment leasing
arrangements that involve lease agreements with specified leasing periods of up
to a year or longer. Although unlikely, if a large number of residents elected
to terminate their resident agreements at or around the same time, then
Karrington's business could be adversely affected.
COMPETITION FOR SKILLED PERSONNEL COULD INCREASE STAFFING AND LABOR COSTS
Karrington competes with various health care service providers,
including other elderly care providers, in attracting and retaining qualified
and skilled personnel. A shortage of nurses or other trained personnel or
general inflationary pressures may require that we enhance our pay and benefits
package to compete effectively for such personnel. If there is an increase in
these costs or if we fail to attract and retain qualified and skilled personnel,
the business and financial results of Karrington could be adversely affected.
THE OPERATIONS OF KARRINGTON ARE SUBJECT TO OPERATIONAL RISKS INHERENT IN A
REGULATED INDUSTRY
Assisted living facilities are subject to regulation and licensing by
state and local health and social service agencies and other regulatory
authorities, although requirements vary from state to state. In general, these
requirements address:
- personnel education, training, and records;
- facility services, including administration of medication,
assistance with self-administration of medication, and limited
nursing services;
- monitoring of resident wellness;
- physical plant specifications; furnishing of resident units;
- food and housekeeping services;
- emergency evacuation plans; and
- resident rights and responsibilities, including in some states
the right to receive certain health care services from
providers of a resident's choice.
From time to time in the ordinary course of business, Karrington
receives deficiency reports, which it reviews to take appropriate corrective
action. Although most inspection deficiencies are resolved through a plan of
correction, the reviewing agency typically is authorized to take action against
a licensed facility where deficiencies are noted in the inspection 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.
If Karrington fails to comply with applicable requirements, the business and
revenues of Karrington could be materially and adversely affected. To date, none
of the deficiency reports received by Karrington has resulted in a suspension,
fine or other disposition that has had a material adverse effect on Karrington's
revenues.
Regulation of the assisted living industry is evolving and operations
could suffer if, among other things, future regulatory developments, such as
mandatory increases in scope and quality of care given to residents, are enacted
and licensing and certification standards are revised. If the regulatory
requirements increase, the costs of complying with those requirements could
increase as well.
POTENTIAL IMPACT OF ENVIRONMENTAL MATTERS RESULTING FROM OWNERSHIP AND OPERATING
OF ASSISTED LIVING FACILITIES
Under various Federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing materials,
that could be located on, in or under a property. Such laws and regulations
often impose liability without regard to whether or not the owner or operator
knew of, or was responsible for, the presence or release of the hazardous or
toxic substances. The costs of any required remediation or removal of these
substances could be substantial and the liability of an owner or operator as to
any property is generally not limited and could exceed the property's value and
the aggregate assets of the owner or operator. An owner or operator or an entity
that arranges for the disposal of hazardous or toxic substances at a disposal
site also may be liable for the costs of any required remediation or removal of
thereof.
In connection with the ownership or operation of its properties,
Karrington could be liable for the costs of remediation or removal of hazardous
or toxic substances, as well as certain other costs, including governmental
fines and damages for injuries to persons or properties. As a result, the
presence, with or without Karrington's knowledge, of hazardous or toxic
substances at any property owned or operated by it, or acquired or operated by
it in the future, could have an adverse effect on Karrington's financial
condition or earnings.
POTENTIAL IMPACT OF LIABILITY CLAIMS IN EXCESS OF INSURANCE LIMITS
The assisted living business entails an inherent risk of liability. In
recent years, Karrington, as well as other participants in our industry, have
become subject to an increasing number of lawsuits alleging negligence or
related legal theories, many of which involve large claims and
significant legal costs. Karrington maintains insurance policies in amounts and
with the coverage and deductibles it believes are adequate, based on the nature
and risks of our business, historical experience and industry standards.
We cannot be sure that claims will not arise that are in excess of our
coverage or not covered by our policies. If a successful claim against us is
made and it is not covered by our insurance or exceeds the policy limits, our
financial condition and results of operations could be materially and adversely
affected. Claims against us, regardless of their merit or eventual outcome,
could also have a material adverse effect on our ability to attract residents or
expand our business and could require Karrington's management to devote time to
matters unrelated to the operation of our business.
YEAR 2000 ISSUES
The year 2000 issue involves significant risks. There can be
no assurance that Karrington will succeed in fully implementing its year 2000
plan discussed under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations." If Karrington's critical information
technology systems fail upon testing, or any software application or embedded
microprocessors central to Karrington's operations are overlooked in the
assessment or implementation phases, significant problems including delays may
be incurred in billing Karrington's residents. If Karrington's vendors or
suppliers fail to provide its facilities with necessary power,
telecommunications, transportation and financial services, equipment and
services, Karrington will be unable to provide services to its residents. If any
of these uncertainties were to occur, Karrington's business, revenues and
results of operations would be adversely affected. Karrington is unable to
assess the likelihood of such events occurring or the extent of the effect on
Karrington.