KARRINGTON HEALTH INC, 424B1, 1996-07-22

KARRINGTON HEALTH INC
424B1, 1996-07-22
NURSING & PERSONAL CARE FACILITIES

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<PAGE>
PROSPECTUS
3,000,000 SHARES
KARRINGTON HEALTH, INC.
COMMON SHARES
------------------

Of the 3,000,000 Common Shares offered hereby, 2,350,000 shares are being
offered by Karrington Health, Inc. (the "Company") and 650,000 Common Shares are
being offered by JMAC, Inc., a principal shareholder of the Company ("JMAC" or
the "Selling Shareholder"). See "Principal and Selling Shareholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholder.

Prior to this offering, there has been no public market for the Common
Shares of the Company. See "Underwriting" for information relating to the
factors considered in determining the initial public offering price. The Common
Shares have been approved for quotation on the Nasdaq National Market under the
symbol "KARR."

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-MISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDER
<S> <C> <C> <C> <C>
Per Share $13.00 $.91 $12.09 $12.09
Total (3) $39,000,000 $2,730,000 $28,411,500 $7,858,500
</TABLE>

(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting estimated expenses of $600,000, all of which will be paid
by the Company.
(3) The Company and the Selling Shareholder each have granted to the
Underwriters a 30-day option to purchase up to an additional 225,000 Common
Shares on the same terms as set forth above to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Shareholder will be $44,850,000, $3,139,500, $31,131,750
and $10,578,750, respectively. See "Underwriting."
------------------------

The Common Shares are being offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the Common Shares
offered hereby will be available for delivery on or about July 24, 1996 at the
offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001.
------------------------

SMITH BARNEY INC. J.C. BRADFORD & CO.

July 18, 1996
<PAGE>
The inside front cover of the Prospectus will contain gate-fold pictures.
The first page of the gatefold is printed over a background which includes the
name of the Company; a graphic representation of the Company's symbol (a
flower); the words: "personal dignity," "health," "excellence," "individuality,"
"quality of life" and "independence"; and three pictures, two of which include
residents and the third of which is of a typical Karrington residence.

The following legend is printed at the bottom of the first gatefold page:

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

The second page of the gatefold contains the Karrington symbol over the
words Karrington Health and four photographs as follows: (i) a photograph of a
resident over the caption "Independence"; (ii) a photograph of a resident with
visitors over the caption "Quality of Life"; (iii) a photograph of two residents
over the caption "Personal Dignity"; and (iv) a photograph of a private dining
room in a residence over the caption "Private Dining Room."

The third page of the gatefold contains the Company's Mission Statement:
"Dedicated to Excellence In Preserving and Enhancing Personal Dignity,
Individuality, Independence and Quality of Life" and four photographs as
follows: (i) a photograph of an employee with a scale over the caption "Health &
Wellness"; (ii) a photograph of an ice cream parlor in a residence over the
caption "Ice Cream Parlor-Specialty Alzheimer's Care Residence"; (iii) a
photograph of a resident over the caption "Individuality" and (iv) a photograph
of the Karrington of South Hills residence over the caption "Karrington Of South
Hills, Pittsburgh, Pennsylvania, Opening Summer 1996."

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A DISCUSSION OF
CERTAIN FACTORS TO BE CONSIDERED BY PROSPECTIVE INVESTORS.

THE COMPANY

The Company develops, owns and operates private pay, assisted living
residences. Assisted living residences provide housing and care for elderly or
frail individuals who, although generally ambulatory, need assistance with one
or more activities of daily living, such as bathing, grooming, dressing, eating
or personal hygiene.

The Company has developed 15 residences in its target markets, six of which
are open and nine of which are under construction and scheduled to open in late
1996 or the first half of 1997. These 15 residences are located in Ohio,
Pennsylvania, Indiana, Colorado and New Mexico. As part of its nationwide
expansion strategy, the Company has sites for 13 residences under contract in
these states, as well as in Michigan and North Carolina. The Company has begun
predevelopment activities in New York, Kentucky and Illinois.

The prototypical Karrington assisted living model, which has been developed
and refined by the Company since its first residence was opened in 1992, is a
mansion-style residence which houses 60 to 80 residents. Each residence is
typically located in a middle- to upper-income community which has a
well-established population of individuals 75 years of age and older. The
Karrington model combines quality housing, personal care and support services to
provide a cost-effective alternative for individuals with physical frailties or
cognitive disorders, such as Alzheimer's disease, who do not require the regular
skilled medical services provided by nursing facilities. The Karrington model
allows the Company to control development costs, maintain consistent quality and
improve operational effectiveness, while also creating "brand" awareness in the
Company's markets. The Company has been successful in implementing the
Karrington model, with residences open for one year or more having an average
occupancy rate of between 94% and 99% for the 12 months ended December 31, 1994
and 1995 and for the three months ended March 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations."

Karrington residences typically are staffed with licensed nurses on a
24-hour basis and are designed to permit residents to "age in place" within the
residence as they develop further physical or cognitive frailties. The Company
believes that it is able to care for individuals with higher acuity levels
(i.e., those needing greater assistance with activities of daily living) than is
typical in the assisted living industry.

In addition to its own development activities, the Company has entered into
a joint development relationship with Sisters of Charity Health Care Systems,
Inc. ("SCHCS"), a not-for-profit corporation of which the sole member is
Catholic Health Initiatives ("CHI"). CHI is a large, not-for-profit health
organization formed by the recent consolidation of Catholic Health Corporation,
SCHCS and Franciscan Health Systems. CHI operates 61 hospitals and 50 long-term
care facilities in 20 states and has revenues exceeding $4 billion. The Company
and CHI currently intend to develop and operate assisted living residences with
CHI's health care system. See "Business -- Relationship with CHI."

By the end of 1999, the Company plans to open approximately 45 new
Company-owned residences. The Company also intends to develop a significant
number of jointly-owned residences with CHI, of which five are in various stages
of development. In addition, the Company plans to develop and operate Karrington
Place residences, which are assisted living residences specifically designed for
individuals with Alzheimer's disease and other cognitive disorders, in a
substantial portion of its markets. The Company estimates that newly developed
residences will generally range in cost from $6.0 to 7.5 million. The Company
believes the net proceeds from the offering, existing and future

3
<PAGE>
financing commitments and funds from operations will be sufficient to fund its
development plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources."

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. The assisted living industry has estimated annual revenues
of $12 billion, according to industry analysts, and includes facilities ranging
from "board and care" to full-service assisted living facilities such as those
operated by the Company. The number of individuals in the United States 85 years
of age 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 persons 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.

The principal components of the Company's operating and growth strategy are
to: (i) develop Karrington model residences in currently-served and new
communities; (ii) expand joint development relationships with major health care
systems across the United States; (iii) continue its focus on providing a broad
range of services to higher acuity residents; and (iv) acquire residences for
conversion to the Karrington model.

THE OFFERING

<TABLE>
<S> <C>
Common Shares being offered by:
The Company................................ 2,350,000 shares (1)
The Selling Shareholder.................... 650,000 shares (1)
Common Shares outstanding after the
offering..................................... 6,700,000 shares (2)
Use of proceeds.............................. To finance the development and acquisition of
additional assisted living residences, to
repay certain indebtedness to the Selling
Shareholder and for working capital and other
general corporate purposes. See "Use of
Proceeds" and "Certain Transactions."
Nasdaq National Market symbol................ KARR
</TABLE>

- ------------------------
(1) Excludes up to 225,000 Common Shares that may be sold by the Company and up
to 225,000 Common Shares that may be sold by the Selling Shareholder
pursuant to the Underwriters' over-allotment option. See "Underwriting."

(2) Does not include (i) up to 225,000 Common Shares that may be sold by the
Company pursuant to the Underwriters' over-allotment option and (ii) 550,000
Common Shares reserved for issuance under the Company's Incentive Stock
Plan. See "Management -- Incentive Stock Plan" and "Underwriting."

------------------------

UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OPTION TO PURCHASE FROM THE COMPANY AND THE
SELLING SHAREHOLDER UP TO AN AGGREGATE OF 450,000 ADDITIONAL COMMON SHARES TO
COVER OVER-ALLOTMENTS, IF ANY, AND (II) HAS BEEN ADJUSTED TO REFLECT THE
COMPLETION OF THE REORGANIZATION TRANSACTIONS (AS DESCRIBED UNDER "HISTORY AND
ORGANIZATION -- REORGANIZATION TRANSACTIONS"). REFERENCES IN THIS PROSPECTUS TO
THE "COMPANY" REFER COLLECTIVELY TO KARRINGTON HEALTH, INC., ITS SUBSIDIARIES
AND ITS PREDECESSOR ENTITIES.

4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------ --------------
1993 1994 1995 1995 1996
------ ------- ------- ------ ------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues:
Residence operations.............................................................. $2,288 $ 4,977 $ 6,220 $1,390 $1,822
Development and project management fees........................................... 18 287 524 69 122
------ ------- ------- ------ ------
Total........................................................................... 2,306 5,264 6,744 1,459 1,944
Expenses:
Residence operations.............................................................. 1,908 3,454 4,380 1,069 1,327
General and administrative........................................................ 170 634 1,705 268 575
Depreciation and amortization..................................................... 505 844 980 216 294
Write-off of intangible asset..................................................... -- -- 492 -- --
------ ------- ------- ------ ------
Total........................................................................... 2,583 4,932 7,557 1,553 2,196
------ ------- ------- ------ ------
Operating income (loss)............................................................. (277) 332 (813) (94) (252)
Interest expense.................................................................... (707) (1,350) (1,023) (248) (315)
Equity in net earnings (loss) of unconsolidated entity.............................. -- (17) (105) (51) 16
------ ------- ------- ------ ------
Net loss............................................................................ $ (984) $(1,035) $(1,941) $ (393) $ (551)
------ ------- ------- ------ ------
------ ------- ------- ------ ------
Pro forma net loss per common share (1)............................................. $ (.45) $ (.13)
Pro forma weighted average number of common shares outstanding (in thousands) (1)... 4,350 4,350
OTHER OPERATING DATA:
Residences (end of period) (2)
Open or under construction........................................................ 4 5 10 5 11
Under contract.................................................................... 1 2 8 2 12
Number of units (end of period) (2)
Open or under construction........................................................ 213 272 515 272 576
Under contract.................................................................... 59 128 509 128 784
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA (3) AS ADJUSTED (4)
------- ------------- ---------------
BALANCE SHEET DATA:
<S> <C> <C> <C>
Working capital (deficit)....................................................... $(2,300) $(2,300) $ 481
Total assets.................................................................... 30,252 30,252 57,001
Long-term obligations and deferred taxes, less current portion.................. 21,753 22,853 21,790
Equity.......................................................................... 5,290 4,190 32,002
</TABLE>

- ------------------------
(1) Based upon the 4,350,000 pre-offering Common Shares outstanding following
completion of the Reorganization Transactions but prior to this offering.

(2) Includes residences jointly-owned by the Company and CHI.

(3) Adjusted to reflect the pro forma recognition of a net deferred tax
liability of $1.1 million resulting from the Reorganization Transactions.
See Note 10 to the Company's Consolidated Financial Statements.

(4) Adjusted to reflect the offering made hereby and the use of the estimated
net proceeds therefrom as described under "Use of Proceeds."

5
<PAGE>
RISK FACTORS

In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing the Common Shares offered hereby.

HISTORY OF OPERATING LOSSES; ANTICIPATED FUTURE OPERATING LOSSES

The Company was organized in 1990 and has incurred net losses during each
year since its formation. As of March 31, 1996, the cumulative net operating
losses of the Company were $4.8 million. As a result of expenses incurred in
conducting its development activities for new residences and start up losses
that occur from the time that residences are opened until the occupancy rates of
the residences have stabilized, the Company expects to incur a net loss in 1996
and expects to continue to incur such losses at least through 1997. The
Company's development plan includes a significant number of new residences which
may not achieve break-even results within the expected time frame, and operating
expenses, development and construction costs could exceed expectations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEVELOPMENT ACTIVITY AND CONSTRUCTION PROCESS RISKS

The Company's business, financial condition and results of operations could
be adversely affected if the Company is not successful in achieving its
development objectives. Achieving the Company's plan to open 45 new assisted
living residences during the three year period ending December 31, 1999 is
dependent on numerous factors, many of which the Company is unable to control or
significantly influence, which could adversely affect the Company's growth.
These factors include, but are not limited to: (i) locating sites for new
residences at acceptable costs; (ii) obtaining proper zoning use permits,
development plan approval, authorization and licensing from governmental units
in a timely manner; (iii) obtaining adequate financing under acceptable terms;
and (iv) relying on third-party architects and contractors and the availability
and costs of labor and construction materials, as well as weather. See "Business
- -- Development."

NEED FOR ADDITIONAL FINANCING

To achieve its development plan and growth objectives, the Company must
obtain adequate financial resources. The Company estimates the net proceeds of
this offering, together with its existing financing commitments, will provide
adequate capital to fund the Company's development and construction activities
(separate from its joint development activities with CHI) over the next 18
months, including, as part of its overall development plan, completion of its
four residences under construction and the 13 residences to be developed on the
sites for which the Company has purchase commitments. Additional financing may
be necessary if the plan is modified or if certain assumptions of the
development plan prove to be inaccurate. Even if the net proceeds of this
offering are adequate to fund the Company's development activities during such
period, there is no assurance the Company will generate sufficient operating
cash flow during such time to fund working capital and debt service
requirements. The Company expects to periodically seek additional financing
through a variety of sources, including equity or debt financing, leasing, bank
financing, financing from real estate investment trusts or other methods which,
if equity securities are employed, may result in dilution to the Company's
shareholders. There can be no assurance that future financing will be available
to the Company on acceptable terms, if at all. See "-- Substantial
Indebtedness," "Dilution" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

GOVERNMENT 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. In several
states in which the Company operates or intends to operate, assisted living
residences also require a certificate of need before the facility can be opened.
Like other health care

6
<PAGE>
facilities, assisted living residences are subject to periodic survey or
inspection by governmental authorities. Any failure by the Company to comply
with applicable requirements could have a material adverse effect on the
Company.

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 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. There can be
no assurance that federal, state or local laws or regulatory procedures which
might adversely affect the Company will not be imposed or expanded. See
"Business -- Regulation."

COMPETITION

The long-term care industry is highly competitive. The Company believes the
assisted living sector of the long-term care industry, 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 provision of assisted living services receives
increased attention and the number of states providing reimbursement for
assisted living rises, competition will intensify as a result of new market
entrants. The Company also competes with skilled nursing facilities that provide
long-term care services. In implementing its growth strategy the Company expects
increased competition in its efforts to develop and acquire assisted living
communities. Some of the Company's present and potential competitors are
significantly larger and have, or may obtain, greater financial resources than
those of the Company. Consequently, there can be no assurance the Company will
not encounter increased competition in the future. Such competition could limit
the Company's ability to attract residents or expand its business and therefore
have a material adverse effect on the Company.

STAFFING AND LABOR COSTS

The Company competes with other health care service providers of long-term
care in attracting and retaining qualified and skilled personnel. Shortages of
nurses or other trained personnel may require the Company to enhance its
compensation and benefits program to remain competitive in attracting such
personnel. There can be no assurance the Company's labor costs will not increase
or, if they do, that they can be matched by corresponding increases in revenues.
A significant inability of the Company to attract and retain qualified
employees, to control labor costs or to match increases in its labor expenses
with corresponding increases in revenues could have a material adverse effect on
the Company.

CHALLENGE TO MANAGING RAPID GROWTH AND BUSINESS EXPANSION

The Company expects the number of residences it owns and operates will
increase significantly as it pursues its development and acquisition programs
for new assisted living residences. This growth will place significant demands
on Company management resources. Managing this growth effectively may require
continued expansion of its operational, financial and management information
systems, and the ability to continue to attract, train, motivate, manage and
retain key employees. If the Company is unable to manage growth effectively, it
could be adversely affected. See "Business -- Strategy," "-- Development" and
"Management."

LIABILITY AND INSURANCE

The Company's business in assisted living entails an inherent risk of
liability. In recent years, long-term care providers have become subject to an
increasing number of lawsuits alleging negligence or related legal arguments
which have involved large claims and have been costly to defend. The Company
maintains liability insurance intended to cover such claims, and the Company
believes its

7
<PAGE>
insurance coverage, amounts and deductibles are appropriate based on the risks
of the business, experience and industry standards. There can be no assurance,
however, that any particular claim against the Company will be covered by its
insurance or that claims in excess of the Company's insurance coverage will not
be brought against the Company. The Company's insurance policies must be renewed
annually and there can be no assurance the Company will be able to obtain
liability insurance coverage in the future, or that, if such coverage is
available, it will be on acceptable terms.

ENVIRONMENTAL RISKS

Federal, state and local environmental laws, ordinances and regulations
potentially require that a current or previous owner or operator of real
property may be held liable for the cost of removal or remediation of certain
hazardous or toxic substances, including asbestos-containing materials, that
could be located on, in or under such property. Such laws and regulations often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of hazardous or toxic substances. The cost 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
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such substances properly may also adversely affect the
owner's ability to sell or rent the property or to borrow using the property as
collateral.

SUBSTANTIAL INDEBTEDNESS

The Company is subject to mortgage, construction and other indebtedness, in
an aggregate principal amount of approximately $22.0 million at March 31, 1996.
The Company intends to finance its residences through mortgage financing and
operating leases or other financing vehicles. The amount of mortgage
indebtedness and other debt and lease-related payments is expected to increase
substantially as the Company pursues its growth strategy. As a result, an
increasing portion of the Company's cash flow will be devoted to debt service
and related lease payments, and the Company will continue to be subject to risks
normally associated with significant financing leverage. At March 31, 1996,
approximately $11.4 million in principal amount of the Company's indebtedness
bore interest at floating rates. Therefore, increases in prevailing interest
rates could increase the Company's interest payment obligations. In addition,
indebtedness the Company may incur in the future may also bear interest at
floating rates. There can be no assurance the Company will generate sufficient
cash flow from operations to cover required interest, principal and operating
lease payments. Any payment or other default could cause the lender to foreclose
upon the residences 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 the Company. Further, because of cross-default and
cross-collateralization provisions in certain of the Company's mortgages, a
default by the Company on one of its payment obligations could adversely affect
a significant number of the Company's other residences. See Note 6 of Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL

The Company depends significantly on the planning, management and executive
services of Richard R. Slager, President, Chief Executive Officer and
co-founder, and Alan B. Satterwhite, Chief Operating Officer, Chief Financial
Officer and co-founder, the loss of whose services would constitute a "change of
control" under the arrangement with CHI and otherwise could have a material
adverse effect on the Company. See "Business -- Relationship with CHI." The
Company also is dependent upon its ability to attract and retain management
personnel responsible for the day-to-day operations of the assisted living
residences and other key day-to-day business activities. See "Management."

CONTROL BY EXISTING SHAREHOLDERS

Following completion of this offering, the Company's co-founders, Richard R.
Slager and Alan B. Satterwhite, and JMAC will own in the aggregate 55.0% of the
outstanding Common Shares of the Company (or 50.0% if the Underwriters'
over-allotment option is exercised in full). Accordingly, they

8
<PAGE>
will be in a position to substantially control the election of the Company's
directors, to thereby control the policies and operations of the Company and to
influence the outcome of corporate transactions or other matters submitted for
shareholder approval. These matters include mergers, consolidations, the sale of
all or substantially all of the Company's assets and other changes in control of
the Company. See "Principal and Selling Shareholders."

DILUTION

Purchasers of the Common Shares offered hereby will experience an immediate
and substantial dilution of $8.33 in the net tangible book value per share of
their investment. In the event the Company issues additional Common Shares in
the future, including Common Shares that may be issued in connection with future
acquisitions, purchasers of Common Shares in this offering may experience
further dilution in the net tangible book value per share of the Common Shares.
See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POTENTIAL ADVERSE IMPACT
ON MARKET PRICE

Sales of a substantial number of Common Shares in the public market
following this offering, or the perception that such sales could occur, could
have an adverse effect on the price of the Common Shares and may make it more
difficult for the Company to sell Common Shares in the future at times and for
prices that it deems appropriate. The Company, all of its directors and officers
and the Selling Shareholder have agreed, subject to certain exceptions, not to
offer, sell, contract to sell, transfer or otherwise encumber or dispose of,
directly or indirectly, any Common Shares, or securities convertible into or
exchangeable for Common Shares, for a period of 180 days from the date of this
Prospectus without the prior written consent of Smith Barney Inc. Smith Barney
Inc., in its sole discretion, and at any time without prior notice, may release
all or any portion of the Common Shares subject to the lock-up agreements
described herein. When such lock-up restrictions lapse, the Common Shares may be
sold in the public market or otherwise disposed of in compliance with the
Securities Act of 1933, as amended (the "Securities Act"). In addition, holders
of approximately 3,700,000 Common Shares will be entitled to certain
registration rights with respect to such Common Shares. If such holders, by
exercising their registration rights, cause a significant number of Common
Shares to be registered and sold in the public market, such sales could have an
adverse effect on the market price for the Company's Common Shares. See "Shares
Eligible for Future Sale" and "Underwriting."

NO PRIOR PUBLIC MARKET; DETERMINATION OF INITIAL OFFERING PRICE, VOLATILITY OF
COMMON SHARE PRICE

Prior to the offering, there has been no public market for the Common
Shares. Although the Common Shares have been approved for quotation on the
Nasdaq National Market, there can be no assurance that an active trading market
will develop or be sustained. The initial public offering price of the Common
Shares has been determined by negotiations among the Company and the
Representatives of the Underwriters and may not be indicative of the market
price of the Common Shares after completion of the offering. The price of the
Common Shares in the future may be volatile. A variety of events, including
quarter-to-quarter variations in operating results, news announcements, trading
volume, general market trends and other factors, could result in wide
fluctuations in the price of the Common Shares. For a discussion of the factors
considered in determining the initial public offering price, see "Underwriting."

POTENTIAL ANTI-TAKEOVER EFFECT AND POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF
CERTAIN CHARTER AND CODE OF REGULATIONS PROVISIONS AND THE OHIO GENERAL
CORPORATION LAW

Certain provisions of the Company's Articles of Incorporation and Code of
Regulations and of the Ohio Revised Code (the "Ohio GCL"), together or
separately, could discourage potential acquisition proposals, delay or prevent a
change in control of the Company and limit the price that certain investors
might be willing to pay in the future for the Common Shares. Among other things,
these provisions (i) establish a staggered board; (ii) require certain
supermajority votes; and (iii) establish certain advance notice procedures for
nomination of candidates for election as directors and for shareholder proposals
to be considered at shareholders' meetings.

9
<PAGE>
Pursuant to the Company's Articles of Incorporation, upon the closing of
this offering, the Board of Directors of the Company will have authority to
issue up to 2,000,000 preferred shares without further shareholder approval.
Such preferred shares could have dividend, liquidation, conversion, voting and
other rights and privileges that are superior or senior to the Common Shares.
Issuance of preferred shares could result in the dilution of the voting power of
the Common Shares, adversely affect holders of the Common Shares in the event of
liquidation of the Company or delay, defer or prevent a change in control of the
Company.

In addition, Section 1701.831 of the Ohio GCL contains provisions that
require shareholder approval of any proposed "control share acquisition" of any
Ohio corporation at any of three ownership thresholds: 20%, 33 1/3% and 50%; and
Chapter 1704 of the Ohio GCL contains provisions that restrict certain business
combinations and other transactions between an Ohio corporation and interested
shareholders. See "Description of Capital Stock -- Anti-Takeover Effects of
Articles of Incorporation, Code of Regulations and the Ohio General Corporation
Law."

HISTORY AND ORGANIZATION

In April 1996, Karrington Health, Inc. was incorporated under the laws of
the State of Ohio to facilitate this offering and to become the parent of
Karrington Operating Company upon the consummation of the Reorganization
Transactions (as defined below). The Company's principal executive offices are
located at 919 Old Henderson Road, Columbus, Ohio 43220, and its telephone
number is (614) 451-5151.

HISTORY

In 1990, Richard R. Slager, the Company's Chief Executive Officer and
President, and Alan B. Satterwhite, the Company's Chief Operating Officer and
the 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, an
investment company owned by John H. McConnell and John P. McConnell, the founder
and the Chief Executive Officer, 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 defined below), JMAC Properties owned a 66 2/3% equity interest
in Karrington Operating, and DMA owned a 33 1/3% equity interest. To date, the
Company's business has been conducted through Karrington Operating.

REORGANIZATION TRANSACTIONS

Immediately prior to the effective time of the Registration Statement of
which this Prospectus forms a part, (i) JMAC transferred to the Company all of
its shares of JMAC Properties in exchange for 66 2/3% 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 33 1/3% of the
pre-offering outstanding Common Shares of the Company and (ii) the size of the
Board of Directors was increased to 11, divided into three classes. The existing
directors will fill the vacancies created in the Board of Directors. (These
transactions collectively constitute the "Reorganization Transactions"). See
"Management" and "Principal and Selling Shareholders."

10
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,350,000 Common Shares
offered by the Company hereby are estimated to be $27.8 million (approximately
$30.5 million if the Underwriters' over-allotment option is exercised in full),
after deduction of underwriting discounts and commissions and estimated offering
expenses. Indebtedness owed to JMAC, which bears interest at the rate of 15% per
year and matures on January 1, 2000, will be paid in full out of the net
proceeds of the offering to be received by the Company. The outstanding
principal balance and accrued interest due JMAC was approximately $5.6 million
at June 30, 1996. These amounts have been used to finance the development of
assisted living residences. See "Certain Transactions." The balance of the net
proceeds to be received by the Company will be used to finance the development
and acquisition of additional assisted living residences and for working capital
and general corporate purposes. The Company has no current agreements or
understandings with respect to any acquisitions of residences. Pending such
uses, the Company intends to invest the net proceeds in short-term, investment
grade, interest-bearing securities or certificates of deposit. The Company will
not receive any proceeds from the sale of Common Shares offered by the Selling
Shareholder hereby.

DIVIDEND POLICY

The Company does not anticipate paying cash dividends on its Common Shares
in the foreseeable future. The payment of any future dividends will be subject
to the discretion of the Board of Directors of the Company and will depend on
the Company's results of operations, financial position and capital
requirements, general business conditions, restrictions imposed by financing
arrangements, legal restrictions on the payment of dividends, and other factors
the Board of Directors deems relevant.

11
<PAGE>
CAPITALIZATION

The following table sets forth as of March 31, 1996 (i) the capitalization
of the Company, (ii) the pro forma effect of a $1.1 million charge for a net
deferred tax liability resulting from the Reorganization Transactions and (iii)
such pro forma capitalization, as adjusted to reflect the sale of the 2,350,000
Common Shares offered by the Company hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds." This table should be
read in conjunction with the Consolidated Financial Statements of the Company,
including the Notes thereto, appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Long-term obligations, less current portion.................................. $21,753 $21,753 $20,690
------- --------- -----------
Equity:
Preferred Shares, without par value; 2,000,000 shares authorized; no shares
issued and outstanding.................................................... -- -- --
Common Shares, without par value; 28,000,000 shares authorized; 4,350,000
shares issued and outstanding (actual and pro forma); 6,700,000 shares
issued and outstanding (pro forma, as adjusted) (1)....................... -- 5,290 33,102
Partners' equity........................................................... 5,290 -- --
Retained earnings (deficiency)............................................. -- (1,100) (1,100)
------- --------- -----------
Total equity............................................................. 5,290 4,190 32,002
------- --------- -----------
Total capitalization................................................... $27,043 $25,943 $52,692
------- --------- -----------
------- --------- -----------
</TABLE>

- ------------------------
(1) Does not include 550,000 Common Shares reserved for issuance in the future
under the Company's Incentive Stock Plan. See "Management -- Incentive Stock
Plan."

12
<PAGE>
DILUTION

The pro forma net tangible book value of the Company as of March 31, 1996,
was $3.5 million, or $.79 per Common Share assumed to be outstanding. The pro
forma net tangible book value per Common Share represents total tangible assets
of the Company less total liabilities, divided by the number of Common Shares
outstanding after giving effect to the Reorganization Transactions. After giving
effect to this offering and the application of the net proceeds to the Company
therefrom, the pro forma net tangible book value of the Company at March 31,
1996 would have been $31.3 million or $4.67 per share, representing an immediate
increase in net pro forma tangible book value of $3.88 per share to existing
shareholders and an immediate dilution of $8.33 per share to new investors in
the Common Shares offered hereby. See "Use of Proceeds." The following table
illustrates the resulting dilution with respect to the Common Shares offered
hereby:

<TABLE>
<S> <C> <C>
Public offering price per share..................................... $13.00
Pro forma net tangible book value per share as of March 31,
1996............................................................. $ .79
Increase attributable to the offering............................. 3.88
-----
Pro forma net tangible book value per share after the offering...... 4.67
------
Dilution per share to new investors................................. $ 8.33
------
------
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of Common Shares purchased from the Company, the aggregate
consideration paid and the average price per share paid by the existing
shareholders (net of capital distributions) and by new investors purchasing
Common Shares in this offering, without giving effect to estimated underwriting
discounts and expenses of this offering:

<TABLE>
<CAPTION>
SHARES
PURCHASED(1) TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders...................... 4,350,000 64.9% $10,134,000 24.9% $ 2.33
New investors.............................. 2,350,000 35.1 30,550,000 75.1 13.00
--------- ------- ----------- -------
Total.................................... 6,700,000 100.0% $40,684,000 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>

- ------------------------
(1) The sale of Common Shares by the Selling Shareholder will reduce the number
of Common Shares held by existing shareholders to 3,700,000 or 55.2% (50.2%
if the Underwriters' over-allotment option is exercised in full) of the
total number of Common Shares outstanding after this offering, and will
increase the number of Common Shares to be purchased by new investors to
3,000,000 or 44.8% (49.8% if the Underwriters' over-allotment option is
exercised in full) of the total number of Common Shares after this offering.
See "Principal and Selling Shareholders."

13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data and
other operating data of the Company. The selected consolidated financial data
for each of the five years in the period ended December 31, 1995, have been
derived from the audited consolidated financial statements of the Company. The
selected consolidated financial data for the three months ended March 31, 1995
and 1996 and as of March 31, 1996 have been derived from unaudited consolidated
financial statements of the Company which, in the opinion of management of the
Company, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of such data for such periods and as
of such date. Operating results for the three-month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for any other
interim period or for the full year. This data should be read in conjunction
with the more detailed information contained in the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
---- ----- ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Residence operations............................... $-- $ 216 $2,288 $ 4,977 $ 6,220 $1,390 $1,822
Development and project management fees............ 1 -- 18 287 524 69 122
---- ----- ------ ------- ------- ------ ------
Total............................................ 1 216 2,306 5,264 6,744 1,459 1,944
Expenses:
Residence operations............................... -- 221 1,908 3,454 4,380 1,069 1,327
General and administrative......................... 39 84 170 634 1,705 268 575
Depreciation and amortization...................... -- 95 505 844 980 216 294
Write-off of intangible asset...................... -- -- -- -- 492 -- --
---- ----- ------ ------- ------- ------ ------
Total............................................ 39 400 2,583 4,932 7,557 1,553 2,196
---- ----- ------ ------- ------- ------ ------
Operating income (loss).............................. (38 ) (184) (277) 332 (813) (94) (252)
Interest expense..................................... (9 ) (102) (707) (1,350) (1,023) (248) (315)
Equity in net earnings (loss) of unconsolidated
entity.............................................. -- -- -- (17) (105) (51) 16
---- ----- ------ ------- ------- ------ ------
Net loss............................................. $(47) $(286) $ (984) $(1,035) $(1,941) $ (393) $ (551)
---- ----- ------ ------- ------- ------ ------
---- ----- ------ ------- ------- ------ ------
Pro forma net loss per common share (1).............. $ (.45) $ (.13)
Pro forma weighted average number of common shares
outstanding (in thousands) (1)...................... 4,350 4,350

OTHER OPERATING DATA:
Residences (end of period) (2):
Open or under construction......................... 1 2 4 5 10 5 11
Under contract..................................... 1 1 1 2 8 2 12
Number of units (end of period) (2):
Open or under construction......................... 53 106 213 272 515 272 576
Under contract..................................... 53 54 59 128 509 128 784
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, -------------------------------------
----------------------------------------- PRO PRO FORMA,
1991 1992 1993 1994 1995 ACTUAL FORMA (3) AS ADJUSTED (4)
------ ------ ------- ------- ------- ------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............. $ (303) $ (637) $ (702) $ (911) $(1,575) $(2,300) $(2,300) $ 481
Total assets........................... 3,186 9,938 14,883 16,292 26,676 30,252 30,252 57,001
Long-term obligations and deferred
taxes, less current portion........... 2,193 8,753 14,472 16,778 18,250 21,753 22,853 21,790
Equity (deficit)....................... 542 256 (728) (1,763) 5,841 5,290 4,190 32,002
</TABLE>

- ------------------------------
(1) Based upon the 4,350,000 pre-offering Common Shares outstanding following
completion of the Reorganization Transactions but prior to this offering.

(2) Includes residences jointly-owned by the Company and CHI.

(4) Adjusted to reflect the offering made hereby and the use of the estimated
net proceeds therefrom as described under "Use of Proceeds."

14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION IS
BASED UPON AND SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO, THE SELECTED CONSOLIDATED FINANCIAL DATA
AND OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS"
AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.

OVERVIEW

The Company derives its revenues from two primary sources: (i) resident fees
for the delivery of assisted living services and (ii) development fees and
management services income for development and management of residences in which
the Company does not own a controlling interest. The Company's revenue is
derived principally from resident fees, which in 1995 comprised 92.2% of total
revenues (93.7% for the first quarter of 1996). Resident fees are paid monthly
by residents, their families or other responsible parties and historically have
been derived 100% from private pay sources. Resident fees include revenue
derived from basic care, community fees, extended 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. Once opened, Company residences historically have attained
break-even cashflow, after debt service, within approximately seven months of
operations. Within 12 months, Company residences typically reach a stable
occupancy of over 90%. Development fees and management services income, which in
1995 accounted for the remaining 7.8% of revenues (6.3% for the first quarter of
1996), consist 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 on an ongoing basis.

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; and (iii) depreciation and
amortization. In anticipation of its growth plans, the Company made significant
investments in the number of management and staff at its headquarters in 1995
and the first quarter of 1996.

15
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth certain data from the respective consolidated
statements of operations as a percentage of total revenues:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Residence operations................................. 82.7 65.6 65.0 73.3 68.3
General and administrative........................... 7.4 12.0 25.3 18.4 29.6
Depreciation and amortization........................ 21.9 16.1 14.5 14.8 15.1
Write-off of intangible asset........................ -- -- 7.3 -- --
--------- --------- --------- --------- ---------
Total expenses..................................... 112.0 93.7 112.1 106.5 113.0
--------- --------- --------- --------- ---------
Operating income (loss)................................ (12.0)% 6.3% (12.1)% (6.5)% (13.0)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

Resident days.......................................... 26,889 57,213 67,256 15,944 19,032
Average daily resident rate (1)........................ $ 71.33 $ 79.33 $ 86.90 $ 82.64 $ 89.92
Average occupancy percentage (2)....................... -- 98.9% 96.4% 94.2% 94.4%
End of period (3):
Number of residences................................. 3 3 4 3 5
Number of units...................................... 160 160 219 160 245
</TABLE>

- ------------------------
(1) Excludes community fees of $370,000, $438,000 and $375,000 for the years
ended December 31, 1993, 1994 and 1995, respectively, and $73,000 and
$111,000 for the three months ended March 31, 1995 and 1996, respectively.

(2) Average occupancy percentage represents the average occupancy of the
Company-owned residences open for one year or more at the beginning of the
period presented.

(3) Excludes one residence in Dayton, Ohio jointly-owned by the Company and CHI
accounted for by the equity method.

THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995

Total revenue increased $485,000, or 33.3%, to $1.9 million in the first
quarter of 1996 from $1.5 million in the first quarter of 1995, primarily due to
the growth in resident revenues. Resident revenues increased $432,000, or 31.1%,
primarily due to the opening of the Shaker Heights residence in October 1995 and
the Alzheimer's care residence in February 1996 (total of $336,000) and to the
increase in the average daily resident rate. The average daily resident rate
increased 8.8% to $89.92 in the first quarter of 1996 compared to $82.64 for the
same period in 1995, primarily due to an increase in the average daily basic
care rate of $6.50 and an increase in the level of extended care services
provided to residents.

Development and project management fees increased $53,000, or 78.2%, to
$122,000 in the first quarter of 1996 from $69,000 in the first quarter of 1995,
primarily due to development fees associated with the relationship with CHI. See
Note 7 to the Consolidated Financial Statements and "Business -- Relationship
with CHI" for further discussion of this relationship.

Residence operations expenses increased $258,000, or 24.2%, to $1.3 million
in the first quarter of 1996 from $1,069,000 in the first quarter of 1995. As a
percentage of total revenues, residence operations expenses decreased from 73.3%
in the first quarter of 1995 to 68.3% in the same period of 1996. This decrease
is primarily attributable to the Company's adoption of the provisions of AICPA
SOP of 93-7, the effect of which was a charge of $95,000 in the first quarter of
1995 (see Note 2 to Consolidated Financial Statements). This decrease was offset
by the opening of a new residence in

16
<PAGE>
Shaker Heights, Ohio in October 1995 and an Alzheimer's residence in Columbus,
Ohio in February 1996, as operations expenses are historically higher as a
percent of total revenues during the first year of operation of a residence.
Excluding these two residences, operations expenses would have been 62.5% of
total revenues in the first quarter of 1996.

General and administrative expenses increased $307,000, or 114%, to $575,000
in the first quarter of 1996 from $268,000 in the first quarter of 1995,
primarily due to increased compensation, payroll taxes and related benefits of
$216,000 as a result of hiring additional management and staff at the Company's
headquarters in anticipation of the Company's growth plans and the addition of a
manager-in-training program initiated in the Spring of 1995. The Company expects
the rate of increase in its general and administrative expenses will decrease as
new personnel needs have been reduced by recent hires. In addition, the Company
expects its general and administrative expenses will decrease as a percentage of
its total operating revenues due to anticipated economies of scale resulting
from the Company's development program.

Depreciation and amortization increased $78,000, or 36.4%, to $294,000 in
the first quarter of 1996 from $216,000 in the first quarter of 1995, primarily
due to the opening of the two new residences discussed above.

Interest expense increased $67,000, or 26.9%, to $315,000 in the first
quarter of 1996 from $248,000 in the first quarter of 1995, primarily due to the
opening of the two new residences discussed above.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Total revenue increased $1.5 million, or 28.1%, to $6.7 million in 1995 from
$5.3 million in 1994 primarily due to the growth in resident revenues. Resident
revenues increased $1.2 million, or 25.0%, primarily due to the increase in
resident revenues of $531,000 from the Tucker Creek residence which opened in
late December 1993, an increase of $433,000 resulting from higher average daily
resident rates and the opening of the Shaker Heights residence in late October
1995. The average daily resident rate increased 9.5%, to $86.90, in 1995 from
$79.33 in 1994, primarily due to an increase in the average daily basic care
rate of $5.32 and an increase in the level of extended care services provided to
residents.

Development and project management fees increased $237,000, or 82.3%, to
$524,000 in 1995 from $287,000 in 1994, primarily due to the increased number of
projects in process under the relationship with CHI.

Residence operations expenses increased $926,000, or 26.8%, to $4.4 million
in 1995 from $3.5 million in 1994, primarily due to the Company's adoption of
the provisions of AICPA SOP 93-7, the effect of which was an increase in
marketing expenses of $199,000 (see Note 2 to Consolidated Financial
Statements), and a 17.6% increase in resident days. As a percentage of total
revenues, residence operations expenses decreased from 65.6% in 1994 to 62.0% in
1995 (excluding the effects of AICPA SOP 93-7 described above). This decrease is
primarily attributable to the second full year of operations at the Tucker Creek
residence where the average occupancy percentage increased to 93.7% in 1995 from
63.2% in 1994.

General and administrative expenses increased $1.1 million, or 169%, to $1.7
million in 1995 from $634,000 in 1994, primarily due to increased compensation,
payroll taxes and related benefits of $714,000 as a result of hiring additional
management and staff at the Company's headquarters (from 20 at the end of 1994
to 40 at the end of 1995) in anticipation of the Company's growth plans,
including the addition of a manager-in-training program in the Spring of 1995,
increased incentive compensation and compensation increases for existing staff
and management.

Depreciation and amortization increased $136,000, or 16.0%, to $980,000 in
1995 from $844,000 in 1994 primarily due to a change in estimate relating to
pre-opening costs as described in Note 2 to

17
<PAGE>
Consolidated Financial Statements ($92,000), the opening of the Shaker Heights
residence ($48,000) and the Company's move to its new headquarters in July 1995.
These increases were offset by a decrease of $70,000 as a result of the adoption
of AICPA SOP 93-7 described above.

See Note 3 to Consolidated Financial Statements for discussion on the
write-off of the intangible asset.

Interest expense decreased $328,000, or 24.2%, to $1.0 million in 1995 from
$1.4 million in 1994, primarily due to the subordinated debentures contributed
to equity effective January 1, 1995.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

Total revenue increased $3.0 million, or 128%, to $5.3 million in 1994 from
$2.3 million in 1993, primarily due to the growth in resident revenues. Resident
revenues increased $2.7 million, or 117%, primarily due to a full year of
operations for the three initial Company residences which opened in October
1992, March 1993 and December 1993 (total of $2.5 million), and an increase in
the average daily resident rate. The average daily resident rate increased 11.2%
to $79.33 in 1994 from $71.33 in 1993, primarily due to an increase in the
average daily basic care rate of $5.36 and an increase in the level of extended
care services provided to residents.

Development and project management fees increased to $287,000 in 1994 from
$18,000 in 1993 primarily due to the increased number of projects in process
under the relationship with CHI.

Residence operations expenses increased $1.6 million, or 81.0%, to $3.5
million in 1994 from $1.9 million in 1993, primarily due to the 113% increase in
resident days. As a percentage of total revenues, residence operations expenses
decreased from 82.7% in 1993 to 65.6% in 1994. This decrease is attributable to
the two residences opened in March 1993 and October 1992 that were in the fill
up stage in 1993 resulting in a higher percentage of fixed operating expenses.

General and administrative expenses increased $464,000, or 273%, to $634,000
in 1994 from $170,000 in 1993, primarily due to increased compensation, payroll
taxes and related benefits of $338,000, as a result of hiring additional
management and staff at the Company's headquarters (from 12 at the end of 1993
to 20 at the end of 1994), increased incentive compensation and compensation
increases for existing staff and management.

Depreciation and amortization increased $339,000, or 67.2%, to $844,000 in
1994 from $505,000 in 1993, primarily due to a full year of operations for the
two residences that opened in 1993.

Interest expense increased $643,000, or 90.9%, to $1.4 million in 1994 from
$707,000 in 1993, primarily due to a full year of operations in 1994 for two
residences opened in March and December 1993 (total of $420,000) and to
increased amounts outstanding under a subordinated loan payable to JMAC
Properties.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its initial growth through a combination of
mortgage financing, subordinated borrowings from JMAC and its affiliates and
equity contributions. The Company's mortgage and construction mortgage
financings provide for principal repayments in the next two to five years, bear
interest at various fluctuating rates (ranging from 8.9% to 9.6% at March 31,
1996), and are secured by substantially all of the assets of the Company. See
Note 6 of Notes to Consolidated Financial Statements. The Company expects to
refinance such amounts as they mature.

Effective January 1, 1995, JMAC Properties and DMA entered into a
recapitalization agreement pursuant to which subordinated debentures and accrued
interest totaling $5.3 million were converted to equity. In addition, JMAC
Properties invested $5.0 million in equity during 1995.

In December 1995, the Company entered into a loan agreement with JMAC
pursuant to which JMAC agreed to provide up to $8.0 million in loans to the
Company during a commitment period expiring December 31, 1996. Amounts
outstanding under this agreement totalled $1.1 million at March 31, 1996.
Borrowings under the agreement are subordinated to all obligations of the
Company

18
<PAGE>
to financial institutions. Interest on the borrowings accrues at 15% per annum
and is payable annually. If not sooner paid, all amounts outstanding, including
accrued interest, are due January 1, 2000 or earlier if any class of equity
securities of the Company is the subject of an effective registration statement
under the Securities Act, is registered under the Exchange Act or is listed on a
national securities exchange. A portion of the net proceeds received by the
Company in this offering will be used to retire all amounts outstanding under
such agreement at which time the agreement will terminate.

At March 31, 1996, the Company had $22.0 million of outstanding debt (at a
weighted average interest rate of 9.5%). At that date, the Company had equity of
$5.3 million, which resulted from inception-to-date capital contributions of
$10.9 million, less distributions of $785,000 and net operating losses of $4.8
million. The Company continues to operate with significant working capital
requirements primarily due to construction payables associated with residence
development. The working capital deficit at March 31, 1996 was $2.3 million.

During the years ended December 31, 1993, 1994 and 1995, and the three
months ended March 31, 1996, the Company used $5.6 million, $2.1 million, $10.7
million and $3.5 million, respectively, in cash to acquire property and
equipment and other assets, and received $5.9 million, $1.5 million, $10.9
million and $3.6 million, respectively, in cash from financing activities. The
difference was either provided by, or used in, operating activities.

By the end of 1999, the Company plans to open approximately 45 new
Company-owned residences and at least six jointly-owned residences with CHI. To
date, the Company has obtained zoning approval for 11 new residences and has
entered into contracts to purchase 13 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 $6.0 to $7.5 million, with the development
cycle taking up to 24 months from site identification to residence opening.
There can be no assurance that financing for the Company's acquisition and
development program will be available to the Company on acceptable terms, if at
all. Moreover, to the extent the Company acquires properties that do not
generate positive cash flow, the Company may be required to seek additional
capital for working capital and liquidity purposes. Residences typically reach a
stable level of occupancy of over 90% within 12 months. See "Business --
Development."

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 $88 million in financing for one existing and approximately 12 new
Karrington residences, subject to various terms and conditions. The commitment
letters are subject to approval by Meditrust's board of trustees. The
financings, which may be mortgage or lease financings, are to be entered into on
a residence-by-residence basis, and are to be for terms of up to 14 years (with
two additional five-year extension periods for the lease transactions). Interest
during construction is to float at 2% above the prime rate. On completion of
each residence, payments are to be set at an amount equal to 3.25% over the
yield at that time on the ten-year U.S. Treasury notes with the same maturity
date. Additional interest or lease payments are based on increased revenues of a
financed residence during specified periods.

The Company expects that the net proceeds from this offering, together with
existing financing commitments and additional financing the Company anticipates
will be available, will be sufficient to fund its development and acquisition
programs for at least the next 18 months. Additional financing will be required
to complete the Company's growth plans and to refinance certain existing
indebtedness.

19
<PAGE>
BUSINESS

OVERVIEW

The Company has developed 15 residences in its target markets, six of which
are open and nine of which are under construction and scheduled to open in late
1996 or in the first half of 1997. These 15 residences are located in Ohio,
Pennsylvania, Indiana, Colorado and New Mexico. As part of its nationwide
expansion strategy, the Company has sites for 13 residences under contract in
these states, as well as in Michigan and North Carolina. The Company has begun
predevelopment activities in New York, Kentucky and Illinois.

The prototypical Karrington assisted living model, which has been developed
and refined by the Company since its first residence was opened in 1992, is a
mansion-style residence which houses 60 to 80 residents. Each residence is
typically located in a middle- to upper-income community which has a
well-established population of individuals 75 years of age and older. The
Karrington model combines quality housing, personal care and support services to
provide a cost-effective alternative for individuals with physical frailties or
cognitive disorders, such as Alzheimer's disease, who do not require the regular
skilled medical services provided by nursing facilities. The Karrington model
allows the Company to control development costs, maintain consistent quality and
improve operational effectiveness, while also creating "brand" awareness in the
Company's markets. The Company has been successful in implementing the
Karrington model, with residences open for one year or more having an average
occupancy rate of 98.9% and 96.4% for the 12 months ended December 31, 1994 and
1995, respectively, and 94.4% for the three months ended March 31, 1996.

In addition to its own development activities, the Company has entered into
a joint development relationship with Sisters of Charity Health Care Systems,
Inc., a not-for-profit corporation of which the sole member is Catholic Health
Initiatives. CHI is a large, not-for-profit health organization formed by the
recent consolidation of Catholic Health Corporation, SCHCS and Franciscan Health
Systems. CHI operates 61 hospitals and 50 long-term care facilities in 20 states
and has revenues exceeding $4 billion. The Company and CHI currently intend to
develop and operate assisted living residences with CHI's health care system.
See "Business -- Relationship with CHI."

By the end of 1999, the Company plans to open approximately 45 new
Company-owned residences. In addition, the Company intends to develop a
significant number of jointly-owned residences with CHI, of which five are in
various stages of development. The Company also plans to develop and operate
Karrington Place residences, which are assisted living residences specifically
designed for individuals with Alzheimer's disease and other cognitive disorders,
in a substantial portion of its markets.

THE ASSISTED LIVING INDUSTRY

20
<PAGE>
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 need services, as the Company.

The Company believes that the following factors should continue to
positively affect the assisted living industry:

CONSUMER PREFERENCES. The Company believes assisted living is increasingly
the alternative preferred by prospective residents and their families in
providing care for the frail elderly. Assisted living residents have greater
independence, and assisted living services allow them to "age in place" in a
residential setting. The Company believes these factors result in a higher
quality of life than that experienced in the more institutional or clinical
settings, such as skilled nursing facilities.

POSITIVE DEMOGRAPHIC CHANGES. According to the U.S. Bureau of Census, the
number of individuals in the United States 85 years and older is expected to
increase by approximately 43% during the 1990s, from 3.0 million in 1990 to an
estimated 4.3 million in 2000, as compared to total U.S. population growth of
approximately 11% during the same period. It is further estimated that
approximately 57% of the population of seniors over age 85 currently need
assistance with activities of daily living and that more than one-half of
seniors are likely to develop Alzheimer's disease or other cognitive disorders
by age 85.

ASSISTED LIVING DEMAND EXCEEDS SUPPLY. The supply of long-term care beds
per 1,000 individuals 85 years of age and older declined from 686 beds per
thousand to 604 beds per thousand between 1980 and 1991, according to the U.S.
Bureau of Census, and the Company expects this trend to continue. The Company
believes this decline is attributable to several factors. The majority of states
in the United States have adopted certificate of need ("CON") or similar
statutes which generally require that, prior to the addition of new beds, the
addition of new services or the making of certain capital expenditures, a state
agency must determine that a need exists for the new beds or the proposed
activities. The Company believes that this CON process tends to restrict the
supply and availability of licensed nursing facility beds. High construction
costs, limitations on government reimbursement for the full costs of
construction and start-up expenses also act to constrain growth in the supply of
such facilities and beds. At the same time, nursing facility operators are
focusing on patients requiring higher levels of nursing care which results in
fewer nursing beds being available to patients with lower acuity levels.

COST ADVANTAGES. The Company believes that the assisted living industry can
provide comparable services for significantly less than the cost of such
services to private pay residents in nursing facilities. The Company's market
research indicates that the Company provides services at a cost of 25% to 35%
less than the cost of comparable services provided by private intermediate care
nursing facilities in the same market.

CHANGES IN FAMILY COMPOSITION. As a result of the increasing number of
two-income families, the high divorce rate and the number of single-parent
households, as well as the increasing geographic dispersion of families, many
adult children are not available to care in their own homes for elderly parents.
Two-income families are, however, often better able to provide financial support
for elderly parents.

21
<PAGE>
COST CONTAINMENT PRESSURES. Responding to rising health care costs,
governmental and private payor sources have adopted cost containment measures
that have encouraged reduced lengths of stay in hospitals. A result of this
trend is an increase in the number of individuals receiving nursing facility
care as compared to hospitalization. That, in turn, causes nursing facility
operators to focus on improving occupancy and increasing services to residents
requiring high levels of nursing care. As the level of care for nursing facility
residents rises and the supply of nursing facility space is filled by residents
having more acute needs, the Company believes that there will be greater demand
for assisted living residences to provide for residents requiring less nursing
care than generally will be provided to residents in nursing facilities.

STRATEGY

The principal components of the Company's strategy are to:

DEVELOP KARRINGTON MODEL RESIDENCES IN CURRENTLY-SERVED AND NEW
COMMUNITIES. The Company's plans call for rapid development of the Karrington
model in the communities it currently serves, as well as expansion into
additional communities. The Company targets middle-to upper-income metropolitan
markets which have well-established populations of persons 75 years of age and
older. This development activity, in conjunction with the Company's acquisition
strategy (discussed below) and its relationship with CHI, is intended to result
in regional concentrations of assisted living residences. The Company's ultimate
objective is to develop a nationwide network of assisted living residences which
will be utilized by managed care companies.

EXPAND JOINT DEVELOPMENT RELATIONSHIPS WITH MAJOR HEALTH CARE SYSTEMS ACROSS
THE UNITED STATES. The Company believes that it will continue to benefit from
its relationship with CHI, pursuant to which the Company expects to develop and
operate, and jointly own with CHI, assisted living residences in communities
where CHI or its affiliates have a major presence as a health care provider. In
addition, the Company believes its relationship with CHI provides a significant
source of referrals and the opportunity to leverage the Company's expertise by
developing similar relationships with other large, primarily not-for-profit,
health care systems throughout the country.

CONTINUE ITS FOCUS ON PROVIDING A BROAD RANGE OF SERVICES TO HIGHER-ACUITY
RESIDENTS. The Company believes it provides a higher acuity level of care to
its residents than is typically available at assisted living facilities,
including care for individuals with Alzheimer's disease and other cognitive
disorders. The Company is able to provide these services by building its
residences to higher standards and specifications, hiring licensed
professionals, providing advanced training to its staff and complying with
relevant regulations. In addition to providing care to residents with more
complex medical conditions, the Company seeks to offer a broad range of services
to meet the varied needs of all of its residents. In the future, these services
are expected to include physical, occupational, speech and other rehabilitation
therapy programs and other resident services. By providing a higher level of
care and a broader spectrum of services, the Company is able to allow its
residents to "age in place." The Company also is able to provide these services
at rates which are substantially less than the cost of similar services provided
by nursing care facilities.

ACQUIRE RESIDENCES FOR CONVERSION TO THE KARRINGTON MODEL. The Company
intends to acquire assisted living residences or other properties that can be
effectively converted to the Karrington model of operation. These acquisitions
will depend on location, financial feasibility, suitability for conversion and
consistency with other standards and requirements. The Company also intends to
pursue long-term management contracts where opportunities exist to expand the
Company's operations or to facilitate the acquisition of residences.

RELATIONSHIP WITH CHI

In addition to its own residence development activities, the Company has
entered into an informal relationship with Catholic Health Initiatives
contemplating the joint development of a significant number of additional
assisted living residences. The genesis of the CHI relationship was the joint
development by the Company and SCHCS of Karrington of Oakwood, a 53-unit
assisted living

22
<PAGE>
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. In 1995, the parties entered into a
letter of intent relating to the joint development of six additional projects
over a three-year period. The first of the six projects will consist of a
61-unit assisted living residence and an adjacent 28-unit Alzheimer's and
cognitive disorder residence located in Albuquerque, New Mexico, which is
scheduled to commence operations in the fourth quarter of 1996. Three additional
residences are currently under construction in Cincinnati, Dayton and Colorado
Springs.

Each project is to be 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 to be arranged by CHI on behalf of the
venture and is to be non-recourse to the Company. The Company will provide all
development and management services with respect to each residence under a
standard agreement that provides 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 cancellable on 30-days' notice. The average
daily suite rental rate ranges from $37 to $121 per day, depending on unit size,
location, number of occupants and level of care required. Two-thirds of
Karrington's residents live in private suites. While the Company's average daily
suite rental rate is approximately $74, the wide range of rates offered by the
Company allows the Company to accommodate persons of varying financial
resources. Medication administration and various levels of extended care
services, which depend on the degree of frailty, add to the basic rate.
Additional charges may be incurred for other services such as hair care and
special diets. Currently, all residents are private pay.

The Company's basic care program is provided to all residents at no
additional cost and includes: assistance with daily living, such as eating,
bathing, grooming, dressing and personal hygiene; three meals per day served in
a common dining room; 24-hour security; emergency call systems in each unit and
living area; transportation to offices, stores and community services;
assistance with arranging outside services such as physician care, various
therapy programs and other medical services; personal laundry services;
housekeeping services; and social and recreational activities.

In addition to the basic care program, residents may be included in the
extended care program, which assists residents who require more frequent or more
intensive assistance or care. Prior to entering a Karrington residence, and
periodically during their stay, individuals' needs are assessed to determine the
level of extended care services required, and an individual care plan is
designed. Depending on the assessment, the additional cost to the resident may
be at one of four extended care levels and may include a nominal charge for
medication administration. The Company's experience is that approximately
two-thirds of its residents require some extended care services and
approximately 75% require medication administration.

The Company's Alzheimer's and other cognitive disorder programs are provided
in each prototype residence on a floor designated for "special needs." The
Company also develops Karrington Place residences designed specifically for
Alzheimer's disease care. Trained staff provides special care programs for
cognitively impaired residents, and each is charged additional daily fees for
this added

23
<PAGE>
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.

The Company's market research indicates that the Company's total daily rate
for all services is 25% to 35% lower than comparable private intermediate care
nursing facilities in the same market.

STAFFING

Each residence has an Administrator and a four-person management team. This
management team includes the Resident Care Director (who supervises all resident
support staff and care plans), a Registered Nurse (responsible for all wellness
programs, as well as medication programs), the Director of Administration
(responsible for general administrative duties, including housekeeping, and all
food service and dietary needs) and the Associate Administrator (involved in
operations and marketing). Residence management teams report to a regional
director responsible for the operation of several residences. Regional directors
provide support, oversight and mentoring to each residence's staff.

Staffing models are used to determine appropriate personnel levels.
Screening is used to help select staff with "care providing" characteristics.
For each residence, services are typically provided by a staff of approximately
28 full-time employees. 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 manager-in-training
program which provides classroom and on-the-job training to develop future
Karrington administrators and managers. This three to nine month program was
initiated in the spring of 1995 and, as of June 17, 1996, included 12
participants in various stages of the program. The Company believes investment
in the manager-in-training 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.

RESIDENCES

The Company's first residence opened in October 1992, and since such time
the Company has successfully completed and opened five additional residences. At
July 16, 1996, the Company had 15

24
<PAGE>
assisted living residences open or under construction and 13 residences in
various stages of development. All 13 new development sites are under contract,
and construction starts are expected for all these new assisted living
residences before the end of 1996. The Company is in the process of identifying
and negotiating the acquisition of 15 additional sites. In addition to its
development and construction activities, the Company anticipates acquiring
residences developed by others if suitable opportunities arise.

The following table sets forth certain information regarding Karrington
residences in operation or under construction as of July 16, 1996:

<TABLE>
<CAPTION>
ACTUAL OR
PLANNED
RESIDENCE METRO LOCATION OPENING DATE UNITS (1)
- -------------------------------------------------------- -------------------------- ---------------- -------------
<S> <C> <C> <C>
Karrington of Bexley Columbus, OH 10/01/92 53
Karrington on the Scioto Columbus, OH 3/17/93 53
Karrington at Tucker Creek Columbus, OH 12/27/93 54
Karrington of Oakwood (2) Dayton, OH 11/08/94 53
Karrington of Shaker Heights Cleveland, OH 10/30/95 59
Karrington Place Columbus, OH 2/23/96 26
(Alzheimer's Residence)
Karrington of South Hills Pittsburgh, PA 3Q, 1996 67
Karrington of Albuquerque (2) Albuquerque, NM 4Q, 1996 61
Karrington, St. Francis Place (2) Albuquerque, NM 4Q, 1996 28
(Alzheimer's Residence)
Karrington at Fall Creek Indianapolis, IN 4Q, 1996 61
Karrington at Willow Lake Indianapolis, IN 1Q, 1997 61
Karrington of Englewood (2) Dayton, OH 2Q, 1997 48
Karrington of Colorado Springs (2) Colorado Springs, CO 2Q, 1997 64
Karrington of Fort Wayne Fort Wayne, IN 2Q, 1997 61
Karrington of Kenwood (2) Cincinnati, OH 2Q, 1997 67
</TABLE>

- ------------------------
(1) For the six months ended June 30, 1996, the average occupancy rate of the
residences open for one year or more was 98.6% for Karrington of Bexley,
91.2% for Karrington on the Scioto, 91.0% for Karrington at Tucker Creek and
93.6% for Karrington of Oakwood. The average occupancy rate for that period
was 50.3% for Karrington of Shaker Heights which opened in October of 1995
and 34.4% for Karrington Place which opened in February of 1996.

(2) Owned jointly with CHI.

25
<PAGE>
The following table sets forth certain information regarding Karrington
residences that are subject to purchase contracts as of July 16, 1996, but for
which construction had not then commenced:

<TABLE>
<CAPTION>
PLANNED
RESIDENCE METRO LOCATION DEVELOPMENT STAGE OPENING DATE PLANNED UNITS
- ------------------------------------ -------------------------- ------------------- ---------------- -------------
<S> <C> <C> <C> <C>
Karrington of Sylvania Toledo, OH In Zoning 3Q, 1997 61
Karrington of Rocky River Cleveland, OH In Zoning 3Q, 1997 64
Karrington of Monroeville Pittsburgh, PA In Zoning 3Q, 1997 64
Karrington of Bath Akron, OH In Zoning 3Q, 1997 67
Karrington of Carmel Indianapolis, IN In Zoning 4Q, 1997 50
(Alzheimer's Residence)
Karrington of Lyndhurst Cleveland, OH Under Contract 4Q, 1997 47
(Alzheimer's Residence)
Karrington of Ann Arbor Ann Arbor, MI In Zoning 4Q, 1997 67
Karrington of Eastover Charlotte, NC In Zoning 4Q, 1997 90
Karrington of Gahanna Columbus, OH In Zoning 4Q, 1997 50
(Alzheimer's Residence)
Karrington of Fremont Fremont, OH Zoned 4Q, 1997 48
Karrington of Wooster Wooster, OH Zoned 4Q, 1997 48
Karrington of Erie Erie, PA Under Contract 1Q, 1998 67
Karrington of Charlotte Charlotte, NC Under Contract 1Q, 1998 67
</TABLE>

DEVELOPMENT

The Company's development personnel research and identify potential markets,
primarily in major metropolitan areas and their surrounding suburban
communities, and select sites for development within such markets. In evaluating
a market, the Company considers a number of factors, including population,
income and age demographics, traffic count, site visibility, residential and
commercial characteristics, probability of obtaining zoning approvals, proximity
of various competitors, estimated market demand and the potential to achieve
economies of scale in a specific market by concentration of its development and
operating activities.

The principal stages in the development process are (i) site selection and
contract signing, (ii) zoning and site plan approval, (iii) architectural
planning and design, (iv) contractor selection and (v) construction and
licensure. Once a market has been identified, site selection and contract
signing typically take three months. Zoning and site plan approval generally
take three to nine months and are typically the most difficult step in the
development process as a result of the Company's selection of sites in
established communities which frequently require site rezoning. Architectural
planning and design and contractor selection often occur during the zoning
process but can prolong the start of construction. Residence construction
generally takes 12 months. After a residence receives a certificate of occupancy
and appropriate licenses, residents usually begin to move in immediately. The
Company's experience indicates that new residences typically reach a stable
level of occupancy of over 90% within 12 months, but there can be no assurance
that these results will be achieved in new markets. The Company estimates that
total capitalized cost to develop, construct and open a Karrington model
residence, including land acquisition and construction costs, ranges from
approximately $6.0 million to $7.5 million, an average cost per unit of
approximately $110,000. The cost of any particular residence may vary
considerably based on a variety of site-specific factors.

The Company's development activities are coordinated by its 12-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.

26
<PAGE>
The Company's construction strategies include the development of national
purchasing capabilities 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 Karrington model residence is a freestanding, mansion-style building
with a designed capacity of 60 to 80 residents in any of a variety of exterior
styles. The prototype averages 64 units and approximately 45,000 square feet and
is generally built on a 1.5 to 2 acre site. Approximately 50% of the building is
devoted to common areas and amenities. The Company has three basic building plan
designs, which provide it with flexibility in adapting the model to a particular
site and local zoning requirements. The building is usually three stories of
concrete and steel frame construction built to institutional health care
standards but residential in appearance. The interior design promotes a
home-like environment while permitting the effective provision of resident care
programs and promoting resident independence.

The individual resident suites are clustered on each floor to resemble a
neighborhood, with a variety of suite floor plans of one or two rooms and
varying square footage. Each floor has a quiet area resembling a library or den
and an active area designed to support activity programs and interaction among
residents, staff and families. The main floor usually includes the main dining
room, private dining rooms, administrative offices, a library, a living or
family room, an ice cream parlor and a year-round sun porch. Also included are
public restrooms, outside porches, a foyer and a formal entryway with grand
staircase and central elevator. On other floors in each residence are located a
resident laundry room, a wellness center, a bathing spa area, employee break
rooms, a beauty salon and activity areas. The special needs floor also includes
a separate resident kitchen and dining area.

Recently, the Company opened its first stand-alone Alzheimer's care
residence in Columbus, Ohio designed specifically for residents with Alzheimer's
disease. This "Karrington Place" residence was constructed using a special
design concept intended to provide the atmosphere and physical environment
believed by the Company to be most effective in assisting residents in the later
stages of Alzheimer's disease. The Company intends to develop additional
Karrington Place models in many of the markets it enters.

The architectural and interior design of the Karrington prototype
incorporates Karrington's philosophy of dedication to excellence in preserving
and enhancing personal dignity, independence, individuality and quality of life.
The Company believes that its residential environments accomplish other
objectives as well, including: (i) lowering the stress and disruption of the
resident and their family that occurs because of a move; (ii) providing a secure
environment that is easily traveled by residents with a wide variety of
ambulation disabilities; (iii) making available a comfortable home-like
environment that welcomes visitation by family and friends; and (iv) supporting
the Company's special activities programs that promote inter-generational
activities and events to bring together elderly residents with younger persons
in the community.

MARKETING

The Company's marketing approach emphasizes consumer education and awareness
directed to potential residents and family members. The adult children of
residents tend to be significant decision-makers in the selection of the
assisted living option. Other significant referral sources include hospital
discharge planners, physicians, churches, social service agencies focused on the
elderly, nursing facilities in the area, home health agencies, social workers,
legal advisors, other health care providers and families of existing residents.
Telephone directory advertising, media products and informal "networking" are
directed by the Company toward educating decision-makers and other referral
sources in a community. The marketing personnel in the Company's corporate
office develop the overall strategy in each market as well as media materials,
databases, direct mail, signage and

27
<PAGE>
community outreach activities. Each residence has a marketing director
responsible for generating and following-up leads, use of the Company's
computer- based marketing tools, coordinating referral activities and providing
tours, counseling and caregiving advice for potential residents and their
families with respect to the Company's residences and services.

Marketing activities begin during the development stage of a residence,
after the Company has obtained site control, and continue with increased
emphasis when an information center opens for a specific residence approximately
eight months prior to opening. Historically, new residences have achieved
deposits on approximately one-third of the units in a residence prior to
opening, and residences have generally reached stable occupancy in less than 12
months.

REGULATION

The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities, which requirements vary from state to state. These
requirements 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. Inspection deficiencies are resolved through a plan of
correction, although the reviewing agency typically is authorized to take action
against a licensed facility where deficiencies are noted in the survey process.
Such action may include imposition of fines, imposition of a provisional or
conditional license or suspension or revocation of a license or other sanctions.

Health care is an area of extensive and frequent regulatory change. The
assisted living model for long-term care is relatively new, and, accordingly,
the manner and extent to which it is regulated at the federal and state levels
is evolving. Changes in the laws or new interpretations of existing laws may
have a significant effect on methods and costs of doing business. The Company is
actively involved in monitoring regulatory and legislative changes affecting the
assisted living industry and participates with industry organizations to
encourage improvements to existing laws and regulations.

The success of the Company will depend in part upon its ability to satisfy
applicable regulations and requirements and to procure and maintain required
licenses as the regulatory environment for assisted living evolves. The
Company's operations could also be adversely affected by, among other things,
future regulatory developments such as mandatory increases in the scope and
quality of care to be offered to residents and revisions to licensing and
certification standards.

The Company currently is not a Medicare or Medicaid provider. Under some
state licensure laws, and for the convenience of its residents, some of the
Company's assisted living residences maintain contracts with certain health care
providers and practitioners, including pharmacies, visiting nurse, 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 provision

28
<PAGE>
of assisted living services receives increased attention and the number of
states providing reimbursement for assisted living rises, competition will
intensify as a result of new market entrants. The Company also competes with
skilled nursing facilities that provide long-term care services. In implementing
its growth strategy the Company expects increased competition in its efforts to
develop and acquire assisted living communities. Some of the Company's present
and potential competitors are significantly larger and have, or may obtain,
greater financial resources than those of the Company.

PROPRIETARY INFORMATION

The Company is the registered owner of the service mark "Karrington
Communities-Registered Trademark-." The Company believes this mark is of
material importance to its business.

EMPLOYEES

As of July 17, 1996, the Company had approximately 300 employees. None of
the Company's employees are represented by a union or covered by a collective
bargaining agreement. The Company has experienced no work stoppages and
considers its relationship with its employees to be good.

LEGAL PROCEEDINGS

There are no pending material legal proceedings involving the Company.

29
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information as of July 17, 1996,
regarding each of the Company's directors and executive officers:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Richard R. Slager.................................... 42 Chairman of the Board, President and Chief Executive
Officer
Alan B. Satterwhite.................................. 49 Director, Chief Operating Officer and Chief Financial
Officer
Anthony E. DiBlasi................................... 45 Senior Vice President, Construction
John K. Knutson...................................... 53 Senior Vice President, Operations
Stephen Lewis........................................ 50 Senior Vice President, Development, General Counsel
and Assistant Secretary
Mark N. Mace......................................... 40 Senior Vice President, Finance and Treasurer
Charles H. McCreary.................................. 43 Director nominee and Secretary
Michael H. Thomas.................................... 46 Director
John S. Christie..................................... 46 Director
Bernadine P. Healy................................... 51 Director nominee
David H. Hoag........................................ 57 Director nominee
John H. McConnell.................................... 72 Director nominee
James V. Pickett..................................... 54 Director nominee
Harold A. Poling..................................... 70 Director nominee
Robert D. Walter..................................... 51 Director nominee
</TABLE>

Immediately prior to the effective time of the Registration Statement of
which this Prospectus forms a part, the size of the Board of Directors was
increased to 11 and was divided into three classes, each consisting of
approximately one-third of the total number of directors. On or after the date
of this offering, the existing directors will fill the vacancies in the Board of
Directors. The Company has reached agreement with Messrs. Hoag, McConnell,
McCreary, Pickett, Poling and Walter and Dr. Healy to join the Board of
Directors.

Richard R. Slager, a co-founder of the Company, has served as Chairman of
the Board of the Company since April 1996 and as President and Chief Executive
Officer since the Company's formation in 1990. Mr. Slager is the immediate past
Chairman of the Assisted Living Facilities Association of America ("ALFAA"), the
leading trade association serving the assisted living industry. Mr. Slager was a
founding member of ALFAA and currently sits on its Executive Committee.

Alan B. Satterwhite, a co-founder of the Company, has served as a Director
of the Company since April 1996 and as Chief Operating Officer and Chief
Financial Officer since the Company's formation in 1990. Mr. Satterwhite is also
a founding member of ALFAA.

Anthony E. DiBlasi has served as Senior Vice President, Construction since
April 1996. Prior to joining the Company, Mr. DiBlasi was Vice President,
Construction, for Heartland Food Systems, Inc., a major franchisee of Hardees
Restaurants, from 1992 to 1996. Prior thereto he was Vice President, Director of
Construction, for Trio Construction, a general contractor in Columbus, Ohio.

30
<PAGE>
John K. Knutson has served as Senior Vice President, Operations since
February 1996. Prior to joining the Company, Mr. Knutson was Vice President of
Operations for LeisureCare, Inc., a senior housing company based in Bellevue,
Washington. Mr. Knutson was a member of ALFAA's Board of Directors from 1992 to
1996 and its Executive Committee for the past two years.

Stephen Lewis has served as Senior Vice President, Development and General
Counsel of the Company since November 1993. Prior to joining the Company, Mr.
Lewis was general counsel of VOCA Corporation, a multi-state operator of
residential centers for persons with mental retardation and other developmental
disabilities.

Mark N. Mace has served as Senior Vice President, Finance and Treasurer of
the Company since March 1996. Prior to joining the Company, Mr. Mace was a
Senior Manager with Deloitte & Touche LLP, a national accounting firm.

Charles H. McCreary has served as Secretary of the Company since May 1996.
Mr. McCreary has been nominated and has agreed to serve as a Director of the
Company for a term beginning on or after the date of this offering. Mr. McCreary
is a partner in the law firm of Bricker & Eckler, which firm has represented the
Company since its formation.

Michael H. Thomas has served as a Director of the Company since May 1996.
Mr. Thomas is a certified public accountant and has been employed by JMAC, Inc.
as its Executive Vice President and Treasurer since 1980.

John S. Christie has served as a Director of the Company since May 1996.
Since October 1, 1995, Mr. Christie has been the President of JMAC, Inc., an
investment company which is a principal shareholder of the Company. Prior to
1995, Mr. Christie was Senior Vice President, Corporate Development, of the
Battelle Memorial Institute, the world's largest private research organization,
based in Columbus, Ohio.

Bernadine P. Healy, M.D. has been nominated and has agreed to serve as a
Director of the Company for a term beginning on or after the date of this
offering. Dr. Healy has served as Dean of Medicine and as a Professor of
Internal Medicine at The Ohio State University since October 1995. Prior thereto
she was Senior Policy Advisor of The Page Center, The Cleveland Clinic
Foundation. From 1991 to 1993, Dr. Healy was the Director of the National
Institutes of Health. Dr. Healy serves on the Board of Directors of National
City Corp., Invacare and Medtronics.

David H. Hoag has been nominated and has agreed to serve as a Director of
the Company for a term beginning on or after the date of this offering. Mr. Hoag
has served as the Chairman of the Board, President and Chief Executive Officer
of The LTV Corporation since June 1991. The LTV Corporation completed a
reorganization under Chapter 11 of the U.S. Bankruptcy Code in June 1993. Mr.
Hoag serves on the Board of Directors of The Chubb Corporation and Lubrizol
Corporation and is the Chairman of the Board of Allegheny College.

John H. McConnell has been nominated and has agreed to serve as a Director
of the Company for a term beginning on or after the date of this offering. Mr.
McConnell is the founder and Chairman of the Board of Worthington Industries,
Inc. Mr. McConnell is Chairman of the Board of U.S. Health, Inc., a regional
not-for-profit acute care provider based in Columbus, Ohio.

James V. Pickett has been nominated and has agreed to serve as a Director of
the Company for a term beginning on or after the date of this offering. Mr.
Pickett has served as Chairman of Pickett Realty Advisors, a Dublin, Ohio-based
asset manager for a hotel portfolio, since 1965, and, in addition, has served as
the Managing Director of the real estate investment group of Banc One Capital
Corporation since 1993. Mr. Pickett serves on the Board of Directors of Wendy's
International, Inc. and Metatec Corporation.

31
<PAGE>
Harold A. Poling has been nominated and has agreed to serve as a Director of
the Company for a term beginning on or after the date of this offering. Mr.
Poling is the retired Chairman of the Board of Ford Motor Company and also
serves on the Boards of Directors of Shell Oil Company, The LTV Corporation and
Kellogg Company.

Robert D. Walter has been nominated and has agreed to serve as a Director of
the Company for a term beginning on or after the date of this offering. Mr.
Walter is the Chairman and Chief Executive Officer of Cardinal Health, Inc., a
Dublin, Ohio based health care service provider. Mr. Walter serves on the Board
of Directors of Banc One Corporation and Westinghouse Electric Corporation.

COMMITTEES OF THE BOARD OF DIRECTORS

AUDIT COMMITTEE. Upon its creation, the Audit Committee, among other
things, will make recommendations concerning the engagement of independent
auditors, will review the results and scope of the annual audit and other
services provided by the Company's independent auditors and will review the
adequacy of the Company's internal accounting controls. All members of the Audit
Committee will be independent directors.

COMPENSATION COMMITTEE. Upon its creation, the Compensation Committee will
make recommendations to the full Board of Directors concerning salary and bonus
compensation and benefits for executive officers of the Company and will
administer the Incentive Stock Plan with respect to executive officers. The
Compensation Committee will consist of at least three non-employee directors,
each of whom will satisfy the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, and Section 162(m) of the Internal Revenue
Code of 1986, as amended.

COMPENSATION OF THE BOARD OF DIRECTORS

Directors who are employees of the Company will receive no additional
compensation for their services as members of the Board of Directors or as
members of Board committees. Directors who are not employees of the Company will
be paid a quarterly fee of $3,000, as well as additional fees of $1,000 for each
meeting of the Board or of a Board committee attended by such Director. The
Company's Directors are reimbursed for their out-of-pocket expenses incurred in
connection with their service as directors, including travel expenses.

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth certain information regarding cash and
non-cash compensation paid by the Company during the fiscal year ended December
31, 1995, to the Company's Chief Executive Officer and to the only other
executive officer whose salary and bonus exceeded $100,000 during such year
(collectively, the "Named Executive Officers"). The Company did not grant any
stock options or restricted stock awards to any of the Named Executive Officers
during the 1995 fiscal year, and the dollar value of perquisite and other
personal benefits, if any, received by each of the Named Executive Officers in
fiscal year 1995 was less than established reporting thresholds.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND PRINCIPAL POSITION SALARY BONUS(1)
- ------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
$ 146,923 $ 56,044
Richard R. Slager..............................................................
Chairman of the Board, President and Chief Executive Officer
$ 123,846 $ 56,044
Alan B. Satterwhite ...........................................................
Chief Operating Officer and Chief Financial Officer
</TABLE>

- ------------------------
(1) The Named Executive Officers participate in the Company's profit sharing
plan together with substantially all the employees of the Company. For
residence employees, profit sharing is based on the operating profit of the
residence. For other employees, profit sharing is based on the profitability
of the Company. Cash payments are made quarterly.

32
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company has never had a Compensation Committee or other committee of the
Board of Directors performing similar functions. Decisions concerning
compensation of executive officers of the Company were made by the Company's
Chief Executive Officer. The Board of Directors will establish a Compensation
Committee upon the closing of the offering.

INCENTIVE STOCK PLAN

The purpose of the Karrington Health, Inc. 1996 Incentive Stock Plan (the
"Incentive Stock Plan") is to attract and retain key personnel, including
consultants and advisors to and directors of the Company, and to enhance their
interest in the Company's continued success and to allow all employees an
opportunity to have an ownership interest in the Company.

The Incentive Stock Plan provides for the grant of incentive and
nonqualified stock options, stock appreciation rights ("SARs"), restricted
stock, performance shares and unrestricted Common Shares (individually, an
"Award" or, collectively, "Awards"). In addition, the Incentive Stock Plan
provides for the purchase of Common Shares through payroll deduction by all
employees of the Company who have satisfied certain eligibility requirements. No
Award under the Incentive Stock Plan may be granted after the tenth anniversary
of the adoption of the Incentive Stock Plan. The maximum number of Common Shares
available to be issued under the Incentive Stock Plan is 550,000. The Common
Shares to be delivered under the Incentive Stock Plan will be made available
from the authorized but unissued Common Shares or from Common Shares held in
treasury. The Incentive Stock Plan contains customary provisions with respect to
adjustments for stock splits and similar transactions and the rights of
participants upon mergers and other business combinations.

The Incentive Stock Plan will be administered by the Compensation Committee
of the Board of Directors (the "Committee"), on which only non-employee
directors who satisfy the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), may serve. The Committee
has the discretion to select from among eligible employees those to whom Awards
will be granted and determine the terms and conditions applicable to each Award.
With respect to all non-executive officers (I.E., employees who are not subject
to the provisions of Section 16 of the Exchange Act), the Company's Chief
Executive Officer may make recommendations to the Committee. The Committee also
has the sole and complete authority to interpret the provisions of the Incentive
Stock Plan. The Committee's decisions will be binding on the Company and the
participants in the Incentive Stock Plan. Key employees of, and consultants and
advisors to, the Company and any future subsidiaries who can make substantial
contributions to the successful performance of the Company are eligible to be
granted Awards under the Incentive Stock Plan. It is anticipated that the
Committee's determinations of which eligible individuals will be granted Awards
and the terms thereof will be based on each individual's present and potential
contribution to the success of the Company and its subsidiaries. The approximate
number of persons initially eligible to receive Awards under the Incentive Stock
Plan has not yet been determined. Further, the Incentive Stock Plan provides
that employees will be given the opportunity to purchase additional Common
Shares through a payroll deduction program. The Incentive Stock Plan also
provides that, on an annual basis and without any further action by the
Committee or the Board, the Company will grant director options, as described
below, to each non-employee director of the Board.

STOCK OPTIONS. The Committee may grant non-qualified stock options to
employees, advisors and consultants but may grant incentive options only to
employees. The Committee has discretion to fix the exercise price of such
options, which, in the case of an incentive stock option, may not be less than
the fair market value of the Common Shares at the date of grant. In the case of
an incentive stock option granted to a 10% shareholder of the Company, the
exercise price may not be less than 110% of the fair market value of the Common
Shares at the date of grant. The Committee also has broad discretion as to the
terms and conditions under which options will be exercisable. Incentive stock
options will expire not later than ten years after the date on which they are
granted (or five years in

33
<PAGE>
the case of an incentive stock option granted to a 10% shareholder of the
Company). The exercise price of the options may be satisfied in cash or, in the
discretion of the Committee, by exchanging Common Shares owned by the optionee,
or by a combination of the preceding.

DIRECTOR OPTIONS. Under the Incentive Stock Plan, each director who is not
an employee of the Company or of a subsidiary will receive, on the first
business day after the effective date of the Registration Statement of which
this Prospectus is a part, a grant of a non-qualified stock option to purchase
6,000 Common Shares at an exercise price equal to the public offering price set
forth on the cover page of this Prospectus. Thereafter, each person who becomes
a director and is not an employee of the Company or of a subsidiary will
receive, on the first business day after he becomes a director, a grant of a
non-qualified option to purchase 6,000 Common Shares at an exercise price equal
to the fair market value of the Common Shares on the date of grant and, on the
first business day after each succeeding annual meeting of shareholders, each
continuing non-employee director will receive a grant of a non-qualified stock
option to purchase 2,000 Common Shares at an exercise price equal to the fair
market value of the Common Shares on the date of grant. A director option will
be exercisable beginning six months after the date of grant and until the
earlier of (i) the tenth anniversary of the date of grant and (ii) three months
(one year in the case of a director who becomes disabled or dies) after the date
the director ceases to be a director, provided, however, that if a director
ceases to be a director after having been convicted of, or pled guilty to, a
felony, the director option will be canceled on the date the director ceases to
be a director. The exercise price of the director options may be satisfied in
cash or, in the discretion of the Committee, by exchanging Common Shares owned
by the director, or by a combination of cash and Common Shares.

SARS. SARs may be awarded either in tandem with options ("Tandem SARs") or
on a stand-alone basis ("Nontandem SARs"). Tandem SARs may be awarded by the
Committee either at the time the related option is granted or thereafter at any
time prior to the exercise, termination or expiration of the related option. The
exercise price determined with respect to an option shall also be applicable in
connection with the exercise of any Tandem SAR granted with respect to such
option. At the time of grant of a Nontandem SAR, the Committee will specify the
base price of the Common Shares to be issued for determining the amount of cash
or number of the Company's Common Shares to be distributed upon the exercise of
such Nontandem SAR. The base price of Nontandem SARs will not be less than 100%
of the fair market value per share of the Company's Common Shares underlying the
award on the date of grant.

Tandem SARs are exercisable only to the extent that the related option is
exercisable and only for the period determined by the Committee (which period
may expire prior to the expiration date of the related option). Upon the
exercise of all or a portion of Tandem SARs, the related option shall be
canceled with respect to an equal number of the Company's Common Shares.
Similarly, upon exercise of all or a portion of an option, the related Tandem
SARs shall be canceled with respect to an equal number of the Company's Common
Shares. Nontandem SARs shall be exercisable for the period determined by the
Committee.

Upon the surrender of a Tandem SAR and cancellation of the related
unexercised option, the employee will be entitled to receive Common Shares of
the Company having an aggregate fair market value equal to (A) the excess of (i)
the fair market value of one Common Share as of the date the Tandem SAR is
exercised over (ii) the exercise price per share specified in such option,
multiplied by (B) the number of Common Shares subject to the option, or portion
thereof, which is surrendered. Upon surrender of a Nontandem SAR, the employee
will be entitled to receive Common Shares having an aggregate fair market value
equal to (A) the excess of (i) the fair market value of one Common Share as of
the date on which the Nontandem SAR is exercised over (ii) the base price of the
shares covered by the Nontandem SAR multiplied by (B) the number of Common
Shares covered by the Nontandem SAR, or the portion thereof being exercised. The
Committee, in its discretion, may cause all or any portion of the Company's
obligation to an employee in respect of the exercise of an SAR to be satisfied
in cash in lieu of Common Shares. Any fractional shares resulting from the
exercise of an SAR will be paid in cash.

34
<PAGE>
RESTRICTED STOCK AWARDS. An award of restricted stock is an Award of Common
Shares that is subject to such restrictions as the Committee deems appropriate,
including forfeiture conditions and restrictions on transfer for a period
specified by the Committee. Awards of restricted stock may be granted under the
Incentive Stock Plan for or without consideration. Restrictions on restricted
stock may lapse in installments based on factors selected by the Committee. The
Committee, in its sole discretion, may waive or accelerate the lapsing of
restrictions in whole or in part. Prior to the expiration of the restricted
period, except as otherwise provided by the Committee, a participant who has
been granted restricted stock will, from the date of grant, have the rights of a
shareholder of the Company in respect of such Common Shares, including the right
to vote such Common Shares and to receive dividends and other distributions
thereon, subject to the restrictions set forth in the Incentive Stock Plan and
in the instrument evidencing such Award. The shares of restricted stock will be
held by the Company, or by an escrow agent designated by the Company, during the
restricted period and may not be sold, assigned, transferred, pledged or
otherwise encumbered until the restrictions have lapsed. The Committee has
authority to determine the duration of the restricted period and the conditions
under which restricted stock may be forfeited, as well as the other terms and
conditions of such awards.

PERFORMANCE SHARE AWARDS. A performance share award is an Award of a number
of units that represent the right to receive a specified number of Common Shares
or cash, or both, upon satisfaction of certain specified performance goals,
subject to such terms and conditions as the Committee determines. Performance
Awards will be earned to the extent such performance goals established by the
Committee are achieved over a period of time specified by the Committee. The
Committee has discretion to determine the value of each performance Award, to
adjust the performance goals as it deems equitable to reflect events affecting
the Company or changes in law or accounting principles or other factors, and to
determine the extent to which performance Awards that are earned may be paid in
the form of cash, Common Shares or a combination of both.

STOCK PURCHASE PLAN. Periodically, all employees of the Company who have at
least one year of service with the Company will be given the opportunity to
purchase Common Shares under the Incentive Stock Plan through a payroll
deduction program. Pursuant to this program, employees will be able to purchase
Common Shares at a price equal to between 85% and 100% of fair market value.
Certain restrictions contained in Section 423 of the Code apply to this payroll
deduction program, including a limitation on the maximum value of Common Shares
that may be purchased by an individual employee in any calendar year. Upon
purchase of Common Shares through payroll deduction, the Company will issue
share certificates to the participating employees.

UNRESTRICTED SHARES. Unrestricted Shares may also be granted at the
discretion of the Committee. Except as required by applicable law, no payment
will be required for Unrestricted Shares.

The Committee has broad discretion as to the specific terms and conditions
of each Award and any rules applicable thereto, including the effect, if any, of
a change in control of the Company. The terms of each Award are to be evidenced
by a written instrument delivered to the participant. The Common Shares issued
under the Incentive Stock Plan are subject to applicable tax withholding by the
Company which, to the extent permitted by Rule 16b-3 under the Exchange Act, may
be satisfied by the withholding of Common Shares issuable under the Incentive
Stock Plan. Any Awards granted under the Incentive Stock Plan may not be
assigned or transferred except by will or the laws of descent and distribution
or pursuant to a qualified domestic relations order.

The Incentive Stock Plan may be amended or terminated at any time by the
Board of Directors; provided, however, that no such amendment or termination may
adversely affect an optionee's or grantee's rights under any Award theretofore
granted under the Incentive Stock Plan, except with the consent of such optionee
or grantee, and except that no amendment may be made without shareholder
approval if the Committee determines that such approval is necessary to comply
with any tax or

35
<PAGE>
regulatory requirement, including any approval that is required as a
prerequisite for exemptive relief from Section 16 of the Exchange Act, for which
or with which the Committee determines that it is desirable to qualify or
comply.

OPTION GRANTS

The following table sets forth certain information regarding grants of
non-qualified options under the Plan made to be effective as of the first
business day after the effective date of the Registration Statement of which
this Prospectus is a part, in all cases at an exercise price equal to the
initial public offering price set forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NAME AND POSITION NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Richard R. Slager.......................................................... 20,000
Alan B. Satterwhite........................................................ 20,000
All other executive officers as a group (4 persons)........................ 30,000
All other employees........................................................ 45,000
</TABLE>

In addition, each current non-employee director (3 persons) and each
director nominee (6 persons) will automatically receive a non-qualified stock
option to purchase 6,000 Common Shares as more fully described above under
"DIRECTOR OPTIONS."

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE INCENTIVE STOCK PLAN

STOCK OPTIONS. When an optionee exercises a non-qualified stock option, the
difference between the option price and any higher fair market value of the
Common Shares, generally on the date of exercise, will be ordinary income to the
optionee and generally will be allowed as a deduction for federal income tax
purposes to the Company. Any gain or loss realized by an optionee on disposition
of the Common Shares acquired upon exercise of a non- qualified stock option
generally will be capital gain or loss to such optionee, long-term or short-term
depending on the holding period, and will not result in any additional tax
consequences to the Company. The optionee's basis in the Common Shares for
determining gain or loss on the disposition will be the fair market value of
such Common Shares determined generally at the time of exercise.

When an optionee exercises an incentive stock option while employed by the
Company or a subsidiary or within three months (one year for death or
disability) after termination of employment, no ordinary income will be
recognized by the optionee at that time, but the excess (if any) of the fair
market value of the Common Shares acquired upon such exercise over the option
exercise price will be an adjustment to taxable income for purposes of the
federal alternative minimum tax applicable to individuals. If the Common Shares
acquired upon exercise of the incentive stock option are not disposed of prior
to the expiration of one year after the date of acquisition and two years after
the date of grant of the option, the excess (if any) of the sales proceeds over
the aggregate option exercise price of such Common Shares will be long-term
capital gain, but the employer will not be entitled to any tax deduction with
respect to such gain. Generally, if the Common Shares are disposed of prior to
the expiration of such periods (a "disqualifying disposition"), the excess of
the fair market value of such Common Shares at the time of exercise over the
aggregate option price (but not more than the gain on the disposition if the
disposition is a transaction on which a loss, if realized, would be recognized)
will be ordinary income at the time of such disqualifying disposition (and the
Company will generally be entitled to a federal income tax deduction in like
amount). Any gain realized by the optionee as a result of a disqualifying
disposition that exceeds the amount treated as ordinary income will be capital
in nature, long-term or short-term depending on the holding period. If an
incentive stock option is exercised more than three months (one year after death
or disability) after termination of employment, the tax consequences are the
same as described above for non-qualified options.

RESTRICTED STOCK. In the absence of an election by a participant pursuant
to Section 83(b) of the Code, the grant of restricted Common Shares will not
result in taxable income to the participant or a deduction for the Company in
the year of grant. The value of such restricted Common Shares will be

36
<PAGE>
taxable to the participant in the year in which the restrictions lapse.
Alternatively, a participant may elect to treat as income in the year of grant
the fair market value of the restricted Common Shares on the date of grant
pursuant to Section 83(b) of the Code, by making the election within 30 days
after the date of such grant. If such an election were made, such participant
would not be allowed to deduct at a later date the amount included as taxable
income if he or she should forfeit the restricted Common Shares to the Company.
The Company will generally be entitled to a federal income tax deduction equal
to the amount of ordinary income recognized by the participant in the year such
income is recognized. Prior to the lapse of restrictions, dividends paid on the
Common Shares subject to such restrictions will be taxable to the participant as
additional compensation in the year received free of restrictions, and the
Company will be allowed a corresponding federal income tax deduction.

STOCK PURCHASE PLAN. Common Shares purchased pursuant to the stock purchase
plan at 100% of fair market value will be taxed as if such Common Shares had
been acquired on the open market. Therefore, any gain or loss realized by an
employee on disposition of the Common Shares acquired pursuant to the stock
purchase plan generally will be capital gain or loss to such employee, long-term
or short-term depending on the holding period, and will not result in any
additional tax consequences to the Company. If an employee purchases Common
Shares pursuant to the stock purchase plan at less than 100% of fair market
value, then such employee shall treat as ordinary income in the year in which
such employee disposes of such Common Shares (or the year closing with such
employee's death) an amount equal to the lesser of (i) the excess of the fair
market value at the time of such disposition or death over the amount paid for
the Common Shares or (ii) the excess of the fair market value of the Common
Shares at the time the Common Shares were purchased over the amount paid for the
Common Shares.

SARS. There are no income tax consequences to an employee upon the granting
of either a Tandem SAR or a Nontandem SAR. When an employee surrenders an SAR
(either Tandem or Nontandem), the fair market value of the Common Shares of the
Company received on the date of surrender will be ordinary income to the
employee and will be allowed as a deduction for federal income tax purposes to
the Company. If, upon surrender of an SAR, the employee receives cash in lieu of
Common Shares, the amount of cash received by the employee will be ordinary
income and deductible by the Company for federal income tax purposes.

UNRESTRICTED SHARES. To the extent that the Committee grants Unrestricted
Shares to an employee, upon such grant, the fair market value of such Common
Shares will be ordinary income to the employee. At the time of such grant, the
Company will be entitled to a deduction for federal income tax purposes in an
amount equal to the then fair market value of the Unrestricted Shares.

SPECIAL RULES. Special rules apply to a participant who is subject to
Section 16 of the Exchange Act. Certain additional special rules apply if the
exercise price for a stock option is paid in Common Shares previously owned by
the optionee rather than in cash and if the Award is held, following the death
of a participant, by the executors of the participant's estate.

37
<PAGE>
CERTAIN TRANSACTIONS
In December, 1995, the Company entered into a loan agreement with JMAC, an
investment company owned by John H. McConnell and John P. McConnell, the founder
and Chief Executive Officer, respectively, of Worthington Industries, Inc.,
pursuant to which JMAC agreed to provide up to $8.0 million in loans to the
Company during a commitment period expiring December 31, 1996. Borrowings under
the agreement are subordinated to all obligations of the Company to financial
institutions. The loans bear interest at 15% per annum, payable annually. If not
sooner paid, all amounts advanced under the agreement are due January 1, 2000,
or earlier upon the occurrence of certain events. The purpose of the loans is to
provide the Company with equity funds as required by third party lenders for
construction of additional Karrington residences. The agreement contains
customary representations and covenants of the Company and certain conditions to
JMAC's obligation to lend funds. As of June 30, 1996, the outstanding principal
balance and accrued interest due JMAC was approximately $5.6 million. The
aggregate amount due JMAC upon closing of this offering will be repaid from the
net proceeds to be received by the Company from this offering, and the loan
agreement will be terminated. See "Use of Proceeds."

Effective January 1, 1995, JMAC Properties and DMA entered into a Restated
Third Amendment to Partnership Agreement pursuant to which certain subordinated
debentures and accrued interest thereon totaling $5.3 million, owed by the
Company to JMAC and DMA, were converted to equity.

In connection with the construction and permanent mortgage loan arrangements
made with third party lenders in respect of residence development, each of
Karrington Operating, DMA, JMAC, JMAC Properties and Messrs. Slager and
Satterwhite have entered into various unlimited and limited guarantee
agreements. Although no proceeds of this offering are allocated or intended to
be applied to make payments of principal or interest under any such financing
arrangements, any resulting increase in operating capital that might
subsequently be applied for such payments or otherwise to satisfy such financing
obligations will reduce the exposure of the guarantors. The guarantors have not
received any compensation for the guarantees, but are indemnified by the Company
against liability arising thereunder.

Charles H. McCreary, the Company's Secretary and a Director nominee, is a
partner in the law firm of Bricker & Eckler, which provides legal services to
the Company in connection with a variety of business and organizational matters.

38
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The table below sets forth the number and percentage of outstanding Common
Shares beneficially owned upon completion of the Reorganization Transactions,
and as adjusted to give effect to this offering, by (i) each person known by the
Company to own beneficially more than five percent of any class of the Company's
voting securities; (ii) each director and each person who has agreed to become a
director upon completion of the offering; (iii) each Named Executive Officer;
and (iv) all directors and executive officers of the Company as a group. The
Company believes that each individual or entity named has sole investment and
voting power with respect to Common Shares indicated as beneficially owned by
such individual or entity, except as otherwise noted. The address of JMAC is 150
E. Wilson Bridge Road, Suite 230, Worthington, Ohio 43085. The address of each
of Messrs. Slager and Satterwhite is c/o Karrington Health, Inc., 919 Old
Henderson Road, Columbus, Ohio 43220.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING SHARES TO BE AFTER OFFERING
------------------------ SOLD IN ------------------------
NAME NUMBER PERCENT OFFERING NUMBER PERCENT
- ---------------------------------------------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
JMAC, Inc. ......................................... 2,900,000 66.7% 650,000(1) 2,250,000 33.6%
Richard R. Slager................................... 717,750 16.5% -- 717,750 10.7%
Alan B. Satterwhite................................. 717,750 16.5% -- 717,750 10.7%
Charles H. McCreary................................. -- -- -- -- --
Michael H. Thomas................................... -- -- -- -- --
John S. Christie.................................... -- -- -- -- --
Bernadine P. Healy.................................. -- -- -- -- --
David H. Hoag....................................... -- -- -- -- --
John H. McConnell (2)............................... 2,900,000 66.7% 650,000(1) 2,250,000 33.6%
James V. Pickett.................................... -- -- -- -- --
Harold A. Poling.................................... -- -- -- -- --
Robert D. Walter.................................... -- -- -- -- --
All directors, director nominees and executive
officers as a group (11 persons)(2)................ 4,335,500 99.7% 650,000(1) 3,685,500 55.0%
</TABLE>

- ------------------------
(1) If the Underwriters exercise their over-allotment option in full, JMAC will
sell an additional 225,000 Common Shares.

(2) Includes all of the Common Shares held of record by JMAC, Inc. Mr. McConnell
is the Chairman of the Board and a controlling shareholder of JMAC, and the
directors of JMAC have given Mr. McConnell sole voting and investment power
in the Common Shares of the Company held by it.

39
<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of 28,000,000 Common
Shares, without par value, and 2,000,000 preferred shares, without par value. As
of the effective date of the Registration Statement of which this Prospectus
forms a part, 4,350,000 Common Shares were issued and outstanding and 550,000
authorized Common Shares were reserved for issuance under the Company's
Incentive Stock Plan. There are no preferred shares issued and outstanding.

COMMON SHARES

Holders of Common Shares are entitled to one vote for each Common Share held
of record on all matters presented to a vote of shareholders. Holders of Common
Shares have no cumulative voting rights and no preemptive rights to purchase or
subscribe for any stock or other securities. There are no conversion rights or
redemption or sinking fund provisions with respect to the Common Shares. Subject
to preferences that may be applicable to any outstanding preferred shares and
subject to the applicable debt instruments of the Company, holders of Common
Shares are entitled to receive such dividends as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In the
event of liquidation, dissolution or winding up of the affairs of the Company,
holders of Common Shares are entitled to share pro rata in distribution of the
assets of the Company remaining after payment or provision for payment of
liabilities and the liquidation payments to holders of outstanding preferred
shares. All outstanding Common Shares are, and the Common Shares offered hereby
when issued and paid for will be, fully paid and nonassessable.

The Common Shares have been approved for quotation on The Nasdaq National
Market.

PREFERRED SHARES

The Company's Board of Directors has the authority to issue up to 2,000,000
preferred shares in one or more series and to fix, by resolution, the
designations, preferences and relative, participating, optional or other rights,
if any, but currently not the voting rights, and the qualifications, limitations
or restrictions thereof, if any, including the number of shares in such series
(which the Board may increase or decrease as permitted by Ohio law), 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. In addition, the issuance of preferred shares, or the issuance of
rights to purchase such shares, could have the effect of delaying, deferring or
preventing a change of control of the Company or an unsolicited acquisition
proposal.

REGISTRATION RIGHTS AGREEMENT

The Company, JMAC, Messrs. Slager and Satterwhite and Gregory M. Barrows, an
employee of the Company, are parties to a Registration Rights Agreement dated as
of May 8, 1996 (the "Registration Rights Agreement"). At May 8, 1996, JMAC and
Messrs. Slager, Satterwhite and Barrows held, or had the right to acquire, an
aggregate of 4,350,000 Common Shares of the Company. At any time after January
1, 1997, the holders of 50% or more of the outstanding Common Shares subject to
the Registration Rights Agreement may make up to two requests that the Company
register the offering of some or all of such Common Shares at the Company's
expense. The Company is not required to effect more than one demand registration
during any 18-month period and each demand registration is subject to customary
underwriting and hold-back provisions. Each of the holders of the demand
registration rights under the Registration Rights Agreement have incidental or
piggy-back registration rights in the event that the Company proposes to
register the offering of any of its securities (other than the registration of
employee benefit plans or business combination transactions), as well as in
connection with a qualifying demand registration by another holder or holders of
such demand registration rights. To the extent exercised, such incidental
registration rights are also subject to customary underwriting and hold-back
provisions.

40
<PAGE>
TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Shares is National City
Bank.

ANTI-TAKEOVER EFFECTS OF ARTICLES OF INCORPORATION, CODE OF REGULATIONS AND THE
OHIO GENERAL CORPORATION LAW

Certain provisions of the Articles of Incorporation and Code of Regulations
of the Company and of the Ohio GCL summarized in the following paragraphs may be
deemed to have an anti-takeover effect and may delay, defer or prevent a tender
offer or takeover attempt that a shareholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by shareholders.

CLASSIFIED BOARD OF DIRECTORS

The Company's Code of Regulations provides for the Board of Directors to be
divided into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of the Board of Directors will be elected each
year. Moreover, the Code of Regulations provides that the shareholders may
remove a Director only for cause. This provision, when coupled with ability of
the Board of Directors to fill vacant directorships, will preclude a shareholder
from removing incumbent directors without cause and simultaneously gaining
control of the Board of Directors by filling the vacancies created by such
removal with its own nominees.

NO SHAREHOLDER ACTION BY WRITTEN CONSENT

Section 1701.54 of the Ohio GCL requires that an action by written consent
of the shareholders in lieu of a meeting be unanimous, except that, pursuant to
Section 1701.11, the code of regulations may be amended by an action by written
consent of holders of shares entitling them to exercise two-thirds of the voting
power of the corporation or, if the articles of incorporation or code of
regulations otherwise provide, such greater or lesser amount, but not less than
a majority. The Company's Code of Regulations provides that, upon the closing of
the offering, no action to amend the Code of Regulations may be taken by the
shareholders without a meeting. This provision may have the effect of delaying,
deferring or preventing a tender offer or takeover attempt that a shareholder
might consider in its best interest.

SUPERMAJORITY VOTING PROVISIONS
The Code of Regulations provides that the provisions relating to the share
ownership required to call a meeting, the classification of the Board of
Directors, removal of directors, the elimination of shareholder action by
written consent to amend the Code of Regulations, indemnification of directors
and supermajority voting may not be repealed or amended in any respect, and no
other provision may be adopted, amended or repealed which would have the effect
of modifying or permitting the circumvention of such provisions, without the
vote of the holders of not less than 66 2/3% of the total voting power of the
Company.

ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS

The Code of Regulations provides that shareholders seeking to bring business
before an annual meeting of shareholders, or to nominate candidates for election
as directors at an annual or special meeting of shareholders, must provide
timely notice thereof in writing. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be received no later than the close
of business on the 10th day following the day on which such notice of the date
of the meeting was mailed or such public disclosure was made. The Code of
Regulations also specifies certain requirements for a shareholder's notice to be
in proper written form. These provisions may preclude some shareholders from
bringing matters before the shareholders at an annual or special meeting or from
making nominations for directors at an annual or special meeting.

41
<PAGE>
CONTROL SHARE ACQUISITION STATUTE

Section 1701.831 of the Ohio GCL (the "Control Share Acquisition Statute")
requires shareholder approval of any proposed "control share acquisition" of an
Ohio corporation. A "control share acquisition" is the acquisition, directly or
indirectly, by any person (including any individual, partnership, corporation,
limited liability company, society, association or two or more persons who have
a joint or common interest) of shares of a corporation that, when added to all
other shares of the corporation that may be voted, directly or indirectly, by
the acquiring person, would entitle such person to exercise or direct the
exercise of 20% or more (but less than 33 1/3%) of the voting power of the
corporation in the election of directors or 33 1/3% or more (but less than a
majority) of such voting power or a majority or more of such voting power. Under
the Control Share Acquisition Statute, the control share acquisition must be
approved in advance by the holders of a majority of the outstanding voting
shares represented at a meeting at which a quorum is present and by the holders
of a majority of the portion of the outstanding voting shares represented at
such a meeting excluding the voting shares owned by the acquiring shareholder
and certain "interested shares," including shares owned by officers elected or
appointed by the directors of the corporation and by directors of the
corporation who are also employees of the corporation.

The purpose of the Control Share Acquisition Statute is to give shareholders
of Ohio corporations a reasonable opportunity to express their views on a
proposed shift in control, thereby reducing the coercion inherent in an
unfriendly takeover. The provisions of the Control Share Acquisition Statute
grant to the shareholders of the Company the assurance that they will have
adequate time to evaluate the proposal of the acquiring person, that they will
be permitted to vote on the issue of authorizing the acquiring person's purchase
program to go forward in the same manner and with the same proxy information
that would be available to them if a proposed merger of the Company were before
them and, most importantly, that the interests of all shareholders will be taken
into account in connection with such vote and the probability will be increased
that they will be treated equally regarding the price to be offered for their
Common Shares if the implementation of the proposal is approved.

The Control Share Acquisition Statute applies not only to traditional tender
offers but also to open market purchases, privately negotiated transactions and
original issuances by an Ohio corporation, whether friendly or unfriendly. The
procedural requirements of the Control Share Acquisition Statute could render
approval of any control share acquisition difficult in that a majority of the
voting power of the Company, excluding "interested shares," must be represented
at the meeting and must be voted in favor of the acquisition. It is recognized
that the Control Share Acquisition Statute may have the effect of discouraging
or preventing offers which some shareholders might find financially attractive.

MERGER MORATORIUM STATUTE

Chapter 1704 of the Ohio GCL (the "Merger Moratorium Statute") generally
prohibits a wide range of business combinations and other transactions
(including mergers, consolidations, asset sales, loans, disproportionate
distributions of property and disproportionate issuances or transfers of shares
or rights to acquire shares) between an Ohio corporation and a person that owns,
alone or with other related parties, shares representing at least 10% of the
voting power of such corporation (an "Interested Shareholder") for a period of
three years after such person becomes an Interested Shareholder, unless, prior
to the date that the Interested Shareholder became such, the directors approve
either the transaction or the acquisition of the corporation's shares that
resulted in the person becoming an Interested Shareholder. Following the
three-year moratorium period, the corporation may engage in covered transactions
with an Interested Shareholder only if, among other things, (i) the transaction
receives the approval of the holders of 2/3 of all the voting shares and the
approval of the holders of a majority of the voting shares held by persons other
than an Interested Shareholder or (ii) the remaining shareholders receive an
amount for their shares equal to the higher of the highest amount paid in the
past by the Interested Shareholder for the corporation's shares or the amount
that would be due the shareholders if the corporation were to dissolve. The
Merger Moratorium Statute is

42
<PAGE>
designed to prevent many of the self-dealing activities that often accompany
highly-leveraged acquisitions by prohibiting an Interested Shareholder from
using the corporation or its assets or shares for his special benefit. The
Merger Moratorium Statute is intended to encourage potential tender offerors to
negotiate with the Board of Directors of the Company to ensure that the
shareholders of the Company receive fair and equitable consideration for their
shares. However, the Merger Moratorium Statute could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offering, the Company will have 6,700,000 Common
Shares outstanding (6,925,000 Common Shares if the Underwriters exercise their
over-allotment option in full). All Common Shares sold in the offering will be
freely transferable without restriction under the Securities Act, except for any
such shares which may be acquired by an affiliate of the Company (as that term
is defined in Rule 144 under the Securities Act). The remaining 3,700,000
outstanding Common Shares held by current shareholders constitute either
"restricted securities," within the meaning of Rule 144, or securities held by
affiliates, and will only be eligible for sale in the open market after the
offering subject to the contractual lockup provisions and applicable
requirements of Rule 144 described below.

In general, under Rule 144, as currently in effect, if a period of at least
two years has elapsed between the later of the date on which restricted
securities were acquired from the Company and the date on which they were
acquired from an affiliate, then the holder of such restricted securities
(including an affiliate) is entitled to sell a number of Common Shares within
any three-month period that does not exceed the greater of (i) one percent of
the then outstanding Common Shares or (ii) the average weekly reported volume of
trading of the Common Shares during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements pertaining to the
manner of such sales, notices of such sales and the availability of current
public information concerning the Company. Affiliates also must sell Common
Shares not constituting restricted securities in accordance with the foregoing
volume limitations and other requirements but without regard to the two-year
holding period. Under Rule 144(k), if a period of at least three years has
elapsed between the later of the date on which restricted securities were
acquired from the Company and the date on which they were acquired from an
affiliate, a holder of such restricted securities who is not an affiliate at the
time of the sale and has not been an affiliate for at least three months prior
to the sale would be entitled to sell the Common Shares immediately without
regard to the volume limitations and other conditions described above.

Sales of a significant number of Common Shares could have an adverse impact
on the market price of the Common Shares. The Company and all of the Company's
executive officers and directors have agreed not to offer, sell, contract to
sell, pledge, grant any option for the sale of, or otherwise dispose or cause
the disposition of, any Common Shares or securities convertible into or
exchangeable or exercisable for such shares, for a period of 180 days after the
date of this Prospectus, without the prior written consent of Smith Barney Inc.,
except in certain limited circumstances.

After the effective date of the Registration Statement of which this
Prospectus forms a part, the Company expects to file a registration statement on
Form S-8 under the Securities Act covering 550,000 Common Shares reserved for
issuance under the Company's Incentive Stock Plan. Upon the filing of such
registration statement, Common Shares issued upon exercise of options or other
awards granted under the Incentive Stock Plan generally will be available for
sale in the open market by non-affiliates of the Company.

43
<PAGE>
UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Shareholder have agreed to
sell to such Underwriter, Common Shares which equal the number of shares set
forth opposite the name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------ -----------
<S> <C>
Smith Barney Inc.......................... 1,010,000
J.C. Bradford & Co........................ 1,010,000
Advest, Inc............................... 40,000
Alex. Brown & Sons Incorporated........... 60,000
Burnham Securities, Inc................... 40,000
The Chicago Corporation................... 40,000
Dillon, Read & Co. Inc.................... 60,000
Donaldson, Lufkin & Jenrette Securities
Corporation.......................... 60,000
A.G. Edwards & Sons, Inc.................. 60,000
Equitable Securities Corporation.......... 40,000
First Albany Corporation.................. 40,000
Johnson Rice & Company L.L.C.............. 40,000

<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------ -----------
<S> <C>
C.L. King & Associates, Inc............... 40,000
Ladenburg, Thalmann & Co. Inc............. 40,000
McDonald & Company Securities, Inc........ 40,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................... 60,000
The Ohio Company.......................... 40,000
PaineWebber Incorporated.................. 60,000
Principal Financial Securities, Inc....... 40,000
Salomon Brothers Inc...................... 60,000
Southeast Research Partners, Inc.......... 40,000
Stephens Inc.............................. 40,000
Wheat, First Securities, Inc.............. 40,000
-----------
Total................................... 3,000,000
-----------
-----------
</TABLE>

The Underwriters are obligated to take and pay for all Common Shares offered
hereby (other than those covered by the over-allotment option described below)
if any such Common Shares are purchased.

The Underwriters, for whom Smith Barney Inc. and J.C. Bradford & Co. are
acting as Representatives, propose to offer a portion of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and a portion of the shares to certain dealers at a
price which represents a concession not in excess of $.54 per share under the
public offering price. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $.10 per share to certain Underwriters or to
certain other dealers. After the initial public offering, the public offering
price and such concessions may be changed by the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend to
confirm sales to accounts over which they exercise discretionary authority.

The Company and the Selling Shareholder have granted to the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to an aggregate of 450,000 additional Common Shares at the price to public set
forth on the cover page of this Prospectus less the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. Of the Common Shares subject to the Underwriters'
over-allotment option, up to 225,000 shares may be sold by the Company and up to
225,000 shares may be sold by the Selling Shareholder. To the extent such option
is exercised, each Underwriter will be obligated, subject to certain conditions,
to purchase from the Company and the Selling Shareholder on a pro rata basis
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriter's name in the preceding table bears
to the total number of shares listed in such table.

The Company, the Selling Shareholder and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

The Company, its directors and officers and the Selling Shareholder have
agreed not to offer, sell, contract to sell or otherwise dispose of, any Common
Shares or any securities convertible into, or exercisable or exchangeable for,
Common Shares for a period of 180 days after the date of this Prospectus,
without the prior consent of Smith Barney Inc., except in certain limited
circumstances.

44
<PAGE>
At the Company's request, the Underwriters have agreed to reserve up to
80,000 Common Shares for sale at the public offering price to Company employees
and other persons having certain business relationships with the Company. The
number of Common Shares available for sale to the general public will be reduced
to the extent these persons purchase such reserved Common Shares. Any reserved
Common Shares not purchased will be offered by the Underwriters to the general
public on the same basis as the other Common Shares offered hereby.

Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Shares
offered hereby has been determined by negotiations between the Company and the
Representatives. Among the factors considered in determining the initial public
offering price were the history of, and the prospects for, the Company's
business and the industry in which it competes, an assessment of the Company's
management, its past and present operations, the past and present earnings of
the Company and the trend of such earnings, the prospects for earnings of the
Company, the present state of the Company's development, the general condition
of the securities market at the time of the offering and the market prices and
earnings of similar securities of comparable companies at the time of the
offering.

LEGAL MATTERS

The validity of the Common Shares offered hereby will be passed upon for the
Company and the Selling Shareholder by Vorys, Sater, Seymour and Pease,
Columbus, Ohio, and for the Underwriters by Dewey Ballantine, New York, New
York. As to matters governed by Ohio law, Dewey Ballantine will rely upon the
opinion of Vorys, Sater, Seymour and Pease.

CHANGE IN ACCOUNTANTS

On November 7, 1995, the Company replaced Deloitte & Touche LLP with Ernst &
Young LLP as the Company's independent certified public accountants. The reports
of Deloitte & Touche LLP on the consolidated financial statements of the Company
as of December 31, 1994 and for each of the two years in the period then ended
did not contain an adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principle.
During the two years ended December 31, 1994 and the period between December 31,
1994 and the date on which Deloitte & Touche LLP was dismissed, there were no
disagreements between the Company and Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche LLP would have caused Deloitte & Touche LLP to make reference
to the subject matter of such disagreements in connection with its reports.

EXPERTS

The consolidated financial statements of Karrington Health, Inc. at December
31, 1995, and for the year then ended, included in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
are included herein in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.

The consolidated financial statements of Karrington Operating Company at
December 31, 1994 and for each of the two years in the period ended December 31,
1994, included in this Prospectus and Registration Statement, have been audited
by Deloitte & Touche LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included herein in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company, after the offering of Common Shares described herein, will be
subject to the informational requirements of the Exchange Act, and in accordance
therewith, will be required to file

45
<PAGE>
periodic reports and other information with the Commission. Such information can
be inspected without charge after the offering at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its Regional Offices located at
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661
and at 7 World Trade Center, 13th Floor, New York, New York 10048, and copies of
such materials may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed fees.

The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all amendments thereto, the "Registration Statement")
under the Securities Act with respect to the Common Shares offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information contained in the Registration Statement and the exhibits and
financial statements thereto, to which reference is hereby made. Statements
contained in this Prospectus as to the contents of any contract, agreement or
other document are not necessarily complete, and, in each instance, reference is
made to the copy of such contract, agreement or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits thereto, may be inspected and copies thereof can be obtained as
described in the preceding paragraph with respect to periodic reports and other
information filed by the Company under the Exchange Act.

The Company intends to furnish its shareholders with annual reports
containing audited financial statements, which have been certified by the
Company's independent auditors.

46
<PAGE>
KARRINGTON HEALTH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Reports of Independent Auditors............................................................................ F-2
Consolidated Balance Sheets................................................................................ F-4
Consolidated Statements of Operations...................................................................... F-5
Consolidated Statements of Owners' Equity (Deficiency)..................................................... F-6
Consolidated Statements of Cash Flows...................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

To the Shareholders of
Karrington Health, Inc.

We have audited the accompanying consolidated balance sheet of Karrington
Health, Inc. (the "Company"), formerly Karrington Operating Company (a
partnership) and its affiliates as of December 31, 1995, and the related
consolidated statements of operations, owners' equity (deficiency), and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Karrington
Health, Inc. and its affiliates as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Columbus, Ohio
January 19, 1996, except for Notes 9 and 10
as to which the date is July 18, 1996

F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Owners of
Karrington Operating Company:

We have audited the accompanying consolidated balance sheets of Karrington
Operating Company and affiliates as of December 31, 1994, and the related
consolidated statements of operations, owners' equity (deficiency), and cash
flows for each of the two years in the period ended December 31, 1994. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Karrington Operating Company
and affiliates at December 31, 1994, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1994
in conformity with generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

Columbus, Ohio
January 24, 1995

F-3
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ PRO FORMA
1994 1995 MARCH 31, 1996 MARCH 31, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)

<CAPTION>
(NOTE 10)
<S> <C> <C> <C> <C>
Current assets:
Cash.......................................... $ 137,062 $ 144,833 $ 43,253
Accounts receivable........................... 67,520 243,914 193,130
Amounts due from affiliates................... 40,355 523,278 558,211
Prepaid expenses.............................. 121,018 98,821 114,537
-------------- -------------- --------------
Total current assets........................ 365,955 1,010,846 909,131
Property and equipment -- net (NOTE 2).......... 14,844,963 24,879,363 28,571,074
Other assets -- net (NOTE 3).................... 1,081,176 786,233 771,936
-------------- -------------- --------------
Total assets................................ $ 16,292,094 $ 26,676,442 $ 30,252,141
-------------- -------------- --------------
-------------- -------------- --------------
<CAPTION>

LIABILITIES AND OWNERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities...... $ 734,385 $ 1,425,047 $ 2,256,771
Payroll and related taxes..................... 236,827 410,590 287,511
Unearned resident fees........................ 171,006 414,821 321,271
Interest payable.............................. 96,046 129,699 139,115
Current portion of long-term obligations...... 38,905 205,485 204,174
-------------- -------------- --------------
Total current liabilities................... 1,277,169 2,585,642 3,208,842
Long-term obligations (NOTES 5 AND 6):
Subordinated debentures payable to partners... 5,323,443 33,840 1,063,473
Mortgages and other........................... 11,454,753 18,216,053 20,689,613
-------------- -------------- --------------
Total long-term obligations................. 16,778,196 18,249,893 21,753,086
Deferred taxes.................................. -- -- -- $ 1,100,000
Owners' equity (deficiency):
Partners equity (deficiency).................. (1,763,271) 5,840,907 5,290,213 --
Preferred shares, without par value; 2,000,000
shares authorized; no pro forma shares issued
and
outstanding..................................
Common shares, without par value; 28,000,000
shares authorized, 4,350,000 pro forma shares
outstanding.................................. 5,290,213
Retained earnings (deficiency)................ (1,100,000)
-------------- -------------- -------------- --------------
Total liabilities and owners' equity............ $ 16,292,094 $ 26,676,442 $ 30,252,141 $ 5,290,213
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>

See accompanying notes.

F-4
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
--------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Residence operations.............. $ 2,288,387 $ 4,976,787 $ 6,219,465 $ 1,390,342 $ 1,822,164
Development and project management
fees............................. 17,500 287,683 524,391 68,480 122,006
------------- -------------- -------------- ------------- -------------
Total revenues.................. 2,305,887 5,264,470 6,743,856 1,458,822 1,944,170
Expenses:
Residence operations.............. 1,907,684 3,453,690 4,380,312 1,069,056 1,327,527
General and administrative........ 170,319 634,016 1,704,694 268,481 574,894
Depreciation and amortization..... 505,125 844,420 979,797 215,663 294,158
Write-off of intangible asset..... -- -- 492,288 -- --
------------- -------------- -------------- ------------- -------------
Total expenses.................. 2,583,128 4,932,126 7,557,091 1,553,200 2,196,579
------------- -------------- -------------- ------------- -------------
Operating income (loss)............. (277,241) 332,344 (813,235) (94,378) (252,409)
Interest expense.................... (707,186) (1,349,827) (1,022,516) (248,118) (314,784)
Equity in net earnings (loss) of
unconsolidated entity (NOTE 7)..... -- (17,470) (105,529) (50,708) 16,499
------------- -------------- -------------- ------------- -------------
Net loss............................ $ (984,427) $ (1,034,953) $ (1,941,280) $ (393,204) $ (550,694)
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
Unaudited pro forma information
(NOTE 10):
Net loss per share................ $ (.45) $ (.13)
Common shares
outstanding...................... 4,350,000 4,350,000
</TABLE>

See accompanying notes.

F-5
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED STATEMENTS OF OWNERS' EQUITY (DEFICIENCY)

<TABLE>
<CAPTION>
TOTAL OWNERS'
EQUITY
--------------
<S> <C>
Balance at January 1, 1993........................................................................ $ 256,109
Net loss........................................................................................ (984,427)
--------------
Balance at December 31, 1993...................................................................... (728,318)
Net loss........................................................................................ (1,034,953)
--------------
Balance at December 31, 1994...................................................................... (1,763,271)
Conversion of long-term obligations and accrued interest to partners' equity (NOTE 6)........... 5,330,458
Cash capital contributions...................................................................... 5,000,000
Capital distributions........................................................................... (785,000)
Net loss........................................................................................ (1,941,280)
--------------
Balance at December 31, 1995...................................................................... 5,840,907
Net loss (unaudited)............................................................................ (550,694)
--------------
Balance at March 31, 1996 (unaudited)............................................................. $ 5,290,213
--------------
--------------
</TABLE>

See accompanying notes.

F-6
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................... $ (984,427) $ (1,034,953) $ (1,941,280) $ (393,204) $ (550,694)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Write-off of intangible assets............... -- -- 587,288 95,000 --
Depreciation and amortization................ 505,125 844,420 979,797 215,663 294,158
Net loss on disposal of fixed asset.......... -- -- 6,938 -- --
Straight-line rent expense................... -- 19,520 12,520 2,086 3,534
Equity in net (earnings) loss of
unconsolidated entity....................... -- 17,470 105,529 50,708 (16,499)
Change in operating assets and liabilities:
Accounts receivable........................ (8,907) (50,777) (659,317) (205,104) 15,851
Prepaid expenses........................... (17,442) (36,081) 22,197 (35,725) (15,716)
Accounts payable and accrued
liabilities............................... 34,764 66,752 198,573 (31,195) 246,764
Other liabilities.......................... 307,153 522,018 451,231 230,244 (207,213)
------------ ------------ ------------- ----------- ------------
Net cash provided by (used in) operating
activities................................ (163,734) 348,369 (236,524) (71,527) (229,815)
INVESTING ACTIVITIES
Increase in assets whose use is limited........ -- -- (239,000) -- --
Purchases of property and equipment............ (5,205,831) (2,043,109) (10,023,395) (706,714) (3,291,406)
Payments of pre-opening costs.................. (337,395) (27,881) (314,592) (48,447) (130,469)
Payments for organization costs and other...... (32,535) 16,923 (50,320) (16,129) (45,282)
------------ ------------ ------------- ----------- ------------
Net cash used in investing activities...... (5,575,761) (2,054,067) (10,627,307) (771,290) (3,467,157)
FINANCING ACTIVITIES
Proceeds from mortgages........................ 4,828,695 4,468,654 14,324,119 108,789 2,512,691
Repayment of mortgages......................... -- (3,802,002) (7,474,272) (8,112) (37,515)
Proceeds from JMAC debentures.................. 833,595 1,051,000 40,855 -- 1,029,633
Proceeds from other long-term obligations...... 67,156 -- -- -- --
Payment of other long-term obligations......... (22,108) (11,757) (16,986) -- (6,461)
Proceeds from restricted certificate of
deposit....................................... 150,000 -- -- -- --
Payment for financing fees..................... -- (158,180) (217,114) (5,484) (2,956)
Proceeds from partner's capital
contribution.................................. -- -- 5,000,000 750,000 --
Distributions from unconsolidated entity....... -- -- -- -- 100,000
Payment of partner distributions............... -- -- (785,000) -- --
------------ ------------ ------------- ----------- ------------
Net cash provided by financing
activities................................ 5,857,338 1,547,715 10,871,602 845,193 3,595,392
------------ ------------ ------------- ----------- ------------
Increase (decrease) in cash.................... 117,843 (157,983) 7,771 2,376 (101,580)
Cash at beginning of period.................... 177,202 295,045 137,062 137,062 144,833
------------ ------------ ------------- ----------- ------------
Cash at end of period.......................... $ 295,045 $ 137,062 $ 144,833 $ 139,438 $ 43,253
------------ ------------ ------------- ----------- ------------
------------ ------------ ------------- ----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest......................... $ 902,900 $ 981,412 $ 1,399,347 $ 451,626 $ 467,369
</TABLE>

See accompanying notes.

F-7
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996

1. DESCRIPTION OF THE BUSINESS
Karrington Health, Inc. was incorporated in April 1996 to become the parent
of Karrington Operating Company (Karrington Operating) upon the consummation of
the reorganization transactions which will occur 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 is an Ohio General Partnership founded in 1991
by DevelopMed Associates, Inc. (Associates) and JMAC Properties, Inc., a private
investment company, the principal shareholder of which is JMAC, Inc. (JMAC). The
trade name "Karrington Communities," a Registered Trademark, is the operating
name of all residences owned and operated by the Company.

The Company operates private pay, assisted living residences under licenses
from state agencies principally in Ohio and adjacent states. The residences are
for older adults who require 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 also renders consulting, development and
other support services to the long-term care industry with a focus on assisted
living.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements reflect the operations and development
activities of the Company and three limited partnerships (Affiliates) in which
the Company's partnership interest approximates 98% (see Note 4). Significant
interpartnership 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 JOINT VENTURE

The Company uses the equity method of accounting for its investment in
Karrington Operating of Oakwood, LLC, a 50% joint venture formed to operate an
assisted living residence in Dayton, Ohio (see Note 7).

REVENUE RECOGNITION

The Company recognizes rental and 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 various operators of assisted living residences and
recognizes revenue for these fees as the services are provided.

F-8
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, which includes amortization of capital
leases, is computed when assets are placed in service, using the straight-line
method over the respective useful lives of each class of asset which generally
are as follows:

<TABLE>
<S> <C>
Land improvements................................................. 15 years
Buildings......................................................... 40 years
Furnishings and equipment......................................... 10 years
</TABLE>

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995 MARCH 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Land and land improvements....................................... $ 1,967,801 $ 2,913,731 $ 2,922,481
Buildings........................................................ 10,037,507 15,277,629 19,782,690
Furnishings and equipment........................................ 1,987,328 2,902,584 3,277,990
Construction-in-progress......................................... 1,637,587 5,100,340 4,087,489
-------------- -------------- --------------
15,630,223 26,194,284 30,070,650
Accumulated depreciation and amortization........................ (785,260) (1,314,921) (1,499,576)
-------------- -------------- --------------
$ 14,844,963 $ 24,879,363 $ 28,571,074
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

Construction-in-progress and accounts payable and accrued liabilities
include balances due for work incurred of $318,000, $810,000 and $1,395,000 at
December 31, 1994 and 1995, and March 31, 1996, respectively.

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, and by
$28,000 and $15,000 in the first quarters of 1996 and 1995, respectively.

DEFERRED FINANCING COSTS

Financing costs are capitalized and amortized using the interest method for
permanent mortgage loans and the straight-line method, which approximates the
interest method, for construction mortgage loans.

ORGANIZATION COSTS

Organization costs are amortized using the straight-line method over five
years.

F-9
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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," and now expenses
advertising expenditures as incurred. The effect of this change was to increase
the net loss by $129,000 for 1995 (increase in residence operations of $199,000
and decrease in depreciation and amortization of $70,000) and $95,000 for the
three months ended March 31, 1995 (increase in residence operations of $113,000
and decrease in depreciation and amortization of $18,000). Advertising
expenditures were approximately $253,000, $250,000, and $276,000 for 1993, 1994
and 1995, respectively. Of these amounts $108,000 and $16,000 were capitalized
in 1993 and 1994 respectively.

INCOME TAXES

Partnership taxable income and losses are allocated to the partners for
inclusion in their respective income tax returns. Accordingly, no provision or
benefit for income taxes is recorded.

IMPACT OF CERTAIN ACCOUNTING STANDARDS

In March, 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company's adoption of Statement
121 in the first quarter of 1996 had no effect on the Company's consolidated
financial statements.

UNAUDITED FINANCIAL STATEMENTS

The consolidated financial statements as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996 are unaudited; however, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the consolidated financial statements for
these interim periods have been included. The results for the interim period
ended March 31, 1996 are not necessarily indicative of the results to be
obtained for the full fiscal year ending December 31, 1996.

F-10
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996

3. OTHER ASSETS
Other assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Karrington Concept, less accumulated amortization of $61,176 at
December 31, 1994................................................... $ 536,866 $ -- $ --
Pre-opening costs, less accumulated amortization of $433,759, $47,475
and $127,741 at December 31, 1994 and 1995, and March 31, 1996,
respectively (SEE NOTE 2)........................................... 342,826 291,770 341,816
Deferred financing costs, less accumulated amortization of $85,582,
$46,098 and $63,570 at December 31, 1994 and 1995, and March 31,
1996, respectively (SEE NOTE 1)..................................... 174,098 329,199 314,683
Organization costs and other, less accumulated amortization of
$87,810, $125,925 and $137,533 at December 31, 1994 and 1995 and
March 31, 1996, respectively........................................ 43,856 48,264 81,938
Escrow balances (SEE NOTE 6)......................................... -- 239,000 239,000
Equity (deficiency) in joint venture (SEE NOTE 7).................... (16,470) (122,000) (205,501)
------------- ------------- -------------
$ 1,081,176 $ 786,233 $ 771,936
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The Karrington Concept at December 31, 1994 represents an amount allocated
to an intangible asset contributed to the Company in connection with its
organization by Associates. The Company allocated a prorata portion of this
intangible asset to each residence developed. The intangible asset was amortized
using the straight-line method over a period from the commencement of
construction of each residence to December 2001, with the intent that the total
Karrington Concept cost would be amortized over a period not to exceed ten
years. In December 1995, the Company reevaluated this intangible asset and
concluded that a future benefit could not be substantiated. Therefore, a fourth
quarter charge of $492,288 was recorded to write-off this intangible asset.

4. CONSULTING AGREEMENT
The Company had a consulting agreement with the limited partner in its
Affiliates that provided for fees based on a percentage of revenues. Under the
agreement, the Company paid $167,000, $100,000 and $141,000 in such fees in
1993, 1994 and 1995, respectively. In 1995, the Company elected to terminate the
agreement effective March 1996 and a $50,000 termination fee has been accrued at
December 31, 1995. Effective March 1996, the Company exercised, for the account
of JMAC Properties, Inc., a $45,000 buyout option of the limited partner, which
amount has been accrued in accounts payable as a capital distribution at
December 31, 1995.

5. LEASE COMMITMENTS
Two of the Company's facilities are on leased land. The lease period runs to
December 2017 and includes ten additional five (5) year renewal periods. The
Company is responsible for the payment of real estate taxes, site maintenance,
and access road maintenance. Future minimum lease payments under noncancellable
operating leases are as follows for the next five years: 1996 -- $127,000; 1997
- -- $103,000; 1998 -- $76,000; 1999 -- $70,000; and 2000 -- $65,000.

F-11
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996

5. LEASE COMMITMENTS (CONTINUED)
Total rental expense incurred was $106,000 in 1993, $93,000 in 1994, and
$104,000 in 1995. Of these amounts, $23,000, $87,000 and $20,000 was capitalized
to construction-in-progress and pre-opening costs in the respective years.

6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------- MARCH 31, 1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
$475,000 mortgage due in monthly principal installments of $1,979
plus interest at prime plus .75% (9.25% at December 31, 1995).
Balance due in 2001............................................. $ -- $ 457,187 $ 451,250
$4,000,000 mortgage due in monthly principal and interest
installments of $33,394 with interest at LIBOR plus 3.73%
adjusted semi-annually (9.605% at December 31, 1995). Balance
due in 2001..................................................... 3,997,998 3,974,283 3,967,841
$9,400,000 of mortgages due in monthly principal and interest
installments of $79,128. Interest is accrued at 8.9% or 9.1%.
Balances are due in 2000........................................ -- 9,371,396 9,346,270
1994 construction mortgages refinanced in 1995................... 7,400,000 -- --
$11,100,000 construction mortgages. Interest is payable monthly
at prime plus 1% or 1.25% (9.75% at December 31, 1995).
Principal is due in 1997 to 2000................................ -- 4,449,122 6,961,811
Subordinated debentures payable to the partners which was
contributed to the Company as capital effective January 1,
1995............................................................ 5,323,443 -- --
Amount outstanding under $8,000,000 subordinated debenture
payable to JMAC, interest at 15%................................ -- 33,840 1,063,473
Other long-term obligations, including installment debt, capital
leases and accrued rent......................................... 95,660 169,550 166,615
-------------- -------------- --------------
Total long-term obligations...................................... 16,817,101 18,455,378 21,957,260
Less current portion............................................. 38,905 205,485 204,174
-------------- -------------- --------------
Long-term obligations, less current portion...................... $ 16,778,196 $ 18,249,893 $ 21,753,086
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

The mortgage loans are collateralized by substantially all the assets of
each residence. Certain of the mortgage agreements also require the respective
partnerships to maintain specified debt service coverage ratios. Two of the
mortgages require escrow balances held by the lender totaling $239,000. These
amounts are included in other assets in the Company's consolidated balance
sheets.

Interest costs incurred were $996,000 in 1993, $1,426,000 in 1994,
$1,433,000 in 1995, and $291,000 and $477,000 in the three months ended March
31, 1995 and 1996, respectively. Of these

F-12
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996

6. LONG-TERM OBLIGATIONS (CONTINUED)
amounts $289,000, $76,000, $411,000, $43,000 and $162,000 were capitalized to
construction-in-progress in the respective periods. Interest cost incurred
includes amounts due under obligations to JMAC and amounted to $396,000 and
$462,000 in 1993 and 1994, respectively. No such amounts were incurred for 1995.

The carrying amounts of long-term obligations approximate fair value because
the interest rates are self-adjusting or are comparable to mortgage rates
currently available.

As of December 31, 1995, the long-term obligations (including capital
leases) mature over the next five years as follows: 1996 -- $205,000; 1997 --
$4,176,000; 1998 -- $691,000; 1999 -- $216,000 and 2000 -- $8,935,000.

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 owners' equity. In December 1995, the
Company entered into a loan agreement with JMAC. Under the loan agreement, JMAC
agreed to provide up to $8,000,000 in subordinated loans to the Company during a
commitment period expiring December 31, 1996. Borrowings under the agreement are
subordinate to all obligations to financial institutions. Interest accrues at
15% per annum and is payable annually. If not sooner paid, all amounts
outstanding, including accrued interest, are due January 1, 2000 or earlier if
certain events, as defined, occur.

7. INVESTMENT IN JOINT VENTURES
The Company and Sisters of Charity Health Care Systems, Inc. of Cincinnati,
Ohio (a founding system of Catholic Health Initiatives ("CHI")) each own 50% of
Karrington of Oakwood, LLC (Oakwood) under terms of a joint venture agreement.
Oakwood was formed to develop, own and operate an assisted living residence in
Oakwood, Ohio, a suburb of Dayton.

The Company provides marketing, training, management and other services to
Oakwood under a seven year operating agreement providing for a management fee of
6% of revenues. Fifty percent of the management fees of $15,000, $112,000,
$22,000 and $30,000 for the years ended December 31, 1994 and 1995 and the three
months ended March 31, 1995 and 1996, respectively, have been recorded as
development and project management fees in the Company's consolidated statements
of operations. During 1994, the Company received a fee for managing the
development of the project of $175,000, 50% of which was recorded as revenue.

The Oakwood construction mortgage loan of $4,000,000 bears interest at prime
plus 1.25%, payable monthly, with the principal balance due in its entirety at
maturity in September 1996 and is secured by substantially all of Oakwood's
assets. The loan is guaranteed by the Company.

During 1995 the Company entered into an agreement with CHI to develop,
construct and operate up to six additional assisted living facilities by 1998.
The Company typically will have an approximately 20% ownership interest in each
of the residences. Construction is expected to be funded by a combination of
equity contributions and mortgages. As of December 31, 1995 construction had
begun on two residences in Albuquerque, New Mexico and three other sites were
under development.

Under the agreement with CHI, the Company will receive development fees for
each of the projects. In 1995 and for the three months ended March 31, 1995 and
1996, $363,000, $46,000 and $92,000, respectively, of such fees was earned and
recorded as revenue. The Company will serve as manager for each of the
residences and receive management fees upon commencement of operations.

F-13
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996

7. INVESTMENT IN JOINT VENTURES (CONTINUED)
Summary financial information of joint ventures follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets....................................................... $ 196,234 $ 526,636 $ 310,340
Property............................................................. 4,610,048 4,786,285 5,293,716
Other assets......................................................... 234,714 22,466 16,506
------------- ------------- -------------
Total assets......................................................... $ 5,040,996 $ 5,335,387 $ 5,620,562
------------- ------------- -------------
------------- ------------- -------------
Current liabilities.................................................. $ 568,857 $ 626,587 $ 1,090,316
Construction mortgage and other...................................... 3,506,081 4,013,799 4,017,249
Convertible debenture to joint venture partner....................... 999,000 -- --
Joint venture equity................................................. (32,942) 695,001 512,997
------------- ------------- -------------
Total liabilities and joint venture equity........................... $ 5,040,996 $ 5,335,387 $ 5,620,562
------------- ------------- -------------
------------- ------------- -------------
Statements of Operations
Residence revenues................................................... $ 249,284 $ 1,868,618 $ 503,730
Operating expenses................................................... 180,612 1,333,203 330,709
Depreciation and amortization expense................................ 39,395 281,684 42,555
Interest expense..................................................... 64,219 464,788 97,470
------------- ------------- -------------
Total expenses................................................... 284,226 2,079,675 470,734
------------- ------------- -------------
Net income (loss).................................................... $ (34,942) $ (211,057) $ 32,996
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

During the first quarter of 1995, the joint venture changed the amortization
period for pre-opening costs from three years to one. The effect of this change
on the joint venture was to increase amortization expense by $132,877 in 1995
and to reduce amortization expense by $18,053 in the first quarter in 1996. The
Company's equity in net earnings (loss) of unconsolidated entity reflects its
50% share of the effect of this change.

8. COMMITMENTS
The Company has commitments totaling approximately $3,378,000 at December
31, 1995 for various land purchase contracts and $3,600,000 for various
construction contracts. A construction mortgage of $2,200,000 was secured
subsequent to December 31, 1995 for one residence under construction at December
31, 1995. In conjunction with the agreement with CHI (see Note 7), the joint
venture had land purchase commitments totaling approximately $2,183,000 at
December 31, 1995.

9. SUBSEQUENT EVENTS

INITIAL PUBLIC OFFERING

The Company has filed a registration statement with the Securities and
Exchange Commission for the sale of 2,350,000 of its authorized and unissued
common shares. Immediately prior to the effective date of the registration
statement, 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).

F-14
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996

9. SUBSEQUENT EVENTS (CONTINUED)
Following the reorganization, JMAC Properties, Inc. and Associates became
wholly-owned subsidiaries of the Company. As a result, the Company now owns 100%
of the equity interests of Karrington Operating. The Company will serve as a
holding company, and the Company's business will continue to be operated through
Karrington Operating.

INCENTIVE STOCK PLAN

The Company has adopted the 1996 Incentive Stock Plan (the "Plan"). The Plan
provides for the grant of incentive and nonqualified 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. No shares have been issued under the Plan.

The Company has granted nonqualified options to acquire 169,000 common
shares. These options will become effective the day following the effective date
of the registration statement with an exercise price equal to the initial public
offering price. The 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. In
addition, non-employee directors will receive, on the first business day after
the effective date of the registration statement, grants of nonqualified options
to purchase an aggregate of 54,000 common shares at an exercise price equal to
the public offering price. These director options will become exercisable
beginning six months after the date of grant with a ten-year term.

The Company will account for grants under the Plan in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995, the
FASB issued Statement No. 123, Accounting for Stock-Based Compensation, which
provides an alternative to APB Opinion No. 25, in accounting for stock-based
compensation issued to employees. The Statement allows for a fair value-based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement No. 123 requires disclosure of the
pro forma effect on net income and earnings per share of its fair value-based
accounting for those arrangements. These disclosure requirements are effective
for fiscal years beginning after December 15, 1995. Therefore, the Company will
provide these disclosures in the 1996 consolidated financial statements.

TAX STATUS

As a partnership, Karrington Operating recorded no provision for income
taxes. Partnership income and losses are allocated to JMAC Properties, Inc. and
Associates for inclusion in their respective income tax returns. As a result of
the reorganization (described above), the Company will apply the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred income taxes will be provided for differences in the basis for
tax purposes and for financial accounting purposes of recorded assets and
liabilities, principally, depreciable property and certain capitalized
development costs. A tax provision and a net deferred income tax liability of
approximately $1,100,000 would have been recorded at March 31, 1996 had the
reorganization occurred at that date.

10. PRO FORMA INFORMATION (UNAUDITED)

PRO FORMA BALANCE SHEET INFORMATION

The pro forma balance sheet at March 31, 1996 reflects the effects of the
reorganization transaction (see Note 9) as if it had occurred at that date. JMAC
Properties, Inc. and Associates are not

F-15
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996

10. PRO FORMA INFORMATION (UNAUDITED) (CONTINUED)
operating entities but exist solely to hold their respective partnership
interests in Karrington Operating. Therefore, the consolidated assets and
liabilities of Karrington Health, Inc. subsequent to the reorganization consist
solely of the assets and liabilities of Karrington Operating. As a
reorganization, there will be no change in the basis of the assets and
liabilities of Karrington Operating.

The pro forma balance sheet reflects the following adjustments:

Recognition of a $1,100,000 deferred tax liability (see Note 9).

The elimination of partners' equity in Karrington Operating Company that
occurred upon consolidation into Karrington Health, Inc. Karrington
Health, Inc. has recognized the equity acquired as a result of the
reorganization as common shares.

PRO FORMA STATEMENTS OF OPERATIONS INFORMATION

The pro forma net loss per share is based on the number of shares of common
stock outstanding following the reorganization.

F-16
<PAGE>
The following photographs appear on the inside back cover of the Prospectus:
(i) a photograph of the Karrington of Oakwood residence over the caption
"Karrington of Oakwood Catholic Health Initiatives Project Dayton, Ohio"; (ii) a
resident with a young adult over the caption "Intergenerational Activities";
(iii) the grand foyer of a Karrington residence with a similar caption and (iv)
a resident suite of a Karrington residence with a similar caption.
<PAGE>
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON SHARES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
History and Organization....................... 10
Use of Proceeds................................ 11
Dividend Policy................................ 11
Capitalization................................. 12
Dilution....................................... 13
Selected Consolidated Financial Data........... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 15
Business....................................... 20
Management..................................... 30
Certain Transactions........................... 38
Principal and Selling Shareholders............. 39
Description of Capital Stock................... 40
Shares Eligible for Future Sale................ 43
Underwriting................................... 44
Legal Matters.................................. 45
Change in Accountants.......................... 45
Experts........................................ 45
Additional Information......................... 45
Index to Consolidated Financial Statements..... F-1
</TABLE>

------------------------
UNTIL AUGUST 12, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

3,000,000 SHARES

KARRINGTON HEALTH, INC.

COMMON SHARES

---------------------

PROSPECTUS

JULY 18, 1996

---------------------

SMITH BARNEY INC.
J.C. BRADFORD & CO.

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