<PAGE>
As filed with the Securities and Exchange Commission on May 10, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
KARRINGTON HEALTH, INC.
(Exact name of Registrant as specified in its charter)
-------------------
OHIO 8361 31-1461482
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification Number)
or organization)
919 OLD HENDERSON ROAD, COLUMBUS, OHIO 43220
(614) 451-5151
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
-------------------
ALAN B. SATTERWHITE
KARRINGTON HEALTH, INC.
919 OLD HENDERSON ROAD
COLUMBUS, OHIO 43220
(614) 451-5151
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
SUSAN E. BROWN, ESQ. FREDERICK W. KANNER, ESQ.
VORYS, SATER, SEYMOUR AND PEASE DEWEY BALLANTINE
52 EAST GAY STREET 1301 AVENUE OF THE AMERICAS
COLUMBUS, OHIO 43215 NEW YORK, NEW YORK 10019-6092
(614) 464-6323 (212) 259-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE REGISTRATION FEE
OFFERING PRICE(1)
- -------------------------------------------------------------------------------
Common Shares, without par value....... $58,650,000 $20,225
- -------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(b)
OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY THE ITEMS OF PART I OF FORM S-1
FORM S-1
ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
----------------------- ------------------
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................ Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus......... Inside Front Cover and Outside Back
Cover Pages; Additional Information
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges .......................... Prospectus Summary; Risk Factors
4. Use of Proceeds .................. Use of Proceeds
5. Determination of Offering Price .. Outside Front Cover Page; Underwriting
6. Dilution ......................... Dilution
7. Selling Security Holders ......... Principal and Selling Shareholders
8. Plan of Distribution ............. Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered ....................... Description of Capital Stock
10. Interests of Named Experts and
Counsel .......................... Legal Matters; Experts
11. Information with Respect to the
Registrant ....................... Prospectus Summary; Risk Factors;
History and Organization; Use of
Proceeds; Dividend Policy;
Capitalization; Dilution; Financial
Statements; Selected Consolidated
Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Principal and
Selling Shareholders; Certain
Transactions; Description of Capital
Stock; Description of Certain
Indebtedness; Shares Eligible for
Future Sale; Change in Accountants
12. Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities ....... Not Applicable
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 10, 1996
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. It is currently anticipated that the initial
public offering price will be between $15.00 and $17.00 per share. See
"Underwriting" for information relating to the factors to be considered in
determining the initial public offering price. Application has been made
for listing the Common Shares 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 THE OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDER (2)
- -------------------------------------------------------------------------------
Per Share $ $ $ $
- -------------------------------------------------------------------------------
Total (3) $ $ $ $
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(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 $ , all of which
will be paid by the Company.
(3) The Company and the Selling Shareholder have granted to the
Underwriters a 30-day option to purchase up to an additional 450,000
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 $ , $ , $ and $ ,
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 ,
1996 at the offices of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001.
-----------
SMITH BARNEY INC. J.C. BRADFORD & CO.
, 1996
<PAGE>
The following legend will run sideways down the cover page of the
prospectus:
Information contained herein is subject to completion or amendment.
A Registration Statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not be
sold nor may offers to buy be accepted prior to the time the Registration
Statement becomes effective. This Prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be
any sale of these securities in any State in which such offer, solicitation
or sale would be unlawful prior to registration or qualification under the
securities laws of any such State.
<PAGE>
MISSION STATEMENT
"Dedicated to excellence in preserving and enhancing personal dignity,
independence, individuality and quality of life."
[Single page of pictures or gate-fold.]
The Company intends to furnish to its shareholders annual reports
containing financial statements audited by an independent accounting firm.
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.
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 11 residences in its target markets, six of
which are open and five of which are under construction and scheduled to open
in late 1996 or early 1997. These 11 residences are located in Ohio,
Pennsylvania, Indiana 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, North Carolina and Colorado. 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 94.4% for the
three months ended March 31, 1996.
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 Catholic Health Initiatives
("CHI"), a large, not-for-profit health organization formed by the recent
consolidation of Sisters of Charity Health Care System, Catholic Health
Corporation 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 intend to develop and operate assisted living residences
throughout 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.
3
<PAGE>
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 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>
<CAPTION>
<S> <C>
Common Shares being offered by:
The Company .................. 2,350,000 (1)
The Selling Shareholder ...... 650,000 (1)
Common Shares outstanding after
the offering ..................... 6,700,000 (1)(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."
Proposed 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 550,000 Common Shares reserved for issuance under
the Company's Incentive Stock Plan. See "Management - Incentive Stock
Plan."
-----------
UNLESS OTHERWISE INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND 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>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------- ----------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
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 4,182 954 1,303
General and administrative.. 170 634 1,705 268 575
Depreciation and
amortization .............. 505 844 957 219 285
Write-off of intangible
asset ..................... -- -- 492 -- --
---------- ---------- ---------- ---------- -----------
Total .................. 2,583 4,932 7,336 1,441 2,163
---------- ---------- ---------- ---------- -----------
Operating income (loss)...... (277) 332 (592) 18 (219)
Interest expense ............ (707) (1,350) (1,023) (248) (315)
Equity in net earnings (loss)
of unconsolidated entity.... (17) (39) (34) 8
---------- ---------- ---------- ---------- -----------
Net loss .................... $ (984) $ (1,035) $ (1,654) $ (264) $ (526)
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Pro forma net loss per
common share (1)............ $ (.38) $ (.12)
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)
------ ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) .......................... $ (2,300) $(2,300) $1,139
Total assets ....................................... 30,564 30,564 63,869
Long-term obligations and deferred taxes,
less current portion .............................. 21,753 22,853 20,690
Equity ............................................. 5,602 4,502 38,870
</TABLE>
- -----------------
(1) Based upon the 4,350,000 pre-offering Common Shares that will be
outstanding following the reorganization 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 (assuming an initial
public offering price of $16 per share) 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 $4.5 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 three residences under construction and the ten 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 facilities, assisted living residences are
6
<PAGE>
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 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 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 insurance coverage, amounts and
7
<PAGE>
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 the 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
the Consolidated Financial Statements and "Management's Discussion and
Analysis - 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
will be in a position to
8
<PAGE>
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 $10.35 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 and all of the directors,
officers and existing shareholders of the Company 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 Company has made application for listing the Common
Shares 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 will be 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 to be 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 1989, 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 will transfer 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 will
transfer 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 will be increased to 11, divided into three
classes. Upon the closing of this offering, the existing directors will fill
the vacancies in the Board of Directors. (These transactions collectively
constitute the "Reorganization Transactions"). See "Management" and
"Principal and Selling Shareholders."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,350,000 Common
Shares offered by the Company hereby (assuming an initial public offering
price of $16 per share) are estimated to be $34.4 million (approximately
$37.7 million if the Underwriters' over-allotment option is exercised in
full), after deduction of
10
<PAGE>
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 $2.2 million at April
30, 1996. The Company is expected to borrow an additional $4.3 million
pursuant to this arrangement by 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
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 capitalization, as adjusted to reflect the sale
of the 2,350,000 Common Shares offered by the Company hereby (assuming an
initial public offering price of $16 per share) 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
-------- ----------- ------------
(In thousands)
<S> <C> <C> <C>
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) ... 5,602 39,970
Partners' equity ............................. 5,602
Retained earnings ............................ -- (1,100) (1,100)
------- -------- --------
Total equity ........................... 5,602 4,502 38,870
------- -------- --------
Total capitalization ................. $27,355 $26,255 $59,560
------- -------- --------
------- -------- --------
</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 $.81 per Common Share 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 further effect to this offering (assuming an initial
public offering price of $16 per share) 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 $37.9 million or $5.65 per share, representing
an immediate increase in net pro forma tangible book value of $4.84 per share to
existing shareholders and an immediate dilution of $10.35 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:
Assumed public offering price per share ...... $16.00
Pro forma net tangible book value per
share as of March 31, 1996 ................. $ .81
Increase attributable to new investors ....... 4.84
-----
Pro forma net tangible book value per
share after the offering ................... 5.65
-----
Dilution per share to new investors .......... $10.35
-----
-----
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, and assuming an initial public offering
price of $16 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
------------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- --------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Existing shareholders......... 4,350,000 64.9% $10,134,000 21.2% $ 2.33
New investors ................ 2,350,000 35.1 37,600,000 78.8 16.00
--------- --------- ----------- ---------
Total....................... 6,700,000 100.0% $47,734,000 100.0%
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</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% 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% 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
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ ---------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------- -------- ------- ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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 4,182 954 1,303
General and administrative... 39 84 170 634 1,705 268 575
Depreciation and amortization. -- 95 505 844 957 219 285
Write-off of intangible asset. -- -- -- -- 492 -- --
------ ------ ------- ------- ------- ------ -------
Total ...................... 39 400 2,583 4,932 7,336 1,441 2,163
------ ------ ------- ------- ------- ------ -------
Operating Income (loss)........ (38) (184) (277) 332 (592) 18 (219)
Interest expense .............. (9) (102) (707) (1,350) (1,023) (248) (315)
Equity in net earnings (loss)
of unconsolidated entity ..... -- -- -- (17) (39) (34) 8
------ ------ ------- ------- ------- ------ -------
Net loss ...................... $(47) $(286) $(984) $(1,035) $(1,654) $(264) $(526)
------ ------ ------- ------- ------- ------ -------
------ ------ ------- ------- ------- ------ -------
Pro forma net loss per common
share (1) .................... $ (.38) $(.12)
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>
DECEMBER 31, MARCH 31, 1996
----------------------------------------------- ------------------------------------------
PRO PRO FORMA,
1991 1992 1993 1994 1995 ACTUAL FORMA (3) AS ADJUSTED (4)
------- ------- -------- ------ -------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..... $ (303) $ (637) $ (702) $ (911) $ (1,575) $ (2,300) $(2,300) $ 1,139
Total assets ................. 3,186 9,938 14,883 16,292 26,964 30,564 30,564 63,869
Long-term obligations and
deferred taxes, less
current portion ............. 2,193 8,753 14,472 16,778 18,250 21,753 22,853 20,690
Equity (deficit) ............. 542 256 (728) (1,763) 6,128 5,602 4,502 38,870
</TABLE>
- ----------------
(1) Based upon the 4,350,000 pre-offering Common Shares that will be
outstanding following the reorganization 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 (assuming an initial public
offering price of $16 per share) 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.
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 into the following
categories: (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.
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 62.0 65.4 67.0
General and administrative ...... 7.4 12.0 25.3 18.4 29.6
Depreciation and amortization ... 21.9 16.1 14.2 15.0 14.7
Write-off of intangible asset ... -- -- 7.3 -- --
----- ------ ------ ------ ------
Total expenses 112.0 93.7 108.8 98.8 111.3
----- ------ ------ ------ ------
Operating income (loss) (12.0)% 6.3% (8.8)% 1.2% (11.3)%
----- ------ ------ ------ ------
----- ------ ------ ------ ------
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
(footnotes on following page)
</TABLE>
15
<PAGE>
- -----------------
(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 $349,000, or 36.6%, to $1.3
million in the first quarter of 1996 from $954,000 in the first quarter of
1995. As a percentage of total revenues, residence operations expenses
increased from 65.4% in the first quarter of 1995 to 67.0% in the same period
of 1996. This increase is primarily attributable to the opening of a new
residence in 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 61.9% 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 in anticipation of the Company's growth plans and the
manager-in-training program initiated in the spring of 1995.
Depreciation and amortization increased $66,000, or 30.5%, to $285,000 in
the first quarter of 1996 from $219,000 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
16
<PAGE>
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 $729,000, or 21.1%, to $4.2
million in 1995 from $3.5 million in 1994, primarily due to the 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. 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 $112,000, or 13.3%, to $957,000
in 1995 from $845,000 in 1994 primarily due to the opening of the Shaker
Heights residence ($48,000) and the Company's move to its new headquarters
in July 1995.
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 $340,000, or 67.2%, to
$845,000 in 1994 from $505,000 in 1993, primarily due to a full year of
operations for the two residences that opened in 1993.
17
<PAGE>
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. The Company expects to refinance such amounts as they mature. See
Note 6 to the Consolidated Financial Statements.
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 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
upon the occurrence of certain events. 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 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 $5.6 million, which resulted from inception-to-date capital
contributions of $10.9 million, less distributions of $785,000 and net
operating losses of $4.5 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 eight new residences,
including five residences under construction, and has entered into contracts
to purchase ten additional sites. The Company has been, and will continue to
be, dependent on third-party financing for its acquisition and development
program. 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. 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
18
<PAGE>
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.
BUSINESS
OVERVIEW
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 11 residences in its target markets, six of
which are open and five of which are under construction and scheduled to open
in late 1996 or early 1997. These 11 residences are located in Ohio,
Pennsylvania, Indiana 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, North Carolina and Colorado. 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 94.4% for the
three months ended March 31, 1996.
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 Catholic Health Initiatives
("CHI"), a large, not-for-profit health organization formed by the recent
consolidation of Sisters of Charity Health Care System, Catholic Health
Corporation 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 intend to develop and operate assisted living residences
throughout 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.
19
<PAGE>
THE ASSISTED LIVING INDUSTRY
The assisted living industry has developed over the past decade to
provide a cost-effective residential alternative for elderly individuals who
do not require the intensive medical attention provided by a skilled nursing
facility but who cannot, or choose not to, live independently due to physical
frailty or cognitive disorders. Industry analysts have estimated that the
assisted living industry has annual revenues of $12 billion. Assisted living
represents a combination of housing and 24-hour a day personal support
services designed to aid elderly residents with activities of daily living,
such as bathing, grooming, dressing, eating and personal hygiene. Assisted
living residences provide assistance to residents with limited medical needs
and may provide higher levels of personal assistance for special need
residents, such as incontinent residents or residents with Alzheimer's
disease or other forms of cognitive disorders.
The assisted living industry is fragmented and, to date, is
characterized by many small operators. The scope of assisted living services
varies substantially among operators, ranging from basic "board and care"
services to full service assisted living residences such as those operated by
the Company. Many smaller assisted living providers do not operate in
residences designed specifically for assisted living, do not have
professionally trained staffs and may provide only limited assistance with
low-level care activities. The Company believes there are few assisted living
operators in its markets who provide the same comprehensive range of assisted
living services, such as Alzheimer's care and other special 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.
20
<PAGE>
CHANGES IN FAMILY COMPOSITION. As a result of the increasing number of
two-income families, the high divorce rate and the number of single-parent
households, as well as the increasing geographic dispersion of families, many
adult children are not available to care in their own homes for elderly
parents. Two-income families are, however, often better able to provide
financial support for elderly parents.
COST CONTAINMENT PRESSURES. Responding to rising health care costs,
governmental and private payor sources have adopted cost containment measures
that have encouraged reduced lengths of stay in hospitals. A result of this
trend is an 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 provides a higher level of acuity 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.
21
<PAGE>
RELATIONSHIP WITH CHI
In addition to its own residence development activities, the Company
has entered into a joint development relationship with Catholic Health
Initiatives. The genesis of the CHI relationship was the joint development
by the Company and Sisters of Charity Health Care System, a predecessor of
CHI, of Karrington of Oakwood, a 53-unit assisted living residence located in
the Dayton, Ohio area which opened in November 1994. Following the success of
the Karrington of Oakwood residence, the Company and CHI determined to expand
their relationship. In 1995, the parties agreed in principle to, and
established certain parameters for, the 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 third quarter of 1996. Three sites
for additional residences have been identified by the Company and CHI and are
currently under contract with construction expected to begin in 1996. These
sites are located 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.
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 add to base costs depending on the
degree of frailty. 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.
22
<PAGE>
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 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 May 1, 1996,
included 10 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.
23
<PAGE>
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 May 1, 1996, the Company had 11 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 May 1, 1996:
<TABLE>
<CAPTION>
ACTUAL OR PLANNED
RESIDENCE METRO LOCATION OPENING DATE UNITS
- ------------------------------------------------------------------------------------------
<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* Dayton, OH 11/08/94 53
Karrington of Shaker Heights Cleveland, OH 10/30/95 59
Karrington Place Columbus, OH 2/08/96 26
(Alzheimer's Residence)
Karrington of South Hills Pittsburgh, PA 3Q, 1996 67
Karrington of Albuquerque* Albuquerque, NM 3Q, 1996 61
Karrington, St. Francis Place* Albuquerque, NM 3Q, 1996 28
(Alzheimer's Residence)
Karrington at Fall Creek Indianapolis, IN 4Q, 1996 61
Karrington at Willow Lake Indianapolis, IN 1Q, 1997 61
</TABLE>
- ------------
*Owned jointly with CHI.
The following table sets forth certain information regarding Karrington
residences that are subject to purchase contracts as of May 1, 1996, but for
which construction had not then commenced:
<TABLE>
<CAPTION>
PLANNED
METRO DEVELOPMENT OPENING PLANNED
RESIDENCE LOCATION STAGE DATE UNITS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Karrington of Englewood* Dayton, OH Zoned 2Q, 1997 48
Karrington of Colorado Colorado Springs, CO In Zoning 2Q, 1997 64
Springs*
Karrington of Fort Wayne Fort Wayne, IN Zoned 2Q, 1997 61
Karrington of Kenwood* Cincinnati, OH Zoned; Construction to 2Q, 1997 67
begin 2Q, 1996
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
PLANNED
METRO DEVELOPMENT OPENING PLANNED
RESIDENCE LOCATION STAGE DATE 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 Carmel Indianapolis, IN Under Contract 3Q, 1997 64
Karrington of Lyndhurst Cleveland, OH Under Contract 3Q, 1997 67
Karrington of Monroeville Pittsburgh, PA In Zoning 3Q, 1997 64
Karrington of Bath Akron, OH In Zoning 3Q, 1997 67
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 Under Contract 4Q, 1997 67
</TABLE>
- -----------------
* Owned jointly with CHI.
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 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.
25
<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
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
26
<PAGE>
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 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
27
<PAGE>
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.
EMPLOYEES
As of May 1, 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.
28
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of May 8, 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 ............... 49 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 ........... 73 Director nominee
Harold A. Poling ............ 71 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 will
be increased to 11 and will be divided into three classes, each consisting of
approximately one-third of the total number of directors. Upon closing of the
offering, the existing directors will fill the vacancies in the Board of
Directors. The Company has reached agreement with Messrs. Hoag, McConnell,
McCreary and Poling and Dr. Healy to join the Board of Directors upon the
closing of this offering.
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.
29
<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 upon the closing 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
Properties, 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 upon the closing 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 upon the closing 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 upon the closing 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.
Harold A. Poling has been nominated and has agreed to serve as a
Director of the Company upon the closing 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, Chicago &
Northwestern Transportation Company and Kellogg Company.
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
30
<PAGE>
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 Board members, each of
whom will be a "disinterested director," as defined by Rule 16b-3 under The
Securities Exchange Act of 1934, as amended, and an outside director for
purposes of 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>
Richard R. Slager
Chairman of the Board, President
and Chief Executive Officer ............... $146,923 $56,044
Alan B. Satterwhite
Chief Operating Officer and Chief
Financial Officer ......................... $123,846 $56,044
</TABLE>
- --------------------
(1) The Named Executive Officers participate in the Company's profit
sharing plan together with substantially all of the other 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.
31
<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 are "disinterested" within the meaning 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 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.
32
<PAGE>
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 first annual meeting of
shareholders a grant of a non-qualified stock option to purchase 6,000
Common Shares, and will receive on the first business day after each
succeeding annual meeting of shareholders a grant of a non-qualified
stock option to purchase 2,000 Common Shares, in all cases 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 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 shares of the Company's 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 shares 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
shares 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.
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
33
<PAGE>
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 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.
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
34
<PAGE>
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 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
35
<PAGE>
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.
CERTAIN TRANSACTIONS
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. 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 April 30,
1996, the outstanding principal balance and accrued interest due JMAC was
approximately $2.2 million. The Company is expected to borrow an additional
$4.3 million pursuant to this arrangement by June 30, 1996. 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, was 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.
36
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth the number and percentage of outstanding
Common Shares to be beneficially owned upon completion of the Reorganization
Transactions 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 OWNED SHARES BENEFICIALLY 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 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 ......... -- -- -- -- --
Harold A. Poling .......... -- -- -- -- --
All directors, director
nominees and executive
officers as a group
(9 persons) .............. 1,435,500 33.0% -- 1,435,500 21.4%
</TABLE>
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 and are
entitled to vote cumulatively for the election of directors. 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
37
<PAGE>
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.
Application has been made for listing the Common Shares 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 and Messrs. Slager, Satterwhite and Barrows 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 request 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is ______________.
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.
38
<PAGE>
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 a written consent of
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
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.
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
39
<PAGE>
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 any corporate defense against persons
seeking to acquire control may have the effect of discouraging or preventing
offers which some shareholders might find financially attractive. On the
other hand, the need on the part of the acquiring person to convince the
shareholders of the Company of the value and validity of his offer may cause
such offer to be more financially attractive in order to gain shareholder
approval.
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 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 will
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 presents potential pitfalls for unwary shareholders. Close attention
to the impact of common corporate actions, such as the grant of employee
stock options and loans to Interested Shareholders in the ordinary course of
business, is necessary to determine whether such actions are encompassed by
the Merger Moratorium Statute.
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
40
<PAGE>
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 that the Company may award options and
Common Shares pursuant to the Incentive Stock Plan and may issue Common
Shares in connection with a transaction registered on Form S-4.
On 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.
UNDERWRITING
Under the terms and subject to the conditions contained in the
Underwriting Agreement dated the date hereof, each of the underwriters named
below ("Underwriters") has severally agreed to purchase, and the Company and
the Selling Shareholder have agreed to sell to such Underwriter, the
respective number of shares of Common Shares set forth opposite the name of
such Underwriter below.
NUMBER OF
UNDERWRITER SHARES
----------- ----------
Smith Barney Inc. . . . . .
J.C. Bradford & Co. . . . . .
Total . . . . . . . . . . . 3,000,000
The Underwriters are obligated to purchase 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.
41
<PAGE>
The Underwriters, for whom Smith Barney Inc. and J.C. Bradford & Co.
are acting as representatives (the "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 $ per share under the public offering price. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $
per share to certain other dealers. The Representatives of the Underwriters
have advised the Company that the Underwriters do not intend to confirm sales
to any 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, in connection with the offering of the shares offered hereby. To the
extent such option is exercised, each Underwriter will be obligated, subject
to certain conditions, to purchase 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, its directors and officers and the holders of all of the
Company's currently outstanding Common Shares (including 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.
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, the past and present earnings of the Company and
the trend of such earnings, the prospects for growth of the Company's
revenues and earnings, the present state of the Company's development, the
current state of the economy in the United States, the current level of
activity in the industry in which the Company competes and in related or
comparable industries, and prevailing conditions in the securities markets at
the time of the offering, including current market valuations of comparable
publicly-traded companies.
The Company, the Selling Stockholder and the Underwriters have agreed
to indemnify each other against certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon
for the Company by Vorys, Sater, Seymour and Pease, Columbus, Ohio, and for
the Underwriters by Dewey Ballantine, New York, New York.
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
42
<PAGE>
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 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,
Northwest Atrium 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.
43
<PAGE>
KARRINGTON HEALTH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
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
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.
Columbus, Ohio
January 19, 1996, except for Notes 9 and 10
as to which the date is ________, 1996
THE FOREGOING REPORT IS IN THE FORM THAT WILL BE SIGNED UPON THE COMPLETION
OF THE REORGANIZATION AS DESCRIBED IN NOTE 9 TO THE FINANCIAL STATEMENTS.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
May 10, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Owners of
Karrington Operating Company:
We have audited the accompanying consolidated balance sheet 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.
Columbus, Ohio
January 24, 1995 /s/ DELOITTE & TOUCHE LLP
F-3
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
<TABLE>
DECEMBER 31, PRO FORMA
----------------------------- MARCH 31, MARCH 31,
1994 1995 1996 1996
---------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(NOTE 10)
<S> <C> <C> <C> <C>
ASSETS
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 1,073,457 1,083,410
------------ ------------ ------------
Total assets. . . . . . . . . . . . . . . . . $ 16,292,094 $ 26,963,666 $30,563,615
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND OWNERS' EQUITY
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
Owners' equity (deficiency):
Partners' equity (deficiency) . . . . . . . (1,763,271) 6,128,131 5,601,687 ---
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. . . . . . . . . . . . . . $ 5,601,687
Retained earnings (deficiency). . . . . . (1,100,000)
------------ ------------ ------------ -------------
Total liabilities and owners' equity. . . . . $ 16,292,094 $ 26,963,666 $30,563,615 $ 4,501,687
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------- ----------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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 4,182,312 954,056 1,303,527
General and administrative . . . . . . . . 170,319 634,016 1,704,694 268,481 574,894
Depreciation and amortization . . . . . . 505,125 844,420 957,012 218,232 284,881
Write-off of intangible asset . . . . . . -- --- 492,288 --- ---
------------ ----------- ----------- ----------- -----------
Total expenses . . . . . . . . . . . 2,583,128 4,932,126 7,336,306 1,440,769 2,163,302
------------ ----------- ----------- ----------- -----------
Operating income (loss) . . . . . . . . . . . . (277,241) 332,344 (592,450) 18,053 (219,132)
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) (39,090) (34,081) 7,472
------------ ----------- ----------- ----------- -----------
Net loss $ (984,427) $(1,034,953) $(1,654,056) $ (264,146) $ (526,444)
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Unaudited pro forma information (NOTE 10):
Net loss per share. . . . . . . . . . . . . $ (.38) $ ( .12)
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 . . . . . . . . . . . . . . . . . . (1,654,056)
-------------
Balance at December 31, 1995 . . . . . . . . . 6,128,131
Net loss (unaudited) . . . . . . . . . . . . (526,444)
-------------
Balance at March 31, 1996 (unaudited) . . . . . $ 5,601,687
-------------
-------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- ----------------
1993 1994 1995 1995 1996
----------- ------------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . $ (984,427) $ (1,034,953) $ (1,654,056) $(264,146) $ (526,444)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Write-off of intangible asset . . . . . . . --- --- 492,288 --- ---
Depreciation and amortization . . . . . . . 505,125 844,420 957,012 218,232 284,881
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 39,090 34,081 (7,472)
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 (133,524) (51,527) (205,815)
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) (417,592) (68,447) (154,469)
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) (10,730,307) (791,290) (3,491,157)
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 --- --- 1,029,633
Proceeds from other long-term obligations . . . 67,156 --- --- --- ---
Proceeds (payment) of other long-term obligations (22,108) (11,757) 23,869 --- (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)
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:
Land improvements 15 years
Buildings 40 years
Furnishings and equipment 10 years
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- MARCH 31,
1994 1995 1996
-------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
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
Costs incurred in connection with preparing the residence for opening and
initital occupancy are capitalized and amortized over the estimated
benefit period of three years, commencing with the opening of the residence.
F-9
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
ADVERTISING EXPENSE
Advertising expenditures are expensed when incurred except for direct
response advertising which is capitalized to pre-opening costs.
Advertising expenditures were approximately $253,000, $250,000, and
$276,000 for 1993, 1994 and 1995, respectively. Of these amounts
$108,000, $16,000 and $99,000 were capitalized in the respective periods.
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)
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Karrington Concept, less accumulated amortization of
$61,176 at December 31, 1994 . . . . . . . . . . . . . . . . . $ 536,866 $ --- $ ---
Pre-opening costs, less accumulated amortization of
$433,759, $410,740, and $481,886 at December 31, 1994 and
1995, and March 31, 1996, respectively . . . . . . . . . . . . 342,826 512,555 595,878
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 . . . . . . . . . . . . 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) (55,561) (148,089)
----------- ----------- -----------
$1,081,176 $ 1,073,457 $ 1,083,410
----------- ----------- -----------
----------- ----------- -----------
</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 there would be no future benefit from this asset.
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.
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.
F-11
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
MARCH 31,
1994 1995 1996
------------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
$475,000 mortgage due in monthly principal installments
of $1,979 plus interest at prime plus .75%. 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. 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%. 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.
F-12
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS (CONTINUED)
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 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 System of Cincinnati, Ohio
(a predecessor to 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
the 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 generally will have a 20% to 35%
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)
Summary financial information of joint ventures follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
MARCH 31,
1994 1995 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 . . . . . . . . . . . . 234,714 155,343 131,330
------------- ------------ ------------
Total assets $ 5,040,996 $ 5,468,264 $ 5,735,386
------------- ------------ ------------
------------- ------------ ------------
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) 827,878 627,821
------------- ------------ ------------
Total liabilities and joint venture
equity . . . . . . . . . . . . . . . $ 5,040,996 $ 5,468,264 $ 5,735,386
------------- ------------ ------------
------------- ------------ ------------
STATEMENTS OF OPERATIONS
Residence revenues . . . . . . . . . . $ 249,284 $ 1,868,618 $ 503,730
Operating expenses . . . . . . . . . . 180,612 1,333,203 330,709
Depreciation expense . . . . . . . . . 39,395 148,807 60,608
Interest expense . . . . . . . . . . . 64,219 464,788 97,470
------------- ------------ ------------
Total expenses . . . . . . . . . . 284,226 1,946,798 488,787
------------- ------------ ------------
Net income (loss) . . . . . . . . . . . $ (34,942) $ (78,180) $ 14,943
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
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.
F-14
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
The Company plans to file 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 will contribute the stock in their respective companies for
stock in the Company. The shareholders of JMAC Properties, Inc. will
receive 66-2/3% of the pre-offering outstanding common shares of the
Company while the shareholders of Associates will receive the remaining
33-1/3% (a total of 4,350,000 shares). Following the
reorganization, JMAC Properties, Inc. and Associates will become
wholly-owned subsidiaries of the Company. As a result, the Company
will own 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 as of May 10, 1996.
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.
F-15
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 will 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 will occur upon consolidation into Karrington
Health, Inc. Karrington Health, Inc. will recognize the
equity acquired as a result of the reorganization as additional
paid-in capital.
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>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
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
PAGE
-----
Prospectus Summary . . . . . . .
Risk Factors . . . . . . . . . .
History and Reorganization . . .
Use of Proceeds. . . . . . . . .
Dividend Policy. . . . . . . . .
Capitalization . . . . . . . . .
Dilution . . . . . . . . . . . .
Selected Consolidated Financial.
Data . . . . . . . . . . . . . .
Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . .
Business . . . . . . . . . . . .
Management . . . . . . . . . . .
Certain Transactions . . . . . .
Principal and Selling
Shareholders. . . . . . . . . .
Description of Capital Stock . .
Shares Eligible for Future Sale.
Underwriting . . . . . . . . . .
Legal Matters. . . . . . . . . .
Change in Accountants. . . . . .
Experts . . . . . . . . . . . .
Additional Information . . . . .
Index to Consolidated Financial
Statements. . . . . . . . . . .
Until , 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 COMMON SHARES
KARRINGTON HEALTH, INC.
COMMON SHARES
--------
PROSPECTUS
, 1996
--------
SMITH BARNEY INC.
J.C. BRADFORD & CO.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated (except for the Securities
and Exchange Commission registration fee, the National Association of
Securities Dealers, Inc. filing fee and The Nasdaq National Market listing
fee) fees and expenses payable by the Company in connection with the
distribution of the Common Shares:
Securities and Exchange Commission registration fee $20,225
National Association of Securities Dealers, Inc. filing fee 6,365
Nasdaq National Market listing fee 29,813
Printing and engraving costs *
Legal fees and expenses *
Accountants' fees and expenses *
Blue sky qualification fees and expenses *
Transfer agent fees *
Miscellaneous *
-------
Total $ *
-------
- ------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Division (E) of Section 1701.13 of the Ohio Revised Code
governs indemnification by a corporation and provides as
follows:
(E)(1) A corporation may indemnify or agree to
indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or
investigative, other than an action by or in the right of
the corporation, by reason of the fact that he is or was
a director, officer, employee, member, manager, or agent
of the corporation, or is or was serving at the request
of the corporation as a director, trustee, officer,
employee, or agent of another corporation, domestic or
foreign, nonprofit or for profit, a limited liability
company, or a partnership, joint venture, trust or other
enterprise, against expenses, including attorney's fees,
judgments, fines, and amounts paid in settlement actually
and reasonably incurred by him in connection with such
action, suit, or proceeding, if he acted in good faith
and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, if he
had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit, or
proceeding by judgment, order, settlement, or conviction,
or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the
person did not act in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any
criminal action or proceeding, he had reasonable cause to
believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to
indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened,
pending, or completed action or suit by or in the right
of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer,
employee, member, manager, or agent of the corporation,
or is or was serving at the request of the corporation as
a director, trustee, officer, employee, member, manager,
or agent of another corporation,
II-1
<PAGE>
domestic or foreign, nonprofit or for profit,
a limited liability company, or a partnership, joint
venture, trust, or other enterprise, against expenses,
including attorney's fees, actually and reasonably
incurred by him in connection with the defense or
settlement of such action or suit, if he acted in good
faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation,
except that no indemnification shall be made in respect
of any of the following:
(a) Any claim, issue, or matter as to
which such person is adjudged to be liable for
negligence or misconduct in the performance of his
duty to the corporation unless, and only to the
extent that, the court of common pleas or the court
in which such action or suit was brought determines,
upon application, that, despite the adjudication of
liability, but in view of all the circumstances of
the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court
of common pleas or such other court shall deem
proper;
(b) Any action or suit in which the only
liability asserted against a director is pursuant to
section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee,
officer, employee, member, manager, or agent has been
successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in division
(E)(1) or (2) of this section, or in defense of any
claim, issue or matter therein, he shall be indemnified
against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the action
suit or proceeding.
(4) Any indemnification under division (E)(1) or
(2) of this section, unless ordered by a court, shall be
made by the corporation only as authorized in the
specific case, upon a determination that indemnification
of the director, trustee, officer, employee, member,
manager, or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth
in division (E)(1) or (2) of this section. Such
determination shall be made as follows:
(a) By a majority vote of a quorum
consisting of directors of the indemnifying
corporation who were not and are not parties to or
threatened by the action, suit, or proceeding
referred to in division (E)(1) or (2) of this
section;
(b) If the quorum described in division
(E)(4)(a) of this section is not obtainable or if a
majority vote of a quorum of disinterested directors
so directs, in a written opinion by independent
legal counsel other than an attorney, or a firm
having associated with it an attorney, who has been
retained by or who has performed services for the
corporation or any person to be indemnified within
the past five years;
(c) By the shareholders; or
(d) By the court of common pleas or the
court in which such action, suit or proceeding
referred to in division (E)(1) or (2) of this
section was brought.
Any determination made by the disinterested
directors under division (E)(4)(a) or by independent
legal counsel under division (E)(4)(b) of this section
shall be promptly communicated to the person who
threatened or brought the action or suit by or in the
right of the corporation under division (E)(2) of this
section, and, within ten days after receipt of such
notification, such person shall have the right to
petition the court of common pleas or the court in which
such action or suit was brought to review the
reasonableness of such determination.
(5)(a) Unless at the time of a director's act or
omission that is the subject of an action, suit, or
proceeding referred to in division (E)(1) or (2) of this
section, the articles or the regulations of a
II-2
<PAGE>
corporation state, by specific reference to this division,
that the provisions of this division do not apply to the
corporation and unless the only liability asserted
against a director in an action, suit, or proceeding
referred to in division (E)(1) or (2) of this section is
pursuant to section 1701.95 of the Revised Code,
expenses, including attorney's fees, incurred by a
director in defending the action, suit, or proceeding
shall be paid by the corporation as they are incurred, in
advance of the final disposition of the action, suit, or
proceeding, upon receipt of an undertaking by or on
behalf of the director in which he agrees to both of the
following:
(i) Repay such amount if it is
proved by clear and convincing evidence in a
court of competent jurisdiction that his
action or failure to act involved an act or
omission undertaken with deliberate intent to
cause injury to the corporation or undertaken
with reckless disregard for the best interests
of the corporation;
(ii) Reasonably cooperate with
the corporation concerning the action, suit, or
proceeding.
(b) Expenses, including attorney's fees, incurred
by a director, trustee, officer, employee, member,
manager, or agent in defending any action, suit, or
proceeding referred to in division (E)(1) or (2) of this
section, may be paid by the corporation as they are
incurred, in advance of the final disposition of the
action, suit, or proceeding, as authorized by the
directors in the specific case, upon receipt of an
undertaking by or on behalf of the director, trustee,
officer, employee, member, manager, or agent to repay
such amount, if it ultimately is determined that he is
not entitled to be indemnified by the corporation.
(6) The indemnification authorized by this section
shall not be exclusive of, and shall be in addition to,
any other rights granted to those seeking indemnification
under the articles, the regulations, any agreement, a
vote of shareholders or disinterested directors, or
otherwise, both as to action in their official capacities
and as to action in another capacity while holding their
offices or positions, and shall continue as to a person
who has ceased to be a director, trustee, officer,
employee, member, manager, or agent and shall inure to
the benefit of the heirs, executors, and administrators
of such a person.
(7) A corporation may purchase and maintain
insurance or furnish similar protection, including, but
not limited to, trust funds, letters of credit, or self-
insurance, on behalf of or for any person who is or was a
director, officer, employee, or agent of the corporation,
or is or was serving at the request of the corporation as
a director, trustee, officer, employee, member, manager,
or agent of another corporation, domestic or foreign,
nonprofit or for profit, a limited liability company, or
a partnership, joint venture, trust, or other enterprise,
against any liability asserted against him and incurred
by him in any such capacity, or arising out of his status
as such, whether or not the corporation would have the
power to indemnify him against such liability under this
section. Insurance may be purchased from or maintained
with a person in which the corporation has a financial
interest.
(8) The authority of a corporation to indemnify
persons pursuant to division (E)(1) or (2) of this
section does not limit the payment of expenses as they
are incurred, indemnification, insurance, or other
protection that may be provided pursuant to divisions
(E)(5), (6), and (7) of this section. Divisions (E)(1)
and (2) of this section do not create any obligation to
repay or return payments made by the corporation pursuant
to division (E)(5), (6), or (7).
(9) As used in division (E) of this section,
"corporation" includes all constituent entities in a
consolidation or merger and the new or surviving
corporation, so that any person who is or was a director,
officer, employee, trustee, member, manager, or agent of
such a constituent entity, or is or was serving at the
request of such constituent entity as a director,
trustee, officer, employee, member, manager, or agent of
another corporation, domestic or foreign, nonprofit or
for profit, a limited liability company, or a
partnership, joint venture, trust, or other enterprise,
shall stand in the same position under this section
II-3
<PAGE>
with respect to the new or surviving corporation as he would
if he had served the new or surviving corporation in the
same capacity.
Section 5.01 of the Registrant's Code of Regulations
governs indemnification by Registrant and provides as follows:
SECTION 5.01. MANDATORY INDEMNIFICATION. The
corporation shall indemnify any officer or director of
the corporation who was or is a party or is threatened to
be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative or investigative (including, without
limitation, any action threatened or instituted by or in
the right of the corporation), by reason of the fact that
he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer,
employee, member, manager or agent of another corporation
(domestic or foreign, nonprofit or for profit), limited
liability company, partnership, joint venture, trust or
other enterprise, against expenses (including, without
limitation, attorneys' fees, filing fees, court
reporters' fees and transcript costs), judgments, fines
and amounts paid in settlement if actually and reasonably
incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the corporation, 8and with respect to any
criminal action or proceeding, he had no reasonable cause
to believe his condu8ct was unlawful. A person claiming
indemnification under this Section 5.01 shall be
presumed, in respect of any act or omission giving rise
to such claim for indemnification, to have acted in good
faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and
with respect to any criminal matter, to have had no
reasonable cause to believe his conduct was unlawful, and
the termination of any action, suit or proceeding by
judgment, order, settlement or conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of
itself, rebut such presumption.
Reference is also made to Section 9 of the Underwriting
Agreement contained in Exhibit 1.1 hereto, indemnifying
directors and officers of the Company against certain
liabilities.
In addition, the Registrant intends to purchase insurance
coverage which will insure directors and officers against
certain liabilities which might be incurred by them in such
capacity.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Registrant was organized in April, 1996, to facilitate
this offering and to become the successor to Karrington
Operating Company upon the consummation of the Reorganization
Transactions described in the Prospectus. JMAC has entered
into a Reorganization Agreement with Registrant dated May 8,
1996, pursuant to which it has agreed to acquire 2,900,000
Common Shares of the Company in exchange for all of its shares
of JMAC Properties. Each of Richard R. Slager, Alan B.
Satterwhite and Gregory M. Barrows have also entered into the
Reorganization Agreement, and they have agreed to acquire
717,750, 717,750 and 14,500, respectively, Common Shares of
Registrant in exchange for their shares of DMA. The
Reorganization Agreement was entered into, and the shares
subject to the Agreements will be issued, without registration
under the Securities Act of 1933 in reliance upon the
exemption provided by Section 4(2) of that Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS:
1.1* Form of Underwriting Agreement
3.1* Amended Articles of Incorporation of the Company
3.2* Code of Regulations of the Company
4.1* Form of Stock Certificate for Common
Shares of the Company
II-4
<PAGE>
5.1* Opinion of Vorys, Sater, Seymour and Pease
10.1* 1996 Incentive Stock Plan
10.2 Loan Agreement between the Company
and JMAC dated December 29, 1995
10.3 Restated Third Amendment to Partnership
Agreement dated January 1, 1995, by
and between JMAC Properties and DMA
10.4 Registration Rights Agreement dated
May 8, 1996, by and among the Company and the
Investors (as defined therein)
10.5 Reorganization Agreement dated May 8, 1996,
by and among the Company and the Investors
(as defined therein)
16.1 Letter re change in certifying accountant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
23.3* Consent of Vorys, Sater, Seymour and
Pease (included in Exhibit 5.1)
23.4* Consent of Bernadine P. Healy,
director nominee
23.5* Consent of John H. McConnell,
director nominee
23.6* Consent of Charles H. McCreary,
director nominee
23.7* Consent of Harold A. Poling, director nominee
24.1 Powers of Attorney (included on signature page)
- ----------------
* To be filed by amendment.
B) FINANCIAL STATEMENT SCHEDULES:
Schedules not listed have been omitted because the
information required to be set forth therein is not applicable
or is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is
asserted against the registrant by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
(2) The undersigned hereby undertakes that:
(a) For purposes of determining any liability under
the Securities Act of 1933, the information omitted from
the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement
as of the time it was declared effective.
(b) For the purpose of determining any liability
under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be
deemed to be a new registration statement
II-5
<PAGE>
relating to the securities offered therein, and the
offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Columbus, State of
Ohio, on May 10, 1996.
KARRINGTON HEALTH, INC.
By: /s/ RICHARD R. SLAGER
---------------------------------
RICHARD R. SLAGER
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
We, the undersigned directors and officers of Karrington Health, Inc. (the
"Company") and each of us, do hereby constitute and appoint Richard R. Slager
and Alan B. Satterwhite, or either of them, our true and lawful attorneys
and agents, each with power of substitution, to do any and all acts and
things in our names and on our behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in
the capacities indicated above, which said attorneys or agents, or either of
them, may deem necessary or advisable to enable the Company to comply with
the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with
the filing of this Registration Statement on Form S-1 in connection with the
public offering of the Common Shares of the Company and the Selling
Shareholder, including specifically but without limitation, power and
authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments (including post-effective amendments)
to such Registration Statement; and we do hereby ratify and confirm all that
the said attorneys and agents, or their substitute or substitutes, or either
of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ RICHARD R. SLAGER Chairman of the Board, President May 10, 1996
--------------------------- and Chief Executive Officer
RICHARD R. SLAGER (PRINCIPAL EXECUTIVE OFFICER)
/s/ ALAN B. SATTERWHITE Director, Chief Operating Officer May 10, 1996
--------------------------- and Chief Financial Officer
ALAN B. SATTERWHITE (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/s/ JOHN S. CHRISTIE Director May 10, 1996
---------------------------
JOHN S. CHRISTIE
/s/ MICHAEL H. THOMAS Director May 10, 1996
---------------------------
MICHAEL H. THOMAS
</TABLE>
II-7
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
1.1* Form of Underwriting Agreement
3.1* Amended Articles of Incorporation of the Company
3.2* Code of Regulations of the Company
4.1* Form of Stock Certificate for Common Shares of the Company
5.1* Opinion of Vorys, Sater, Seymour and Pease
10.1* 1996 Incentive Stock Plan
10.2 Loan Agreement between the Company and JMAC dated December 29, 1995
10.3 Restated Third Amendment to Partnership Agreement dated January 1,
1995, by and between JMAC Properties and DMA
10.4 Registration Rights Agreement dated May 8, 1996 by and among the
Company and the Investors (as defined therein)
10.5 Reorganization Agreement dated May 8, 1996, by and among the Company
and the Investors (as defined therein)
16.1 Letter re change in certifying accountant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
23.3* Consent of Vorys, Sater, Seymour and Pease (included in Exhibit 5.1)
23.4* Consent of Bernadine P. Healy, director nominee
23.5* Consent of John H. McConnell, director nominee
23.6* Consent of Charles H. McCreary, director nominee
23.7* Consent of Harold A. Poling, director nominee
24.1 Powers of Attorney (included on signature page)
</TABLE>
- -----------------
* To be filed by amendment.
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement"), is made and entered into this 29th
day of December, 1995 by and between DEVELOPMED OPERATING COMPANY, an Ohio
general partnership with an address at 919 Old Henderson Road, Columbus, Ohio
43220, (the "Borrower") and JMAC, INC., an Ohio corporation with an address at
Suite 150, 150 East Wilson Bridge Road, Worthington, Ohio 43085, (the "Lender"),
W I T N E S S E T H:
WHEREAS, the Borrower has applied to the Lender for a loan, and the Lender
is willing to lend to the Borrower, up to the total principal amount of
$8,000,000 in the form of a subordinated credit facility, all upon the terms and
conditions hereof and subject to the covenants and agreements hereinafter set
forth.
Now, THEREFORE, the parties agree as follows:
ARTICLE I
LOAN AND LOAN COMMITMENT
Section 1.1. LOAN COMMITMENT. Subject to and upon the terms and
conditions hereinafter set forth, the Lender hereby agrees to make loans to the
Borrower from time to time from the date hereof to December 31, 1996 (the
"Commitment Period") of sums (each referred to herein as a "Loan" and
collectively as the "Loans") in an aggregate principal amount not to exceed
$8,000,000. The obligation of the Lender to make the Loans during such period
is referred to herein as the "Commitment."
Section 1.2. NOTE. The Loans made by the Lender pursuant hereto, and
the obligation of the Borrower to repay the aggregate unpaid principal balance
of all Loans made hereunder (hereinafter referred to as the "Principal Debt"),
shall be unsecured, general obligations of Borrower, evidenced by a Subordinated
Debenture (the "Note") of even date herewith made by the Borrower payable to the
order of the Lender in the amount of $8,000,000 with interest thereon at a rate
of fifteen percent (15%) per annum. If not sooner paid, the entire principal
amount of the Loans outstanding and all accrued and unpaid interest on the Loans
shall be due and payable on the earliest of (i) January 1, 2000; (ii) the date
any class of equity interests of Borrower is listed on a national securities
exchange; (iii) the date any class of equity interests of Borrower is registered
under Section 12(g) of the Securities Exchange Act of 1934; or (iv) the date any
class of equity interests of Borrower is the subject of a registration statement
which has become effective under the Securities Act of 1933 (the "Termination
Date"). All expenditures by the Lender pursuant to the Loan Documents other
than advances of principal, all amounts remaining due and unpaid after the
Termination Date and any amounts due and unpaid after an Event of Default shall
bear interest at the maximum rate permitted by law, until such amounts are paid
to the Lender. The Note shall be in the form of Exhibit A attached hereto, with
blanks
<PAGE>
appropriately completed in conformity herewith. At the time of the making of
each Loan and at the time of each payment of principal thereon under the Note,
the holder of the Note shall be and is hereby authorized to make a notation on
the schedule substantially in the form of the Schedule A attached to the Note of
the date and amount of the Loan, or payment, as the case may be; provided,
however, that the failure to make such a notation with respect to any Loan shall
not limit or otherwise affect the liability of the Borrower hereunder or under
the Note with respect to any Loan or any other indebtedness of the Borrower to
the Lender, and payments of principal and interest on the Note made by the
Borrower shall not be affected by the failure to make a notation thereof on said
schedule.
All obligations of Borrower under the Note shall be subordinated in
right of payment to the prior payment in full of principal of and interest on
all indebtedness of Borrower for money borrowed from banks, trust companies,
insurance companies or other financial institutions, whether owed at the date
hereof or subsequently incurred, and all deferrals, renewals, extensions and
refundings of such indebtedness (collectively, "Senior Obligations").
Section 1.3. PURPOSE OF LOANS. The purpose of the Loans is to
provide to Borrower the equity funds to be required under loan commitments from
third party lenders to extend credit to Borrower with respect to development of
assisted living facilities. The contemplated development schedule for such
facilities is attached hereto as Schedule A, which may be revised from time to
time during the Commitment Period as mutually agreed by Borrower and Lender (the
"Development Schedule").
Section 1.4. CONDITIONS PRECEDENT TO LOANS. The obligation of the
Lender to lend each portion of the Commitment is contingent on the completion,
to the satisfaction of the Lender, of all of the following conditions during the
Commitment Period:
(a) The Borrower, or any entity owned and controlled by the
Borrower, shall have submitted to the Lender written evidenced of
sufficient financing being in place for the full completion of the
construction of the assisted living facility for which the Loan is
sought, such evidence to include written commitments of third party
lenders and/or documentation of available working capital funds of the
Borrower, or any entity owned or controlled by the Borrower, committed
to such purposes.
(b) EFFECTIVENESS OF LOAN DOCUMENTS. Each of the Loan
Documents shall be in full force and effect.
(c) AVAILABILITY OF COMMITMENT. The sum of the then
existing Principal Debt and the amount of the requested Loan shall be
equal to or less than the Commitment.
(d) REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained herein or in any of the Loan Documents made by or
on behalf of the Borrower shall be true and correct with the same effect
as if the representations and warranties had been made on and as of the
date of such Loan.
2
<PAGE>
(e) OTHER CONDITIONS PRECEDENT. The conditions precedent
set forth in Sections 2.1, 2.2 and 2.4 of this Agreement shall have been
fully satisfied and complied with.
(f) The Borrower shall have given the Lender irrevocable
written notice of such intent at least seven (7) days prior to the date
of such intended borrowing by means of completion of a borrowing
application substantially in the form of Exhibit B attached hereto, with
blanks appropriately completed in conformity therewith (a "Borrowing
Application"). The Borrowing Application shall be delivered to the
Lender at the address set forth on the first page of this Agreement and
in conformity with the provisions of Section 10.5 hereof. Subject to
the terms and conditions of this Agreement, the Lender shall be
obligated, within seven (7) days of the receipt by the Lender of a
notice of intent to borrow in the form of a Borrowing Application, to
disburse the amount set forth in such Borrowing Application.
Section 1.5. APPLICATION OF PAYMENTS. Unless an Event of Default (as
hereinafter defined) has occurred and is continuing, all payments received
pursuant to this Agreement or any of the other Loan Documents shall be applied
to the Obligations (as hereinafter defined) in the following order: (a) to all
of the costs and expenses of the Lender which have not been reimbursed pursuant
hereto and to all indemnified amounts under the Loan Documents; and (b) first,
to accrued interest, and second, to principal. If an Event of Default has
occurred, payment shall be applied to the obligations in such order and manner
as the Lender may determine, any instructions from the Borrower to the contrary
notwithstanding.
Section 1.6. USE OF PROCEEDS. The Borrower hereby agrees and
covenants that each Loan shall be used by the Borrower for the purpose set forth
in Section 1.3.
Section 1.7. SUBJECT TO PROVISIONS OF PARTNERSHIP AGREEMENT.
Notwithstanding anything in this Agreement or the Note to the contrary, the
Lender agrees that the payment and performance of this Agreement is expressly
subject to the provisions of Article 5, Distributions, of the Partnership
Agreement of DevelopMed Operating Company, dated as of October 18, 1991, by and
between JMAC Properties, Inc. and DevelopMed Associates, Inc., as amended (the
"Partnership Agreement").
ARTICLE II
CONDITIONS PRECEDENT TO CLOSING
Each closing of a Loan hereunder shall take place at the offices of
Lender, or at such other place and time as shall be mutually agreed by the
Borrower and the Lender (a "Closing"), upon the delivery to the Lender of such
documents and instruments as are provided for herein, and provided that such
conditions precedent to the Closing hereinafter set forth have been fully
satisfied. The obligation of the Lender as set forth herein is subject, at the
time of such Closing,
3
<PAGE>
to the satisfaction in the opinion of the Lender, unless waived in writing, of
each of the following conditions:
Section 2.1. EXECUTION AND DELIVERY OF LOAN DOCUMENTS. The Borrower
shall have executed and delivered to the Lender each of the Loan Documents.
Section 2.2. REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained herein or in any of the other Loan Documents made in
connection herewith by or on behalf of the Borrower shall be true and correct.
Section 2.3. DOCUMENTATION AND PROCEEDINGS. All partnership and
legal proceedings and all documents and instruments in connection with the
transactions contemplated by this Agreement and the other Loan Documents shall
be satisfactory in form and substance to the Lender and its counsel, and the
Lender and its counsel shall have received all information and copies of all
documents and instruments, including records of partnership proceedings, which
the Lender or its counsel may reasonably have requested in connection therewith.
Such documents and instruments shall be, where appropriate, certified by proper
corporate or governmental authorities, and shall include, for the Closing, the
following:
(a) a certificate of the general partners of the Borrower as
to the adoption of resolutions of the Borrower authorizing the
execution, delivery and performance of each of the Loan Documents and
the transactions contemplated thereby; and
(b) such other documents as the Lender or its counsel may
request.
Section 2.4. NO CHANGE IN CONDITION. No adverse change in condition
(financial or otherwise) of the Borrower or any other event shall have occurred
which creates a possibility of adversely affecting the ability of the Borrower
to meet and carry out its obligations under any of the Loan Documents or to
perform the transactions contemplated thereby.
ARTICLE III
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, so long as this Agreement is in
effect and until all of the Obligations are paid and performed in full, unless
compliance shall have been waived in writing by the Lender, the Borrower shall:
Section 3.1. PAYMENT OF CHARGES. Pay and discharge before the same
shall become delinquent (i) all taxes, assessments and governmental charges or
levies imposed upon it and its property and (ii) all lawful claims which, if
unpaid, could by law become a lien upon any of its property, provided, however,
that the Borrower shall not be required to pay or discharge any such
4
<PAGE>
tax, assessment, charge or levy which is being contested in good faith by
appropriate proceedings and with adequate reserves therefor having been set
aside on its books.
Section 3.2. MAINTENANCE OF RECORDS. Keep at all times books of
record and accounts in which full, true and correct entries will be made of all
dealings or transactions relating to its business operations and affairs, and
provide adequate protection against loss or damage to such books of record and
accounts.
Section 3.3. COMPLIANCE WITH LAWS. Comply with all applicable laws,
rules, regulations and orders of any governmental authority or agency.
Section 3.4. FINANCIAL STATEMENTS. Furnish to the Lender (i) monthly
financial statements prepared by the Borrower within twenty (20) days after the
last day of each month, and (ii) within forty-five (45) days after the last day
of each fiscal year, complete and detailed financial statements of the Borrower,
as of and for the year ended on such last date, prepared by a certified public
accountant acceptable to the Lender.
Section 3.5. NOTICE OF LITIGATION. Promptly give written notice to
the Lender of (i) any action, proceeding or claim of any nature by any person or
entity, or investigation by any governmental agency or officer, of which the
Borrower may have notice, which may be commenced or asserted against the
Borrower or relate to any of the Loan Documents or the transactions contemplated
thereby, and (ii) any dispute which may exist between the Borrower and any
governmental regulatory body which may materially and adversely affect the
normal business operations of the Borrower or any of its properties or assets,
or the carrying out of the intent and purpose of the Loan Documents and the
transactions contemplated thereby.
Section 3.6. NOTICE OF DEFAULT. Promptly give written notice to the
Lender of (i) the occurrence of any Event of Default hereunder, or any event
which, with the passage of time or giving of notice or both, may constitute an
Event of Default.
Section 3.7. FURTHER ASSURANCES. Take any and all such action as the
Lender may from time to time deem reasonably necessary or proper in connection
with this Agreement or any of the other Loan Documents, the Obligations of the
Borrower hereunder or thereunder, or for better assuring and confirming unto the
Lender all or any part of the security for any of such Obligations, or for
granting unto the Lender any additional security for any of the Obligations
which the Lender may reasonably request from time to time.
ARTICLE IV
NEGATIVE COVENANTS
The Borrower covenants and agrees that so long as this Loan Agreement is
in effect and until all of the Obligations are paid and performed in full,
unless compliance shall have been waived in writing by the Lender, the Borrower
shall not:
5
<PAGE>
Section 4.1 ADVANCES AND LOANS. Lend money or credit or make
advances to any person or entity, except for loans to entities controlled by the
Borrower, or advances made to employees of the Borrower for the payment of items
for which an expense report or a voucher will be filed and which items will
constitute ordinary and necessary business expenses of the Borrower.
Section 4.2. DISTRIBUTIONS. The Borrower shall not return any
capital to its partners or authorize or make any other distribution, payment or
delivery of property or cash to its partners as such, except as agreed to in
writing by the Lender.
Section 4.3. LIENS. Contract, create, incur, assume or suffer to
exist any mortgage, pledge, lien or other charge or incumbrance of any kind
(including the charge upon property purchased under conditional sale or other
title retention documents) upon or with respect to, or grant any security
interest or lien in, any of its property or assets, whether now owned or
hereafter acquired, save and except for the security interest and lien granted
herein to the Lender and any security interest and lien granted in connection
with any Senior Obligations.
Section 4.4. GUARANTIES AND OTHER LIABILITIES. Purchase or
repurchase (or agree, contingently or otherwise to do so) the indebtedness of,
or assume, guarantee (directly or indirectly or by an instrument having the
affect of assuring another's payment or performance of any obligation or
capability of doing so), endorse or otherwise become liable, directly or
indirectly, in connection with the obligations of any person or entity, (other
than entities controlled by Borrower) except by endorsement of negotiable
instruments for deposit or collection in the ordinary course of business.
Section 4.5. CONSOLIDATION OR MERGER. Wind up, liquidate or dissolve
the affairs of the Borrower or enter into any transaction for merger or
consolidation, or convey, sell, lease or otherwise dispose of (or agree to do so
at any future time) all or substantially all of the property or assets of the
Borrower, or any property or assets essential to the conduct of its business
substantially as now conducted, or any of its notes receivable, installment or
conditional sales agreements or accounts receivable.
ARTICLE V
OBLIGATIONS
Section 5.1. OBLIGATIONS. As used herein, the term "Obligations"
means the obligations of the Borrower (i) to pay all indebtedness arising out
of, pursuant to or in connection with this Agreement, any future advances under
this Agreement, and all renewals, extensions or amendments of such indebtedness
or any part thereof or any such future advances; (ii) to pay the principal of
and interest on the Note in accordance with the terms thereof, and all renewals,
extensions, modifications and amendments of the Note or any part thereof and any
future advances made pursuant thereto; (iii) to repay to the Lender all amounts
advanced by the
6
<PAGE>
Lender hereunder or otherwise on behalf of the Borrower; (iv) to pay any and all
other indebtedness of the Borrower to the Lender of every kind, nature or
description, direct or indirect, primary or secondary, secured or unsecured,
joint or several, absolute or contingent, due or to become due, now existing or
hereafter arising, regardless of how such indebtedness may be evidenced,
including without limitation all future advances, whether or not presently
contemplated by the Borrower and the Lender; (v) to perform fully all of the
terms and provisions of each of the documents and instruments constituting the
Loan Documents; and (vi) to reimburse the Lender, on demand, for all of the
Lender's expenses and costs, plus interest thereon at the rate specified in the
Note for past due payments, from the date of the advances or incurring of such
expenses or costs until reimbursed, including the fees and expenses of counsel,
incurred in connection with the preparation, administration, amendment,
modification or enforcement of this Agreement, any of the other Loan Documents
or any other documents or instruments required hereunder or thereunder.
ARTICLE VI
LOAN DOCUMENTS
Section 6.1. LOAN DOCUMENTS. This Agreement, the Note, and all
documents or instruments executed pursuant hereto or thereto, are collectively
referred to herein as the "Loan Documents".
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement, the Borrower
hereby represents and warrants to the Lender, and its successors and assigns, as
follows (which representations and warranties shall survive the execution and
delivery hereof):
Section 7.1. POWER AND AUTHORITY. The Borrower is a general
partnership duly created under the laws of the State of Ohio and has the full
power and authority to enter into the transactions contemplated by all of the
Loan Documents and any other documents or instruments given to secure the
Obligations secured thereby, and all of the Obligations of Borrower under all of
the foregoing are valid and binding upon the Borrower.
Section 7.2. NO VIOLATION. Neither the execution nor the delivery of
this Agreement or any of the other Loan Documents, nor the consummation of the
transactions contemplated hereby or thereby, will contravene any provision of
applicable law or will conflict or be inconsistent with any of the terms,
covenants and conditions of any agreement, document or instrument by which the
Borrower or its property is bound or to which it is a party.
Section 7.3. CONSENTS. Borrower has obtained all consents necessary
for the valid execution, delivery and performance of all of the covenants and
obligations set forth in the Loan
7
<PAGE>
Documents. No other consent of any other party or entity is necessary to
authorize or empower the Borrower to enter into the transactions contemplated by
the Loan Documents and any other documents or instruments given to secure the
Obligations secured thereby.
Section 7.4. EXECUTION OF LOAN DOCUMENTS. Each of the agreements,
documents and instruments constituting the Loan Documents has been duly executed
and delivered by the Borrower and each constitutes the legal, valid and binding
obligations of the Borrower enforceable in accordance with its terms, except to
the extent that the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization or similar laws affecting the enforcement of
creditors' rights generally.
Section 7.5. RECORDING AND ENFORCEABILITY. On or prior to the date
each Closing, the Borrower shall have completed all recordings, filings,
registrations, notices or other similar actions which are required to be taken
in order to ensure the legality, validity, binding affect and enforceability of
each of the Loan Documents.
Section 7.6. BURDENSOME AGREEMENTS. The Borrower is not a party to
any contract, agreement, judgment, decree or other, or subject to any provision
of its articles of incorporation or bylaws which materially and adversely
affects or may in the future materially and adversely affect its business,
properties or assets, or its condition (financial or otherwise).
ARTICLE VIII
DEFAULT
The occurrence of any of the following events shall constitute Events of
Default hereunder (each referred to herein as an "Event of Default"):
Section 8.1. NON-PAYMENT. The Borrower shall default in the due and
punctual payment of any principal or interest of the Note or under any Senior
Obligation, subject to any grace period or cure provision of such Senior
Obligation.
Section 8.2. DEFAULT IN LOAN DOCUMENTS. The Borrower shall default
in the due performance or observance by it of any term, covenant or agreement
contained in any of the Loan Documents.
Section 8.3. REPRESENTATIONS AND WARRANTIES. Any material
representation, warranty or statement made by the Borrower herein or otherwise
in writing in connection herewith or in connection with any of the other Loan
Documents and any agreements or documents referred to herein or therein, or in
any financial statement, certificate or statement signed by any duly-authorized
officer or employee of the Borrower and furnished pursuant to any of the Loan
Documents, shall be breached, or shall be materially false, incorrect or
incomplete when made.
8
<PAGE>
Section 8.4 VALIDITY OF LOAN DOCUMENTS. Any of the Loan Documents
shall cease to be a legal, valid and binding agreement enforceable against any
party executing the same in accordance with the respective terms thereof, or
shall in any way be terminated, or shall become or be declared ineffective or
inoperative, or shall in any way whatsoever cease to give or provide the
respective rights, remedies, powers and privileges intended to be created
thereby.
Section 8.5. BANKRUPTCY. The Borrower shall suspend or discontinue
its business operations, or shall generally fail to pay its debts as they
mature, or shall file a petition commencing a voluntary case concerning the
Borrower under any chapter of the United States Bankruptcy Code, or any
involuntary case shall be commenced against the Borrower under the United States
Bankruptcy Code, or the Borrower shall become insolvent (howsoever such
insolvency may be evidenced).
ARTICLE IX
REMEDIES OF LENDER
The following rights and remedies shall be available to the Lender:
Section 9.1. REMEDIES UPON DEFAULT. Should an Event of Default
occur, the Lender may, without demand or notice at its election, do one or more
of the following:
(a) ACCELERATION. Declare the entire unpaid balance of the
Note and all other indebtedness of the Borrower to the Lender, or any
part thereof, immediately due and payable, whereupon the Principal Debt
of and accrued interest on the Note (at the rate set forth therein)
shall be forthwith due and payable without demand, diligence,
presentment for payment, notice of nonpayment, protest, notice of
protest, notice of intent to accelerate, notice of acceleration and all
other notices or further actions of any kind, all of which are hereby
expressly waived by the Borrower, for itself and for any of its
successors and assigns.
(b) RIGHTS UNDER LOAN DOCUMENTS. Exercise any and all
rights afforded to the Lender under or pursuant to any of the Loan
Documents.
(c) RIGHTS UNDER APPLICABLE LAWS. Exercise any and all
rights afforded to the Lender by the laws of the State of Ohio or any
other applicable jurisdiction.
(d) LITIGATION. File and prosecute suit against the
Borrower or any other person or persons liable therefore to collect the
Obligations and the indebtedness due, and for any other remedy, legal or
equitable, to which the Lender may show itself entitled.
Section 9.2. ACCEPTANCE. The acceptance by the Lender at any time
and from time to time of part payment of the Obligations shall not be deemed to
be a waiver of any Event of
9
<PAGE>
Default then existing. No waiver by the Lender of any Event of Default shall be
deemed to be a waiver of any other Event of Default then existing or
subsequently occurring.
Section 9.3. CUMULATIVE RIGHTS. All rights available to the Lender
under the Loan Documents shall be cumulative of and in addition to all of the
rights granted to the Lender at law or in equity, whether or not the Obligations
are then due and payable and whether or not the Lender shall have instituted
suit for collection or other action in connection with the Loan Documents.
Section 9.4. RIGHT OF SETOFF. In addition to any rights now or
hereafter granted under applicable law and not by way of limitation of any such
rights, upon the occurrence of any Event of Default or any condition, event or
act which, with the giving of notice or lapse of time, or both, would constitute
such an Event of Default, the Lender is hereby authorized at any time or from
time to time, without notice to the Borrower or to any other person or entity,
any such notice being hereby expressly waived, to set off and to appropriate and
to apply any and all indebtedness at any time held or owing by the Lender to or
for the credit or the account of the Borrower against and on account of the
Obligations and liabilities of the Borrower to the Lender under any of the Loan
Documents, including without limitation all claims of any nature or description
arising out of or connected with any of the Loan Documents, irrespective of
whether or not the Lender shall have made any demand hereunder and although said
Obligations, liabilities or claims, or any of them, shall be contingent or
unmatured.
ARTICLE X
MISCELLANEOUS
Section 10.1. BENEFIT. This Agreement shall be binding upon and inure
to the benefit of the Lender, the Borrower, and their successors and assigns;
provided, however, that the Borrower may not transfer or assign all or any of
its rights or obligations hereunder or under any of the other Loan Documents
without the prior written consent of the Lender.
Section 10.2. OHIO LAW CONTROLS. This Agreement and the rights and
obligations of the parties hereunder and under the other Loan Documents shall be
construed in accordance with and be governed by the laws of the State of Ohio
and by applicable federal law. ANY ACTION, SUIT OR PROCEEDING ARISING IN
CONNECTION WITH OR PURSUANT TO THE EXECUTION, VALIDITY OR PERFORMANCE OF THIS
AGREEMENT SHALL BE PROSECUTED AS TO ALL PARTIES AND THEIR SUCCESSORS AND ASSIGNS
IN COLUMBUS, OHIO. EACH PARTY HERETO CONSENTS TO AND SUBMITS TO THE EXERCISE OF
JURISDICTION OVER ITS PERSON BY ANY COURT SITUATED IN COLUMBUS, OHIO, AND HAVING
JURISDICTION OVER THE SUBJECT MATTER HEREOF.
10
<PAGE>
Section 10.3 ENTIRE AGREEMENT. This Agreement, together with the
other Loan Documents, embodies the entire agreement between the parties with
regard to the subject matter hereof and supersedes all prior agreements and
understandings relating to the subject matter hereof.
Section 10.4. INVALIDITY OF ANY PROVISION. The invalidity of any one
or more phrases, sentences, clauses, paragraphs or sections hereof or of any of
the other Loan Documents shall not affect the remaining portions of this Note or
of any of the other Loan Documents or any part thereof, all of which are
inserted conditionally on their being held legally valid. In the event that one
or more of the phrases, sentences, clauses, paragraphs or sections contained
herein or therein should be invalid, or should operate to render this Note or
any of the other Loan Documents shall be construed as if such invalid phrase or
phrases, sentence or sentences, clause or clauses, paragraph or paragraphs, or
section or sections had not been inserted.
Section 10.5. NOTICES. Notices hereunder may be given by mailing the
same by United States registered or certified mail to the appropriate party at
the addresses set forth on the first page of this Agreement. Copies of all
notices to be sent to any party hereunder shall also be sent to counsel for such
party.
Section 10.6. USURY SAVINGS CLAUSE. Under no circumstances shall the
amounts paid or agreed to be paid hereunder or under any of the other Loan
Documents exceed the highest lawful rate permitted under applicable usury law
(the "Maximum Rate") and the payment of the Obligations of the Borrower
hereunder and thereunder are hereby limited accordingly. If under any
circumstances whatsoever, whether by reason of advancement or acceleration of
the maturity of the Obligations or otherwise, the aggregate amount paid
hereunder or under any of the other Loan Documents shall include amounts which
by law are deemed interest and which would exceed the Maximum Rate, the Borrower
stipulates that the payment and collection of such excess amounts shall have
been and will be deemed to have been the result of a mistake on the part of both
the Borrower and the Lender and the party receiving such excess payments shall
promptly credit such excess (to the extent only of such interest payments in
excess of the Maximum Rate) against the unpaid principal amount of the
Obligations to which such excess may lawfully be credited, and any portion of
such excess payments not capable of being so credited shall be refunded to the
Borrower.
Section 10.7. WAIVER. Neither the failure nor delay on the part of
the Lender in exercising any right, power or privilege hereunder or under any of
the other Loan Documents shall operate as a waiver thereof, nor shall a single
or partial exercise thereof preclude any other further exercise of any other
right, power or privilege, nor shall any course of dealing between the Lender
and the Borrower operate as a waiver of any right, power or privilege of the
Lender. Failure of the Lender to give, or the Borrower to receive, any notice
required to be given under any of the Loan Documents shall not relieve the
Borrower of any covenant or obligation thereunder and shall not constitute a
waiver of any Event of Default then existing.
Section 10.8. MODIFICATION. ETC. No modification, amendment or waiver
of any provision of this Agreement or any of the other Loan Documents, nor
consent to any departure by
11
<PAGE>
the Borrower, shall in any event be effective unless the same shall be in
writing and signed by the Lender. Any such waiver or consent shall only be
effective with respect to the specific instance and for the specific person for
which the same is given. No notice or demand made to the Borrower in any event
shall entitle the Borrower to any other or further notice or demand in the same,
similar or other circumstances.
Section 10.9. EXTENSIONS AND RENEWALS. This Agreement shall be
applicable to all extensions and renewals of any or all of the Obligations, and
the terms and conditions of this Agreement shall apply, in toto, to all of the
Obligations and any extensions and renewals thereof.
Section 10.10. RIGHT TO DEFEND. The Lender shall have the right, at
the Borrower's sole cost and expense, to appear in or defend any action or
proceeding in which the Lender is named or joined or otherwise purporting to
effect the rights or duties thereof, and in connection therewith the Lender
shall have the right to pay out of the proceedings of the Loans and/or recover
from the Borrower all necessary costs and expenses, including without limitation
attorneys' fees, appear in or defend any such action or proceeding with counsel
satisfactory to the Lender.
Section 10.11. INDEMNITY. The Borrower hereby agrees to protect,
indemnify, defend and hold harmless the Lender from and against any and all
liability, expense or damage of any kind or nature from any suits, claims or
demands, including without limitation costs and expenses of attorneys' fees, as
a result of any matter, whether in suit or otherwise, arising out of, pursuant
to or in connection with this Agreement or any of the other Loan Documents, or
the transactions contemplated hereby or thereby.
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
BORROWER:
DEVELOPMED OPERATING COMPANY
By: DEVELOPMED ASSOCIATES, INC., a
general partner
By:___________________________
Title:________________________
By: JMAC PROPERTIES, INC., a
general partner
By:___________________________
Title:________________________
LENDER:
JMAC, INC.
By:___________________________________
Title:________________________________
13
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibit A Subordinated Debenture
Exhibit B Borrowing Application
Schedule A Development Schedule
14
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("ACT") OR
THE SECURITIES LAWS OF ANY STATE JURISDICTION ("STATE ACTS"). IT MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE NOTE UNDER THE ACT AND STATE ACTS OR AN OPINION
OF COUNSEL REASONABLY SATISFACTORY TO THE BORROWER THAT SUCH REGISTRATION IS NOT
REQUIRED.
DEVELOPMED OPERATING COMPANY
15% SUBORDINATED DEBENTURE
Issuer DevelopMed Operating Company,
an Ohio general partnership
919 Old Henderson Road
Columbus, Ohio 43220
Principal Amount $8,000,000
Date of Note December 29, 1995
Maturity Date January 1, 2000, or such earlier date as set
forth herein
Interest Rate 15% per annum, payable annually
* * * * * * * * * * * *
<PAGE>
SUBORDINATED DEBENTURE
For value received, DevelopMed Operating Company (the "Borrower") hereby
unconditionally promises to pay to the order of JMAC, Inc., an Ohio corporation,
or its successors or assigns (the "Holder") the principal amount of Eight
Million Dollars ($8,000,000), or so much thereof as may be disbursed to, or for
the benefit of, the undersigned and remain unpaid (the "Principal Debt"), and to
pay interest on the Principal Debt (the "Interest"), each upon the terms and
subject to the conditions set forth in this Subordinated Debenture (this
"Note"). This Note has been issued pursuant to a Loan Agreement (the
"Agreement"), between the Borrower and the Holder, dated as of December 29,
1995, the terms, conditions and other provisions of which are incorporated
herein and made a part hereof. All defined terms not defined herein shall have
the meaning specified in the Agreement.
1. PAYMENT OF PRINCIPAL AND INTEREST. Principal and Interest
hereunder shall be payable as follows:
(a) The interest rate on this Note shall be 15% per annum.
Interest shall be calculated monthly on the Principal Debt and shall be
computed on the basis of the actual number of days elapsed over a year
consisting of 12 months of 30 days each. Interest shall commence to
accrue on the date the first Loan is effected pursuant to the Agreement,
and will continue to accrue until (a) the Principal Debt is paid in full
pursuant to the terms hereof and (b) all other obligations of the
Borrower under this Note and the Agreement have been satisfied.
Interest which accrues hereunder shall be referred to as "Accrued
Interest." Accrued Interest on this Note shall be due and payable
annually within 10 days following the end of each calendar year.
(b) The amount of the Principal Debt, together with any
Accrued Interest while remains unpaid, shall be due and payable upon the
earliest of:
(i) January 1, 2000;
(ii) the date any class of equity interests of
Borrower is listed on a national securities exchange;
(iii) the date any class of equity interests of
Borrower is registered under Section 12(g) of the Securities
Exchange Act of 1934; or
(iv) the date any class of equity interests of
Borrower is the subject of a registration statement which has
become effective under the Securities Act of 1933.
(c) All expenditures by the Holder under the Loan Documents,
other than advances of principal, all amounts remaining due and unpaid
after the due date and any amounts due and unpaid after an Event of
Default shall bear interest at the maximum rate permitted by law, until
such amounts are paid to the Holder.
2
<PAGE>
The principal and interest due hereunder shall be evidenced by the
Holder's records which, absent manifest error, shall be conclusive as to the
computation of principal and interest balances owing by the Borrower to the
Holder hereunder. Interest accruing on past due principal and interest hereunder
shall be payable on demand.
The indebtedness evidenced hereby may be prepaid in whole or in part in
accordance with the provisions of the Agreement. In any event, all payments and
prepayments received by the Holder shall (a) be applied to all of the costs and
expenses of the Holder to be reimbursed by the Borrower as set forth in the
Agreement and to all indemnified amounts thereunder; (b) be applied, first, to
Accrued Interest, and second, to Principal Debt; and (c) shall be credited as of
the time received by the Holder in cash or equivalent or when finally collected.
The Holder shall not be obligated to extend any credit or make any funds
available to Borrower hereunder after the term of this Note or after the
occurrence of any Event of Default.
The Holder of this Note is authorized to endorse the date and amount of
each payment or prepayment of principal hereof on Schedule A which is attached
hereto and incorporated herein by reference or on a continuation thereof, which
endorsement shall constitute prima facie evidence of the accuracy of the
information endorsed.
All obligations of Borrower under this Note shall be subordinated in
right of payment to the prior payment in full of principal of and interest on
all indebtedness of Borrower for money borrowed from banks, trust companies,
insurance companies, or other financial institutions, whether owed at the date
hereof or subsequently incurred, and all deferrals, renewals, extensions and
refundings of such indebtedness.
2. DEFAULT AND REMEDIES. The occurrence of any of the following
events shall constitute Events of Default hereunder (each referred to herein as
an "Event of Default").
(a) NON-PAYMENT. The Borrower shall default in the due and
punctual payment of any principal or interest of this Note, or under any
Senior Obligation (as defined in the Agreement), subject to any grace
period or cure provision of such Senior Obligation.
(b) DEFAULT IN LOAN DOCUMENTS. The Borrower shall default
in the due performance or observance by it of any material term,
covenant or agreement contained in any of the Loan Documents.
(c) REPRESENTATIONS AND WARRANTIES. Any material
representation, warranty or statement made by the Borrower in the
Agreement or otherwise in connection herewith or in connection with any
of the other Loan Documents and any agreements or documents referred to
herein or therein, or in any financial statement, certificate or
statement signed by any duly authorized officer or employee of the
Borrower and furnished pursuant to any of the Loan Documents, shall be
materially breached, or shall be materially false, incorrect or
incomplete when made.
3
<PAGE>
(d) VALIDITY OF LOAN DOCUMENTS. Any of the Loan Documents
shall cease to be a legal, valid and binding agreement enforceable
against any party executing the same in accordance with the respective
terms thereof, or shall in any way be terminated, or shall become or be
declared ineffective or inoperative, or shall in any way whatsoever
cease to give or provide the respective rights, remedies, powers and
privileges intended to be created thereby.
(e) BANKRUPTCY. The Borrower shall suspend or discontinue
its business operations, or shall generally fail to pay its debts as
they mature, or shall file a petition commencing a voluntary case
concerning the Borrower under any chapter of the United States
Bankruptcy Code, or any involuntary case shall be commenced against the
Borrower under the United States Bankruptcy Code, or the Borrower shall
become insolvent (howsoever such insolvency may be evidenced).
If an Event of Default occurs and is continuing, the Holder may declare
(i) the Principal Debt, (ii) the Accrued Interest, and (iii) any other amounts
payable under this Note or the Agreement ((i), (ii), and (iii) collectively the
"Obligations") to be due and payable immediately. In addition, if an Event of
Default occurs and is continuing, the Holder may pursue any available remedy by
proceeding in law or in equity to collect the Obligations or to enforce the
performance of any provision of this Note.
3. SUBJECT TO PROVISIONS OF PARTNERSHIP, AGREEMENT.
Notwithstanding anything in this Note or the Agreement to the contrary, the
Holder agrees that the payment and performance of this Note is expressly subject
to the provisions of Article 5, Distributions, of the Partnership Agreement of
DevelopMed Operating Company, dated as of October 18, 1991, by and between JMAC
Properties, Inc. and DevelopMed Associates, Inc., as amended.
4. MANNER OF PAYMENT. All payments of the Obligations will be paid
b y the Borrower to the order of the Holder in immediately available funds (U.S.
Dollars). Unless the Holder provides different payment instructions to the
Borrower by written notice, all such payments will be made, as directed by
Holder, either by (i) a good funds check made payable to the order of the Holder
mailed (first class postage prepaid) or personally delivered to the Holder at
the address specified above or (ii) by wire transfer transmitted to the bank
account of the Holder. Upon the payment or discharge in full of the
Obligations, the Holder will deliver this Note to the Borrower endorsed "Paid-
in-Full and Discharged."
5. WAIVERS. To the full extent not otherwise prohibited or limited
by applicable law or by the terms of this Note or the Agreement, the Borrower
and all persons now or hereafter liable, primarily or secondarily, for the
payment, notice of dishonor, protest, notice of protest and any and all other
notices or demands in connection with the delivery, acceptance, performance,
default, endorsement of the Note, notice of any action taken in reliance upon
this Note, or any other notice or demand of any type or description except as
specifically provided for in this Note or the Agreement, and (ii) agrees that
the time for payment or payments of the
4
<PAGE>
Obligations or any part thereof, may be extended without releasing or otherwise
affecting the liability of the Borrower hereon. The failure by the Holder to
exercise any right under this Note shall not be construed as a waiver of such
right or any other right by the Holder.
6. NOTICE. Any notice or demand required or permitted to be given
to the Borrower or Holder in connection with this Note (Each, a "Notice") shall
be mailed by first class mail postage prepaid and addressed to the Borrower at
its address specified above or if to the Holder, to:
JMAC, Inc.
Suite 150
150 East Wilson Bridge Road
Worthington, Ohio 43085
The Borrower or the Holder may change its respective address for the delivery of
Notices by giving written Notice as provided for in this section.
7. GOVERNING LAW; CHOICE OF FORUM; CONSENT TO JURISDICTION. This
Note and the rights and obligations of the Borrower and the Holder under this
Note shall be governed by and construed and enforced in accordance with the laws
of the State of Ohio. As specifically bargained inducement for the Holder to
extend credit giving rise to the indebtedness evidence hereby, the undersigned
and Holder hereby agree that: ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR
ARISING FROM OR OUT OF THIS NOTE, ITS MAKING, VALIDITY R PERFORMANCE, AT THE
SOLE OPTION OF THE LENDER OR LEGAL HOLDER HEREOF, SHALL BE PROSECUTED AS TO ALL
PARTIES AND THEIR SUCCESSORS AND ASSIGNS IN COLUMBUS, OHIO. THE UNDERSIGNED
CONSENTS TO AND SUBMITS TO THE EXERCISE OF JURISDICTION OVER ITS PERSON BY ANY
COURT SITUATED IN COLUMBUS, OHIO, AND HAVING JURISDICTION OVER THE SUBJECT
MATTER HEREOF.
8. NO WAIVER IMPLIED BY DELAY. No delay or omission on the part of
the Holder in exercising any right hereunder shall operate as a waiver of such
right or any right under this Note. A waiver on any one occasion must be in
writing and shall not be construed as a bar to or waiver of any such right
and/or remedy on any future occasion.
9. SEVERABILITY OF PROVISIONS. Any provision of this Note which is
prohibited or unenforceable under applicable law in any jurisdiction shall, as
to such jurisdiction and only such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions of the Note or affecting the validity or enforceability of such
provision in any other jurisdiction. No provision of this Note shall be deemed
to require the payment or permit the collection of interest in excess of that
permitted by applicable law. In the event that the Interest Rate is determined
to be in excess of that interest rate permitted by applicable law, then the
Interest Rate shall be deemed to be the maximum interest rate permitted from
time to time during the term of this Note under applicable law.
5
<PAGE>
THE UNDERSIGNED HEREBY AUTHORIZES ANY ATTORNEY-AT-LAW TO APPEAR FOR THE
UNDERSIGNED IN ANY ACTION ON THIS NOTE, AT ANY TIME AFTER THE SAME BECOMES DUE
AND HEREIN PROVIDED IN ANY COURT OF RECORD IN OR OF THE STATE OF OHIO OR
ELSEWHERE, TO WAIVE THE ISSUANCE AND SERVICE OF PROCESS AGAINST THE UNDERSIGNED,
AND TO CONFESS JUDGMENT IN FAVOR OF THE LEGAL HOLDER OF THIS NOTE AGAINST THE
UNDERSIGNED FOR WHOM AN APPEARANCE HAS BEEN SO ENTERED, FOR THE AMOUNT THAT MAY
BE DUE HEREON AND THE COSTS OF SUIT, AND ALSO TO WAIVE AND RELEASE ALL ERRORS IN
SAID PROCEEDINGS AND JUDGMENT, AND ALL PROCEEDINGS, PETITIONS, WRITS OF ERROR,
RIGHTS OF APPEAL AND STAYS OF EXECUTION FROM THE JUDGMENT RENDERED. THE
FOREGOING WARRANT OF ATTORNEY SHALL SURVIVE ANY JUDGMENT, AND, IF ANY JUDGMENT
BE VACATED FOR ANY REASON, THE HOLDER HEREOF NEVERTHELESS MAY THEREAFTER USE THE
FOREGOING WARRANT OF ATTORNEY TO OBTAIN AN ADDITIONAL JUDGMENT OR JUDGMENTS
AGAINST THE UNDERSIGNED.
This Note was executed by the Borrower as of the date specified on the
first page hereof at Columbus, Franklin County, Ohio.
WARNING--BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL.
- --------------------------------------------------------------------------------
IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
- --------------------------------------------------------------------------------
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU
- -------------------------------------------------------------------------
REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED
- -------------------------------------------------------------------------------
GOODS. FAULTY GOODS. FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT. OR ANY
- -----------------------------------------------------------------------------
OTHER CAUSE.
- ------------
DEVELOPMED OPERATING COMPANY,
an Ohio general partnership
By: DEVELOPMED ASSOCIATES, INC.,
a general partner
By: ________________________________
Title:______________________________
By: JMAC PROPERTIES, INC.,
a general partner
By: ________________________________
Title:______________________________
6
<PAGE>
SCHEDULE A TO
SUBORDINATED DEBENTURE
LOANS AND REPAYMENTS OF LOANS
Unpaid
Amount Amount Principal
of of Balance of Notation
Date Loan Loan Repaid Loans Made By
---- ---- ----------- ----- -------
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
______________ ______________ ______________ ______________ ______________
7
<PAGE>
EXHIBIT B
BORROWING APPLICATION
JMAC, INC.
Suite 150
150 East Wilson Bridge Road
Worthington, Ohio 43085
Reference is made to that certain Loan Agreement dated as of December
29, 1995 (the "Agreement") executed by and between DevelopMed Operating
Partnership as Borrower (the "Borrower"), and JMAC, Inc. as Lender (the
"Lender"). The terms used herein shall have the same meanings provided therefor
in the Agreement unless the context hereof otherwise requires or provides.
This Borrowing Application must be submitted to the Lender by delivery
as set forth in the Agreement not less than seven (7) full business days prior
to the date of the proposed disbursement hereunder.
Pursuant to the terms of the Agreement, the Borrower hereby requests a
disbursement of $______________ pursuant to the Commitment on ____________, l99_
for purposes of the __________________ project.
The Borrower hereby certifies to the Lender that on the date hereof (a)
all of the conditions precedent and requirements for borrowing proceeds of the
Loan to be met by the Borrower pursuant to the terms of the Agreement have been
fully and completely satisfied, (b) no Event of Default has occurred, or any act
or omission which, with the giving of notice or passage of time, or both, would
constitute an Event of Default, and (c) all of the representations and
warranties of the Borrower in the Agreement are true in all material respects as
if made on the date hereof.
DEVELOPMED OPERATING PARTNERSHIP
Dated: ________________, l99_ By: DEVELOPMED ASSOCIATES, INC., a
general partner
By: ____________________________
Its: ____________________________
<PAGE>
SCHEDULE A
----------
KARRINGTON COMMUNITIES
REVISED DEVELOPMENT SCHEDULE
9 mos. Out
Open Info.
Revised Opening Start Const. Center (Adm.) Total
--------------- ------------ ------------- -----
Shaker 30-Oct-95 30-Oct-94 01/28/95 $400
Worthington, Ohio 12-Jan-96 30-Jul-95 10/28/95 1,500
Toledo, Ohio 12-June-96 27-Jun-95 09/25/95 0
South Hills, Pa. 06-June-96 31-Jul-95 10/29/95 1,408
Fall Creek, Ind. 26-Oct-96 13-Nov-95 02/11/95 1,300
Willow Lake, Ind. 05-Dec-96 06-Feb-96 05/06/96 1,262
Rocky River 01-Apr-97 06-May-96 08/04/96 1,262
Carmel, Ind. 01-Apr-97 01-May-96 07/30/96 1,262
Gahanna, Ohio 01-Jul-97 01-May-95 07/30/96 1,262
Lyndhurst, Ohio 01-Jul-97 08-May-96 08/06/96 1,262
Sylvania, Ohio 04-Mar-97 08-May-96 08/06/96 1,262
Louisville, Ky. 01-Jul-97 01-May-96 07/30/96 1,262
Bath, Oh. 01-Apr-97 06-May-96 08/04/96 1,262
Monroeville, Pa. 01-Jul-97 01-Jun-96 08/30/96 1,262
Fort Wayne, Ind. 05-Feb-97 12-Mar-96 06/10/96 1,262
Gahanna, Oh. 01-Jul-97 04-Jun-96 09/02/96 1,262
Ann Arbor, Mi 10-Apr-97 15-May-96 08/13/96 0
Detroit, Mi 31-Mar-98 05-May-97 08/30/97 1,262
Penn Hills, Pa. 27-Mar-97 01-May-96 07/30/96 0
Louisville, Ky. 28-Mar-98 02-Jun-97 08/31/97 1,262
Toledo, Ohio 28-Apr-98 02-Jun-97 08/31/97 1,262
Lexington, Ky. 02-Mar-98 05-Jul-97 10/03/97 0
Cleveland 3-Parma Area 01-Jan-99 02-Feb-98 05/03/98 1,262
Cleveland 4-Westlake Area 01-Jan-99 02-Feb-98 05/03/98 1,262
Cleveland 5-Bay Village 01-Jan-99 02-Feb-98 05/03/98 1,262
Detroit 3-Royal Oak 01-Jan-99 02-Feb-98 05/03/98 1,262
SISTERS OF CHARITY:
- -------------------
Albuquerque-Assisted 01-Jul-96 06-Aug-95 11/04/95 250
Albuquerque-Alzheimers 01-Jul-96 06-Aug-95 11/04/95 100
Colorado Springs 01-Mar-97 05-Apr-96 07/04/96 250
Cincinnati-Wyoming 01-Dec-96 06-Jan-96 04-05/96 250
Cincinnati-Montgomery 01-Dec-96 06-Jan-96 04/05/96 250
Dayton/Englewood 31-Mar-97 05-May-96 08/03/96 250
Total all Projects 27,324
<TABLE>
<CAPTION>
CAPITAL REQUIREMENTS, EXCLUDING WORKING CAPITAL, IN 000'S
PROTOTYPE QUARTERLY REQUIREMENTS: EQUITY ONLY
Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Jul-96 Aug-96 Sep-96
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shaker 300 100
Worthington, Ohio 700 800
Toledo, Ohio 0 0
South Hills, Pa. 704 704 0
Fall Creek, Ind. 500 300 300 200
Willow Lake, Ind. 0 778 228 256
Rocky River 778 228 256
Carmel, Ind. 778 228 256
Gahanna, Ohio 778 228 256
Lyndhurst, Ohio 778 228 256
Sylvania, Ohio 778 228 256
Louisville, Ky. 778 228 256
Bath, Oh. 778 228 256
Monroeville, Pa. 778 28 256
Fort Wayne, Ind. 778 228 256
Gahanna, Oh. 778 228 256
Ann Arbor, Mi
Detroit, Mi
Penn Hills, Pa.
Louisville, Ky.
Toledo, Ohio
Lexington, Ky.
Cleveland 3-Parma Area
Cleveland 4-Westlake Area
Cleveland 5-Bay Village
Detroit 3-Royal Oak
SISTERS OF CHARITY:
- -------------------
Albuquerque-Assisted
Albuquerque-Alzheimers
Colorado Springs
Cincinnati-Wyoming
Cincinnati-Montgomery
Dayton/Englewood
Total all Projects 2,204 1,904 300 978 1,006 1,262 4,374 3,730 1,964 768 0
----- ----- --- --- ----- ----- ----- ----- ----- --- -
Quarter Totals 4,108 2,284 9,386 2,732
----- ----- ----- -----
Period Totals $4,108 11,650 $14,382
------ ------ -------
------ ------ -------
</TABLE>
<PAGE>
RESTATED THIRD AMENDMENT TO PARTNERSHIP AGREEMENT
This Restated Third Amendment is entered into effective as of January 1,
1995 by and among DevelopMed Associates, Inc., an Ohio corporation
("DevelopMed"), and JMAC Properties, Inc., an Ohio corporation ("JMAC
Properties").
WHEREAS, DevelopMed and JMAC Properties are general partners in DevelopMed
Operating Company, an Ohio general partnership (the "Partnership") organized
pursuant to a Partnership Agreement made on October 18, 1991, to be effective as
of October 1, 1991 (the "Partnership Agreement"), as previously amended pursuant
to: (i) an Amendment to Partnership Agreement made effective as of April 2, 1992
(the "Amendment"); and (ii) a Memorandum of Agreement made effective as of
January 1, 1995 (the "Memorandum Agreement");
WHEREAS, the parties previously executed a Third Amendment to Partnership
Agreement (the "Third Amendment") pursuant to which the economic arrangements
described herein initially were agreed to, and the parties desire to simplify
the documentation of such previously agreed to economic arrangements; and
WHEREAS, the parties desire to restate the Third Amendment in its entirety
and to thereby amend the Partnership Agreement in certain respects.
NOW, THEREFORE, the parties hereby agree as follows:
1. Capitalized terms not otherwise defined herein shall have the meanings
set forth in the Partnership Agreement, the Amendment and the Loan Agreement.
2. The following amendments shall be made to section 1.2 of the
Agreement:
(a) The definition of "Net Capital Contribution" shall be amended and
restated as follows:
"Net Capital Contribution" shall at any time mean, with respect to any
Interest of any Partner, (i) the Aggregate Capital Contribution made by
such Partner to such time less (ii) all prior distributions made to such
Partner pursuant to sections 5.1(b)(2), 5.1(b)(3), 5.2(b)(2), 5.2(b)(3),
5.2(b)(4) and 5.3(b)(2). Each Partner's Net Capital Contribution shall be
allocated equally among all Units held by such Partner.
3. Section 3.3 of the Agreement shall be deleted in its entirety, and the
following shall be inserted in its place:
The Interests shall be divided into 120 Units. The Units shall be
allocated among the Partners as follows:
DevelopMed 40 Units
JMAC Properties 80 Units
<PAGE>
4. The existing provision of section 4.3 shall be designated as section
4.3(a), and the following shall be added as section 4.3(b):
(b) During calendar year 1995, JMAC Properties shall be required to
make additional Required Equity Contributions of cash with respect to its
Interest in the aggregate amount of $5,000,000, which shall be payable in
U.S. dollars at such times and in such amounts as the Managing Partner
shall reasonably determine.
5. Section 5.1(b)(3) of the Agreement shall be deleted in its entirety
and the following shall be inserted in its place:
(3) Third, to make a distribution to the Partners to the extent of;
and in proportion to, each Partner's Net Capital Contribution; and
(4) Finally, with any remainder among the Partners in proportion to
their Units.
6. Section 6.1(b) shall be deleted in its entirety and the following
shall be inserted in its place:
(b) Any Profit for each period shall be allocated among the Partners
in the following order of priority:
First, if the Net Capital Contribution of any Partner is in excess of
the balance of the Capital Account of such Partner, then to all such Partners to
the extent of; and in proportion to, such excess of each such Partner; and
Finally, to all of the Partners in proportion to their Units.
7. As set forth in the Memorandum Agreement, the parties agree as
follows:
(a) The parties acknowledge and agree that, as of December 31, 1994,
JMAC has effected Funding Loans to the Partnership in the aggregate
principal amount of $4,209,595, at such times and in such amounts as set
forth on Schedule A attached hereto. The proceeds of the Funding Loans have
been applied by the Partnership principally for development of the Original
Properties and Additional Projects, directly or through affiliated
entities. Accrued and unpaid interest on the Funding Loans was $607,180.75
as of December 31, 1994, as set forth on Schedule A attached hereto. The
aggregate amount of principal and interest outstanding under the Funding
Loans as of December 31, 1994 was $4,816,775.75 (the "Conversion Amount").
Effective as of January 1, 1995, the Conversion Amount shall be
converted to a Capital Contribution and credited to the Capital Account of
JMAC Properties. All instruments evidencing the Partnership's obligations
as borrower with respect to the Funding Loans, including without limitation
the 12% Subordinated Debenture dated October 18, 1991 in the principal
amount of $2,500,000 and the 12% Supplemental
2
<PAGE>
Subordinated Debenture dated March 11, 1993 in the principal amount of
$250,000, are hereby deemed paid in full, discharged and canceled as a
result of such conversion.
(b) The parties acknowledge and agree that the DMA Operating Loan
evidenced by two (2)12% Subordinated Debentures in the amount of $62,500
each and payable to Richard R. Slager and Alan B. Satterwhite,
respectively, principals of DevelopMed, as of December 31, 1994 had an
outstanding principal balance in the aggregate amount of $106,666 ($53,333
each), with accrued but unpaid interest of $14,031.78 ($7,015.89 each)
through such date. The 12% Subordinated Debenture originally payable to
Richard R. Slager previously had been purchased by and assigned to JMAC.
Effective as of January 1, 1995, the $120,697.78 of principal and accrued
but unpaid interest thereon of the DMA Operating Loan shall be converted to
a Capital Contribution, with $60,348.89 credited to the Capital Account of
DevelopMed, and $60,348.89 credited to the Capital Account of JMAC
Properties. The 12% Subordinated Debentures dated October 18, 1991 are
hereby deemed paid in full, discharged and canceled as a result of such
conversions. As evidenced by his signature in the Memorandum Agreement,
Alan B. Satterwhite has consented to such conversion for the benefit of
DevelopMed of $60,348.89 otherwise payable to him.
(c) The parties acknowledge and agree that the DMA Debenture Loan
evidenced by a Debenture dated October 18, 1991 in the original principal
amount of $400,000, as of December 31, 1994 had an outstanding principal
balance of $400,000, with all interest paid through such date. Effective as
of January 1, 1995, the $400,000 principal balance of the DMA Debenture
Loan shall be converted to a Capital Contribution and credited to the
Capital Account of DevelopMed. The Debenture dated October 18, 1991 is
hereby deemed paid in fill, discharged and canceled as a result of such
conversion.
8. The Third Amendment is hereby restated in its entirety.
9. Except as otherwise expressly provided herein, the provisions of the
Partnership Agreement shall remain in full force and effect.
10. This agreement may be signed in counterparts, each of which when
considered together shall be considered one and the same original.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Restated Third
Amendment to be executed effective as of the date first set forth above.
DevelopMed Associates, Inc.
By:
----------------------------
Richard R. Slager, President
JMAC Properties, Inc.
By:
-----------------------------
Michael H. Thomas, Vice President
4
<PAGE>
Exhibit 10.4
KARRINGTON HEALTH, INC.
REGISTRATION RIGHTS AGREEMENT
May 8, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
Preliminary Statement....................................................... 1
Terms and Conditions........................................................ 1
Section 1. Definitions.................................................. 1
Section 2. Securities Subject to this Agreement......................... 2
Section 3. Demand Registration.......................................... 2
Section 4. Piggyback Registrations...................................... 5
Section 5. Holdback Agreements.......................................... 7
Section 6. Registration Procedures...................................... 8
Section 7. Registration Expenses........................................ 11
Section 8. Indemnification.............................................. 12
Section 9. Rule 144..................................................... 14
Section 10. Participation in Underwritten Registrations.................. 15
Section 11. Miscellaneous................................................ 15
-i-
<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of May 8, 1996, by
and among JMAC, Inc., an Ohio corporation ("JMAC"), Richard R. Slager
("Slager"), Alan B. Satterwhite ("Satterwhite") and Gregory M. Barrows
("Barrows") (JMAC, Slager, Satterwhite and Barrows are collectively referred to
herein as the "Investors") and Karrington Health, Inc., an Ohio corporation (the
"Company").
PRELIMINARY STATEMENT
Pursuant to a Reorganization Agreement by and among the Investors and the
Company dated as of May 8, 1996 (the "Reorganization Agreement"), JMAC has
agreed to contribute to the Company all of its shares of JMAC Properties, Inc.,
an Ohio corporation ("JMAC Properties") (being 100% of the outstanding equity
securities of JMAC Properties), in exchange for 2,900,000 Common Shares of the
Company, and Slager, Satterwhite and Barrows have agreed to contribute to the
Company all of their shares of DevelopMed Associates, Inc., an Ohio corporation
("DMA") (being 100% of the outstanding equity securities of DMA), in exchange
for 717,750, 717,750 and 14,500 Common Shares of the Company, respectively. The
Investors' agreement to acquire the Common Shares is on the condition that the
Company agrees to certain terms and conditions related to the registration of
securities of the Company as set forth in this Agreement.
TERMS AND CONDITIONS
In consideration of the mutual covenants and agreements contained in this
Agreement and the Investment Agreement, and intending to be legally bound, the
parties hereto agree as follows:
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms
have the meanings indicated below or in the referenced sections of this
Agreement:
"Common Shares": The Company's Common Shares, as the same may be
constituted from time to time.
"Demand Registration": As defined in SECTION 3(a) hereof.
"Exchange Act": The Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder.
"Initial Public Offering": The first primary offering of Common Shares by
the Company registered pursuant to the Securities Act.
<PAGE>
"Person": An individual, a partnership, a corporation, a limited liability
company, an association, a joint stock company, a trust, a joint venture, an
unincorporated organization and a government entity or any department, agency,
or political subdivision thereof.
"Piggyback Registration": As defined in SECTION 4(a) hereof.
"Registrable Securities": The Common Shares of the Company acquired by the
Investors from the Company pursuant to the Reorganization Agreement and any
additional Common Shares of the Company issued as a stock split, stock dividend
or other distribution with respect thereto. A Registrable Security ceases to be
a Registrable Security when (i) it is registered under the Securities Act and
disposed of in accordance with the registration statement covering it or (ii) it
is sold or transferred in accordance with the requirements of Rule 144 (or
similar provisions then in effect) promulgated by the SEC under the Securities
Act ("Rule 144").
"Registration Expenses": As defined in SECTION 7 hereof.
"SEC": The United States Securities and Exchange Commission.
"Securities Act": The Securities Act of 1933, as amended, and the rules
and regulations thereunder.
"Underwritten registration" or "underwritten offering": A registration in
which securities of the Company are sold pursuant to a firm commitment
underwriting.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT.
(a) HOLDERS OF REGISTRABLE SECURITIES. A Person is deemed to be a holder
of Registrable Securities whenever that Person owns, directly or beneficially,
or has the right to acquire Registrable Securities, disregarding any legal
restrictions upon the exercise of that right.
(b) MAJORITY OF REGISTRABLE SECURITIES. As used in this Agreement, the
term "majority of the Registrable Securities" means 51% or more of the
Registrable Securities being registered unless the context indicates that it is
51% or more of the Registrable Securities then issued and outstanding.
SECTION 3. DEMAND REGISTRATION.
(a) REQUESTS FOR REGISTRATION. Subject to the provisions of this SECTION
3, at any time on or after January 1, 1997, the holders of 50% or more of the
then
-2-
<PAGE>
outstanding Registrable Securities may demand that the Company register all or
part of their Registrable Securities under the Securities Act (a "Demand
Registration") on Forms S-1, S-2 or S-3 (or similar forms then in effect or such
other form as the Company and such holders shall agree) promulgated by the SEC
under the Securities Act. Within ten days after receipt of a demand, the
Company will notify in writing all holders of Registrable Securities of the
demand. Any holder who wants to include his or its Registrable Securities in
the Demand Registration must notify the Company within ten business days of
receiving the notice of the Demand Registration. Except as provided in this
SECTION 3, the Company will include in all Demand Registrations all Registrable
Securities for which the Company receives timely written demands for inclusion.
All demands made pursuant to this SECTION 3(a) must specify the number of
Registrable Securities to be registered and the intended method of disposing of
the Registrable Securities. The Company will not be required to file more than
two Demand Registrations pursuant to this Agreement. The Company will not be
required to file more than one Demand Registration during any 18 month period
and will not be required to keep a Demand Registration effective for more than
90 days.
(b) FORM OF REGISTRATION. The Demand Registration will be on Form S-3
whenever the Company is permitted to use such form, unless the holders of a
majority of the Registrable Securities or the underwriter reasonably request
registration on an expanded form. The Company will use its reasonable best
efforts to qualify for registration on Form S-3.
(c) REGISTRATION EXPENSES. The Company will pay all Registration Expenses
for two Demand Registrations pursuant to this Agreement.
(d) SELECTION OF UNDERWRITERS. The holders of a majority of the
Registrable Securities requested to be included in the Demand Registration shall
select the investment banker(s) and manager(s) that will administer the
offering, as long as the investment banker(s) and manager(s) are reasonably
satisfactory to the Company, and the Company shall enter into a customary
underwriting agreement with those investment banker(s) and manager(s).
(e) PRIORITY ON DEMAND REGISTRATIONS. If the managing underwriter gives
the Company and the holders of the Registrable Securities being registered a
written opinion that the number of Registrable Securities requested to be
included exceeds the number of securities that can be sold, the Company will
include in the registration only the number of Registrable Securities that the
underwriters believe can be sold. The number of securities registered shall be
allocated pro rata among the holders of the Registrable Securities on the basis
of the total number of Registrable Securities requested to be included in the
registration. In addition, if the managing underwriter shall advise the
Company, in writing or otherwise, that
-3-
<PAGE>
an underwriters' over-allotment option, not in excess of 15% of the total
offering to be so effected, is necessary or desirable for the marketing of such
offering, all Registrable Securities which are to be included in such offering
pursuant to this SECTION 3(e) shall be allocated pro rata to the primary portion
of such offering and the underwriters' over-allotment portion on the basis of
the total number of Registrable Securities requested to be included in the
registration.
(f) DELAY IN FILING. The Company may delay the filing of the registration
statement in connection with a Demand Registration for a period of not more than
120 days upon the advice of the investment banker(s) and manager(s) that will
administer the offering that a delay is necessary or appropriate under the
circumstances. The Company may not use this right to delay more than once
during the term of this Agreement.
(g) LIMITED PIGGYBACK RIGHT ON DEMAND REGISTRATIONS.
(1) Whenever the holders of Registrable Securities demand a Demand
Registration, the Company may notify in writing the other holders of
securities of the same type as the Registrable Securities, that are to be
registered not later than the earlier to occur of (i) the 5th day following
the Company's receipt of notice of exercise of the Demand Registration right
or (ii) 45 days prior to the anticipated filing date.
(2) The Company may include securities of the same type and
class of other holders in the Demand Registration, unless the managing
underwriter gives the Company its written opinion that a portion of
the total number or dollar amount of securities requested to be
included cannot be sold. If the number or dollar amount of securities
requested to be sold exceeds the amount that in the opinion of the
managing underwriter can be sold, the Company will include in the
registration: (i) first, all Registrable Securities; and (ii) second,
up to the full number or dollar amount of securities requested to be
included in the registration in excess of the number or dollar amount
of Registrable Securities to be registered (allocated pro rata among
the holders of the securities in such proportions as the Company and
those holders may agree). In the event that the managing underwriter
advises the Company that an underwriters' over-allotment option is
necessary or advisable, the preceding priority shall apply to the
determination of which securities are to be included in the primary
portion of such registration.
-4-
<PAGE>
(3) The holders of securities (including the Company) other than
Registrable Securities to be registered pursuant to this SECTION 3(g) shall
enter into the same agreement with the managing underwriter as do the
holders of the Registrable Securities, which agreement may contain or
require, if so determined by the managing underwriter, provisions or
agreements requiring the holders of Registrable Securities and/or such other
holders to deliver the Registrable Securities or other securities to be so
registered to the managing underwriter pursuant to an escrow arrangement and
to deliver powers of attorney on behalf of such holders.
(4) If any of the holders of any other securities of the Company
register those securities in a Demand Registration in accordance with this
SECTION 3(g), those holders shall pay the fees and expenses of their counsel
and their pro rata share of the Registration Expenses not paid by the
Company for any reason.
SECTION 4. PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register any of
its securities under the Securities Act (except for the registration of
securities to be offered pursuant to an employee benefit plan on Form S-8,
pursuant to a registration made on Form S-4 or any successor forms then in
effect) at any time other than pursuant to a Demand Registration and the
registration form to be used may be used for the registration of the Registrable
Securities (a "Piggyback Registration"), it will so notify in writing all
holders of Registrable Securities not later than the earlier to occur of (i) the
5th day following the Company's receipt of notice of exercise of other demand
registration rights, or (ii) 30 days prior to the anticipated filing date.
Subject to the provisions of SECTIONS 4(c) and 4(d), the Company will include in
the Piggyback Registration all Registrable Securities, on a pro rata basis based
upon the total number of outstanding Common Shares on a fully diluted basis,
with respect to which the Company has received written requests for inclusion
within 15 business days after the applicable holder's receipt of the Company's
notice. Such Registrable Securities may be made subject to an underwriters'
over-allotment option, if so requested by the managing underwriter. The holders
of Registrable Securities may withdraw all or any part of the Registrable
Securities from a Piggyback Registration at any time before ten business days
prior to the effective date of the Piggyback Registration. The Company, the
holders of Registrable Securities and any Person who hereafter becomes entitled
to register its securities in a registration initiated by the Company must sell
their securities on the same terms and conditions. A registration of
Registrable Securities pursuant to this SECTION 4 shall not be counted as a
Demand Registration under SECTION 3.
-5-
<PAGE>
(b) PIGGYBACK EXPENSES. The Company shall pay for the holders of the
Registrable Securities included in a Piggyback Registration all Registration
Expenses of those holders (except to the extent prohibited by applicable state
securities laws).
(c) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company and the managing
underwriter gives the Company its written opinion that the total number or
dollar amount of securities requested to be included in the registration exceeds
the number or dollar amount of securities that can be sold, the Company will
include the securities in the registration in the following order of priority:
first, all securities the Company proposes to sell; second, up to the full
number or dollar amount of Registrable Securities requested to be included in
the registration (allocated pro rata among the holders of Registrable Securities
on the basis of the dollar amount or number of Registrable Securities requested
to be included, as the case may be); and third, any other securities (provided
they are of the same class as the securities sold by the Company) requested to
be included, allocated among the holders of the securities in such proportions
as the Company and those holders may agree. In the event that the managing
underwriter advises the Company that an underwriters' over-allotment option is
necessary or advisable, the preceding priority shall apply to the determination
of which securities are to be included in the primary portion of such
registration.
(d) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration is
an underwritten secondary registration on behalf of holders of the Company's
securities who hereafter obtain registration rights from the Company in
accordance with SECTION 11(i), and the managing underwriter gives the Company
its written opinion that the dollar amount or number of securities requested to
be included in the registration exceeds the dollar amount or number of
securities that can be sold, the Company will include in the registration: (1)
to the extent of 50% of the number or dollar amount of securities other than
Registrable Securities that in the underwriter's opinion can be sold, the
securities requested to be included in the registration, allocated among the
holders of those securities in such proportions as the Company and those holders
may agree; and (2) to the extent of the balance, the Registrable Securities
requested to be included, allocated pro rata among the holders of Registrable
Securities on the basis of the dollar amount or number of securities (as the
case may be) requested to be included. If after including all of the
Registrable Securities the underwriters determine that there are additional
securities that can be sold, then securities other than Registrable Securities
may be added to the registration. In the event that the managing underwriter
advises the Company that an underwriters' over-allotment option is necessary or
advisable, the preceding priority shall apply to the determination of which
securities are to be included in the primary portion of such registration.
-6-
<PAGE>
(e) SELECTION OF UNDERWRITERS. If any Piggyback Registration is an
underwritten offering, the Company will select the investment banker(s) and
manager(s) that will administer the offering, as long as the investment
banker(s) and manager(s) are reasonably satisfactory to the holders of a
majority of the Registrable Securities, and shall enter into a customary
underwriting agreement with the investment banker(s) and manager(s).
(f) OTHER REGISTRATIONS. The Company agrees that after filing a
registration statement with respect to Registrable Securities pursuant to
SECTION 3 or this SECTION 4 that has not been withdrawn or abandoned, the
Company will not register any of its equity securities or securities convertible
or exchangeable into or exercisable for its equity securities under the
Securities Act, whether on its own behalf or at the request of any holder of
those securities until at least three months have elapsed from the effective
date of the previous registration, and the parties hereto agree that the Company
will not be required to effect any such registration notwithstanding the other
provisions of this Agreement. This three-month hiatus does not apply to
registrations of securities to be issued in connection with employee benefit
plans, to permit exercise or conversions of previously issued options, warrants,
or other convertible securities, or in connection with a Demand Registration.
SECTION 5. HOLDBACK AGREEMENTS.
(a) RESTRICTIONS ON PUBLIC SALE BY SECURITIES HOLDERS. Each holder of
Registrable Securities whose securities are included in a registration statement
agrees not to make any public sale or distribution of equity securities of the
Company (except as part of the underwritten registration or pursuant to
registration on Form S-8 or any successor form), including a sale pursuant to
Rule 144, during the seven days prior to and the 180 days after the effective
date of such registration statement unless the managing underwriters agree
otherwise.
(b) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY AND OTHERS. The Company
agrees not to make any public sale or distribution of its equity securities, or
any securities convertible into or exchangeable or exercisable for its equity
securities, including a sale under Regulation D under the Securities Act or
under any other exemption of the Securities Act (except as part of the
underwritten registration or pursuant to registrations on Forms S-8 or S-4 or
any successor form), during the seven days prior to and the 180 days after the
effective date of any underwritten Demand Registration or any underwritten
Piggyback Registration unless the managing underwriters agree otherwise. The
Company also agrees to use reasonable efforts to cause each holder of at least
5% (on a fully-diluted basis) of its equity securities (other than Registrable
Securities) or any securities convertible
-7-
<PAGE>
into or exchangeable or exercisable for its equity securities (other than
Registrable Securities), purchased from the Company at any time on or after the
date of this Agreement (other than in a registered public offering) to agree not
to make any public sale or distribution of those securities, including a sale
pursuant to Rule 144 (except as part of the underwritten registration, if
permitted), during the seven days prior to and the 180 days after the effective
date of the registration unless the managing underwriter agrees otherwise.
SECTION 6. REGISTRATION PROCEDURES.
(a) Whenever the holders of Registrable Securities request the
registration of any Registrable Securities pursuant to this Agreement, the
Company shall use its best efforts to register and to permit the sale of the
Registrable Securities in accordance with the intended method of disposition.
To carry out this obligation, the Company shall, as expeditiously as possible:
(1) prepare a registration statement on the appropriate form; at
least ten days before filing a registration statement or prospectus or at
least three business days before filing any amendments or supplements
thereto including Registrable Securities, furnish to the counsel for the
holders of a majority of the Registrable Securities being registered copies
of all documents proposed to be filed for that counsel's review and
approval, which approval shall not be unreasonably withheld or delayed;
file the registration statement with the SEC and use its best efforts to
cause the registration statement to become effective;
(2) notify immediately each seller of Registrable Securities of any
stop order threatened or issued by the SEC and take all actions reasonably
required to prevent the entry of a stop order or if entered to have it
rescinded or otherwise removed;
(3) prepare and file with the SEC such amendments and supplements
to the registration statement and the corresponding prospectus necessary to
keep the registration statement effective for 90 days or such shorter period
as may be required to sell all Registrable Securities covered by the
registration statement; and comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by the
registration statement during each period in accordance with the sellers'
intended methods of disposition as set forth in the registration statement;
(4) furnish to each seller of Registrable Securities a sufficient
number of copies of the registration statement, each amendment and
-8-
<PAGE>
supplement thereto (in each case including all exhibits), the corresponding
prospectus (including each preliminary prospectus), and such other
documents as a seller may reasonably request to facilitate the disposition
of the seller's Registrable Securities;
(5) use its best efforts to register or qualify the Registrable
Securities under securities or blue sky laws of jurisdictions in the United
States of America as any seller requests and will do any and all other
reasonable acts and things that may be necessary or advisable to enable the
seller to consummate the disposition of the seller's Registrable Securities
in such jurisdictions; PROVIDED, HOWEVER, that the Company shall not be
obligated to qualify as a foreign corporation to do business under the laws
of any jurisdiction in which it is not then qualified to file any general
consent to service or process;
(6) notify each seller of Registrable Securities, at any time when
a prospectus is required to be delivered under the Securities Act, of any
event as a result of which the prospectus or any document incorporated
therein by reference contains an untrue statement of a material fact or
omits to state any material fact necessary to make the statements therein
not misleading, and will prepare a supplement or amendment to the prospectus
or any such document incorporated therein by reference so that thereafter
the prospectus will not contain an untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein not
misleading;
(7) cause all registered Registrable Securities to be listed on
each securities exchange, if any, on which similar securities issued by the
Company are then listed;
(8) provide an institutional transfer agent and registrar and a
CUSIP number for all Registrable Securities on or before the effective date
of the registration statement;
(9) enter into such customary agreements (including an underwriting
agreement in customary form) and take all other actions in connection with
those agreements as the holders of the Registrable Securities being
registered or the underwriters, if any, reasonably request to expedite or
facilitate the disposition of the Registrable Securities;
(10) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant
-9-
<PAGE>
to the registration statement, and any attorney, accountant, or other agent
of any seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all information requested by
any seller, underwriter, attorney, accountant or agent in connection with
the registration statement; provided that an appropriate confidentiality
agreement is executed by any such seller, underwriter, attorney, accountant
or other agent;
(11) in connection with any underwritten offering, obtain a
"comfort" letter from the Company's independent public accountants in
customary form and covering those matters customarily covered by "comfort"
letters as the holders of the Registrable Securities being registered or the
managing underwriter reasonably requests (and the letter shall be addressed
to holders of the Registrable Securities, the Company and the underwriters);
(12) furnish, at the request of any holder of Registrable Securities
being registered, an opinion of the counsel representing the Company for the
purposes of the registration, in the form and substance customarily given to
underwriters in an underwritten public offering and reasonably satisfactory
to the counsel representing the holders of Registrable Securities being
registered, addressed to the underwriters, if any, and to the holders of
Registrable Securities being registered; and
(13) use its best efforts to comply with all applicable rules and
regulations of the SEC and make available to its security holders, as soon
as reasonably practicable, an earnings statement complying with the
provisions of Section 11(a) of the Securities Act and covering the period of
at least twelve months, but not more than eighteen months, beginning with
the first month after the effective date of the Registration Statement.
(b) From time to time, the Company may require each seller of Registrable
Securities subject to the registration to furnish to the Company information
regarding the distribution of the securities subject to the registration.
(c) Each holder of Registrable Securities agrees by acquisition of those
securities that, upon receipt of any notice from the Company of any event of the
kind described in SECTION 6(a)(6), the holder will discontinue disposition of
Registrable Securities until the holder receives copies of the supplemented or
amended prospectus contemplated by SECTION 6(a)(6). In addition, if the Company
requests,
-10-
<PAGE>
the holder will deliver to the Company (at the Company's expense) all copies,
other than permanent file copies then in the holder's possession, of the
prospectus covering the Registrable Securities current at the time of receipt of
the notice. If the Company gives any such notice, the time period mentioned in
SECTION 6(A)(3) shall be extended by the number of days elapsing between the
date of notice and the date that each seller receives the copies of the
supplemented or amended prospectus contemplated by SECTION 6(a)(3).
(d) Whenever the holders of Registrable Securities have requested that any
Registrable Securities be registered pursuant to this Agreement, those holders
shall notify the Company, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any
event, which as to any holder of Registrable Securities is (i) to his or its
respective knowledge and (ii) uniquely within his or its respective knowledge
and (iii) solely as to matters concerning that holder of the Registrable
Securities, as a result of which the prospectus included in the registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading.
SECTION 7. REGISTRATION EXPENSES.
(a) All Registration Expenses incident to the Company's performance of or
compliance with this Agreement shall be paid as provided in this Agreement. The
term "Registration Expenses" includes without limitation all registration filing
fees, professional fees and other expenses of compliance with federal, state and
other securities laws (including fees and disbursements of counsel for the
underwriters in connection with state or other securities law qualifications and
registrations), printing expenses, messenger, telephone and delivery expenses;
reasonable fees and disbursements of counsel for the Company and for one counsel
for the sellers of the Registrable Securities (subject to the provisions of
SECTION 7(b)); reasonable fees and disbursements of all independent certified
public accountants (including the expenses of any audit or "comfort" letters
required by or incident to performance of the obligations contemplated by this
Agreement); fees and expenses of the underwriters (excluding discounts and
commissions); fees and expenses of any special experts retained by the Company
at the request of the managing underwriters in connection with the registration;
and fees and expenses of other Persons retained by the Company in connection
with the registration. The term "Registration Expenses" does not include the
Company's internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit and the fees and expenses incurred in connection
with the listing of the securities to be registered on each securities exchange
on which similar securities issued by the Company are then listed, all of which
shall be paid by the Company.
-11-
<PAGE>
(b) In connection with each registration for which the Company is required
to pay the Registration Expenses of the holders of Registrable Securities, the
Company will promptly reimburse those holders for the reasonable fees and
disbursements of one law firm, selected by the holders of a majority of the
Registrable Securities, to serve as counsel to all the holders.
(c) To the extent the Company is not required to pay Registration
Expenses, each holder of securities included in any registration will pay those
Registration Expenses allocable to the holder's securities so included, and any
Registration Expenses not allocable will be borne by all sellers in proportion
to the number of securities each registers.
SECTION 8. INDEMNIFICATION.
(a) INDEMNIFICATION BY COMPANY. In the event of any registration of
Registrable Securities under the Securities Act pursuant to this Agreement, to
the full extent permitted by law, the Company agrees to indemnify each holder of
Registrable Securities, its officers and directors, and each Person who controls
the holder (within the meaning of the Securities Act and the Exchange Act)
against all losses, claims, damages, liabilities and expenses caused by any
untrue or allegedly untrue statement of material fact contained in any
registration statement under which such Registrable Securities were registered
under the Securities Act, any prospectus or preliminary prospectus contained
therein or any omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except to the extent the untrue statement or omission resulted from information
that the holder furnished in writing to the Company expressly for use therein,
or caused by the holder's failure to deliver information required to be included
therein or by the holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto to any
purchaser after the Company has furnished the holder with a sufficient number of
copies of the relevant documents. In connection with a firm or best efforts
underwritten offering, to the extent customarily required by the managing
underwriter, the Company will indemnify the underwriters, their officers and
directors and each Person who controls the underwriters (within the meaning of
the Securities Act and the Exchange Act), to the extent customary in such
agreements.
(b) INDEMNIFICATION BY HOLDERS OF SECURITIES. In connection with any
registration statement, each participating holder of Registrable Securities will
furnish to the Company in writing such information and affidavits as the Company
reasonably requests for use in connection with any registration statement or
prospectus, and each holder agrees to indemnify, to the extent permitted by law,
the
-12-
<PAGE>
Company, its directors and officers, and each Person who controls the Company
(within the meaning of the Securities Act and the Exchange Act) against any
losses, claims, damages, liabilities and expenses resulting from any untrue or
allegedly untrue statement of a material fact or any omission or alleged
omission of a material fact required to be stated in the registration statement
or prospectus or any amendment thereof or supplement thereto necessary to make
the statements therein not misleading, but only to the extent that the untrue
statement or omission is contained in or omitted from any information or
affidavit the holder furnished in writing, or resulting from the holder's
failure to deliver information required to be included therein or to deliver a
copy of the registration statement or prospectus or any amendments or
supplements thereto to any purchaser after the Company has furnished the holder
with a sufficient number of copies of the relevant documents.
(c) INDEMNIFICATION PROCEEDINGS. Any Person entitled to indemnification
under this Agreement will (i) give prompt notice to the indemnifying party of
any claim with respect to which it seeks indemnification and (ii) unless in the
indemnified party's reasonable judgment a conflict of interest may exist between
the indemnified and indemnifying parties with respect to the claim, permit the
indemnifying party to assume the defense of the claim with counsel reasonably
satisfactory to the indemnified party. If the indemnifying party does not
assume the defense, the indemnifying party will not be liable for any settlement
made without its consent (but that consent may not be unreasonably withheld).
No indemnifying party will consent to entry of any judgment or will enter into
any settlement that does not include as an unconditional term the claimant's or
plaintiff's release of the indemnified party from all liability concerning the
claim or litigation. An indemnifying party who is not entitled to or elects not
to assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by the
indemnifying party with respect to the claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between the
indemnified party and any other indemnified party with respect to the claim, in
which event the indemnifying party shall be obligated to pay the fees and
expenses of additional counsel.
(d) CONTRIBUTION. If the indemnification provided for in SECTION 8(a) or
(b) is unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or expenses referred to therein, then each indemnifying
party thereunder shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities in
such proportion as is appropriate to reflect the relative fault of the Company
and the participating holders of Registrable Securities in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative fault of the Company and the participating
-13-
<PAGE>
holders of Registrable Securities shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the participating holders of
Registrable Securities and the parties' relative intent and knowledge.
The parties hereto agree that it would not be just and equitable if
contribution pursuant this SECTION 8(d) were determined by pro rata allocation
or by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph.
Notwithstanding anything herein to the contrary, no participating holder of
Registrable Securities shall be required to contribute any amount in excess of
the amount by which the net proceeds of the offering (before deducting expenses,
if any) received by such participating holder exceeds the amount of any damages
that such participating holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled contribution from any person who
was not guilty of such fraudulent misrepresentation.
SECTION 9. RULE 144.
(a) If the Company files a registration statement pursuant to the
requirements of the Securities Act or Section 12 of the Exchange Act, the
Company covenants that it will file the reports required to be filed by it under
the Securities Act and the Exchange Act and the rules and regulations adopted by
the SEC thereunder, and it will take such further action as any holder of
Registrable Securities reasonably may request, all to the extent required from
time to time, to enable the holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (i) Rule 144 under the Securities Act as amended from time to time,
or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the
request of any holder of Registrable Securities, the Company will deliver to the
holder a written statement as to whether it has complied with the requirements
of Rule 144 or any successor rule.
(b) If any proposed sale of Registrable Securities may be effected by the
holders thereof pursuant to Rule 144(k) without any adverse effect on the
proposed sale, including without limitation the contemplated sale price or the
quantity of Registrable Securities to be sold, then the holders of the
Registrable Securities covenant to rely upon Rule 144(k) in the sale thereof in
lieu of requesting a Demand Registration; PROVIDED, HOWEVER, the holders of
Registrable Securities shall not be obligated to take any action so that they
are eligible to use or rely upon Rule 144(k) in connection with any sale or
distribution.
-14-
<PAGE>
SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may
participate in any underwritten registration without (a) agreeing to sell
securities on the basis provided in underwriting arrangements approved by the
persons entitled hereunder to approve such arrangements (the holders of the
Registrable Securities in a Demand Registration pursuant to SECTION 3(d) and the
Company in a piggyback registration pursuant to SECTION 4(e)), and (b)
completing and executing all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required by the underwriting
arrangements.
SECTION 11. MISCELLANEOUS.
(a) AMENDMENT. This Agreement may be amended or modified only by a
written agreement executed by the Company and the holders of a majority of the
Registrable Securities then issued and outstanding.
(b) ATTORNEYS' FEES. In any legal action or proceeding brought to enforce
any provision of this Agreement, the prevailing party shall be entitled to
recover all reasonable expenses, charges, court costs and attorneys' fees in
addition to any other available remedy at law or in equity.
(c) BENEFIT OF PARTIES; ASSIGNMENT. All of the terms and provisions of
this Agreement shall be binding on and inure to the benefit of the parties and
their respective successors and assigns, including without limitation all
subsequent holders of Registrable Securities entitled to the benefits of this
Agreement who agree in writing to become bound by the terms of this Agreement;
PROVIDED, HOWEVER, the Company may not transfer or assign its rights or
obligations under this Agreement.
(d) CAPTIONS. The captions of the sections and subsections of this
Agreement are solely for convenient reference and shall not be deemed to affect
the meaning or interpretation of any provision of this Agreement.
(e) COOPERATION. The parties agree that after execution of this Agreement
they will from time to time, upon the request of any other party and without
further consideration, execute, acknowledge and deliver in proper form any
further instruments and take such other action as any other party may reasonably
require to carry out effectively the intent of this Agreement.
(f) COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
-15-
<PAGE>
(g) ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties with respect to the subject matter of this Agreement. There are no
promises, covenants or undertakings other than those expressly set forth or
provided for in this Agreement.
(h) GOVERNING LAW AND CHOICE OF FORUM. The internal law of the State of
Ohio will govern the interpretation, construction and enforcement of this
Agreement and all transactions and agreements contemplated hereby,
notwithstanding any state's choice of law rules to the contrary. Any litigation
related to this Agreement may be maintained only in the federal district court
for the Southern District of Ohio, Columbus Division (or any successor
jurisdiction) or in an Ohio state court in Franklin County, and each party
hereby irrevocably consents and submits in the jurisdiction of that federal or
state court and irrevocably waives any objection the party may have based upon
improper venue, FORUM NON CONVENIENS or other similar doctrines or rules.
(i) NO INCONSISTENT AGREEMENTS. Except with the prior written consent of
the holders of a majority of the Registrable Securities then issued and
outstanding, the Company will not enter into any agreement with respect to its
securities that shall grant to any Person registration rights that in any way
conflict with, or have priority over, the rights provided under this Agreement.
(j) NOTICES. All notices, requests, demands or other communications that
are required or may be given pursuant to the terms of this Agreement shall be in
writing and delivery shall be deemed sufficient in all respects and to have been
duly given on the date of service if delivered personally to the party to whom
notice is to be given, or on the third day after mailing if mailed by first
class mail - return receipt requested, postage prepaid, and properly addressed
to the addresses set forth in the Investment Agreement or to such other
address(es) as the respective parties hereto shall from time to time designate
to the other(s) in writing.
(k) SPECIFIC PERFORMANCE. Each of the parties agrees that damages for a
breach of or default under this Agreement would be inadequate and that in
addition to all other remedies available at law or in equity the parties and
their successors and assigns shall be entitled to specific performance or
injunctive relief, or both, in the event of a breach or a threatened breach of
this Agreement.
(l) VALIDITY OF PROVISIONS. Should any part of this Agreement for any
reason be declared by any court of competent jurisdiction to be invalid, that
decision shall not affect the validity of the remaining portion, which shall
continue in full force and effect as if this Agreement had been executed with
the invalid portion eliminated, it being the intent of the parties that they
would have executed the remaining
-16-
<PAGE>
portion of the Agreement without including any part or portion that may for any
reason be declared invalid.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above.
KARRINGTON HEALTH, INC.
By /s/Alan B. Satterwhite
------------------------------
Alan B. Satterwhite
Chief Operating Officer and
Chief Financial Officer
JMAC, INC.
By /s/Michael H. Thomas
-------------------------------
Michael H. Thomas
Executive Vice President and Treasurer
/s/Richard R. Slager
-------------------------------
Richard R. Slager
/s/Alan B. Satterwhite
-------------------------------
Alan B. Satterwhite
/s/Gregory M. Barrows
-------------------------------
Gregory M. Barrows
-17-
<PAGE>
REORGANIZATION AGREEMENT
This Reorganization Agreement is made to be effective as of May 8,
1996, by and among JMAC, Inc., an Ohio corporation ("JMAC"), Richard R. Slager
("Slager"), Alan B. Satterwhite ("Satterwhite") and Gregory M. Barrows
("Barrows") (each sometimes hereinafter an "INVESTOR" and collectively the
"INVESTORS"), and Karrington Health, Inc., an Ohio corporation ("ISSUER");
WITNESSETH:
WHEREAS, JMAC is the sole shareholder of JMAC Properties, Inc. ("JMAC
Properties"), an Ohio corporation and the holder of two-thirds of the equity
interests in Karrington Operating Company, an Ohio general partnership
("Karrington Operating"); and
WHEREAS, Slager, Satterwhite and Barrows are all of the shareholders
of DevelopMed Associates, Inc. ("DMA"), an Ohio corporation and the holder of
one-third of the equity interests in Karrington Operating; and
WHEREAS, Satterwhite is a party to a Subscription Agreement dated
April 10, 1996 (the "Subscription Agreement") pursuant to which he has
subscribed for and agreed to purchase one Common Share of ISSUER; and
WHEREAS, the parties hereto have agreed, subject to the terms and
conditions set forth herein, that ISSUER shall acquire from the INVESTORS all of
the issued and outstanding securities of JMAC Properties and DMA in exchange
for 4,350,000 common shares of ISSUER, in a transaction satisfying the
requirements of Section 351 of the Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, in consideration of the premises contained herein, the
INVESTORS and the ISSUER hereby make the following agreement, intending to be
legally bound thereby:
(1) Immediately prior to the effectiveness of a registration
statement relating to an initial public offering of the common shares of ISSUER,
the undersigned INVESTORS shall transfer and convey to ISSUER all of the issued
and outstanding common shares of JMAC Properties and DMA owned by them in
exchange for the number of common shares of ISSUER set forth opposite each
INVESTOR'S signature below (the "SHARES") on the terms and subject to the
conditions set forth herein. Upon delivery of certificates evidencing the common
shares of JMAC Properties and DMA, duly endorsed for transfer to ISSUER at its
principal executive offices, ISSUER shall cause its transfer agent to issue
certificates to the INVESTORS representing the SHARES.
<PAGE>
(2) Contemporaneously with the share exchange contemplated by Section
(1), the Subscription Agreement shall terminate.
(3) JMAC hereby represents and warrants to ISSUER that:
(A) It owns all of the issued and outstanding common shares
of JMAC Properties, of record and beneficially, and is transferring
such common shares to ISSUER free and clear of all liens, claims,
encumbrances and rights of others;
(B) JMAC Properties owns two-thirds of the equity interests
in Karrington Operating, of record and beneficially, free and clear of
all liens, claims, encumbrances and rights of others;
(C) There are no outstanding subscriptions, options,
warrants, convertible rights or other rights to purchase or acquire
any additional securities of JMAC Properties or Karrington Operating;
and
(D) It has full power and authority to enter into this
Reorganization Agreement and to transfer the common shares of JMAC
Properties to ISSUER.
(4) Slager, Satterwhite and Barrows represent and warrant that:
(A) They own all of the issued and outstanding common
shares of DMA, of record and beneficially, and are transferring such
common shares to ISSUER free and clear of all liens, claims,
encumbrances and rights of others;
(B) DMA owns one-third of the equity interests in
Karrington Operating, of record and beneficially, free and clear of
all liens, claims, encumbrances and rights of others;
(C) There are no outstanding subscriptions, options,
warrants, convertible rights or other rights to purchase or acquire
any additional securities of DMA or Karrington Operating; and
(D) Each of them has full power and authority to enter into
this Reorganization Agreement and to transfer the common shares of DMA
owned by him to ISSUER.
(5) Each INVESTOR hereby acknowledges, represents and warrants to
ISSUER that:
2
<PAGE>
(A) INVESTOR is purchasing the SHARES for the purpose of
investment and has no present intention of selling, transferring or
otherwise distributing the SHARES, except in compliance with
applicable securities laws;
(B) INVESTOR has such knowledge and experience in financial
and business matters that it (or he) is capable of evaluating the
merits and risks of its (or his) investment in the SHARES;
(C) INVESTOR is aware that (i) the SHARES have not been
registered under the Securities Act of 1933 (the "Act") and (ii) the
SHARES cannot be sold, transferred, pledged or otherwise distributed
by INVESTOR unless a registration statement registering the SHARES
under the Act has been filed with the Securities and Exchange
Commission and has become effective or unless the SHARES are sold or
otherwise distributed in a transaction in respect of which ISSUER has
previously received an opinion of counsel, satisfactory to ISSUER,
stating that such registration is not required; and
(D) ISSUER may prevent transfer and registration of
transfer of the SHARES unless ISSUER shall have received an opinion
from counsel satisfactory to it to the effect that any such transfer
would not violate the Act or the applicable laws of any state. ISSUER
may cause each certificate evidencing the SHARES to bear a legend
reflecting all applicable restrictions on transfer.
(6) This Reorganization Agreement shall terminate only upon the
occurrence of either of the following events: (A) consummation of the share
exchange contemplated by Section 1 hereof or (B) failure of a registration
statement for an initial public offering of common shares to become effective
by December 31, 1996.
(7) This Reorganization Agreement shall be construed in accordance
with and governed in all respects by the laws of the State of Ohio.
(8) This Reorganization Agreement may not be assigned by any party.
3
<PAGE>
IN WITNESS WHEREOF, this Reorganization Agreement has been executed as
of the date first above written.
ISSUER:
KARRINGTON HEALTH, INC.
By /S/Alan B. Satterwhite
----------------------
Alan B. Satterwhite
Chief Operating Officer and
Chief Financial Officer
INVESTORS: NUMBER OF SHARES:
JMAC, Inc. 2,900,000
By /S/Michael H. Thomas
--------------------
Michael H. Thomas,
Executive Vice President and Treasurer
/S/Richard R. Slater
- --------------------
Richard R. Slager 717,750
/S/Alan B. Satterwhite
- ----------------------
Alan B. Satterwhite 717,750
/S/Gregory M. Barrows
- ---------------------
Gregory M. Barrows 14,500
4
<PAGE>
Exhibit 16.1
May 10, 1996
Securities and Exchange Commission
Mail Stop 9-5
450 5th Street, N.W.
Washington, D.C. 20549
Dear Sirs/Madams:
We have read and agree with the comments under the heading "Change in
Accountants" appearing in the Prospectus, which is a part of the Registration
Statement on Form S-1 of Karrington Health, Inc. as filed with the Securities
and Exchange Commission on May 10, 1996.
Yours truly,
/s/ DELOITTE & TOUCHE LLP
<PAGE>
Exhibit 23.1
Consent
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 19, 1996 (except for Notes 9 and 10 as to which
the date is ______________, 1996), in the Registration Statement (Form S-1) and
related Prospectus of Karrington Health, Inc., dated May 10, 1996.
Columbus, Ohio
_____________________________________________________________________
The foregoing consent is in the form that will be signed upon the completion of
the reorganization of the Company as described in Note 9 to the financial
statements.
/s/ ERNST & YOUNG LLP
Columbus, OH
May 10, 1996
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Karrington Health, Inc.
on Form S-1 of our report on Karrington Operating Company (a partnership) dated
January 24, 1995, appearing in the Prospectus, which is part of this
Registration Statement and to the reference to us under the heading "Experts" in
such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
May 10, 1996