<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1996
REGISTRATION NO. 333-03491
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
KARRINGTON HEALTH, INC.
(Exact name of Registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
OHIO 8361 31-1461482
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
------------------------
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. / /
------------------------
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
<TABLE>
<CAPTION>
FORM S-1
ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
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
</TABLE>
<PAGE>
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>
SUBJECT TO COMPLETION, DATED JUNE 16, 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. The Common Shares have been approved for
quotation on the Nasdaq National Market under the symbol "KARR."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-MISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDER
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total (3) $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $ , all of which will be paid by
the Company.
(3) The Company and the Selling Shareholder each have granted to the
Underwriters a 30-day option to purchase up to an additional 225,000 Common
Shares on the same terms as set forth above to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Shareholder will be $ , $ , $ 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 inside front cover of the Prospectus will contain gate-fold pictures.
The first page of the gatefold is printed over a background which includes the
name of the Company; a graphic representation of the Company's symbol (a
flower); the words: "personal dignity," "health," "excellence," "individuality,"
"quality of life" and "independence"; and three pictures, two of which include
residents and the third of which is of a typical Karrington residence.
The following legend is printed at the bottom of the first gatefold page:
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The second page of the gatefold contains the Karrington symbol over the
words Karrington Health and four photographs as follows: (i) a photograph of a
resident over the caption "Independence"; (ii) a photograph of a resident with
visitors over the caption "Quality of Life"; (iii) a photograph of two residents
over the caption "Personal Dignity"; and (iv) a photograph of a private dining
room in a residence over the caption "Private Dining Room."
The third page of the gatefold contains the Company's Mission Statement:
"Dedicated to Excellence In Preserving and Enhancing Personal Dignity,
Individuality, Independence and Quality of Life" and four photographs as
follows: (i) a photograph of an employee with a scale over the caption "Health &
Wellness"; (ii) a photograph of an ice cream parlor in a residence over the
caption "Ice Cream Parlor-Specialty Alzheimer's Care Residence"; (iii) a
photograph of a resident over the caption "Individuality" and (iv) a photograph
of the Karrington of South Hills residence over the caption "Karrington Of South
Hills, Pittsburgh, Pennsylvania, Opening Summer 1996."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A DISCUSSION OF
CERTAIN FACTORS TO BE CONSIDERED BY PROSPECTIVE INVESTORS.
THE COMPANY
The Company develops, owns and operates private pay, assisted living
residences. Assisted living residences provide housing and care for elderly or
frail individuals who, although generally ambulatory, need assistance with one
or more activities of daily living, such as bathing, grooming, dressing, eating
or personal hygiene.
The Company has developed 15 residences in its target markets, six of which
are open and nine of which are under construction and scheduled to open in late
1996 or the first half of 1997. These 15 residences are located in Ohio,
Pennsylvania, Indiana, Colorado and New Mexico. As part of its nationwide
expansion strategy, the Company has sites for 13 residences under contract in
these states, as well as in Michigan and North Carolina. The Company has begun
predevelopment activities in New York, Kentucky and Illinois.
The prototypical Karrington assisted living model, which has been developed
and refined by the Company since its first residence was opened in 1992, is a
mansion-style residence which houses 60 to 80 residents. Each residence is
typically located in a middle- to upper-income community which has a
well-established population of individuals 75 years of age and older. The
Karrington model combines quality housing, personal care and support services to
provide a cost-effective alternative for individuals with physical frailties or
cognitive disorders, such as Alzheimer's disease, who do not require the regular
skilled medical services provided by nursing facilities. The Karrington model
allows the Company to control development costs, maintain consistent quality and
improve operational effectiveness, while also creating "brand" awareness in the
Company's markets. The Company has been successful in implementing the
Karrington model, with residences open for one year or more having an average
occupancy rate of between 94% and 99% for the 12 months ended December 31, 1994
and 1995 and for the three months ended March 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations."
Karrington residences typically are staffed with licensed nurses on a
24-hour basis and are designed to permit residents to "age in place" within the
residence as they develop further physical or cognitive frailties. The Company
believes that it is able to care for individuals with higher acuity levels
(i.e., those needing greater assistance with activities of daily living) than is
typical in the assisted living industry.
In addition to its own development activities, the Company has entered into
a joint development relationship with Sisters of Charity Health Care System
("SCHCS"), a not-for-profit corporation of which the sole member is Catholic
Health Initiatives ("CHI"). CHI is a large, not-for-profit health organization
formed by the recent consolidation of Catholic Health Corporation, SCHCS and
Franciscan Health Systems. CHI operates 61 hospitals and 50 long-term care
facilities in 20 states and has revenues exceeding $4 billion. The Company and
CHI currently intend to develop and operate assisted living residences with
CHI's health care system. See "Business -- Relationship with CHI."
By the end of 1999, the Company plans to open approximately 45 new
Company-owned residences. The Company also intends to develop a significant
number of jointly-owned residences with CHI, of which five are in various stages
of development. In addition, the Company plans to develop and operate Karrington
Place residences, which are assisted living residences specifically designed for
individuals with Alzheimer's disease and other cognitive disorders, in a
substantial portion of its markets. The Company estimates that newly developed
residences will generally range in cost from $6.0 to 7.5 million. The Company
believes the net proceeds from the offering, existing and future
3
<PAGE>
financing commitments and funds from operations will be sufficient to fund its
development plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources."
The assisted living industry has developed over the past decade to provide a
cost-effective residential alternative for elderly individuals who do not
require the intensive medical attention provided by a skilled nursing facility
but who cannot, or choose not to, live independently due to physical frailty or
cognitive disorders. The assisted living industry has estimated annual revenues
of $12 billion, according to industry analysts, and includes facilities ranging
from "board and care" to full-service assisted living facilities such as those
operated by the Company. The number of individuals in the United States 85 years
of age and older is expected to increase by approximately 43% during the 1990s,
from 3.0 million in 1990 to an estimated 4.3 million in 2000, as compared to
total U.S. population growth of approximately 11% during the same period. It is
further estimated that approximately 57% of the population of persons over age
85 currently need assistance with activities of daily living and that more than
one-half of seniors are likely to develop Alzheimer's disease or other cognitive
disorders by age 85.
The principal components of the Company's operating and growth strategy are
to: (i) develop Karrington model residences in currently-served and new
communities; (ii) expand joint development relationships with major health care
systems across the United States; (iii) continue its focus on providing a broad
range of services to higher acuity residents; and (iv) acquire residences for
conversion to the Karrington model.
THE OFFERING
<TABLE>
<S> <C>
Common Shares being offered by:
The Company................................ 2,350,000 shares (1)
The Selling Shareholder.................... 650,000 shares (1)
Common Shares outstanding after the
offering..................................... 6,700,000 shares (2)
Use of proceeds.............................. To finance the development and acquisition of
additional assisted living residences, to
repay certain indebtedness to the Selling
Shareholder and for working capital and other
general corporate purposes. See "Use of
Proceeds" and "Certain Transactions."
Nasdaq National Market symbol................ KARR
</TABLE>
- ------------------------
(1) Excludes up to 225,000 Common Shares that may be sold by the Company and up
to 225,000 Common Shares that may be sold by the Selling Shareholder
pursuant to the Underwriters' over-allotment option. See "Underwriting."
(2) Does not include (i) up to 225,000 Common Shares that may be sold by the
Company pursuant to the Underwriters' over-allotment option and (ii) 550,000
Common Shares reserved for issuance under the Company's Incentive Stock
Plan. See "Management -- Incentive Stock Plan" and "Underwriting."
------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OPTION TO PURCHASE FROM THE COMPANY AND THE
SELLING SHAREHOLDER UP TO AN AGGREGATE OF 450,000 ADDITIONAL COMMON SHARES TO
COVER OVER-ALLOTMENTS, IF ANY, AND (II) HAS BEEN ADJUSTED TO REFLECT THE
COMPLETION OF THE REORGANIZATION TRANSACTIONS (AS DESCRIBED UNDER "HISTORY AND
ORGANIZATION -- REORGANIZATION TRANSACTIONS"). REFERENCES IN THIS PROSPECTUS TO
THE "COMPANY" REFER COLLECTIVELY TO KARRINGTON HEALTH, INC., ITS SUBSIDIARIES
AND ITS PREDECESSOR ENTITIES.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------ --------------
1993 1994 1995 1995 1996
------ ------- ------- ------ ------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues:
Residence operations.............................................................. $2,288 $ 4,977 $ 6,220 $1,390 $1,822
Development and project management fees........................................... 18 287 524 69 122
------ ------- ------- ------ ------
Total........................................................................... 2,306 5,264 6,744 1,459 1,944
Expenses:
Residence operations.............................................................. 1,908 3,454 4,380 1,069 1,327
General and administrative........................................................ 170 634 1,705 268 575
Depreciation and amortization..................................................... 505 844 980 216 294
Write-off of intangible asset..................................................... -- -- 492 -- --
------ ------- ------- ------ ------
Total........................................................................... 2,583 4,932 7,557 1,553 2,196
------ ------- ------- ------ ------
Operating income (loss)............................................................. (277) 332 (813) (94) (252)
Interest expense.................................................................... (707) (1,350) (1,023) (248) (315)
Equity in net earnings (loss) of unconsolidated entity.............................. -- (17) (105) (51) 16
------ ------- ------- ------ ------
Net loss............................................................................ $ (984) $(1,035) $(1,941) $ (393) $ (551)
------ ------- ------- ------ ------
------ ------- ------- ------ ------
Pro forma net loss per common share (1)............................................. $ (.45) $ (.13)
Pro forma weighted average number of common shares outstanding (in thousands) (1)... 4,350 4,350
OTHER OPERATING DATA:
Residences (end of period) (2)
Open or under construction........................................................ 4 5 10 5 11
Under contract.................................................................... 1 2 8 2 12
Number of units (end of period) (2)
Open or under construction........................................................ 213 272 515 272 576
Under contract.................................................................... 59 128 509 128 784
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA (3) AS ADJUSTED (4)
------- ------------- ---------------
BALANCE SHEET DATA:
<S> <C> <C> <C>
Working capital (deficit)....................................................... $(2,300) $(2,300) $ 1,139
Total assets.................................................................... 30,252 30,252 63,557
Long-term obligations and deferred taxes, less current portion.................. 21,753 22,853 21,790
Equity.......................................................................... 5,290 4,190 38,558
</TABLE>
- ------------------------
(1) Based upon the 4,350,000 pre-offering Common Shares that will be outstanding
following completion of the Reorganization Transactions but prior to this
offering.
(2) Includes residences jointly-owned by the Company and CHI.
(3) Adjusted to reflect the pro forma recognition of a net deferred tax
liability of $1.1 million resulting from the Reorganization Transactions.
See Note 10 to the Company's Consolidated Financial Statements.
(4) Adjusted to reflect the offering made hereby (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 $4.8 million. As a result of expenses incurred in
conducting its development activities for new residences and start up losses
that occur from the time that residences are opened until the occupancy rates of
the residences have stabilized, the Company expects to incur a net loss in 1996
and expects to continue to incur such losses at least through 1997. The
Company's development plan includes a significant number of new residences which
may not achieve break-even results within the expected time frame, and operating
expenses, development and construction costs could exceed expectations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEVELOPMENT ACTIVITY AND CONSTRUCTION PROCESS RISKS
The Company's business, financial condition and results of operations could
be adversely affected if the Company is not successful in achieving its
development objectives. Achieving the Company's plan to open 45 new assisted
living residences during the three year period ending December 31, 1999 is
dependent on numerous factors, many of which the Company is unable to control or
significantly influence, which could adversely affect the Company's growth.
These factors include, but are not limited to: (i) locating sites for new
residences at acceptable costs; (ii) obtaining proper zoning use permits,
development plan approval, authorization and licensing from governmental units
in a timely manner; (iii) obtaining adequate financing under acceptable terms;
and (iv) relying on third-party architects and contractors and the availability
and costs of labor and construction materials, as well as weather. See "Business
- -- Development."
NEED FOR ADDITIONAL FINANCING
To achieve its development plan and growth objectives, the Company must
obtain adequate financial resources. The Company estimates the net proceeds of
this offering, together with its existing financing commitments, will provide
adequate capital to fund the Company's development and construction activities
(separate from its joint development activities with CHI) over the next 18
months, including, as part of its overall development plan, completion of its
four residences under construction and the 13 residences to be developed on the
sites for which the Company has purchase commitments. Additional financing may
be necessary if the plan is modified or if certain assumptions of the
development plan prove to be inaccurate. Even if the net proceeds of this
offering are adequate to fund the Company's development activities during such
period, there is no assurance the Company will generate sufficient operating
cash flow during such time to fund working capital and debt service
requirements. The Company expects to periodically seek additional financing
through a variety of sources, including equity or debt financing, leasing, bank
financing, financing from real estate investment trusts or other methods which,
if equity securities are employed, may result in dilution to the Company's
shareholders. There can be no assurance that future financing will be available
to the Company on acceptable terms, if at all. See "-- Substantial
Indebtedness," "Dilution" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
GOVERNMENT REGULATION
The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities, which requirements vary from state to state. In several
states in which the Company operates or intends to operate, assisted living
residences also require a certificate of need before the facility can be opened.
Like other health care
6
<PAGE>
facilities, assisted living residences are subject to periodic survey or
inspection by governmental authorities. Any failure by the Company to comply
with applicable requirements could have a material adverse effect on the
Company.
Health care is an area of extensive and frequent regulatory change. The
assisted living model for long-term care is relatively new and, accordingly, the
manner and extent to which it is regulated at the federal and state levels is
evolving. Changes in the laws or new interpretations of existing laws may have a
significant effect on methods and costs of doing business.
The success of the Company will depend in part upon its ability to satisfy
applicable regulations and requirements and to procure and maintain required
licenses as the regulatory environment for assisted living evolves. There can be
no assurance that federal, state or local laws or regulatory procedures which
might adversely affect the Company will not be imposed or expanded. See
"Business -- Regulation."
COMPETITION
The long-term care industry is highly competitive. The Company believes the
assisted living sector of the long-term care industry, in which it operates,
will become even more competitive in the future. The Company competes with
numerous other companies providing similar long-term care alternatives such as
home health care agencies, community-based service programs, retirement
communities and convalescent centers, and other assisted living providers. The
Company expects that, as the provision of assisted living services receives
increased attention and the number of states providing reimbursement for
assisted living rises, competition will intensify as a result of new market
entrants. The Company also competes with skilled nursing facilities that provide
long-term care services. In implementing its growth strategy the Company expects
increased competition in its efforts to develop and acquire assisted living
communities. Some of the Company's present and potential competitors are
significantly larger and have, or may obtain, greater financial resources than
those of the Company. Consequently, there can be no assurance the Company will
not encounter increased competition in the future. Such competition could limit
the Company's ability to attract residents or expand its business and therefore
have a material adverse effect on the Company.
STAFFING AND LABOR COSTS
The Company competes with other health care service providers of long-term
care in attracting and retaining qualified and skilled personnel. Shortages of
nurses or other trained personnel may require the Company to enhance its
compensation and benefits program to remain competitive in attracting such
personnel. There can be no assurance the Company's labor costs will not increase
or, if they do, that they can be matched by corresponding increases in revenues.
A significant inability of the Company to attract and retain qualified
employees, to control labor costs or to match increases in its labor expenses
with corresponding increases in revenues could have a material adverse effect on
the Company.
CHALLENGE TO MANAGING RAPID GROWTH AND BUSINESS EXPANSION
The Company expects the number of residences it owns and operates will
increase significantly as it pursues its development and acquisition programs
for new assisted living residences. This growth will place significant demands
on Company management resources. Managing this growth effectively may require
continued expansion of its operational, financial and management information
systems, and the ability to continue to attract, train, motivate, manage and
retain key employees. If the Company is unable to manage growth effectively, it
could be adversely affected. See "Business -- Strategy," "-- Development" and
"Management."
LIABILITY AND INSURANCE
The Company's business in assisted living entails an inherent risk of
liability. In recent years, long-term care providers have become subject to an
increasing number of lawsuits alleging negligence or related legal arguments
which have involved large claims and have been costly to defend. The Company
maintains liability insurance intended to cover such claims, and the Company
believes its
7
<PAGE>
insurance coverage, amounts and deductibles are appropriate based on the risks
of the business, experience and industry standards. There can be no assurance,
however, that any particular claim against the Company will be covered by its
insurance or that claims in excess of the Company's insurance coverage will not
be brought against the Company. The Company's insurance policies must be renewed
annually and there can be no assurance the Company will be able to obtain
liability insurance coverage in the future, or that, if such coverage is
available, it will be on acceptable terms.
ENVIRONMENTAL RISKS
Federal, state and local environmental laws, ordinances and regulations
potentially require that a current or previous owner or operator of real
property may be held liable for the cost of removal or remediation of certain
hazardous or toxic substances, including asbestos-containing materials, that
could be located on, in or under such property. Such laws and regulations often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of hazardous or toxic substances. The cost of any
required remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such substances properly may also adversely affect the
owner's ability to sell or rent the property or to borrow using the property as
collateral.
SUBSTANTIAL INDEBTEDNESS
The Company is subject to mortgage, construction and other indebtedness, in
an aggregate principal amount of approximately $22.0 million at March 31, 1996.
The Company intends to finance its residences through mortgage financing and
operating leases or other financing vehicles. The amount of mortgage
indebtedness and other debt and lease-related payments is expected to increase
substantially as the Company pursues its growth strategy. As a result, an
increasing portion of the Company's cash flow will be devoted to debt service
and related lease payments, and the Company will continue to be subject to risks
normally associated with significant financing leverage. At March 31, 1996,
approximately $11.4 million in principal amount of the Company's indebtedness
bore interest at floating rates. Therefore, increases in prevailing interest
rates could increase the Company's interest payment obligations. In addition,
indebtedness the Company may incur in the future may also bear interest at
floating rates. There can be no assurance the Company will generate sufficient
cash flow from operations to cover required interest, principal and operating
lease payments. Any payment or other default could cause the lender to foreclose
upon the residences securing such indebtedness or, in the case of an operating
lease, could terminate the lease, with a consequent loss of income and asset
value to the Company. Further, because of cross-default and
cross-collateralization provisions in certain of the Company's mortgages, a
default by the Company on one of its payment obligations could adversely affect
a significant number of the Company's other residences. See Note 6 of Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends significantly on the planning, management and executive
services of Richard R. Slager, President, Chief Executive Officer and
co-founder, and Alan B. Satterwhite, Chief Operating Officer, Chief Financial
Officer and co-founder, the loss of whose services would constitute a "change of
control" under the arrangement with CHI and otherwise could have a material
adverse effect on the Company. See "Business -- Relationship with CHI." The
Company also is dependent upon its ability to attract and retain management
personnel responsible for the day-to-day operations of the assisted living
residences and other key day-to-day business activities. See "Management."
CONTROL BY EXISTING SHAREHOLDERS
Following completion of this Offering, the Company's co-founders, Richard R.
Slager and Alan B. Satterwhite, and JMAC will own in the aggregate 55.0% of the
outstanding Common Shares of the Company (or 50.0% if the Underwriters'
over-allotment option is exercised in full). Accordingly, they
8
<PAGE>
will be in a position to substantially control the election of the Company's
directors, to thereby control the policies and operations of the Company and to
influence the outcome of corporate transactions or other matters submitted for
shareholder approval. These matters include mergers, consolidations, the sale of
all or substantially all of the Company's assets and other changes in control of
the Company. See "Principal and Selling Shareholders."
DILUTION
Purchasers of the Common Shares offered hereby will experience an immediate
and substantial dilution of $10.36 in the net tangible book value per share of
their investment (assuming an initial public offering price of $16 per share).
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 1990, Richard R. Slager, the Company's Chief Executive Officer and
President, and Alan B. Satterwhite, the Company's Chief Operating Officer and
the Chief Financial Officer, formed DevelopMed Associates, Inc., an Ohio
corporation ("DMA"), for the purpose of developing an assisted living residence
business. In 1991, DMA entered into a strategic alliance with JMAC, an
investment company owned by John H. McConnell and John P. McConnell, the founder
and the Chief Executive Officer, respectively, of Worthington Industries, Inc.,
pursuant to which alliance DMA and JMAC Properties, Inc., an Ohio corporation
("JMAC Properties"), which is a wholly-owned subsidiary of JMAC, formed the
Company's predecessor, Karrington Operating Company, an Ohio general partnership
("Karrington Operating"). Prior to the consummation of the Reorganization
Transactions (as defined below), JMAC Properties owned a 66 2/3% equity interest
in Karrington Operating, and DMA owned a 33 1/3% equity interest. To date, the
Company's business has been conducted through Karrington Operating.
REORGANIZATION TRANSACTIONS
Immediately prior to the effective time of the Registration Statement of
which this Prospectus forms a part, (i) JMAC 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.
Thereafter, 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."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,350,000 Common Shares
offered by the Company hereby (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
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 $3.5 million at May 31, 1996. The
Company is expected to borrow an additional $2.0 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.
11
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996 (i) the capitalization
of the Company, (ii) the pro forma effect of a $1.1 million charge for a net
deferred tax liability resulting from the Reorganization Transactions and (iii)
such pro forma capitalization, as adjusted to reflect the sale of the 2,350,000
Common Shares offered by the Company hereby (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
------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Long-term obligations, less current portion.................................. $21,753 $21,753 $20,690
------- --------- -----------
Equity:
Preferred Shares, without par value; 2,000,000 shares authorized; no shares
issued and outstanding.................................................... -- -- --
Common Shares, without par value; 28,000,000 shares authorized; 4,350,000
shares issued and outstanding (actual and pro forma); 6,700,000 shares
issued and outstanding (pro forma, as adjusted) (1)....................... -- 5,290 39,658
Partners' equity........................................................... 5,290 -- --
Retained earnings (deficiency)............................................. -- (1,100) (1,100)
------- --------- -----------
Total equity............................................................. 5,290 4,190 38,558
------- --------- -----------
Total capitalization................................................... $27,043 $25,943 $59,248
------- --------- -----------
------- --------- -----------
</TABLE>
- ------------------------
(1) Does not include 550,000 Common Shares reserved for issuance in the future
under the Company's Incentive Stock Plan. See "Management -- Incentive Stock
Plan."
12
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996,
was $3.5 million, or $.79 per Common Share assumed to be outstanding. The pro
forma net tangible book value per Common Share represents total tangible assets
of the Company less total liabilities, divided by the number of Common Shares
outstanding after giving effect to the Reorganization Transactions. After giving
effect to this offering (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
$37.8 million or $5.64 per share, representing an immediate increase in net pro
forma tangible book value of $4.85 per share to existing shareholders and an
immediate dilution of $10.36 per share to new investors in the Common Shares
offered hereby. See "Use of Proceeds." The following table illustrates the
resulting dilution with respect to the Common Shares offered hereby:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................. $16.00
Pro forma net tangible book value per share as of March 31,
1996............................................................. $ .79
Increase attributable to the offering............................. 4.85
-----
Pro forma net tangible book value per share after the offering...... 5.64
------
Dilution per share to new investors................................. $10.36
------
------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of Common Shares purchased from the Company, the aggregate
consideration paid and the average price per share paid by the existing
shareholders (net of capital distributions) and by new investors purchasing
Common Shares in this offering, without giving effect to estimated underwriting
discounts and expenses of this offering, and assuming an initial public offering
price of $16 per share:
<TABLE>
<CAPTION>
SHARES
PURCHASED(1) TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders...................... 4,350,000 64.9% $10,134,000 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% (50.2%
if the Underwriters' over-allotment option is exercised in full) of the
total number of Common Shares outstanding after this offering, and will
increase the number of Common Shares to be purchased by new investors to
3,000,000 or 44.8% (49.8% if the Underwriters' over-allotment option is
exercised in full) of the total number of Common Shares after this offering.
See "Principal and Selling Shareholders."
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and
other operating data of the Company. The selected consolidated financial data
for each of the five years in the period ended December 31, 1995, have been
derived from the audited consolidated financial statements of the Company. The
selected consolidated financial data for the three months ended March 31, 1995
and 1996 and as of March 31, 1996 have been derived from unaudited consolidated
financial statements of the Company which, in the opinion of management of the
Company, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of such data for such periods and as
of such date. Operating results for the three-month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for any other
interim period or for the full year. This data should be read in conjunction
with the more detailed information contained in the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------------- --------------
1991 1992 1993 1994 1995 1995 1996
---- ----- ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Residence operations............................... $-- $ 216 $2,288 $ 4,977 $ 6,220 $1,390 $1,822
Development and project management fees............ 1 -- 18 287 524 69 122
---- ----- ------ ------- ------- ------ ------
Total............................................ 1 216 2,306 5,264 6,744 1,459 1,944
Expenses:
Residence operations............................... -- 221 1,908 3,454 4,380 1,069 1,327
General and administrative......................... 39 84 170 634 1,705 268 575
Depreciation and amortization...................... -- 95 505 844 980 216 294
Write-off of intangible asset...................... -- -- -- -- 492 -- --
---- ----- ------ ------- ------- ------ ------
Total............................................ 39 400 2,583 4,932 7,557 1,553 2,196
---- ----- ------ ------- ------- ------ ------
Operating income (loss).............................. (38 ) (184) (277) 332 (813) (94) (252)
Interest expense..................................... (9 ) (102) (707) (1,350) (1,023) (248) (315)
Equity in net earnings (loss) of unconsolidated
entity.............................................. -- -- -- (17) (105) (51) 16
---- ----- ------ ------- ------- ------ ------
Net loss............................................. $(47) $(286) $ (984) $(1,035) $(1,941) $ (393) $ (551)
---- ----- ------ ------- ------- ------ ------
---- ----- ------ ------- ------- ------ ------
Pro forma net loss per common share (1).............. $ (.45) $ (.13)
Pro forma weighted average number of common shares
outstanding (in thousands) (1)...................... 4,350 4,350
OTHER OPERATING DATA:
Residences (end of period) (2):
Open or under construction......................... 1 2 4 5 10 5 11
Under contract..................................... 1 1 1 2 8 2 12
Number of units (end of period) (2):
Open or under construction......................... 53 106 213 272 515 272 576
Under contract..................................... 53 54 59 128 509 128 784
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, -------------------------------------
----------------------------------------- PRO PRO FORMA,
1991 1992 1993 1994 1995 ACTUAL FORMA (3) AS ADJUSTED (4)
------ ------ ------- ------- ------- ------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............. $ (303) $ (637) $ (702) $ (911) $(1,575) $(2,300) $(2,300) $ 1,139
Total assets........................... 3,186 9,938 14,883 16,292 26,676 30,252 30,252 63,557
Long-term obligations and deferred
taxes, less current portion........... 2,193 8,753 14,472 16,778 18,250 21,753 22,853 21,790
Equity (deficit)....................... 542 256 (728) (1,763) 5,841 5,290 4,190 38,558
</TABLE>
- ------------------------------
(1) Based upon the 4,350,000 pre-offering Common Shares that will be outstanding
following completion of the Reorganization Transactions but prior to this
offering.
(2) Includes residences jointly-owned by the Company and CHI.
(3) Adjusted to reflect the pro forma recognition of a net deferred tax
liability of $1.1 million resulting from the Reorganization Transactions.
See Note 10 to the Company's Consolidated Financial Statements.
(4) Adjusted to reflect the offering made hereby (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. THIS
PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS"
AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company derives its revenues from two primary sources: (i) resident fees
for the delivery of assisted living services and (ii) development fees and
management services income for development and management of residences in which
the Company does not own a controlling interest. The Company's revenue is
derived principally from resident fees, which in 1995 comprised 92.2% of total
revenues (93.7% for the first quarter of 1996). Resident fees are paid monthly
by residents, their families or other responsible parties and historically have
been derived 100% from private pay sources. Resident fees include revenue
derived from basic care, community fees, extended care, Alzheimer's care and
other sources. Community fees are one-time fees generally payable by a resident
upon admission, and extended care and Alzheimer's care fees are paid by
residents who require personal care in excess of services provided under the
basic care program. Once opened, Company residences historically have attained
break-even cashflow, after debt service, within approximately seven months of
operations. Within 12 months, Company residences typically reach a stable
occupancy of over 90%. Development fees and management services income, which in
1995 accounted for the remaining 7.8% of revenues (6.3% for the first quarter of
1996), consist of development fees recognized over the development and
construction period and management fees which are a percentage of a managed
residence's total operating revenues and are recognized on an ongoing basis.
The Company categorizes its operating expenses as follows: (i) residence
operations, which includes labor, food, media advertising and promotions and
other direct general operating expenses; (ii) general and administrative
expenses, consisting of corporate and support functions such as marketing,
accounting and other administrative expenses; and (iii) depreciation and
amortization. In anticipation of its growth plans, the Company made significant
investments in the number of management and staff at its headquarters in 1995
and the first quarter of 1996.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain data from the respective consolidated
statements of operations as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Residence operations................................. 82.7 65.6 65.0 73.3 68.3
General and administrative........................... 7.4 12.0 25.3 18.4 29.6
Depreciation and amortization........................ 21.9 16.1 14.5 14.8 15.1
Write-off of intangible asset........................ -- -- 7.3 -- --
--------- --------- --------- --------- ---------
Total expenses..................................... 112.0 93.7 112.1 106.5 113.0
--------- --------- --------- --------- ---------
Operating income (loss)................................ (12.0)% 6.3% (12.1)% (6.5)% (13.0)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Resident days.......................................... 26,889 57,213 67,256 15,944 19,032
Average daily resident rate (1)........................ $ 71.33 $ 79.33 $ 86.90 $ 82.64 $ 89.92
Average occupancy percentage (2)....................... -- 98.9% 96.4% 94.2% 94.4%
End of period (3):
Number of residences................................. 3 3 4 3 5
Number of units...................................... 160 160 219 160 245
</TABLE>
- ------------------------
(1) Excludes community fees of $370,000, $438,000 and $375,000 for the years
ended December 31, 1993, 1994 and 1995, respectively, and $73,000 and
$111,000 for the three months ended March 31, 1995 and 1996, respectively.
(2) Average occupancy percentage represents the average occupancy of the
Company-owned residences open for one year or more at the beginning of the
period presented.
(3) Excludes one residence in Dayton, Ohio jointly-owned by the Company and CHI
accounted for by the equity method.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Total revenue increased $485,000, or 33.3%, to $1.9 million in the first
quarter of 1996 from $1.5 million in the first quarter of 1995, primarily due to
the growth in resident revenues. Resident revenues increased $432,000, or 31.1%,
primarily due to the opening of the Shaker Heights residence in October 1995 and
the Alzheimer's care residence in February 1996 (total of $336,000) and to the
increase in the average daily resident rate. The average daily resident rate
increased 8.8% to $89.92 in the first quarter of 1996 compared to $82.64 for the
same period in 1995, primarily due to an increase in the average daily basic
care rate of $6.50 and an increase in the level of extended care services
provided to residents.
Development and project management fees increased $53,000, or 78.2%, to
$122,000 in the first quarter of 1996 from $69,000 in the first quarter of 1995,
primarily due to development fees associated with the relationship with CHI. See
Note 7 to the Consolidated Financial Statements and "Business -- Relationship
with CHI" for further discussion of this relationship.
Residence operations expenses increased $258,000, or 24.2%, to $1.3 million
in the first quarter of 1996 from $1,069,000 in the first quarter of 1995. As a
percentage of total revenues, residence operations expenses decreased from 73.3%
in the first quarter of 1995 to 68.3% in the same period of 1996. This decrease
is primarily attributable to the Company's adoption of the provisions of AICPA
SOP of 93-7, the effect of which was a charge of $95,000 in the first quarter of
1995 (see Note 2 to Consolidated Financial Statements). This decrease was offset
by the opening of a new residence in
16
<PAGE>
Shaker Heights, Ohio in October 1995 and an Alzheimer's residence in Columbus,
Ohio in February 1996, as operations expenses are historically higher as a
percent of total revenues during the first year of operation of a residence.
Excluding these two residences, operations expenses would have been 62.5% of
total revenues in the first quarter of 1996.
General and administrative expenses increased $307,000, or 114%, to $575,000
in the first quarter of 1996 from $268,000 in the first quarter of 1995,
primarily due to increased compensation, payroll taxes and related benefits of
$216,000 as a result of hiring additional management and staff at the Company's
headquarters in anticipation of the Company's growth plans and the addition of a
manager-in-training program initiated in the Spring of 1995. The Company expects
the rate of increase in its general and administrative expenses will decrease as
new personnel needs have been reduced by recent hires. In addition, the Company
expects its general and administrative expenses will decrease as a percentage of
its total operating revenues due to anticipated economies of scale resulting
from the Company's development program.
Depreciation and amortization increased $78,000, or 36.4%, to $294,000 in
the first quarter of 1996 from $216,000 in the first quarter of 1995, primarily
due to the opening of the two new residences discussed above.
Interest expense increased $67,000, or 26.9%, to $315,000 in the first
quarter of 1996 from $248,000 in the first quarter of 1995, primarily due to the
opening of the two new residences discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenue increased $1.5 million, or 28.1%, to $6.7 million in 1995 from
$5.3 million in 1994 primarily due to the growth in resident revenues. Resident
revenues increased $1.2 million, or 25.0%, primarily due to the increase in
resident revenues of $531,000 from the Tucker Creek residence which opened in
late December 1993, an increase of $433,000 resulting from higher average daily
resident rates and the opening of the Shaker Heights residence in late October
1995. The average daily resident rate increased 9.5%, to $86.90, in 1995 from
$79.33 in 1994, primarily due to an increase in the average daily basic care
rate of $5.32 and an increase in the level of extended care services provided to
residents.
Development and project management fees increased $237,000, or 82.3%, to
$524,000 in 1995 from $287,000 in 1994, primarily due to the increased number of
projects in process under the relationship with CHI.
Residence operations expenses increased $926,000, or 26.8%, to $4.4 million
in 1995 from $3.5 million in 1994, primarily due to the Company's adoption of
the provisions of AICPA SOP 93-7, the effect of which was an increase in
marketing expenses of $199,000 (see Note 2 to Consolidated Financial
Statements), and a 17.6% increase in resident days. As a percentage of total
revenues, residence operations expenses decreased from 65.6% in 1994 to 62.0% in
1995 (excluding the effects of AICPA SOP 93-7 described above). This decrease is
primarily attributable to the second full year of operations at the Tucker Creek
residence where the average occupancy percentage increased to 93.7% in 1995 from
63.2% in 1994.
General and administrative expenses increased $1.1 million, or 169%, to $1.7
million in 1995 from $634,000 in 1994, primarily due to increased compensation,
payroll taxes and related benefits of $714,000 as a result of hiring additional
management and staff at the Company's headquarters (from 20 at the end of 1994
to 40 at the end of 1995) in anticipation of the Company's growth plans,
including the addition of a manager-in-training program in the Spring of 1995,
increased incentive compensation and compensation increases for existing staff
and management.
Depreciation and amortization increased $136,000, or 16.0%, to $980,000 in
1995 from $844,000 in 1994 primarily due to a change in estimate relating to
pre-opening costs as described in Note 2 to
17
<PAGE>
Consolidated Financial Statements ($92,000), the opening of the Shaker Heights
residence ($48,000) and the Company's move to its new headquarters in July 1995.
These increases were offset by a decrease of $70,000 as a result of the adoption
of AICPA SOP 93-7 described above.
See Note 3 to Consolidated Financial Statements for discussion on the
write-off of the intangible asset.
Interest expense decreased $328,000, or 24.2%, to $1.0 million in 1995 from
$1.4 million in 1994, primarily due to the subordinated debentures contributed
to equity effective January 1, 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenue increased $3.0 million, or 128%, to $5.3 million in 1994 from
$2.3 million in 1993, primarily due to the growth in resident revenues. Resident
revenues increased $2.7 million, or 117%, primarily due to a full year of
operations for the three initial Company residences which opened in October
1992, March 1993 and December 1993 (total of $2.5 million), and an increase in
the average daily resident rate. The average daily resident rate increased 11.2%
to $79.33 in 1994 from $71.33 in 1993, primarily due to an increase in the
average daily basic care rate of $5.36 and an increase in the level of extended
care services provided to residents.
Development and project management fees increased to $287,000 in 1994 from
$18,000 in 1993 primarily due to the increased number of projects in process
under the relationship with CHI.
Residence operations expenses increased $1.6 million, or 81.0%, to $3.5
million in 1994 from $1.9 million in 1993, primarily due to the 113% increase in
resident days. As a percentage of total revenues, residence operations expenses
decreased from 82.7% in 1993 to 65.6% in 1994. This decrease is attributable to
the two residences opened in March 1993 and October 1992 that were in the fill
up stage in 1993 resulting in a higher percentage of fixed operating expenses.
General and administrative expenses increased $464,000, or 273%, to $634,000
in 1994 from $170,000 in 1993, primarily due to increased compensation, payroll
taxes and related benefits of $338,000, as a result of hiring additional
management and staff at the Company's headquarters (from 12 at the end of 1993
to 20 at the end of 1994), increased incentive compensation and compensation
increases for existing staff and management.
Depreciation and amortization increased $339,000, or 67.2%, to $844,000 in
1994 from $505,000 in 1993, primarily due to a full year of operations for the
two residences that opened in 1993.
Interest expense increased $643,000, or 90.9%, to $1.4 million in 1994 from
$707,000 in 1993, primarily due to a full year of operations in 1994 for two
residences opened in March and December 1993 (total of $420,000) and to
increased amounts outstanding under a subordinated loan payable to JMAC
Properties.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its initial growth through a combination of
mortgage financing, subordinated borrowings from JMAC and its affiliates and
equity contributions. The Company's mortgage and construction mortgage
financings provide for principal repayments in the next two to five years, bear
interest at various fluctuating rates (ranging from 8.9% to 9.6% at March 31,
1996), and are secured by substantially all of the assets of the Company. See
Note 6 of Notes to Consolidated Financial Statements. The Company expects to
refinance such amounts as they mature.
Effective January 1, 1995, JMAC Properties and DMA entered into a
recapitalization agreement pursuant to which subordinated debentures and accrued
interest totaling $5.3 million were converted to equity. In addition, JMAC
Properties invested $5.0 million in equity during 1995.
In December 1995, the Company entered into a loan agreement with JMAC
pursuant to which JMAC agreed to provide up to $8.0 million in loans to the
Company during a commitment period expiring December 31, 1996. Amounts
outstanding under this agreement totalled $1.1 million at March 31, 1996.
Borrowings under the agreement are subordinated to all obligations of the
Company
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<PAGE>
to financial institutions. Interest on the borrowings accrues at 15% per annum
and is payable annually. If not sooner paid, all amounts outstanding, including
accrued interest, are due January 1, 2000 or earlier if any class of equity
securities of the Company is the subject of an effective registration statement
under the Securities Act, is registered under the Exchange Act or is listed on a
national securities exchange. A portion of the net proceeds received by the
Company in this offering will be used to retire all amounts outstanding under
such agreement at which time the agreement will terminate.
At March 31, 1996, the Company had $22.0 million of outstanding debt (at a
weighted average interest rate of 9.5%). At that date, the Company had equity of
$5.3 million, which resulted from inception-to-date capital contributions of
$10.9 million, less distributions of $785,000 and net operating losses of $4.8
million. The Company continues to operate with significant working capital
requirements primarily due to construction payables associated with residence
development. The working capital deficit at March 31, 1996 was $2.3 million.
During the years ended December 31, 1993, 1994 and 1995, and the three
months ended March 31, 1996, the Company used $5.6 million, $2.1 million, $10.7
million and $3.5 million, respectively, in cash to acquire property and
equipment and other assets, and received $5.9 million, $1.5 million, $10.9
million and $3.6 million, respectively, in cash from financing activities. The
difference was either provided by, or used in, operating activities.
By the end of 1999, the Company plans to open approximately 45 new
Company-owned residences and at least six jointly-owned residences with CHI. To
date, the Company has obtained zoning approval for nine new residences and has
entered into contracts to purchase 13 additional sites. The Company has been,
and will continue to be, dependent on third-party financing for its acquisition
and development program. The Company estimates that newly developed residences
will generally range in cost from $6.0 to $7.5 million, with the development
cycle taking up to 24 months from site identification to residence opening.
There can be no assurance that financing for the Company's acquisition and
development program will be available to the Company on acceptable terms, if at
all. Moreover, to the extent the Company acquires properties that do not
generate positive cash flow, the Company may be required to seek additional
capital for working capital and liquidity purposes. Residences typically reach a
stable level of occupancy of over 90% within 12 months. See "Business --
Development."
In May, 1996, the Company entered into non-binding financing commitment
letters with Meditrust Mortgage Investments, Inc. ("MMI"), an affiliate of
Meditrust (a large health care REIT). Under the letters, MMI is to provide up to
approximately $88 million in financing for one existing and approximately 12 new
Karrington residences, subject to various terms and conditions. The commitment
letters are subject to approval by Meditrust's board of trustees. The
financings, which may be mortgage or lease financings, are to be entered into on
a residence-by-residence basis, and are to be for terms of up to 14 years (with
two additional five-year extension periods for the lease transactions). Interest
during construction is to float at 2% above the prime rate. On completion of
each residence, payments are to be set at an amount equal to 3.25% over the
yield at that time on the ten-year U.S. Treasury notes with the same maturity
date. Additional interest or lease payments are based on increased revenues of a
financed residence during specified periods.
The Company expects that the net proceeds from this offering, together with
existing financing commitments and additional financing the Company anticipates
will be available, will be sufficient to fund its development and acquisition
programs for at least the next 18 months. Additional financing will be required
to complete the Company's growth plans and to refinance certain existing
indebtedness.
19
<PAGE>
BUSINESS
OVERVIEW
The Company develops, owns and operates private pay, assisted living
residences. Assisted living residences provide housing and care for elderly or
frail individuals who, although generally ambulatory, need assistance with one
or more activities of daily living, such as bathing, grooming, dressing, eating
or personal hygiene.
The Company has developed 15 residences in its target markets, six of which
are open and nine of which are under construction and scheduled to open in late
1996 or in the first half of 1997. These 15 residences are located in Ohio,
Pennsylvania, Indiana, Colorado and New Mexico. As part of its nationwide
expansion strategy, the Company has sites for 13 residences under contract in
these states, as well as in Michigan and North Carolina. The Company has begun
predevelopment activities in New York, Kentucky and Illinois.
The prototypical Karrington assisted living model, which has been developed
and refined by the Company since its first residence was opened in 1992, is a
mansion-style residence which houses 60 to 80 residents. Each residence is
typically located in a middle- to upper-income community which has a
well-established population of individuals 75 years of age and older. The
Karrington model combines quality housing, personal care and support services to
provide a cost-effective alternative for individuals with physical frailties or
cognitive disorders, such as Alzheimer's disease, who do not require the regular
skilled medical services provided by nursing facilities. The Karrington model
allows the Company to control development costs, maintain consistent quality and
improve operational effectiveness, while also creating "brand" awareness in the
Company's markets. The Company has been successful in implementing the
Karrington model, with residences open for one year or more having an average
occupancy rate of 98.9% and 96.4% for the 12 months ended December 31, 1994 and
1995, respectively, and 94.4% for the three months ended March 31, 1996.
Karrington residences typically are staffed with licensed nurses on a
24-hour basis and are designed to permit residents to "age in place" within the
residence as they develop further physical or cognitive frailties. The Company
believes that it is able to care for individuals with higher acuity levels
(i.e., those needing greater assistance with activities of daily living) than is
typical in the assisted living industry.
In addition to its own development activities, the Company has entered into
a joint development relationship with Sisters of Charity Health Care System, a
not-for-profit corporation of which the sole member is Catholic Health
Initiatives. CHI is a large, not-for-profit health organization formed by the
recent consolidation of Catholic Health Corporation, SCHCS and Franciscan Health
Systems. CHI operates 61 hospitals and 50 long-term care facilities in 20 states
and has revenues exceeding $4 billion. The Company and CHI currently intend to
develop and operate assisted living residences with CHI's health care system.
See "Business -- Relationship with CHI."
By the end of 1999, the Company plans to open approximately 45 new
Company-owned residences. In addition, the Company intends to develop a
significant number of jointly-owned residences with CHI, of which five are in
various stages of development. The Company also plans to develop and operate
Karrington Place residences, which are assisted living residences specifically
designed for individuals with Alzheimer's disease and other cognitive disorders,
in a substantial portion of its markets.
THE ASSISTED LIVING INDUSTRY
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
20
<PAGE>
bathing, grooming, dressing, eating and personal hygiene. Assisted living
residences provide assistance to residents with limited medical needs and may
provide higher levels of personal assistance for special need residents, such as
incontinent residents or residents with Alzheimer's disease or other forms of
cognitive disorders.
The assisted living industry is fragmented and, to date, is characterized by
many small operators. The scope of assisted living services varies substantially
among operators, ranging from basic "board and care" services to full service
assisted living residences such as those operated by the Company. Many smaller
assisted living providers do not operate in residences designed specifically for
assisted living, do not have professionally trained staffs and may provide only
limited assistance with low-level care activities. The Company believes there
are few assisted living operators in its markets who provide the same
comprehensive range of assisted living services, such as Alzheimer's care and
other special need services, as the Company.
The Company believes that the following factors should continue to
positively affect the assisted living industry:
CONSUMER PREFERENCES. The Company believes assisted living is increasingly
the alternative preferred by prospective residents and their families in
providing care for the frail elderly. Assisted living residents have greater
independence, and assisted living services allow them to "age in place" in a
residential setting. The Company believes these factors result in a higher
quality of life than that experienced in the more institutional or clinical
settings, such as skilled nursing facilities.
POSITIVE DEMOGRAPHIC CHANGES. According to the U.S. Bureau of Census, the
number of individuals in the United States 85 years and older is expected to
increase by approximately 43% during the 1990s, from 3.0 million in 1990 to an
estimated 4.3 million in 2000, as compared to total U.S. population growth of
approximately 11% during the same period. It is further estimated that
approximately 57% of the population of seniors over age 85 currently need
assistance with activities of daily living and that more than one-half of
seniors are likely to develop Alzheimer's disease or other cognitive disorders
by age 85.
ASSISTED LIVING DEMAND EXCEEDS SUPPLY. The supply of long-term care beds
per 1,000 individuals 85 years of age and older declined from 686 beds per
thousand to 604 beds per thousand between 1980 and 1991, according to the U.S.
Bureau of Census, and the Company expects this trend to continue. The Company
believes this decline is attributable to several factors. The majority of states
in the United States have adopted certificate of need ("CON") or similar
statutes which generally require that, prior to the addition of new beds, the
addition of new services or the making of certain capital expenditures, a state
agency must determine that a need exists for the new beds or the proposed
activities. The Company believes that this CON process tends to restrict the
supply and availability of licensed nursing facility beds. High construction
costs, limitations on government reimbursement for the full costs of
construction and start-up expenses also act to constrain growth in the supply of
such facilities and beds. At the same time, nursing facility operators are
focusing on patients requiring higher levels of nursing care which results in
fewer nursing beds being available to patients with lower acuity levels.
COST ADVANTAGES. The Company believes that the assisted living industry can
provide comparable services for significantly less than the cost of such
services to private pay residents in nursing facilities. The Company's market
research indicates that the Company provides services at a cost of 25% to 35%
less than the cost of comparable services provided by private intermediate care
nursing facilities in the same market.
CHANGES IN FAMILY COMPOSITION. As a result of the increasing number of
two-income families, the high divorce rate and the number of single-parent
households, as well as the increasing geographic dispersion of families, many
adult children are not available to care in their own homes for elderly parents.
Two-income families are, however, often better able to provide financial support
for elderly parents.
21
<PAGE>
COST CONTAINMENT PRESSURES. Responding to rising health care costs,
governmental and private payor sources have adopted cost containment measures
that have encouraged reduced lengths of stay in hospitals. A result of this
trend is an increase in the number of individuals receiving nursing facility
care as compared to hospitalization. That, in turn, causes nursing facility
operators to focus on improving occupancy and increasing services to residents
requiring high levels of nursing care. As the level of care for nursing facility
residents rises and the supply of nursing facility space is filled by residents
having more acute needs, the Company believes that there will be greater demand
for assisted living residences to provide for residents requiring less nursing
care than generally will be provided to residents in nursing facilities.
STRATEGY
The principal components of the Company's strategy are to:
DEVELOP KARRINGTON MODEL RESIDENCES IN CURRENTLY-SERVED AND NEW
COMMUNITIES. The Company's plans call for rapid development of the Karrington
model in the communities it currently serves, as well as expansion into
additional communities. The Company targets middle-to upper-income metropolitan
markets which have well-established populations of persons 75 years of age and
older. This development activity, in conjunction with the Company's acquisition
strategy (discussed below) and its relationship with CHI, is intended to result
in regional concentrations of assisted living residences. The Company's ultimate
objective is to develop a nationwide network of assisted living residences which
will be utilized by managed care companies.
EXPAND JOINT DEVELOPMENT RELATIONSHIPS WITH MAJOR HEALTH CARE SYSTEMS ACROSS
THE UNITED STATES. The Company believes that it will continue to benefit from
its relationship with CHI, pursuant to which the Company expects to develop and
operate, and jointly own with CHI, assisted living residences in communities
where CHI or its affiliates have a major presence as a health care provider. In
addition, the Company believes its relationship with CHI provides a significant
source of referrals and the opportunity to leverage the Company's expertise by
developing similar relationships with other large, primarily not-for-profit,
health care systems throughout the country.
CONTINUE ITS FOCUS ON PROVIDING A BROAD RANGE OF SERVICES TO HIGHER-ACUITY
RESIDENTS. The Company believes it provides a higher acuity level of care to
its residents than is typically available at assisted living facilities,
including care for individuals with Alzheimer's disease and other cognitive
disorders. The Company is able to provide these services by building its
residences to higher standards and specifications, hiring licensed
professionals, providing advanced training to its staff and complying with
relevant regulations. In addition to providing care to residents with more
complex medical conditions, the Company seeks to offer a broad range of services
to meet the varied needs of all of its residents. In the future, these services
are expected to include physical, occupational, speech and other rehabilitation
therapy programs and other resident services. By providing a higher level of
care and a broader spectrum of services, the Company is able to allow its
residents to "age in place." The Company also is able to provide these services
at rates which are substantially less than the cost of similar services provided
by nursing care facilities.
ACQUIRE RESIDENCES FOR CONVERSION TO THE KARRINGTON MODEL. The Company
intends to acquire assisted living residences or other properties that can be
effectively converted to the Karrington model of operation. These acquisitions
will depend on location, financial feasibility, suitability for conversion and
consistency with other standards and requirements. The Company also intends to
pursue long-term management contracts where opportunities exist to expand the
Company's operations or to facilitate the acquisition of residences.
RELATIONSHIP WITH CHI
In addition to its own residence development activities, the Company has
entered into an informal relationship with Catholic Health Initiatives
contemplating the joint development of a significant number of additional
assisted living residences. The genesis of the CHI relationship was the joint
development by the Company and Sisters of Charity Health Care System of
Karrington of Oakwood, a
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<PAGE>
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 entered into a letter of intent relating to the joint development of six
additional projects over a three-year period. The first of the six projects will
consist of a 61-unit assisted living residence and an adjacent 28-unit
Alzheimer's and cognitive disorder residence located in Albuquerque, New Mexico,
which is scheduled to commence operations in the fourth quarter of 1996. Three
additional residences are currently under construction in Cincinnati, Dayton and
Colorado Springs.
Each project is to be owned jointly by the Company and CHI, with CHI
typically owning approximately 80% of the equity of the project. Construction
and permanent debt financing generally is to be arranged by CHI on behalf of the
venture and is to be non-recourse to the Company. The Company will provide all
development and management services with respect to each residence under a
standard agreement that provides a development fee of $250,000 and a management
fee of 5% of revenues.
SERVICES AND OPERATIONS
SERVICES PROVIDED
Seventy-five percent of Karrington residents are females and the average age
of all residents is 83. Most Karrington residents have some disability
associated with aging, such as dementia, Alzheimer's disease, arthritis,
nutritional problems, incontinence, strokes or other disorders, and need
assistance with two or more activities of daily living. Residents needs
generally fall into one or more of the following categories: (i) requiring
physical support or assistance with activities of daily living; (ii) requiring
assistance, reminders and cuing due to some cognitive impairment; and (iii)
requiring socialization and interaction with others.
Residents generally pay a daily suite rental rate under a resident agreement
which is renewable annually and cancellable on 30-days' notice. The average
daily suite rental rate ranges from $37 to $121 per day, depending on unit size,
location, number of occupants and level of care required. Two-thirds of
Karrington's residents live in private suites. While the Company's average daily
suite rental rate is approximately $74, the wide range of rates offered by the
Company allows the Company to accommodate persons of varying financial
resources. Medication administration and various levels of extended care
services, which depend on the degree of frailty, add to the basic rate.
Additional charges may be incurred for other services such as hair care and
special diets. Currently, all residents are private pay.
The Company's basic care program is provided to all residents at no
additional cost and includes: assistance with daily living, such as eating,
bathing, grooming, dressing and personal hygiene; three meals per day served in
a common dining room; 24-hour security; emergency call systems in each unit and
living area; transportation to offices, stores and community services;
assistance with arranging outside services such as physician care, various
therapy programs and other medical services; personal laundry services;
housekeeping services; and social and recreational activities.
In addition to the basic care program, residents may be included in the
extended care program, which assists residents who require more frequent or more
intensive assistance or care. Prior to entering a Karrington residence, and
periodically during their stay, individuals' needs are assessed to determine the
level of extended care services required, and an individual care plan is
designed. Depending on the assessment, the additional cost to the resident may
be at one of four extended care levels and may include a nominal charge for
medication administration. The Company's experience is that approximately
two-thirds of its residents require some extended care services and
approximately 75% require medication administration.
The Company's Alzheimer's and other cognitive disorder programs are provided
in each prototype residence on a floor designated for "special needs." The
Company also develops Karrington Place residences designed specifically for
Alzheimer's disease care. Trained staff provides special care programs for
cognitively impaired residents, and each is charged additional daily fees for
this added
23
<PAGE>
support. Programs include added assistance, stimulation, special activities,
intervention and therapeutic programs that are developed and supported by
physicians specializing in dementia care that consult with the Company.
The Company's market research indicates that the Company's total daily rate
for all services is 25% to 35% lower than comparable private intermediate care
nursing facilities in the same market.
STAFFING
Each residence has an Administrator and a four-person management team. This
management team includes the Resident Care Director (who supervises all resident
support staff and care plans), a Registered Nurse (responsible for all wellness
programs, as well as medication programs), the Director of Administration
(responsible for general administrative duties, including housekeeping, and all
food service and dietary needs) and the Associate Administrator (involved in
operations and marketing). Residence management teams report to a regional
director responsible for the operation of several residences. Regional directors
provide support, oversight and mentoring to each residence's staff.
Staffing models are used to determine appropriate personnel levels.
Screening is used to help select staff with "care providing" characteristics.
For each residence, services are typically provided by a staff of approximately
28 full-time employees. The largest staff component is "Resident Assistants,"
who include licensed practical nurses and other trained staff members who are
responsible for administering services to residents.
The Company maintains competitive compensation programs, including
incentives and quarterly profit sharing, which it believes help attract and
retain excellent employees. The Company believes that the combination of proper
interviewing, selection methods and review, training and appropriate incentives
significantly reduces hiring and retraining costs and allows for a more stable,
long-term work force. All employees participate in a recruitment and development
program called the Predictive Index-Registered Trademark-, a third-party program
which is focused on determining key criteria and personal attributes which the
Company believes are important to the proper placement of staff and management.
TRAINING AND QUALITY ASSURANCE
The Company provides its personnel with an extensive and innovative training
program. This training covers all aspects of Karrington's operation. At the end
of a 90-day probationary period, each new employee is evaluated for permanent
placement. Additionally, the Company has an extensive manager-in-training
program which provides classroom and on-the-job training to develop future
Karrington administrators and managers. This three to nine month program was
initiated in the spring of 1995 and, as of June 17, 1996, included 12
participants in various stages of the program. The Company believes investment
in the manager-in-training program is vital to its continued growth, quality
control and consistency of service delivery.
The Company has structured a comprehensive quality assurance ("QA") program
intended to maintain standards of care established for each residence. Under the
Company's QA program, the care and services provided at each residence are
monitored by the professional services staff which reports directly to the
Company's senior management. The QA team works with residence management teams
to assure that all staff members are trained, that clinical policies and
procedures are followed, and that all state and federal standards are met while
achieving the stringent requirements of the Company. The Company's QA program
helps support compliance with federal and state regulations and requirements for
licensing. Karrington has also developed a Quality of Service program which
includes periodic surveys and follow-up with all current and former residents
and responsible parties.
RESIDENCES
The Company's first residence opened in October 1992, and since such time
the Company has successfully completed and opened five additional residences. At
June 17, 1996, the Company had 15
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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 June 17, 1996:
<TABLE>
<CAPTION>
ACTUAL OR
PLANNED
RESIDENCE METRO LOCATION OPENING DATE UNITS (1)
- -------------------------------------------------------- -------------------------- ---------------- -------------
<S> <C> <C> <C>
Karrington of Bexley Columbus, OH 10/01/92 53
Karrington on the Scioto Columbus, OH 3/17/93 53
Karrington at Tucker Creek Columbus, OH 12/27/93 54
Karrington of Oakwood (2) Dayton, OH 11/08/94 53
Karrington of Shaker Heights Cleveland, OH 10/30/95 59
Karrington Place Columbus, OH 2/23/96 26
(Alzheimer's Residence)
Karrington of South Hills Pittsburgh, PA 3Q, 1996 67
Karrington of Albuquerque (2) Albuquerque, NM 4Q, 1996 61
Karrington, St. Francis Place (2) Albuquerque, NM 4Q, 1996 28
(Alzheimer's Residence)
Karrington at Fall Creek Indianapolis, IN 4Q, 1996 61
Karrington at Willow Lake Indianapolis, IN 1Q, 1997 61
Karrington of Englewood (2) Dayton, OH 2Q, 1997 48
Karrington of Colorado Springs (2) Colorado Springs, CO 2Q, 1997 64
Karrington of Fort Wayne Fort Wayne, IN 2Q, 1997 61
Karrington of Kenwood (2) Cincinnati, OH 2Q, 1997 67
</TABLE>
- ------------------------
(1) For the five months ended May 31, 1996, the average occupancy rate of the
residences open for one year or more was 98.8% for Karrington of Bexley,
90.4% for Karrington on the Scioto, 92.3% for Karrington at Tucker Creek and
94.2% for Karrington of Oakwood. The average occupancy rate for that period
was 49% for Karrington of Shaker Heights which opened in October of 1995 and
32.6% for Karrington Place which opened in February of 1996.
(2) Owned jointly with CHI.
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The following table sets forth certain information regarding Karrington
residences that are subject to purchase contracts as of June 17, 1996, but for
which construction had not then commenced:
<TABLE>
<CAPTION>
PLANNED
RESIDENCE METRO LOCATION DEVELOPMENT STAGE OPENING DATE PLANNED UNITS
- ------------------------------------ -------------------------- ------------------- ---------------- -------------
<S> <C> <C> <C> <C>
Karrington of Sylvania Toledo, OH In Zoning 3Q, 1997 61
Karrington of Rocky River Cleveland, OH In Zoning 3Q, 1997 64
Karrington of Monroeville Pittsburgh, PA In Zoning 3Q, 1997 64
Karrington of Bath Akron, OH In Zoning 3Q, 1997 67
Karrington of Carmel Indianapolis, IN Under Contract 4Q, 1997 50
(Alzheimer's Residence)
Karrington of Lyndhurst Cleveland, OH Under Contract 4Q, 1997 47
(Alzheimer's Residence)
Karrington of Ann Arbor Ann Arbor, MI In Zoning 4Q, 1997 67
Karrington of Eastover Charlotte, NC In Zoning 4Q, 1997 90
Karrington of Gahanna Columbus, OH Under Contract 4Q, 1997 50
(Alzheimer's Residence)
Karrington of Fremont Fremont, OH Under Contract 4Q, 1997 48
Karrington of Wooster Wooster, OH In Zoning 4Q, 1997 48
Karrington of Erie Erie, PA Under Contract 1Q, 1998 67
Karrington of Charlotte Charlotte, NC Under Contract 1Q, 1998 67
</TABLE>
DEVELOPMENT
The Company's development personnel research and identify potential markets,
primarily in major metropolitan areas and their surrounding suburban
communities, and select sites for development within such markets. In evaluating
a market, the Company considers a number of factors, including population,
income and age demographics, traffic count, site visibility, residential and
commercial characteristics, probability of obtaining zoning approvals, proximity
of various competitors, estimated market demand and the potential to achieve
economies of scale in a specific market by concentration of its development and
operating activities.
The principal stages in the development process are (i) site selection and
contract signing, (ii) zoning and site plan approval, (iii) architectural
planning and design, (iv) contractor selection and (v) construction and
licensure. Once a market has been identified, site selection and contract
signing typically take three months. Zoning and site plan approval generally
take three to nine months and are typically the most difficult step in the
development process as a result of the Company's selection of sites in
established communities which frequently require site rezoning. Architectural
planning and design and contractor selection often occur during the zoning
process but can prolong the start of construction. Residence construction
generally takes 12 months. After a residence receives a certificate of occupancy
and appropriate licenses, residents usually begin to move in immediately. The
Company's experience indicates that new residences typically reach a stable
level of occupancy of over 90% within 12 months, but there can be no assurance
that these results will be achieved in new markets. The Company estimates that
total capitalized cost to develop, construct and open a Karrington model
residence, including land acquisition and construction costs, ranges from
approximately $6.0 million to $7.5 million, an average cost per unit of
approximately $110,000. The cost of any particular residence may vary
considerably based on a variety of site-specific factors.
The Company's development activities are coordinated by its 12-person
development staff, which has extensive real estate acquisition, design,
engineering, zoning, general construction and project management experience.
Architectural design and hands-on construction functions are usually contracted
to experienced outside architects and contractors.
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<PAGE>
The Company's construction strategies include the development of national
purchasing capabilities for major building components and the retention of
several regional contractors engaged to construct its residences. The Company
believes these approaches will help reduce construction costs or mitigate the
rate of cost increases due to inflation, increase product quality, and shorten
construction periods that result from increased familiarity with the
architectural, engineering and construction design of the Company's prototype
residences.
ARCHITECTURAL DESIGNS
The Karrington model residence is a freestanding, mansion-style building
with a designed capacity of 60 to 80 residents in any of a variety of exterior
styles. The prototype averages 64 units and approximately 45,000 square feet and
is generally built on a 1.5 to 2 acre site. Approximately 50% of the building is
devoted to common areas and amenities. The Company has three basic building plan
designs, which provide it with flexibility in adapting the model to a particular
site and local zoning requirements. The building is usually three stories of
concrete and steel frame construction built to institutional health care
standards but residential in appearance. The interior design promotes a
home-like environment while permitting the effective provision of resident care
programs and promoting resident independence.
The individual resident suites are clustered on each floor to resemble a
neighborhood, with a variety of suite floor plans of one or two rooms and
varying square footage. Each floor has a quiet area resembling a library or den
and an active area designed to support activity programs and interaction among
residents, staff and families. The main floor usually includes the main dining
room, private dining rooms, administrative offices, a library, a living or
family room, an ice cream parlor and a year-round sun porch. Also included are
public restrooms, outside porches, a foyer and a formal entryway with grand
staircase and central elevator. On other floors in each residence are located a
resident laundry room, a wellness center, a bathing spa area, employee break
rooms, a beauty salon and activity areas. The special needs floor also includes
a separate resident kitchen and dining area.
Recently, the Company opened its first stand-alone Alzheimer's care
residence in Columbus, Ohio designed specifically for residents with Alzheimer's
disease. This "Karrington Place" residence was constructed using a special
design concept intended to provide the atmosphere and physical environment
believed by the Company to be most effective in assisting residents in the later
stages of Alzheimer's disease. The Company intends to develop additional
Karrington Place models in many of the markets it enters.
The architectural and interior design of the Karrington prototype
incorporates Karrington's philosophy of dedication to excellence in preserving
and enhancing personal dignity, independence, individuality and quality of life.
The Company believes that its residential environments accomplish other
objectives as well, including: (i) lowering the stress and disruption of the
resident and their family that occurs because of a move; (ii) providing a secure
environment that is easily traveled by residents with a wide variety of
ambulation disabilities; (iii) making available a comfortable home-like
environment that welcomes visitation by family and friends; and (iv) supporting
the Company's special activities programs that promote inter-generational
activities and events to bring together elderly residents with younger persons
in the community.
MARKETING
The Company's marketing approach emphasizes consumer education and awareness
directed to potential residents and family members. The adult children of
residents tend to be significant decision-makers in the selection of the
assisted living option. Other significant referral sources include hospital
discharge planners, physicians, churches, social service agencies focused on the
elderly, nursing facilities in the area, home health agencies, social workers,
legal advisors, other health care providers and families of existing residents.
Telephone directory advertising, media products and informal "networking" are
directed by the Company toward educating decision-makers and other referral
sources in a community. The marketing personnel in the Company's corporate
office develop the overall strategy in each market as well as media materials,
databases, direct mail, signage and
27
<PAGE>
community outreach activities. Each residence has a marketing director
responsible for generating and following-up leads, use of the Company's
computer- based marketing tools, coordinating referral activities and providing
tours, counseling and caregiving advice for potential residents and their
families with respect to the Company's residences and services.
Marketing activities begin during the development stage of a residence,
after the Company has obtained site control, and continue with increased
emphasis when an information center opens for a specific residence approximately
eight months prior to opening. Historically, new residences have achieved
deposits on approximately one-third of the units in a residence prior to
opening, and residences have generally reached stable occupancy in less than 12
months.
REGULATION
The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities, which requirements vary from state to state. These
requirements address, among other things: personnel education, training and
records; facility services, including administration of medication and limited
nursing services; physical plant specifications; furnishing of residents' units;
food and housekeeping services; emergency evacuation plans; and residents'
rights and responsibilities. In several states in which the Company operates or
intends to operate, assisted living residences also require a certificate of
need before the residences can be opened. In most states, assisted living
residences are subject to state or local fire and building codes and food
service licensure requirements. Like other health care residences, assisted
living residences are subject to periodic survey or inspection by governmental
authorities. From time to time in the ordinary course of business, the Company
receives survey reports. The Company reviews such reports and takes appropriate
corrective action. Inspection deficiencies are resolved through a plan of
correction, although the reviewing agency typically is authorized to take action
against a licensed facility where deficiencies are noted in the survey process.
Such action may include imposition of fines, imposition of a provisional or
conditional license or suspension or revocation of a license or other sanctions.
Health care is an area of extensive and frequent regulatory change. The
assisted living model for long-term care is relatively new, and, accordingly,
the manner and extent to which it is regulated at the federal and state levels
is evolving. Changes in the laws or new interpretations of existing laws may
have a significant effect on methods and costs of doing business. The Company is
actively involved in monitoring regulatory and legislative changes affecting the
assisted living industry and participates with industry organizations to
encourage improvements to existing laws and regulations.
The success of the Company will depend in part upon its ability to satisfy
applicable regulations and requirements and to procure and maintain required
licenses as the regulatory environment for assisted living evolves. The
Company's operations could also be adversely affected by, among other things,
future regulatory developments such as mandatory increases in the scope and
quality of care to be offered to residents and revisions to licensing and
certification standards.
The Company currently is not a Medicare or Medicaid provider. Under some
state licensure laws, and for the convenience of its residents, some of the
Company's assisted living residences maintain contracts with certain health care
providers and practitioners, including pharmacies, visiting nurse, social
service and home health organizations, through which health care providers make
their health care products or services available to residents. Some of the
services furnished by these contract parties may be covered by the Medicare
programs.
COMPETITION
The long-term care industry is highly competitive. The Company believes the
assisted living sector of long- term care, in which it operates, will become
even more competitive in the future. The Company competes with numerous other
companies providing similar long-term care alternatives such as home health care
agencies, community-based service programs, retirement communities and
convalescent centers, and other assisted living providers. The Company expects
that, as the provision
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<PAGE>
of assisted living services receives increased attention and the number of
states providing reimbursement for assisted living rises, competition will
intensify as a result of new market entrants. The Company also competes with
skilled nursing facilities that provide long-term care services. In implementing
its growth strategy the Company expects increased competition in its efforts to
develop and acquire assisted living communities. Some of the Company's present
and potential competitors are significantly larger and have, or may obtain,
greater financial resources than those of the Company.
PROPRIETARY INFORMATION
The Company is the registered owner of the service mark "Karrington
Communities-Registered Trademark-." The Company believes this mark is of
material importance to its business.
EMPLOYEES
As of June 17, 1996, the Company had approximately 300 employees. None of
the Company's employees are represented by a union or covered by a collective
bargaining agreement. The Company has experienced no work stoppages and
considers its relationship with its employees to be good.
LEGAL PROCEEDINGS
There are no pending material legal proceedings involving the Company.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of June 17, 1996,
regarding each of the Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Richard R. Slager.................................... 42 Chairman of the Board, President and Chief Executive
Officer
Alan B. Satterwhite.................................. 49 Director, Chief Operating Officer and Chief Financial
Officer
Anthony E. DiBlasi................................... 45 Senior Vice President, Construction
John K. Knutson...................................... 53 Senior Vice President, Operations
Stephen Lewis........................................ 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........................................ 58 Director nominee
John H. McConnell.................................... 72 Director nominee
James V. Pickett..................................... 54 Director nominee
Harold A. Poling..................................... 71 Director nominee
Robert D. Walter..................................... 50 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. On or after the date
of this offering, the existing directors will fill the vacancies in the Board of
Directors. The Company has reached agreement with Messrs. Hoag, McConnell,
McCreary, Pickett, Poling and Walter and Dr. Healy to join the Board of
Directors.
Richard R. Slager, a co-founder of the Company, has served as Chairman of
the Board of the Company since April 1996 and as President and Chief Executive
Officer since the Company's formation in 1990. Mr. Slager is the immediate past
Chairman of the Assisted Living Facilities Association of America ("ALFAA"), the
leading trade association serving the assisted living industry. Mr. Slager was a
founding member of ALFAA and currently sits on its Executive Committee.
Alan B. Satterwhite, a co-founder of the Company, has served as a Director
of the Company since April 1996 and as Chief Operating Officer and Chief
Financial Officer since the Company's formation in 1990. Mr. Satterwhite is also
a founding member of ALFAA.
Anthony E. DiBlasi has served as Senior Vice President, Construction since
April 1996. Prior to joining the Company, Mr. DiBlasi was Vice President,
Construction, for Heartland Food Systems, Inc., a major franchisee of Hardees
Restaurants, from 1992 to 1996. Prior thereto he was Vice President, Director of
Construction, for Trio Construction, a general contractor in Columbus, Ohio.
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<PAGE>
John K. Knutson has served as Senior Vice President, Operations since
February 1996. Prior to joining the Company, Mr. Knutson was Vice President of
Operations for LeisureCare, Inc., a senior housing company based in Bellevue,
Washington. Mr. Knutson was a member of ALFAA's Board of Directors from 1992 to
1996 and its Executive Committee for the past two years.
Stephen Lewis has served as Senior Vice President, Development and General
Counsel of the Company since November 1993. Prior to joining the Company, Mr.
Lewis was general counsel of VOCA Corporation, a multi-state operator of
residential centers for persons with mental retardation and other developmental
disabilities.
Mark N. Mace has served as Senior Vice President, Finance and Treasurer of
the Company since March 1996. Prior to joining the Company, Mr. Mace was a
Senior Manager with Deloitte & Touche LLP, a national accounting firm.
Charles H. McCreary has served as Secretary of the Company since May 1996.
Mr. McCreary has been nominated and has agreed to serve as a Director of the
Company for a term beginning on or after the date of this offering. Mr. McCreary
is a partner in the law firm of Bricker & Eckler, which firm has represented the
Company since its formation.
Michael H. Thomas has served as a Director of the Company since May 1996.
Mr. Thomas is a certified public accountant and has been employed by JMAC, Inc.
as its Executive Vice President and Treasurer since 1980.
John S. Christie has served as a Director of the Company since May 1996.
Since October 1, 1995, Mr. Christie has been the President of JMAC, Inc., an
investment company which is a principal shareholder of the Company. Prior to
1995, Mr. Christie was Senior Vice President, Corporate Development, of the
Battelle Memorial Institute, the world's largest private research organization,
based in Columbus, Ohio.
Bernadine P. Healy, M.D. has been nominated and has agreed to serve as a
Director of the Company for a term beginning on or after the date of this
offering. Dr. Healy has served as Dean of Medicine and as a Professor of
Internal Medicine at The Ohio State University since October 1995. Prior thereto
she was Senior Policy Advisor of The Page Center, The Cleveland Clinic
Foundation. From 1991 to 1993, Dr. Healy was the Director of the National
Institutes of Health. Dr. Healy serves on the Board of Directors of National
City Corp., Invacare and Medtronics.
David H. Hoag has been nominated and has agreed to serve as a Director of
the Company for a term beginning on or after the date of this offering. Mr. Hoag
has served as the Chairman of the Board, President and Chief Executive Officer
of The LTV Corporation since June 1991. The LTV Corporation completed a
reorganization under Chapter 11 of the U.S. Bankruptcy Code in June 1993. Mr.
Hoag serves on the Board of Directors of The Chubb Corporation and Lubrizol
Corporation and is the Chairman of the Board of Allegheny College.
John H. McConnell has been nominated and has agreed to serve as a Director
of the Company for a term beginning on or after the date of this offering. Mr.
McConnell is the founder and Chairman of the Board of Worthington Industries,
Inc. Mr. McConnell is Chairman of the Board of U.S. Health, Inc., a regional
not-for-profit acute care provider based in Columbus, Ohio.
James V. Pickett has been nominated and has agreed to serve as a Director of
the Company for a term beginning on or after the date of this offering. Mr.
Pickett has served as Chairman of Pickett Realty Advisors, a Dublin, Ohio-based
asset manager for a hotel portfolio, since 1965, and, in addition, has served as
the Managing Director of the real estate investment group of Banc One Capital
Corporation since 1993. Mr. Pickett serves on the Board of Directors of Wendy's
International, Inc. and Metatec Corporation.
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<PAGE>
Harold A. Poling has been nominated and has agreed to serve as a Director of
the Company for a term beginning on or after the date of this offering. Mr.
Poling is the retired Chairman of the Board of Ford Motor Company and also
serves on the Boards of Directors of Shell Oil Company, The LTV Corporation and
Kellogg Company.
Robert D. Walter has been nominated and has agreed to serve as a Director of
the Company for a term beginning on or after the date of this offering. Mr.
Walter is the Chairman and Chief Executive Officer of Cardinal Health, Inc., a
Dublin, Ohio based health care service provider. Mr. Walter serves on the Board
of Directors of Banc One Corporation and Westinghouse Electric Corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. Upon its creation, the Audit Committee, among other
things, will make recommendations concerning the engagement of independent
auditors, will review the results and scope of the annual audit and other
services provided by the Company's independent auditors and will review the
adequacy of the Company's internal accounting controls. All members of the Audit
Committee will be independent directors.
COMPENSATION COMMITTEE. Upon its creation, the Compensation Committee will
make recommendations to the full Board of Directors concerning salary and bonus
compensation and benefits for executive officers of the Company and will
administer the Incentive Stock Plan with respect to executive officers. The
Compensation Committee will consist of at least three 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>
$ 146,923 $ 56,044
Richard R. Slager..............................................................
Chairman of the Board, President and Chief Executive Officer
$ 123,846 $ 56,044
Alan B. Satterwhite ...........................................................
Chief Operating Officer and Chief Financial Officer
</TABLE>
- ------------------------
(1) The Named Executive Officers participate in the Company's profit sharing
plan together with substantially all the employees of the Company. For
residence employees, profit sharing is based on the operating profit of the
residence. For other employees, profit sharing is based on the profitability
of the Company. Cash payments are made quarterly.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has never had a Compensation Committee or other committee of the
Board of Directors performing similar functions. Decisions concerning
compensation of executive officers of the Company were made by the Company's
Chief Executive Officer. The Board of Directors will establish a Compensation
Committee upon the closing of the offering.
INCENTIVE STOCK PLAN
The purpose of the Karrington Health, Inc. 1996 Incentive Stock Plan (the
"Incentive Stock Plan") is to attract and retain key personnel, including
consultants and advisors to and directors of the Company, and to enhance their
interest in the Company's continued success and to allow all employees an
opportunity to have an ownership interest in the Company.
The Incentive Stock Plan provides for the grant of incentive and
nonqualified stock options, stock appreciation rights ("SARs"), restricted
stock, performance shares and unrestricted Common Shares (individually, an
"Award" or, collectively, "Awards"). In addition, the Incentive Stock Plan
provides for the purchase of Common Shares through payroll deduction by all
employees of the Company who have satisfied certain eligibility requirements. No
Award under the Incentive Stock Plan may be granted after the tenth anniversary
of the adoption of the Incentive Stock Plan. The maximum number of Common Shares
available to be issued under the Incentive Stock Plan is 550,000. The Common
Shares to be delivered under the Incentive Stock Plan will be made available
from the authorized but unissued Common Shares or from Common Shares held in
treasury. The Incentive Stock Plan contains customary provisions with respect to
adjustments for stock splits and similar transactions and the rights of
participants upon mergers and other business combinations.
The Incentive Stock Plan will be administered by the Compensation Committee
of the Board of Directors (the "Committee"), on which only non-employee
directors who satisfy the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), may serve. The Committee
has the discretion to select from among eligible employees those to whom Awards
will be granted and determine the terms and conditions applicable to each Award.
With respect to all non-executive officers (I.E., employees who are not subject
to the provisions of Section 16 of the Exchange Act), the Company's Chief
Executive Officer may make recommendations to the Committee. The Committee also
has the sole and complete authority to interpret the provisions of the Incentive
Stock Plan. The Committee's decisions will be binding on the Company and the
participants in the Incentive Stock Plan. Key employees of, and consultants and
advisors to, the Company and any future subsidiaries who can make substantial
contributions to the successful performance of the Company are eligible to be
granted Awards under the Incentive Stock Plan. It is anticipated that the
Committee's determinations of which eligible individuals will be granted Awards
and the terms thereof will be based on each individual's present and potential
contribution to the success of the Company and its subsidiaries. The approximate
number of persons initially eligible to receive Awards under the Incentive Stock
Plan has not yet been determined. Further, the Incentive Stock Plan provides
that employees will be given the opportunity to purchase additional Common
Shares through a payroll deduction program. The Incentive Stock Plan also
provides that, on an annual basis and without any further action by the
Committee or the Board, the Company will grant director options, as described
below, to each non-employee director of the Board.
STOCK OPTIONS. The Committee may grant non-qualified stock options to
employees, advisors and consultants but may grant incentive options only to
employees. The Committee has discretion to fix the exercise price of such
options, which, in the case of an incentive stock option, may not be less than
the fair market value of the Common Shares at the date of grant. In the case of
an incentive stock option granted to a 10% shareholder of the Company, the
exercise price may not be less than 110% of the fair market value of the Common
Shares at the date of grant. The Committee also has broad discretion as to the
terms and conditions under which options will be exercisable. Incentive stock
options will expire not later than ten years after the date on which they are
granted (or five years in
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<PAGE>
the case of an incentive stock option granted to a 10% shareholder of the
Company). The exercise price of the options may be satisfied in cash or, in the
discretion of the Committee, by exchanging Common Shares owned by the optionee,
or by a combination of the preceding.
DIRECTOR OPTIONS. Under the Incentive Stock Plan, each director who is not
an employee of the Company or of a subsidiary will receive, on the first
business day after the effective date of the Registration Statement of which
this Prospectus is a part, a grant of a non-qualified stock option to purchase
6,000 Common Shares at an exercise price equal to the public offering price set
forth on the cover page of this Prospectus. Thereafter, each person who becomes
a director and is not an employee of the Company or of a subsidiary will
receive, on the first business day after he becomes a director, a grant of a
non-qualified option to purchase 6,000 Common Shares at an exercise price equal
to the fair market value of the Common Shares on the date of grant and, on the
first business day after each succeeding annual meeting of shareholders, each
continuing non-employee director will receive a grant of a non-qualified stock
option to purchase 2,000 Common Shares at an exercise price equal to the fair
market value of the Common Shares on the date of grant. A director option will
be exercisable beginning six months after the date of grant and until the
earlier of (i) the tenth anniversary of the date of grant and (ii) three months
(one year in the case of a director who becomes disabled or dies) after the date
the director ceases to be a director, provided, however, that if a director
ceases to be a director after having been convicted of, or pled guilty to, a
felony, the director option will be canceled on the date the director ceases to
be a director. The exercise price of the director options may be satisfied in
cash or, in the discretion of the Committee, by exchanging Common Shares owned
by the director, or by a combination of cash and Common Shares.
SARS. SARs may be awarded either in tandem with options ("Tandem SARs") or
on a stand-alone basis ("Nontandem SARs"). Tandem SARs may be awarded by the
Committee either at the time the related option is granted or thereafter at any
time prior to the exercise, termination or expiration of the related option. The
exercise price determined with respect to an option shall also be applicable in
connection with the exercise of any Tandem SAR granted with respect to such
option. At the time of grant of a Nontandem SAR, the Committee will specify the
base price of the Common Shares to be issued for determining the amount of cash
or number of the Company's Common Shares to be distributed upon the exercise of
such Nontandem SAR. The base price of Nontandem SARs will not be less than 100%
of the fair market value per share of the Company's Common Shares underlying the
award on the date of grant.
Tandem SARs are exercisable only to the extent that the related option is
exercisable and only for the period determined by the Committee (which period
may expire prior to the expiration date of the related option). Upon the
exercise of all or a portion of Tandem SARs, the related option shall be
canceled with respect to an equal number of the Company's Common Shares.
Similarly, upon exercise of all or a portion of an option, the related Tandem
SARs shall be canceled with respect to an equal number of the Company's Common
Shares. Nontandem SARs shall be exercisable for the period determined by the
Committee.
Upon the surrender of a Tandem SAR and cancellation of the related
unexercised option, the employee will be entitled to receive Common Shares of
the Company having an aggregate fair market value equal to (A) the excess of (i)
the fair market value of one Common Share as of the date the Tandem SAR is
exercised over (ii) the exercise price per share specified in such option,
multiplied by (B) the number of Common Shares subject to the option, or portion
thereof, which is surrendered. Upon surrender of a Nontandem SAR, the employee
will be entitled to receive Common Shares having an aggregate fair market value
equal to (A) the excess of (i) the fair market value of one Common Share as of
the date on which the Nontandem SAR is exercised over (ii) the base price of the
shares covered by the Nontandem SAR multiplied by (B) the number of Common
Shares covered by the Nontandem SAR, or the portion thereof being exercised. The
Committee, in its discretion, may cause all or any portion of the Company's
obligation to an employee in respect of the exercise of an SAR to be satisfied
in cash in lieu of Common Shares. Any fractional shares resulting from the
exercise of an SAR will be paid in cash.
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<PAGE>
RESTRICTED STOCK AWARDS. An award of restricted stock is an Award of Common
Shares that is subject to such restrictions as the Committee deems appropriate,
including forfeiture conditions and restrictions on transfer for a period
specified by the Committee. Awards of restricted stock may be granted under the
Incentive Stock Plan for or without consideration. Restrictions on restricted
stock may lapse in installments based on factors selected by the Committee. The
Committee, in its sole discretion, may waive or accelerate the lapsing of
restrictions in whole or in part. Prior to the expiration of the restricted
period, except as otherwise provided by the Committee, a participant who has
been granted restricted stock will, from the date of grant, have the rights of a
shareholder of the Company in respect of such Common Shares, including the right
to vote such Common Shares and to receive dividends and other distributions
thereon, subject to the restrictions set forth in the Incentive Stock Plan and
in the instrument evidencing such Award. The shares of restricted stock will be
held by the Company, or by an escrow agent designated by the Company, during the
restricted period and may not be sold, assigned, transferred, pledged or
otherwise encumbered until the restrictions have lapsed. The Committee has
authority to determine the duration of the restricted period and the conditions
under which restricted stock may be forfeited, as well as the other terms and
conditions of such awards.
PERFORMANCE SHARE AWARDS. A performance share award is an Award of a number
of units that represent the right to receive a specified number of Common Shares
or cash, or both, upon satisfaction of certain specified performance goals,
subject to such terms and conditions as the Committee determines. Performance
Awards will be earned to the extent such performance goals established by the
Committee are achieved over a period of time specified by the Committee. The
Committee has discretion to determine the value of each performance Award, to
adjust the performance goals as it deems equitable to reflect events affecting
the Company or changes in law or accounting principles or other factors, and to
determine the extent to which performance Awards that are earned may be paid in
the form of cash, Common Shares or a combination of both.
STOCK PURCHASE PLAN. Periodically, all employees of the Company who have at
least one year of service with the Company will be given the opportunity to
purchase Common Shares under the Incentive Stock Plan through a payroll
deduction program. Pursuant to this program, employees will be able to purchase
Common Shares at a price equal to between 85% and 100% of fair market value.
Certain restrictions contained in Section 423 of the Code apply to this payroll
deduction program, including a limitation on the maximum value of Common Shares
that may be purchased by an individual employee in any calendar year. Upon
purchase of Common Shares through payroll deduction, the Company will issue
share certificates to the participating employees.
UNRESTRICTED SHARES. Unrestricted Shares may also be granted at the
discretion of the Committee. Except as required by applicable law, no payment
will be required for Unrestricted Shares.
The Committee has broad discretion as to the specific terms and conditions
of each Award and any rules applicable thereto, including the effect, if any, of
a change in control of the Company. The terms of each Award are to be evidenced
by a written instrument delivered to the participant. The Common Shares issued
under the Incentive Stock Plan are subject to applicable tax withholding by the
Company which, to the extent permitted by Rule 16b-3 under the Exchange Act, may
be satisfied by the withholding of Common Shares issuable under the Incentive
Stock Plan. Any Awards granted under the Incentive Stock Plan may not be
assigned or transferred except by will or the laws of descent and distribution
or pursuant to a qualified domestic relations order.
The Incentive Stock Plan may be amended or terminated at any time by the
Board of Directors; provided, however, that no such amendment or termination may
adversely affect an optionee's or grantee's rights under any Award theretofore
granted under the Incentive Stock Plan, except with the consent of such optionee
or grantee, and except that no amendment may be made without shareholder
approval if the Committee determines that such approval is necessary to comply
with any tax or
35
<PAGE>
regulatory requirement, including any approval that is required as a
prerequisite for exemptive relief from Section 16 of the Exchange Act, for which
or with which the Committee determines that it is desirable to qualify or
comply.
OPTION GRANTS
The following table sets forth certain information regarding grants of
non-qualified options under the Plan made to be effective as of the first
business day after the effective date of the Registration Statement of which
this Prospectus is a part, in all cases at an exercise price equal to the
initial public offering price set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NAME AND POSITION NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Richard R. Slager.......................................................... 20,000
Alan B. Satterwhite........................................................ 20,000
All other executive officers as a group (4 persons)........................ 30,000
All other employees........................................................ 45,000
</TABLE>
In addition, each current non-employee director (3 persons) and each
director nominee (6 persons) will automatically receive a non-qualified stock
option to purchase 6,000 Common Shares as more fully described above under
"DIRECTOR OPTIONS."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE INCENTIVE STOCK PLAN
STOCK OPTIONS. When an optionee exercises a non-qualified stock option, the
difference between the option price and any higher fair market value of the
Common Shares, generally on the date of exercise, will be ordinary income to the
optionee and generally will be allowed as a deduction for federal income tax
purposes to the Company. Any gain or loss realized by an optionee on disposition
of the Common Shares acquired upon exercise of a non- qualified stock option
generally will be capital gain or loss to such optionee, long-term or short-term
depending on the holding period, and will not result in any additional tax
consequences to the Company. The optionee's basis in the Common Shares for
determining gain or loss on the disposition will be the fair market value of
such Common Shares determined generally at the time of exercise.
When an optionee exercises an incentive stock option while employed by the
Company or a subsidiary or within three months (one year for death or
disability) after termination of employment, no ordinary income will be
recognized by the optionee at that time, but the excess (if any) of the fair
market value of the Common Shares acquired upon such exercise over the option
exercise price will be an adjustment to taxable income for purposes of the
federal alternative minimum tax applicable to individuals. If the Common Shares
acquired upon exercise of the incentive stock option are not disposed of prior
to the expiration of one year after the date of acquisition and two years after
the date of grant of the option, the excess (if any) of the sales proceeds over
the aggregate option exercise price of such Common Shares will be long-term
capital gain, but the employer will not be entitled to any tax deduction with
respect to such gain. Generally, if the Common Shares are disposed of prior to
the expiration of such periods (a "disqualifying disposition"), the excess of
the fair market value of such Common Shares at the time of exercise over the
aggregate option price (but not more than the gain on the disposition if the
disposition is a transaction on which a loss, if realized, would be recognized)
will be ordinary income at the time of such disqualifying disposition (and the
Company will generally be entitled to a federal income tax deduction in like
amount). Any gain realized by the optionee as a result of a disqualifying
disposition that exceeds the amount treated as ordinary income will be capital
in nature, long-term or short-term depending on the holding period. If an
incentive stock option is exercised more than three months (one year after death
or disability) after termination of employment, the tax consequences are the
same as described above for non-qualified options.
RESTRICTED STOCK. In the absence of an election by a participant pursuant
to Section 83(b) of the Code, the grant of restricted Common Shares will not
result in taxable income to the participant or a deduction for the Company in
the year of grant. The value of such restricted Common Shares will be
36
<PAGE>
taxable to the participant in the year in which the restrictions lapse.
Alternatively, a participant may elect to treat as income in the year of grant
the fair market value of the restricted Common Shares on the date of grant
pursuant to Section 83(b) of the Code, by making the election within 30 days
after the date of such grant. If such an election were made, such participant
would not be allowed to deduct at a later date the amount included as taxable
income if he or she should forfeit the restricted Common Shares to the Company.
The Company will generally be entitled to a federal income tax deduction equal
to the amount of ordinary income recognized by the participant in the year such
income is recognized. Prior to the lapse of restrictions, dividends paid on the
Common Shares subject to such restrictions will be taxable to the participant as
additional compensation in the year received free of restrictions, and the
Company will be allowed a corresponding federal income tax deduction.
STOCK PURCHASE PLAN. Common Shares purchased pursuant to the stock purchase
plan at 100% of fair market value will be taxed as if such Common Shares had
been acquired on the open market. Therefore, any gain or loss realized by an
employee on disposition of the Common Shares acquired pursuant to the stock
purchase plan generally will be capital gain or loss to such employee, long-term
or short-term depending on the holding period, and will not result in any
additional tax consequences to the Company. If an employee purchases Common
Shares pursuant to the stock purchase plan at less than 100% of fair market
value, then such employee shall treat as ordinary income in the year in which
such employee disposes of such Common Shares (or the year closing with such
employee's death) an amount equal to the lesser of (i) the excess of the fair
market value at the time of such disposition or death over the amount paid for
the Common Shares or (ii) the excess of the fair market value of the Common
Shares at the time the Common Shares were purchased over the amount paid for the
Common Shares.
SARS. There are no income tax consequences to an employee upon the granting
of either a Tandem SAR or a Nontandem SAR. When an employee surrenders an SAR
(either Tandem or Nontandem), the fair market value of the Common Shares of the
Company received on the date of surrender will be ordinary income to the
employee and will be allowed as a deduction for federal income tax purposes to
the Company. If, upon surrender of an SAR, the employee receives cash in lieu of
Common Shares, the amount of cash received by the employee will be ordinary
income and deductible by the Company for federal income tax purposes.
UNRESTRICTED SHARES. To the extent that the Committee grants Unrestricted
Shares to an employee, upon such grant, the fair market value of such Common
Shares will be ordinary income to the employee. At the time of such grant, the
Company will be entitled to a deduction for federal income tax purposes in an
amount equal to the then fair market value of the Unrestricted Shares.
SPECIAL RULES. Special rules apply to a participant who is subject to
Section 16 of the Exchange Act. Certain additional special rules apply if the
exercise price for a stock option is paid in Common Shares previously owned by
the optionee rather than in cash and if the Award is held, following the death
of a participant, by the executors of the participant's estate.
37
<PAGE>
CERTAIN TRANSACTIONS
In December, 1995, the Company entered into a loan agreement with JMAC, an
investment company owned by John H. McConnell and John P. McConnell, the founder
and Chief Executive Officer, respectively, of Worthington Industries, Inc.,
pursuant to which JMAC agreed to provide up to $8.0 million in loans to the
Company during a commitment period expiring December 31, 1996. Borrowings under
the agreement are subordinated to all obligations of the Company to financial
institutions. The loans bear interest at 15% per annum, payable annually. If not
sooner paid, all amounts advanced under the agreement are due January 1, 2000,
or earlier upon the occurrence of certain events. The purpose of the loans is to
provide the Company with equity funds as required by third party lenders for
construction of additional Karrington residences. The agreement contains
customary representations and covenants of the Company and certain conditions to
JMAC's obligation to lend funds. As of May 31, 1996, the outstanding principal
balance and accrued interest due JMAC was approximately $3.5 million. The
Company is expected to borrow an additional $2.0 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, were converted to equity.
In connection with the construction and permanent mortgage loan arrangements
made with third party lenders in respect of residence development, each of
Karrington Operating, DMA, JMAC, JMAC Properties and Messrs. Slager and
Satterwhite have entered into various unlimited and limited guarantee
agreements. Although no proceeds of this offering are allocated or intended to
be applied to make payments of principal or interest under any such financing
arrangements, any resulting increase in operating capital that might
subsequently be applied for such payments or otherwise to satisfy such financing
obligations will reduce the exposure of the guarantors. The guarantors have not
received any compensation for the guarantees, but are indemnified by the Company
against liability arising thereunder.
Charles H. McCreary, the Company's Secretary and a Director nominee, is a
partner in the law firm of Bricker & Eckler, which provides legal services to
the Company in connection with a variety of business and organizational matters.
38
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth the number and percentage of outstanding Common
Shares to be beneficially owned upon completion of the Reorganization
Transactions, and as adjusted to give effect to this offering, by (i) each
person known by the Company to own beneficially more than five percent of any
class of the Company's voting securities; (ii) each director and each person who
has agreed to become a director upon completion of the offering; (iii) each
Named Executive Officer; and (iv) all directors and executive officers of the
Company as a group. The Company believes that each individual or entity named
has sole investment and voting power with respect to Common Shares indicated as
beneficially owned by such individual or entity, except as otherwise noted. The
address of JMAC is 150 E. Wilson Bridge Road, Suite 230, Worthington, Ohio
43085. The address of each of Messrs. Slager and Satterwhite is c/o Karrington
Health, Inc., 919 Old Henderson Road, Columbus, Ohio 43220.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING SHARES TO BE AFTER OFFERING
------------------------ SOLD IN ------------------------
NAME NUMBER PERCENT OFFERING NUMBER PERCENT
- ---------------------------------------------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
JMAC, Inc. ......................................... 2,900,000 66.7% 650,000(1) 2,250,000 33.6%
Richard R. Slager................................... 717,750 16.5% -- 717,750 10.7%
Alan B. Satterwhite................................. 717,750 16.5% -- 717,750 10.7%
Charles H. McCreary................................. -- -- -- -- --
Michael H. Thomas................................... -- -- -- -- --
John S. Christie.................................... -- -- -- -- --
Bernadine P. Healy.................................. -- -- -- -- --
David H. Hoag....................................... -- -- -- -- --
John H. McConnell (2)............................... 2,900,000 66.7% 650,000(1) 2,250,000 33.6%
James V. Pickett.................................... -- -- -- -- --
Harold A. Poling.................................... -- -- -- -- --
Robert D. Walter.................................... -- -- -- -- --
All directors, director nominees and executive
officers as a group (11 persons)(2)................ 4,335,500 99.7% 650,000(1) 3,685,500 55.0%
</TABLE>
- ------------------------
(1) If the Underwriters exercise their over-allotment option in full, JMAC will
sell an additional 225,000 Common Shares.
(2) Includes all of the Common Shares held of record by JMAC, Inc. Mr. McConnell
is the Chairman of the Board and a controlling shareholder of JMAC, and the
directors of JMAC have given Mr. McConnell sole voting and investment power
in the Common Shares of the Company held by it.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 28,000,000 Common
Shares, without par value, and 2,000,000 preferred shares, without par value. As
of the effective date of the Registration Statement of which this Prospectus
forms a part, 4,350,000 Common Shares were issued and outstanding and 550,000
authorized Common Shares were reserved for issuance under the Company's
Incentive Stock Plan. There are no preferred shares issued and outstanding.
COMMON SHARES
Holders of Common Shares are entitled to one vote for each Common Share held
of record on all matters presented to a vote of shareholders. Holders of Common
Shares have no cumulative voting rights and no preemptive rights to purchase or
subscribe for any stock or other securities. There are no conversion rights or
redemption or sinking fund provisions with respect to the Common Shares. Subject
to preferences that may be applicable to any outstanding preferred shares and
subject to the applicable debt instruments of the Company, holders of Common
Shares are entitled to receive such dividends as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In the
event of liquidation, dissolution or winding up of the affairs of the Company,
holders of Common Shares are entitled to share pro rata in distribution of the
assets of the Company remaining after payment or provision for payment of
liabilities and the liquidation payments to holders of outstanding preferred
shares. All outstanding Common Shares are, and the Common Shares offered hereby
when issued and paid for will be, fully paid and nonassessable.
The Common Shares have been approved for quotation on The Nasdaq National
Market.
PREFERRED SHARES
The Company's Board of Directors has the authority to issue up to 2,000,000
preferred shares in one or more series and to fix, by resolution, the
designations, preferences and relative, participating, optional or other rights,
if any, but currently not the voting rights, and the qualifications, limitations
or restrictions thereof, if any, including the number of shares in such series
(which the Board may increase or decrease as permitted by Ohio law), liquidation
preferences, dividend rates, conversion rights and redemption provisions of the
shares constituting any series, without any further vote or action by the
Company's shareholders. Any series of preferred shares so issued could have
priority over the Common Shares with respect to dividend or liquidation rights
or both. In addition, the issuance of preferred shares, or the issuance of
rights to purchase such shares, could have the effect of delaying, deferring or
preventing a change of control of the Company or an unsolicited acquisition
proposal.
REGISTRATION RIGHTS AGREEMENT
The Company, JMAC, Messrs. Slager and Satterwhite and Gregory M. Barrows, an
employee of the Company, are parties to a Registration Rights Agreement dated as
of May 8, 1996 (the "Registration Rights Agreement"). At May 8, 1996, JMAC and
Messrs. Slager, Satterwhite and Barrows held, or had the right to acquire, an
aggregate of 4,350,000 Common Shares of the Company. At any time after January
1, 1997, the holders of 50% or more of the outstanding Common Shares subject to
the Registration Rights Agreement may make up to two requests that the Company
register the offering of some or all of such Common Shares at the Company's
expense. The Company is not required to effect more than one demand registration
during any 18-month period and each demand registration is subject to customary
underwriting and hold-back provisions. Each of the holders of the demand
registration rights under the Registration Rights Agreement have incidental or
piggy-back registration rights in the event that the Company proposes to
register the offering of any of its securities (other than the registration of
employee benefit plans or business combination transactions), as well as in
connection with a qualifying demand registration by another holder or holders of
such demand registration rights. To the extent exercised, such incidental
registration rights are also subject to customary underwriting and hold-back
provisions.
40
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is National City
Bank.
ANTI-TAKEOVER EFFECTS OF ARTICLES OF INCORPORATION, CODE OF REGULATIONS AND THE
OHIO GENERAL CORPORATION LAW
Certain provisions of the Articles of Incorporation and Code of Regulations
of the Company and of the Ohio GCL summarized in the following paragraphs may be
deemed to have an anti-takeover effect and may delay, defer or prevent a tender
offer or takeover attempt that a shareholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by shareholders.
CLASSIFIED BOARD OF DIRECTORS
The Company's Code of Regulations provides for the Board of Directors to be
divided into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of the Board of Directors will be elected each
year. Moreover, the Code of Regulations provides that the shareholders may
remove a Director only for cause. This provision, when coupled with ability of
the Board of Directors to fill vacant directorships, will preclude a shareholder
from removing incumbent directors without cause and simultaneously gaining
control of the Board of Directors by filling the vacancies created by such
removal with its own nominees.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT
Section 1701.54 of the Ohio GCL requires that an action by written consent
of the shareholders in lieu of a meeting be unanimous, except that, pursuant to
Section 1701.11, the code of regulations may be amended by an action by written
consent of holders of shares entitling them to exercise two-thirds of the voting
power of the corporation or, if the articles of incorporation or code of
regulations otherwise provide, such greater or lesser amount, but not less than
a majority. The Company's Code of Regulations provides that, upon the closing of
the offering, no action to amend the Code of Regulations may be taken by the
shareholders without a meeting. This provision may have the effect of delaying,
deferring or preventing a tender offer or takeover attempt that a shareholder
might consider in its best interest.
SUPERMAJORITY VOTING PROVISIONS
The Code of Regulations provides that the provisions relating to the share
ownership required to call a meeting, the classification of the Board of
Directors, removal of directors, the elimination of shareholder action by
written consent to amend the Code of Regulations, indemnification of directors
and supermajority voting may not be repealed or amended in any respect, and no
other provision may be adopted, amended or repealed which would have the effect
of modifying or permitting the circumvention of such provisions, without the
vote of the holders of not less than 66 2/3% of the total voting power of the
Company.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The Code of Regulations provides that shareholders seeking to bring business
before an annual meeting of shareholders, or to nominate candidates for election
as directors at an annual or special meeting of shareholders, must provide
timely notice thereof in writing. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be received no later than the close
of business on the 10th day following the day on which such notice of the date
of the meeting was mailed or such public disclosure was made. The Code of
Regulations also specifies certain requirements for a shareholder's notice to be
in proper written form. These provisions may preclude some shareholders from
bringing matters before the shareholders at an annual or special meeting or from
making nominations for directors at an annual or special meeting.
41
<PAGE>
CONTROL SHARE ACQUISITION STATUTE
Section 1701.831 of the Ohio GCL (the "Control Share Acquisition Statute")
requires shareholder approval of any proposed "control share acquisition" of an
Ohio corporation. A "control share acquisition" is the acquisition, directly or
indirectly, by any person (including any individual, partnership, corporation,
limited liability company, society, association or two or more persons who have
a joint or common interest) of shares of a corporation that, when added to all
other shares of the corporation that may be voted, directly or indirectly, by
the acquiring person, would entitle such person to exercise or direct the
exercise of 20% or more (but less than 33 1/3%) of the voting power of the
corporation in the election of directors or 33 1/3% or more (but less than a
majority) of such voting power or a majority or more of such voting power. Under
the Control Share Acquisition Statute, the control share acquisition must be
approved in advance by the holders of a majority of the outstanding voting
shares represented at a meeting at which a quorum is present and by the holders
of a majority of the portion of the outstanding voting shares represented at
such a meeting excluding the voting shares owned by the acquiring shareholder
and certain "interested shares," including shares owned by officers elected or
appointed by the directors of the corporation and by directors of the
corporation who are also employees of the corporation.
The purpose of the Control Share Acquisition Statute is to give shareholders
of Ohio corporations a reasonable opportunity to express their views on a
proposed shift in control, thereby reducing the coercion inherent in an
unfriendly takeover. The provisions of the Control Share Acquisition Statute
grant to the shareholders of the Company the assurance that they will have
adequate time to evaluate the proposal of the acquiring person, that they will
be permitted to vote on the issue of authorizing the acquiring person's purchase
program to go forward in the same manner and with the same proxy information
that would be available to them if a proposed merger of the Company were before
them and, most importantly, that the interests of all shareholders will be taken
into account in connection with such vote and the probability will be increased
that they will be treated equally regarding the price to be offered for their
Common Shares if the implementation of the proposal is approved.
The Control Share Acquisition Statute applies not only to traditional tender
offers but also to open market purchases, privately negotiated transactions and
original issuances by an Ohio corporation, whether friendly or unfriendly. The
procedural requirements of the Control Share Acquisition Statute could render
approval of any control share acquisition difficult in that a majority of the
voting power of the Company, excluding "interested shares," must be represented
at the meeting and must be voted in favor of the acquisition. It is recognized
that the Control Share Acquisition Statute may have the effect of discouraging
or preventing offers which some shareholders might find financially attractive.
MERGER MORATORIUM STATUTE
Chapter 1704 of the Ohio GCL (the "Merger Moratorium Statute") generally
prohibits a wide range of business combinations and other transactions
(including mergers, consolidations, asset sales, loans, disproportionate
distributions of property and disproportionate issuances or transfers of shares
or rights to acquire shares) between an Ohio corporation and a person that owns,
alone or with other related parties, shares representing at least 10% of the
voting power of such corporation (an "Interested Shareholder") for a period of
three years after such person becomes an Interested Shareholder, unless, prior
to the date that the Interested Shareholder became such, the directors approve
either the transaction or the acquisition of the corporation's shares that
resulted in the person becoming an Interested Shareholder. Following the
three-year moratorium period, the corporation may engage in covered transactions
with an Interested Shareholder only if, among other things, (i) the transaction
receives the approval of the holders of 2/3 of all the voting shares and the
approval of the holders of a majority of the voting shares held by persons other
than an Interested Shareholder or (ii) the remaining shareholders receive an
amount for their shares equal to the higher of the highest amount paid in the
past by the Interested Shareholder for the corporation's shares or the amount
that would be due the shareholders if the corporation were to dissolve. The
Merger Moratorium Statute is
42
<PAGE>
designed to prevent many of the self-dealing activities that often accompany
highly-leveraged acquisitions by prohibiting an Interested Shareholder from
using the corporation or its assets or shares for his special benefit. The
Merger Moratorium Statute is intended to encourage potential tender offerors to
negotiate with the Board of Directors of the Company to ensure that the
shareholders of the Company receive fair and equitable consideration for their
shares. However, the Merger Moratorium Statute could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 6,700,000 Common
Shares outstanding (6,925,000 Common Shares if the Underwriters exercise their
over-allotment option in full). All Common Shares sold in the offering will be
freely transferable without restriction under the Securities Act, except for any
such shares which may be acquired by an affiliate of the Company (as that term
is defined in Rule 144 under the Securities Act). The remaining 3,700,000
outstanding Common Shares held by current shareholders constitute either
"restricted securities," within the meaning of Rule 144, or securities held by
affiliates, and will only be eligible for sale in the open market after the
offering subject to the contractual lockup provisions and applicable
requirements of Rule 144 described below.
In general, under Rule 144, as currently in effect, if a period of at least
two years has elapsed between the later of the date on which restricted
securities were acquired from the Company and the date on which they were
acquired from an affiliate, then the holder of such restricted securities
(including an affiliate) is entitled to sell a number of Common Shares within
any three-month period that does not exceed the greater of (i) one percent of
the then outstanding Common Shares or (ii) the average weekly reported volume of
trading of the Common Shares during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain requirements pertaining to the
manner of such sales, notices of such sales and the availability of current
public information concerning the Company. Affiliates also must sell Common
Shares not constituting restricted securities in accordance with the foregoing
volume limitations and other requirements but without regard to the two-year
holding period. Under Rule 144(k), if a period of at least three years has
elapsed between the later of the date on which restricted securities were
acquired from the Company and the date on which they were acquired from an
affiliate, a holder of such restricted securities who is not an affiliate at the
time of the sale and has not been an affiliate for at least three months prior
to the sale would be entitled to sell the Common Shares immediately without
regard to the volume limitations and other conditions described above.
Sales of a significant number of Common Shares could have an adverse impact
on the market price of the Common Shares. The Company and all of the Company's
executive officers and directors have agreed not to offer, sell, contract to
sell, pledge, grant any option for the sale of, or otherwise dispose or cause
the disposition of, any Common Shares or securities convertible into or
exchangeable or exercisable for such shares, for a period of 180 days after the
date of this Prospectus, without the prior written consent of Smith Barney Inc.,
except in certain limited circumstances.
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.
43
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Shareholder have agreed to
sell to such Underwriter, Common Shares which equal the number of shares set
forth opposite the name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Smith Barney Inc.....................................................................................
J.C. Bradford & Co...................................................................................
-----------
Total.............................................................................................. 3,000,000
-----------
-----------
</TABLE>
The Underwriters are obligated to take and pay for all Common Shares offered
hereby (other than those covered by the over-allotment option described below)
if any such Common Shares are purchased.
The Underwriters, for whom Smith Barney Inc. and J.C. Bradford & Co. are
acting as Representatives, propose to offer a portion of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and a portion of the shares to certain dealers at a
price which represents a concession not in excess of $ 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 Underwriters or to
certain other dealers. After the initial public offering, the public offering
price and such concessions may be changed by the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend to
confirm sales to accounts over which they exercise discretionary authority.
The Company and the Selling Shareholder have granted to the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to an aggregate of 450,000 additional Common Shares at the price to public set
forth on the cover page of this Prospectus less the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. Of the Common Shares subject to the Underwriters'
over-allotment option, up to 225,000 shares may be sold by the Company and up to
225,000 shares may be sold by the Selling Shareholder. To the extent such option
is exercised, each Underwriter will be obligated, subject to certain conditions,
to purchase from the Company and the Selling Shareholder on a pro rata basis
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriter's name in the preceding table bears
to the total number of shares listed in such table.
The Company, the Selling Shareholder and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company, its directors and officers and the holders of all of the
Company's currently outstanding Common Shares (including the Selling
Shareholder) have agreed not to offer, sell, contract to
44
<PAGE>
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, its past and present operations, the past and present earnings of
the Company and the trend of such earnings, the prospects for earnings of the
Company, the present state of the Company's development, the general condition
of the securities market at the time of the offering and the market prices and
earnings of similar securities of comparable companies at the time of the
offering.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for the
Company and the Selling Shareholder by Vorys, Sater, Seymour and Pease,
Columbus, Ohio, and for the Underwriters by Dewey Ballantine, New York, New
York. As to matters governed by Ohio law, Dewey Ballantine will rely upon the
opinion of Vorys, Sater, Seymour and Pease.
CHANGE IN ACCOUNTANTS
On November 7, 1995, the Company replaced Deloitte & Touche LLP with Ernst &
Young LLP as the Company's independent certified public accountants. The reports
of Deloitte & Touche LLP on the consolidated financial statements of the Company
as of December 31, 1994 and for each of the two years in the period then ended
did not contain an adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principle.
During the two years ended December 31, 1994 and the period between December 31,
1994 and the date on which Deloitte & Touche LLP was dismissed, there were no
disagreements between the Company and Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche LLP would have caused Deloitte & Touche LLP to make reference
to the subject matter of such disagreements in connection with its reports.
EXPERTS
The consolidated financial statements of Karrington Health, Inc. at December
31, 1995, and for the year then ended, included in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
are included herein in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of Karrington Operating Company at
December 31, 1994 and for each of the two years in the period ended December 31,
1994, included in this Prospectus and Registration Statement, have been audited
by Deloitte & Touche LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included herein in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
45
<PAGE>
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, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661 and at 7 World Trade Center, 13th Floor, New
York, New York 10048, and copies of such materials may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed fees.
The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all amendments thereto, the "Registration Statement")
under the Securities Act with respect to the Common Shares offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information contained in the Registration Statement and the exhibits and
financial statements thereto, to which reference is hereby made. Statements
contained in this Prospectus as to the contents of any contract, agreement or
other document are not necessarily complete, and, in each instance, reference is
made to the copy of such contract, agreement or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits thereto, may be inspected and copies thereof can be obtained as
described in the preceding paragraph with respect to periodic reports and other
information filed by the Company under the Exchange Act.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements, which have been certified by the
Company's independent auditors.
46
<PAGE>
KARRINGTON HEALTH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Reports of Independent Auditors............................................................................ F-2
Consolidated Balance Sheets................................................................................ F-4
Consolidated Statements of Operations...................................................................... F-5
Consolidated Statements of Owners' Equity (Deficiency)..................................................... F-6
Consolidated Statements of Cash Flows...................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Karrington Health, Inc.
We have audited the accompanying consolidated balance sheet of Karrington
Health, Inc. (the "Company"), formerly Karrington Operating Company (a
partnership) and its affiliates as of December 31, 1995, and the related
consolidated statements of operations, owners' equity (deficiency), and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Karrington
Health, Inc. and its affiliates as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
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
July 16, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Owners of
Karrington Operating Company:
We have audited the accompanying consolidated balance sheets of Karrington
Operating Company and affiliates as of December 31, 1994, and the related
consolidated statements of operations, owners' equity (deficiency), and cash
flows for each of the two years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Karrington Operating Company
and affiliates at December 31, 1994, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1994
in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
January 24, 1995
F-3
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ PRO FORMA
1994 1995 MARCH 31, 1996 MARCH 31, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(NOTE 10)
<S> <C> <C> <C> <C>
Current assets:
Cash.......................................... $ 137,062 $ 144,833 $ 43,253
Accounts receivable........................... 67,520 243,914 193,130
Amounts due from affiliates................... 40,355 523,278 558,211
Prepaid expenses.............................. 121,018 98,821 114,537
-------------- -------------- --------------
Total current assets........................ 365,955 1,010,846 909,131
Property and equipment -- net (NOTE 2).......... 14,844,963 24,879,363 28,571,074
Other assets -- net (NOTE 3).................... 1,081,176 786,233 771,936
-------------- -------------- --------------
Total assets................................ $ 16,292,094 $ 26,676,442 $ 30,252,141
-------------- -------------- --------------
-------------- -------------- --------------
<CAPTION>
LIABILITIES AND OWNERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities...... $ 734,385 $ 1,425,047 $ 2,256,771
Payroll and related taxes..................... 236,827 410,590 287,511
Unearned resident fees........................ 171,006 414,821 321,271
Interest payable.............................. 96,046 129,699 139,115
Current portion of long-term obligations...... 38,905 205,485 204,174
-------------- -------------- --------------
Total current liabilities................... 1,277,169 2,585,642 3,208,842
Long-term obligations (NOTES 5 AND 6):
Subordinated debentures payable to partners... 5,323,443 33,840 1,063,473
Mortgages and other........................... 11,454,753 18,216,053 20,689,613
-------------- -------------- --------------
Total long-term obligations................. 16,778,196 18,249,893 21,753,086
Deferred taxes.................................. -- -- -- $ 1,100,000
Owners' equity (deficiency):
Partners equity (deficiency).................. (1,763,271) 5,840,907 5,290,213 --
Preferred shares, without par value; 2,000,000
shares authorized; no pro forma shares issued
and
outstanding..................................
Common shares, without par value; 28,000,000
shares authorized, 4,350,000 pro forma shares
outstanding.................................. 5,290,213
Retained earnings (deficiency)................ (1,100,000)
-------------- -------------- -------------- --------------
Total liabilities and owners' equity............ $ 16,292,094 $ 26,676,442 $ 30,252,141 $ 5,290,213
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
--------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Residence operations.............. $ 2,288,387 $ 4,976,787 $ 6,219,465 $ 1,390,342 $ 1,822,164
Development and project management
fees............................. 17,500 287,683 524,391 68,480 122,006
------------- -------------- -------------- ------------- -------------
Total revenues.................. 2,305,887 5,264,470 6,743,856 1,458,822 1,944,170
Expenses:
Residence operations.............. 1,907,684 3,453,690 4,380,312 1,069,056 1,327,527
General and administrative........ 170,319 634,016 1,704,694 268,481 574,894
Depreciation and amortization..... 505,125 844,420 979,797 215,663 294,158
Write-off of intangible asset..... -- -- 492,288 -- --
------------- -------------- -------------- ------------- -------------
Total expenses.................. 2,583,128 4,932,126 7,557,091 1,553,200 2,196,579
------------- -------------- -------------- ------------- -------------
Operating income (loss)............. (277,241) 332,344 (813,235) (94,378) (252,409)
Interest expense.................... (707,186) (1,349,827) (1,022,516) (248,118) (314,784)
Equity in net earnings (loss) of
unconsolidated entity (NOTE 7)..... -- (17,470) (105,529) (50,708) 16,499
------------- -------------- -------------- ------------- -------------
Net loss............................ $ (984,427) $ (1,034,953) $ (1,941,280) $ (393,204) $ (550,694)
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
Unaudited pro forma information
(NOTE 10):
Net loss per share................ $ (.45) $ (.13)
Common shares
outstanding...................... 4,350,000 4,350,000
</TABLE>
See accompanying notes.
F-5
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED STATEMENTS OF OWNERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL OWNERS'
EQUITY
--------------
<S> <C>
Balance at January 1, 1993........................................................................ $ 256,109
Net loss........................................................................................ (984,427)
--------------
Balance at December 31, 1993...................................................................... (728,318)
Net loss........................................................................................ (1,034,953)
--------------
Balance at December 31, 1994...................................................................... (1,763,271)
Conversion of long-term obligations and accrued interest to partners' equity (NOTE 6)........... 5,330,458
Cash capital contributions...................................................................... 5,000,000
Capital distributions........................................................................... (785,000)
Net loss........................................................................................ (1,941,280)
--------------
Balance at December 31, 1995...................................................................... 5,840,907
Net loss (unaudited)............................................................................ (550,694)
--------------
Balance at March 31, 1996 (unaudited)............................................................. $ 5,290,213
--------------
--------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................... $ (984,427) $ (1,034,953) $ (1,941,280) $ (393,204) $ (550,694)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Write-off of intangible assets............... -- -- 587,288 95,000 --
Depreciation and amortization................ 505,125 844,420 979,797 215,663 294,158
Net loss on disposal of fixed asset.......... -- -- 6,938 -- --
Straight-line rent expense................... -- 19,520 12,520 2,086 3,534
Equity in net (earnings) loss of
unconsolidated entity....................... -- 17,470 105,529 50,708 (16,499)
Change in operating assets and liabilities:
Accounts receivable........................ (8,907) (50,777) (659,317) (205,104) 15,851
Prepaid expenses........................... (17,442) (36,081) 22,197 (35,725) (15,716)
Accounts payable and accrued
liabilities............................... 34,764 66,752 198,573 (31,195) 246,764
Other liabilities.......................... 307,153 522,018 451,231 230,244 (207,213)
------------ ------------ ------------- ----------- ------------
Net cash provided by (used in) operating
activities................................ (163,734) 348,369 (236,524) (71,527) (229,815)
INVESTING ACTIVITIES
Increase in assets whose use is limited........ -- -- (239,000) -- --
Purchases of property and equipment............ (5,205,831) (2,043,109) (10,023,395) (706,714) (3,291,406)
Payments of pre-opening costs.................. (337,395) (27,881) (314,592) (48,447) (130,469)
Payments for organization costs and other...... (32,535) 16,923 (50,320) (16,129) (45,282)
------------ ------------ ------------- ----------- ------------
Net cash used in investing activities...... (5,575,761) (2,054,067) (10,627,307) (771,290) (3,467,157)
FINANCING ACTIVITIES
Proceeds from mortgages........................ 4,828,695 4,468,654 14,324,119 108,789 2,512,691
Repayment of mortgages......................... -- (3,802,002) (7,474,272) (8,112) (37,515)
Proceeds from JMAC debentures.................. 833,595 1,051,000 40,855 -- 1,029,633
Proceeds from other long-term obligations...... 67,156 -- -- -- --
Payment of other long-term obligations......... (22,108) (11,757) (16,986) -- (6,461)
Proceeds from restricted certificate of
deposit....................................... 150,000 -- -- -- --
Payment for financing fees..................... -- (158,180) (217,114) (5,484) (2,956)
Proceeds from partner's capital
contribution.................................. -- -- 5,000,000 750,000 --
Distributions from unconsolidated entity....... -- -- -- -- 100,000
Payment of partner distributions............... -- -- (785,000) -- --
------------ ------------ ------------- ----------- ------------
Net cash provided by financing
activities................................ 5,857,338 1,547,715 10,871,602 845,193 3,595,392
------------ ------------ ------------- ----------- ------------
Increase (decrease) in cash.................... 117,843 (157,983) 7,771 2,376 (101,580)
Cash at beginning of period.................... 177,202 295,045 137,062 137,062 144,833
------------ ------------ ------------- ----------- ------------
Cash at end of period.......................... $ 295,045 $ 137,062 $ 144,833 $ 139,438 $ 43,253
------------ ------------ ------------- ----------- ------------
------------ ------------ ------------- ----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest......................... $ 902,900 $ 981,412 $ 1,399,347 $ 451,626 $ 467,369
</TABLE>
See accompanying notes.
F-7
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996
1. DESCRIPTION OF THE BUSINESS
Karrington Health, Inc. was incorporated in April 1996 to become the parent
of Karrington Operating Company (Karrington Operating) upon the consummation of
the reorganization transactions which will occur immediately prior to the
effective date of the registration statement (see Note 9). Hereinafter, all
references to the "Company" encompass Karrington Operating and Karrington
Health, Inc. Karrington Operating is an Ohio General Partnership founded in 1991
by DevelopMed Associates, Inc. (Associates) and JMAC Properties, Inc., a private
investment company, the principal shareholder of which is JMAC, Inc. (JMAC). The
trade name "Karrington Communities," a Registered Trademark, is the operating
name of all residences owned and operated by the Company.
The Company operates private pay, assisted living residences under licenses
from state agencies principally in Ohio and adjacent states. The residences are
for older adults who require assistance with activities of daily living. These
activities include bathing, dressing, meal preparation, housekeeping, taking
medications, transportation, and other activities that, because of the
resident's condition, are difficult for residents to accomplish in an
independent living setting. The Company also renders consulting, development and
other support services to the long-term care industry with a focus on assisted
living.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements reflect the operations and development
activities of the Company and three limited partnerships (Affiliates) in which
the Company's partnership interest approximates 98% (see Note 4). Significant
interpartnership transactions and accounts are eliminated in consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from the estimates.
INVESTMENT IN JOINT VENTURE
The Company uses the equity method of accounting for its investment in
Karrington Operating of Oakwood, LLC, a 50% joint venture formed to operate an
assisted living residence in Dayton, Ohio (see Note 7).
REVENUE RECOGNITION
The Company recognizes rental and service fee revenue in the period in which
it is earned. Payments received in advance are reflected as unearned resident
fees in the accompanying consolidated financial statements. Community fees are
payments received from residents at move in and may be refundable ratably over
three months from the date of admission if the resident moves out. Community
fees are recognized as revenue when received less an estimate of the amount that
may be refunded. The Company performs development and project management
consulting services for various operators of assisted living residences and
recognizes revenue for these fees as the services are provided.
F-8
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY
Property and equipment are recorded at cost. In connection with the
development of residence projects, the Company has entered into land purchase
contracts, agreements with architects, financing agreements and construction
contracts which are administered by the Company. All costs related to the
development of residences are capitalized during the construction period.
Indirect project development and pre-acquisition costs are allocated to projects
and also are capitalized. Depreciation, which includes amortization of capital
leases, is computed when assets are placed in service, using the straight-line
method over the respective useful lives of each class of asset which generally
are as follows:
<TABLE>
<S> <C>
Land improvements................................................. 15 years
Buildings......................................................... 40 years
Furnishings and equipment......................................... 10 years
</TABLE>
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995 MARCH 31, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Land and land improvements....................................... $ 1,967,801 $ 2,913,731 $ 2,922,481
Buildings........................................................ 10,037,507 15,277,629 19,782,690
Furnishings and equipment........................................ 1,987,328 2,902,584 3,277,990
Construction-in-progress......................................... 1,637,587 5,100,340 4,087,489
-------------- -------------- --------------
15,630,223 26,194,284 30,070,650
Accumulated depreciation and amortization........................ (785,260) (1,314,921) (1,499,576)
-------------- -------------- --------------
$ 14,844,963 $ 24,879,363 $ 28,571,074
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Construction-in-progress and accounts payable and accrued liabilities
include balances due for work incurred of $318,000, $810,000 and $1,395,000 at
December 31, 1994 and 1995, and March 31, 1996, respectively.
PRE-OPENING COSTS
Pre-opening costs include costs to hire and train staff, costs to prepare
the residence for operation and other related costs incurred prior to opening.
Prior to 1995, costs incurred in connection with preparing the residence for
opening and initial occupancy were capitalized and amortized over three years,
commencing with the opening of the residence. In the first quarter of 1995, the
Company changed the amortization period for pre-opening costs from three years
to one to be more consistent with prevailing industry practice. The effect of
this change was to increase amortization expense by $92,000 in 1995, and by
$28,000 and $15,000 in the first quarters of 1996 and 1995, respectively.
DEFERRED FINANCING COSTS
Financing costs are capitalized and amortized using the interest method for
permanent mortgage loans and the straight-line method, which approximates the
interest method, for construction mortgage loans.
ORGANIZATION COSTS
Organization costs are amortized using the straight-line method over five
years.
F-9
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE
Prior to 1995, the Company capitalized advertising expenditures as part of
pre-opening costs. In the first quarter of 1995, the Company adopted the
provisions of AICPA SOP 93-7, "Reporting on Advertising Costs," and now expenses
advertising expenditures as incurred. The effect of this change was to increase
the net loss by $129,000 for 1995 (increase in residence operations of $199,000
and decrease in depreciation and amortization of $70,000) and $95,000 for the
three months ended March 31, 1995 (increase in residence operations of $113,000
and decrease in depreciation and amortization of $18,000). Advertising
expenditures were approximately $253,000, $250,000, and $276,000 for 1993, 1994
and 1995, respectively. Of these amounts $108,000 and $16,000 were capitalized
in 1993 and 1994 respectively.
INCOME TAXES
Partnership taxable income and losses are allocated to the partners for
inclusion in their respective income tax returns. Accordingly, no provision or
benefit for income taxes is recorded.
IMPACT OF CERTAIN ACCOUNTING STANDARDS
In March, 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company's adoption of Statement
121 in the first quarter of 1996 had no effect on the Company's consolidated
financial statements.
UNAUDITED FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 1996 and for the three
months ended March 31, 1995 and 1996 are unaudited; however, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the consolidated financial statements for
these interim periods have been included. The results for the interim period
ended March 31, 1996 are not necessarily indicative of the results to be
obtained for the full fiscal year ending December 31, 1996.
F-10
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Karrington Concept, less accumulated amortization of $61,176 at
December 31, 1994................................................... $ 536,866 $ -- $ --
Pre-opening costs, less accumulated amortization of $433,759, $47,475
and $127,741 at December 31, 1994 and 1995, and March 31, 1996,
respectively (SEE NOTE 2)........................................... 342,826 291,770 341,816
Deferred financing costs, less accumulated amortization of $85,582,
$46,098 and $63,570 at December 31, 1994 and 1995, and March 31,
1996, respectively (SEE NOTE 1)..................................... 174,098 329,199 314,683
Organization costs and other, less accumulated amortization of
$87,810, $125,925 and $137,533 at December 31, 1994 and 1995 and
March 31, 1996, respectively........................................ 43,856 48,264 81,938
Escrow balances (SEE NOTE 6)......................................... -- 239,000 239,000
Equity (deficiency) in joint venture (SEE NOTE 7).................... (16,470) (122,000) (205,501)
------------- ------------- -------------
$ 1,081,176 $ 786,233 $ 771,936
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Karrington Concept at December 31, 1994 represents an amount allocated
to an intangible asset contributed to the Company in connection with its
organization by Associates. The Company allocated a prorata portion of this
intangible asset to each residence developed. The intangible asset was amortized
using the straight-line method over a period from the commencement of
construction of each residence to December 2001, with the intent that the total
Karrington Concept cost would be amortized over a period not to exceed ten
years. In December 1995, the Company reevaluated this intangible asset and
concluded that a future benefit could not be substantiated. Therefore, a fourth
quarter charge of $492,288 was recorded to write-off this intangible asset.
4. CONSULTING AGREEMENT
The Company had a consulting agreement with the limited partner in its
Affiliates that provided for fees based on a percentage of revenues. Under the
agreement, the Company paid $167,000, $100,000 and $141,000 in such fees in
1993, 1994 and 1995, respectively. In 1995, the Company elected to terminate the
agreement effective March 1996 and a $50,000 termination fee has been accrued at
December 31, 1995. Effective March 1996, the Company exercised, for the account
of JMAC Properties, Inc., a $45,000 buyout option of the limited partner, which
amount has been accrued in accounts payable as a capital distribution at
December 31, 1995.
5. LEASE COMMITMENTS
Two of the Company's facilities are on leased land. The lease period runs to
December 2017 and includes ten additional five (5) year renewal periods. The
Company is responsible for the payment of real estate taxes, site maintenance,
and access road maintenance. Future minimum lease payments under noncancellable
operating leases are as follows for the next five years: 1996 -- $127,000; 1997
- -- $103,000; 1998 -- $76,000; 1999 -- $70,000; and 2000 -- $65,000.
F-11
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996
5. LEASE COMMITMENTS (CONTINUED)
Total rental expense incurred was $106,000 in 1993, $93,000 in 1994, and
$104,000 in 1995. Of these amounts, $23,000, $87,000 and $20,000 was capitalized
to construction-in-progress and pre-opening costs in the respective years.
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------- MARCH 31, 1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
$475,000 mortgage due in monthly principal installments of $1,979
plus interest at prime plus .75% (9.25% at December 31, 1995).
Balance due in 2001............................................. $ -- $ 457,187 $ 451,250
$4,000,000 mortgage due in monthly principal and interest
installments of $33,394 with interest at LIBOR plus 3.73%
adjusted semi-annually (9.605% at December 31, 1995). Balance
due in 2001..................................................... 3,997,998 3,974,283 3,967,841
$9,400,000 of mortgages due in monthly principal and interest
installments of $79,128. Interest is accrued at 8.9% or 9.1%.
Balances are due in 2000........................................ -- 9,371,396 9,346,270
1994 construction mortgages refinanced in 1995................... 7,400,000 -- --
$11,100,000 construction mortgages. Interest is payable monthly
at prime plus 1% or 1.25% (9.75% at December 31, 1995).
Principal is due in 1997 to 2000................................ -- 4,449,122 6,961,811
Subordinated debentures payable to the partners which was
contributed to the Company as capital effective January 1,
1995............................................................ 5,323,443 -- --
Amount outstanding under $8,000,000 subordinated debenture
payable to JMAC, interest at 15%................................ -- 33,840 1,063,473
Other long-term obligations, including installment debt, capital
leases and accrued rent......................................... 95,660 169,550 166,615
-------------- -------------- --------------
Total long-term obligations...................................... 16,817,101 18,455,378 21,957,260
Less current portion............................................. 38,905 205,485 204,174
-------------- -------------- --------------
Long-term obligations, less current portion...................... $ 16,778,196 $ 18,249,893 $ 21,753,086
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The mortgage loans are collateralized by substantially all the assets of
each residence. Certain of the mortgage agreements also require the respective
partnerships to maintain specified debt service coverage ratios. Two of the
mortgages require escrow balances held by the lender totaling $239,000. These
amounts are included in other assets in the Company's consolidated balance
sheets.
Interest costs incurred were $996,000 in 1993, $1,426,000 in 1994,
$1,433,000 in 1995, and $291,000 and $477,000 in the three months ended March
31, 1995 and 1996, respectively. Of these
F-12
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996
6. LONG-TERM OBLIGATIONS (CONTINUED)
amounts $289,000, $76,000, $411,000, $43,000 and $162,000 were capitalized to
construction-in-progress in the respective periods. Interest cost incurred
includes amounts due under obligations to JMAC and amounted to $396,000 and
$462,000 in 1993 and 1994, respectively. No such amounts were incurred for 1995.
The carrying amounts of long-term obligations approximate fair value because
the interest rates are self-adjusting or are comparable to mortgage rates
currently available.
As of December 31, 1995, the long-term obligations (including capital
leases) mature over the next five years as follows: 1996 -- $205,000; 1997 --
$4,176,000; 1998 -- $691,000; 1999 -- $216,000 and 2000 -- $8,935,000.
Effective January 1, 1995, the Company's partners entered into a
recapitalization agreement whereby subordinated debentures and accrued interest
totaling $5,330,458 were converted to owners' equity. In December 1995, the
Company entered into a loan agreement with JMAC. Under the loan agreement, JMAC
agreed to provide up to $8,000,000 in subordinated loans to the Company during a
commitment period expiring December 31, 1996. Borrowings under the agreement are
subordinate to all obligations to financial institutions. Interest accrues at
15% per annum and is payable annually. If not sooner paid, all amounts
outstanding, including accrued interest, are due January 1, 2000 or earlier if
certain events, as defined, occur.
7. INVESTMENT IN JOINT VENTURES
The Company and Sisters of Charity Health Care 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 of Oakwood's
assets. The loan is guaranteed by the Company.
During 1995 the Company entered into an agreement with CHI to develop,
construct and operate up to six additional assisted living facilities by 1998.
The Company typically will have an approximately 20% ownership interest in each
of the residences. Construction is expected to be funded by a combination of
equity contributions and mortgages. As of December 31, 1995 construction had
begun on two residences in Albuquerque, New Mexico and three other sites were
under development.
Under the agreement with CHI, the Company will receive development fees for
each of the projects. In 1995 and for the three months ended March 31, 1995 and
1996, $363,000, $46,000 and $92,000, respectively, of such fees was earned and
recorded as revenue. The Company will serve as manager for each of the
residences and receive management fees upon commencement of operations.
F-13
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996
7. INVESTMENT IN JOINT VENTURES (CONTINUED)
Summary financial information of joint ventures follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets....................................................... $ 196,234 $ 526,636 $ 310,340
Property............................................................. 4,610,048 4,786,285 5,293,716
Other assets......................................................... 234,714 22,466 16,506
------------- ------------- -------------
Total assets......................................................... $ 5,040,996 $ 5,335,387 $ 5,620,562
------------- ------------- -------------
------------- ------------- -------------
Current liabilities.................................................. $ 568,857 $ 626,587 $ 1,090,316
Construction mortgage and other...................................... 3,506,081 4,013,799 4,017,249
Convertible debenture to joint venture partner....................... 999,000 -- --
Joint venture equity................................................. (32,942) 695,001 512,997
------------- ------------- -------------
Total liabilities and joint venture equity........................... $ 5,040,996 $ 5,335,387 $ 5,620,562
------------- ------------- -------------
------------- ------------- -------------
Statements of Operations
Residence revenues................................................... $ 249,284 $ 1,868,618 $ 503,730
Operating expenses................................................... 180,612 1,333,203 330,709
Depreciation and amortization expense................................ 39,395 281,684 42,555
Interest expense..................................................... 64,219 464,788 97,470
------------- ------------- -------------
Total expenses................................................... 284,226 2,079,675 470,734
------------- ------------- -------------
Net income (loss).................................................... $ (34,942) $ (211,057) $ 32,996
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
During the first quarter of 1995, the joint venture changed the amortization
period for pre-opening costs from three years to one. The effect of this change
on the joint venture was to increase amortization expense by $132,877 in 1995
and to reduce amortization expense by $18,053 in the first quarter in 1996. The
Company's equity in net earnings (loss) of unconsolidated entity reflects its
50% share of the effect of this change.
8. COMMITMENTS
The Company has commitments totaling approximately $3,378,000 at December
31, 1995 for various land purchase contracts and $3,600,000 for various
construction contracts. A construction mortgage of $2,200,000 was secured
subsequent to December 31, 1995 for one residence under construction at December
31, 1995. In conjunction with the agreement with CHI (see Note 7), the joint
venture had land purchase commitments totaling approximately $2,183,000 at
December 31, 1995.
9. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
The Company has filed a registration statement with the Securities and
Exchange Commission for the sale of 2,350,000 of its authorized and unissued
common shares. Immediately prior to the effective date of the registration
statement, the shareholders of JMAC Properties, Inc. and Associates 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
F-14
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996
9. SUBSEQUENT EVENTS (CONTINUED)
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.
The Company has granted nonqualified options to acquire 169,000 common
shares. These options will become effective the day following the effective date
of the registration statement with an exercise price equal to the initial public
offering price. The options have a ten-year term with 25% of the options vesting
on each of the second through the fifth anniversaries of the date of grant. In
addition, non-employee directors will receive, on the first business day after
the effective date of the registration statement, grants of nonqualified options
to purchase an aggregate of 54,000 common shares at an exercise price equal to
the public offering price. These director options will become exercisable
beginning six months after the date of grant with a ten-year term.
The Company will account for grants under the Plan in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995, the
FASB issued Statement No. 123, Accounting for Stock-Based Compensation, which
provides an alternative to APB Opinion No. 25, in accounting for stock-based
compensation issued to employees. The Statement allows for a fair value-based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement No. 123 requires disclosure of the
pro forma effect on net income and earnings per share of its fair value-based
accounting for those arrangements. These disclosure requirements are effective
for fiscal years beginning after December 15, 1995. Therefore, the Company will
provide these disclosures in the 1996 consolidated financial statements.
TAX STATUS
As a partnership, Karrington Operating recorded no provision for income
taxes. Partnership income and losses are allocated to JMAC Properties, Inc. and
Associates for inclusion in their respective income tax returns. As a result of
the reorganization (described above), the Company will apply the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred income taxes will be provided for differences in the basis for
tax purposes and for financial accounting purposes of recorded assets and
liabilities, principally, depreciable property and certain capitalized
development costs. A tax provision and a net deferred income tax liability of
approximately $1,100,000 would have been recorded at March 31, 1996 had the
reorganization occurred at that date.
10. PRO FORMA INFORMATION (UNAUDITED)
PRO FORMA BALANCE SHEET INFORMATION
The pro forma balance sheet at March 31, 1996 reflects the effects of the
reorganization transaction (see Note 9) as if it had occurred at that date. JMAC
Properties, Inc. and Associates are not
F-15
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
THE UNAUDITED THREE MONTHS ENDED MARCH 31, 1995 AND 1996
10. PRO FORMA INFORMATION (UNAUDITED) (CONTINUED)
operating entities but exist solely to hold their respective partnership
interests in Karrington Operating. Therefore, the consolidated assets and
liabilities of Karrington Health, Inc. subsequent to the reorganization 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 common shares.
PRO FORMA STATEMENTS OF OPERATIONS INFORMATION
The pro forma net loss per share is based on the number of shares of common
stock outstanding following the reorganization.
F-16
<PAGE>
The following photographs appear on the inside back cover of the Prospectus:
(i) a photograph of the Karrington of Oakwood residence over the caption
"Karrington of Oakwood Catholic Health Initiatives Project Dayton, Ohio"; (ii) a
resident with a young adult over the caption "Intergenerational Activities";
(iii) the grand foyer of a Karrington residence with a similar caption and (iv)
a resident suite of a Karrington residence with a similar caption.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON SHARES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
History and Reorganization..................... 10
Use of Proceeds................................ 11
Dividend Policy................................ 11
Capitalization................................. 12
Dilution....................................... 13
Selected Consolidated Financial Data........... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 15
Business....................................... 20
Management..................................... 30
Certain Transactions........................... 38
Principal and Selling Shareholders............. 39
Description of Capital Stock................... 40
Shares Eligible for Future Sale................ 43
Underwriting................................... 44
Legal Matters.................................. 45
Change in Accountants.......................... 45
Experts........................................ 45
Additional Information......................... 46
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
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 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:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee...................... $ 20,225
National Association of Securities Dealers, Inc. filing fee.............. 6,365
Nasdaq National Market listing fee....................................... 34,250
Printing and engraving costs............................................. 100,000
Legal fees and expenses.................................................. 215,000
Accountants' fees and expenses........................................... 175,000
Blue sky qualification fees and expenses................................. 42,000
Transfer agent fees...................................................... 2,500
Miscellaneous............................................................ 4,660
---------
Total................................................................ $ 600,000
---------
---------
</TABLE>
- ------------------------
* 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, 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
II-1
<PAGE>
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 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
II-2
<PAGE>
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 with respect
to the new or surviving corporation as he would if he had served the new or
surviving corporation in the same capacity.
II-3
<PAGE>
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, and with respect to any criminal action or proceeding, he
had no reasonable cause to believe his conduct 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 has purchased insurance coverage under policies
issued by National Union Fire Insurance Co. (AIG), which 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.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS:
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement
3.1+ Form of Amended Articles of Incorporation of the Company
3.2+ Form of Code of Regulations 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)
10.6+ Letter of intent dated April 29, 1996, by and between the Company and Sisters of
Charity Health Care Systems, Inc.
16.1+ Letter re change in certifying accountant
21.1+ List of Subsidiaries
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 David H. Hoag, director nominee
23.6 Consent of John H. McConnell, director nominee
23.7 Consent of Charles H. McCreary, director nominee
23.8 Consent of James V. Pickett, director nominee
23.9 Consent of Harold A. Poling, director nominee
23.10 Consent of Robert D. Walter, director nominee
24.1+ Powers of Attorney
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
(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
II-5
<PAGE>
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 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 Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Columbus, State of Ohio, on July 16, 1996.
KARRINGTON HEALTH, INC.
By: /S/ RICHARD R. SLAGER
-----------------------------------
Richard R. Slager
CHAIRMAN OF THE BOARD, PRESIDENT
AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ----------------------------------------------- ----------------
<C> <S> <C>
/S/ RICHARD R. SLAGER Chairman of the Board, President and Chief
------------------------------------ Executive Officer (PRINCIPAL EXECUTIVE
Richard R. Slager OFFICER) July 16, 1996
/S/ ALAN B. SATTERWHITE* Director, Chief Operating Officer and Chief
------------------------------------ Financial Officer (PRINCIPAL FINANCIAL AND
Alan B. Satterwhite ACCOUNTING OFFICER) July 16, 1996
/S/ JOHN S. CHRISTIE* Director
------------------------------------
John S. Christie July 16, 1996
/S/ MICHAEL H. THOMAS* Director
------------------------------------
Michael H. Thomas July 16, 1996
*By: /S/ RICHARD R. SLAGER
------------------------------
Richard R. Slager
(ATTORNEY-IN-FACT)
</TABLE>
II-7
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1+ Form of Amended Articles of Incorporation of the Company
3.2+ Form of Code of Regulations 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)
10.6+ Letter of Intent dated April 29, 1996, by and between the Company and Sisters of Charity Health Care
Systems, Inc.
16.1+ Letter re change in certifying accountant
21.1+ List of Subsidiaries
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 David H. Hoag, director nominee
23.6 Consent of John H. McConnell, director nominee
23.7 Consent of Charles H. McCreary, director nominee
23.8 Consent of James V. Pickett, director nominee
23.9 Consent of Harold A. Poling, director nominee
23.10 Consent of Robert D. Walter, director nominee
24.1+ Powers of Attorney
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
EXHIBIT 1.1
3,000,000 SHARES
KARRINGTON HEALTH, INC.
COMMON SHARES
UNDERWRITING AGREEMENT
July __, 1996
SMITH BARNEY INC.
J.C. BRADFORD & CO.
AS REPRESENTATIVES OF THE SEVERAL UNDERWRITERS
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Karrington Health, Inc., an Ohio corporation (the "Company"), proposes
to issue and sell an aggregate of 2,350,000 of its common shares, no par
value per share (the "Common Shares"), to the several Underwriters named in
Schedule I hereto (the "Underwriters"), and JMAC, Inc. (the "Selling
Shareholder") proposes to sell to the several Underwriters 650,000 Common
Shares. The 2,350,000 Common Shares to be issued and sold to the
Underwriters by the Company and the 650,000 Common Shares to be sold to the
Underwriters by the Selling Shareholder are hereinafter referred to as the
"Firm Shares." In addition, solely for the purpose of covering
over-allotments, the Company and the Selling Shareholder each proposes to
sell to the Underwriters, upon the terms and conditions set forth in Section
2 hereof, up to an additional 225,000 Common Shares (the "Additional
Shares"). The Firm Shares and the Additional Shares are hereinafter
collectively referred to as the "Shares." The Company and the Selling
Shareholder are hereinafter sometimes referred to as the "Sellers."
The Sellers wish to confirm as follows their agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Shares by the
Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 under the Act (the "registration
statement"),
<PAGE>
including a prospectus subject to completion, relating to the Shares.
The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits) as
amended at the time it becomes effective or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at
the time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before
the offering of the Shares may commence, the term "Registration Statement" as
used in this Agreement means the registration statement as amended by said
post-effective amendment. If an abbreviated registration statement is
prepared and filed with the Commission in accordance with Rule 462(b) under
the Act (an " Abbreviated Registration Statement"), the term "Registration
Statement" as used in this Agreement includes the Abbreviated Registration
Statement. The term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in
reliance on Rule 430A under the Act and such information is included in a
prospectus filed with the Commission pursuant to Rule 424(b) under the Act,
the term "Prospectus" as used in this Agreement means the prospectus in the
form included in the Registration Statement as supplemented by the addition
of the Rule 430A information contained in the prospectus filed with the
Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used
in this Agreement means the prospectus subject to completion in the form
included in the registration statement at the time of the initial filing of
the registration statement with the Commission, and as such prospectus shall
have been amended from time to time prior to the date of the Prospectus.
2. AGREEMENTS TO SELL AND PURCHASE. Subject to such adjustments as you
may determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell
to each Underwriter and, upon the basis of the representations, warranties
and agreements of the Sellers herein contained and subject to all the terms
and conditions set forth herein, each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $ per
share (the "Purchase Price Per Share"), that number of Firm Shares which
bears the same proportion to the aggregate number of Firm Shares to be issued
and sold by the Company as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 12 hereof) bears to the aggregate number of
Firm Shares to be sold by the Sellers.
Subject to such adjustments as you may determine in order to avoid
fractional shares, the Selling Shareholder agrees, subject to all the terms
and conditions set forth herein, to sell to each Underwriter and, upon the
basis of the representations, warranties and agreements of the Sellers herein
contained and subject to all the terms and conditions set forth herein, each
Underwriter agrees to purchase from the Selling Shareholder at the Purchase
Price Per Share that number of Firm Shares which bears the same proportion to
the number of Firm Shares to be sold by the Selling Shareholder as the number
of Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto (or such number of Firm Shares increased as set forth in Section 12
hereof) bears to the aggregate number of Firm Shares to be sold by the
Sellers.
The Company and the Selling Shareholder each also agrees, subject to
all the terms and conditions set forth herein, to sell to the Underwriters,
and, upon the basis of the representations, warranties and agreements of the
Sellers herein contained and subject to all the terms and conditions set
forth herein, the Underwriters shall have the right to purchase from each of
the Company and the Selling Shareholder, at the purchase price per share,
pursuant to an option (the "over-allotment option") which may be exercised at
any time and from time to time prior to 9:00 P.M., New York City time, on the
30th day after the date of the Prospectus (or, if such 30th day shall be a
Saturday or Sunday or a holiday, on the next business day
2
<PAGE>
thereafter when the New York Stock Exchange is open for trading), up to an
aggregate of 225,000 Additional Shares. Upon any exercise of the
over-allotment option, each Underwriter, severally and not jointly, agrees to
purchase from the Company and the Selling Shareholder, on a pro rata basis,
the number of Additional Shares (subject to such adjustments as you may
determine in order to avoid fractional shares) which bears the same
proportion to the number of Additional Shares to be purchased by the
Underwriters as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number of Firm Shares increased as
set forth in Section 12 hereof) bears to the aggregate number of Firm Shares.
Certificates in transferable form for the Shares the Selling
Shareholder agrees to sell pursuant to this Agreement have been placed in
custody with National City Bank (the "Custodian") for delivery under this
Agreement pursuant to a Custody Agreement and Power of Attorney (the "Custody
Agreement") executed by the Selling Shareholder appointing Michael H. Thomas
and John S. Christie as agents and attorneys-in-fact (the
"Attorneys-in-Fact"). The Selling Shareholder agrees that (i) the Shares
represented by the certificates held in custody pursuant to the Custody
Agreement are subject to the interests of the Underwriters and the Company,
(ii) the arrangements made by the Selling Shareholder for such custody are,
except as specifically provided in the Custody Agreement, irrevocable and
(iii) the obligations of the Selling Shareholder hereunder and under the
Custody Agreement shall not be terminated by any act of the Selling
Shareholder or by operation of law, whether by the dissolution, winding up,
distribution of assets or other event affecting the legal existence of the
Selling Shareholder or the occurrence of any other event. If any event
listed in the preceding sentence shall occur before the delivery of the
Shares hereunder, certificates for the Shares to be sold by the Selling
Shareholder shall be delivered to the Underwriters by the Attorneys-in-Fact
in accordance with the terms and conditions of this Agreement and the Custody
Agreement as if such event had not occurred, regardless of whether or not the
Attorneys-in-Fact or any Underwriter shall have received notice of such
event.
3. TERMS OF PUBLIC OFFERING. The Sellers have been advised by you that
the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and
initially to offer the Shares upon the terms set forth in the Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office
of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at
10:00 A.M., New York City time, on , 1996 (the "Closing Date").
The place of closing for the Firm Shares and the Closing Date may be varied
by agreement between you, the Company and the Attorneys-in-Fact.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the aforementioned
office of Smith Barney Inc. at such time on such date (the "Option Closing
Date"), which may be the same as the Closing Date but shall in no event be
earlier than the Closing Date nor earlier than two nor later than ten
business days after the giving of the notice hereinafter referred to, as
shall be specified in a written notice from you on behalf of the Underwriters
to the Company and the Attorneys-in-Fact of the Underwriters' determination
to purchase a number, specified in such notice, of Additional Shares. The
place of closing for any Additional Shares and the Option Closing Date for
such Shares may be varied by agreement between you, the Company and the
Attorneys-in-Fact.
3
<PAGE>
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such
denominations as you shall request by written notice, it being understood
that a facsimile transmission shall be deemed written notice, prior to 9:30
A.M., New York City time, on the second business day preceding the Closing
Date or any Option Closing Date, as the case may be. Such certificates shall
be made available to you in New York City for inspection and packaging not
later than 9:30 A.M., New York City time, on the business day next preceding
the Closing Date or the Option Closing Date, as the case may be. The
certificates evidencing the Firm Shares and any Additional Shares to be
purchased hereunder shall be delivered to you on the Closing Date or the
Option Closing Date, as the case may be, against payment of the purchase
price therefor in immediately available funds.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment
thereto or any Abbreviated Registration Statement to be declared, or, in the
case of an Abbreviated Registration Statement, to become effective before the
offering of the Shares may commence, the Company will endeavor to cause the
Registration Statement or such post-effective amendment or Abbreviated
Registration Statement to become effective as soon as possible and will
advise you promptly and, if requested by you, will confirm such advice in
writing, when the Registration Statement or such post-effective amendment or
Abbreviated Registration Statement has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission
for amendment of or a supplement to the Registration Statement, any
Prepricing Prospectus or the Prospectus or for additional information; (ii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction or the
initiation of any proceeding for such purpose; and (iii) within the period of
time referred to in paragraph (f) below, of any change in the Company's
condition (financial or other), business, prospects, properties, net worth or
results of operations, or of the happening of any event, which in any of
these cases makes any statement of a material fact made in the Registration
Statement or the Prospectus (as then amended or supplemented) untrue or which
requires the making of any additions to or changes in the Registration
Statement or the Prospectus (as then amended or supplemented) in order to
state a material fact required by the Act or the regulations thereunder to be
stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus (as
then amended or supplemented) to comply with the Act or any other law. If at
any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Company will furnish to you, without charge, three copies of
the registration statement as originally filed with the Commission and of
each amendment thereto, including, executed signature pages, financial
statements and all exhibits to the registration statement and will also
furnish to you, without charge, such number of conformed copies of the
registration statement as originally filed and of each amendment thereto, but
without exhibits, as you may reasonably request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which you
shall not previously have been advised or to which you shall reasonably
object after being so advised or (ii) so long as, in the opinion of counsel
4
<PAGE>
for the Underwriters, a prospectus is required to be delivered in connection
with sales by any Underwriter or dealer, file any information, documents or
reports pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), without delivering a copy of such information, documents or
reports to you, as Representatives of the Underwriters, prior to or
concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered or will deliver to you, without charge, in such
quantities as you have reasonably requested or may hereafter reasonably
request, copies of each form of the Prepricing Prospectus. The Company
consents to the use, in accordance with the provisions of the Act and with
the securities or Blue Sky laws of the jurisdictions in which the Shares are
offered by the several Underwriters and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the
reasonable opinion of counsel for the Underwriters a prospectus is required
by the Act to be delivered in connection with sales by any Underwriter or
dealer, the Company will expeditiously deliver to each Underwriter and each
dealer, without charge, as many copies of the Prospectus (and of any
amendment or supplement thereto) as you may reasonably request. The Company
consents to the use of the Prospectus (and of any amendment or supplement
thereto) in accordance with the provisions of the Act and with the securities
or Blue Sky laws of the jurisdictions in which the Shares are offered by the
several Underwriters and by all dealers to whom Shares may be sold, both in
connection with the offering and sale of the Shares and for such period of
time thereafter as the Prospectus is required by the Act to be delivered in
connection with sales by any Underwriter or dealer. If during such period of
time any event shall occur that in the judgment of the Company or in the
reasonable opinion of counsel for the Underwriters is required to be set
forth in the Prospectus (as then amended or supplemented) or should be set
forth therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary to supplement or amend the Prospectus to comply with the Act or any
other law, the Company will forthwith prepare and, subject to the provisions
of paragraph (d) above, file with the Commission an appropriate supplement or
amendment thereto and will expeditiously furnish copies thereof to the
Underwriters and dealers in such quantities as you shall reasonably request.
In the event that the Company and you, as Representatives of the several
Underwriters, agree that the Prospectus should be amended or supplemented,
the Company, if requested by you, will promptly issue a press release
announcing or disclosing the matters to be covered by the proposed amendment
or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers under
the securities or Blue Sky laws of such jurisdictions as you may designate
and will file such consents to service of process or other documents
necessary or appropriate in order to effect such registration or
qualification; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified
or to take any action that would subject it to service of process in suits,
other than those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as
practicable after the end of such period, which consolidated earnings
statement shall satisfy the provisions of Section 11(a) of the Act.
5
<PAGE>
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, and (ii) from time to
time such other information concerning the Company as you may reasonably
request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 12 hereof or by notice given by you terminating
this Agreement pursuant to Section 12 or Section 13 hereof) or if this
Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Company or the Selling Shareholder to comply with
the terms or fulfill any of the conditions of this Agreement, the Company
agrees to reimburse the Representatives for all out-of-pocket expenses
(including reasonable fees and expenses of counsel for the Underwriters)
incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectus pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not sell,
offer to sell, contract to sell or otherwise transfer or dispose of any
Common Shares (or any securities convertible into or exercisable or
exchangeable for Common Shares), or grant any options or warrants to purchase
Common Shares, for a period of 180 days after the date of the Prospectus,
without the prior written consent of Smith Barney Inc., except for issuances
of options pursuant to the Company's incentive stock plan (provided that such
options shall not be exercisable for a period of 180 days after the date of
the Prospectus).
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
the Common Shares to facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the Common Shares
approved for quotation, subject to notice of issuance, on the Nasdaq National
Market prior to or concurrently with the effectiveness of the registration
statement.
6. AGREEMENTS OF THE SELLING SHAREHOLDER. The Selling Shareholder agrees
with the several Underwriters as follows:
(a) The Selling Shareholder will take all reasonable actions in
cooperation with the Company and the Underwriters to cause the registration
statement, any Abbreviated Registration Statement and any post-effective
amendment thereto to become effective at the earliest possible time.
6
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(b) The Selling Shareholder will pay all federal and other taxes, if
any, on the transfer or sale of any Shares that are sold by the Selling
Shareholder to the Underwriters.
(c) The Selling Shareholder will do or perform all things required to
be done or performed by the Selling Shareholder prior to the Closing Date or
any Option Closing Date, as the case may be, to satisfy all conditions
precedent to the delivery of the Shares by the Selling Shareholder pursuant
to this Agreement.
(d) The Selling Shareholder will not offer, sell, contract to sell or
otherwise dispose of, or grant any option to purchase, any Common Shares (or
any securities convertible into or exercisable or exchangeable for Common
Shares) owned by such Selling Shareholder, except for the sale of Shares to
the Underwriters pursuant to this Agreement, or exercise any registration
rights with respect to the sale of Common Shares, without the prior written
consent of Smith Barney Inc. for a period of 180 days after the date of the
Prospectus.
(e) Except as stated in this Agreement and in the Prepricing
Prospectus and the Prospectus, the Selling Shareholder will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
the Common Shares to facilitate the sale or resale of the Shares.
(f) The Selling Shareholder will advise you promptly, and if
requested by you, will confirm such advice in writing, within the period of
time referred to in Section 5(f) hereof, of any change in information
relating to the Selling Shareholder and of any change in the Company's
condition (financial or other), business, prospects, properties, net worth or
results of operations or any other information relating to the Company or
relating to any matter stated in the Prospectus or any amendment or
supplement thereto that comes to the attention of the Selling Shareholder
that suggests that any statement made in the Registration Statement (as then
amended or supplemented, if amended or supplemented) is or may be untrue in
any material respect or that the Registration Statement (as then amended or
supplemented, if amended or supplemented) omits or may omit to state a
material fact or a fact necessary to be stated therein in order to make the
statements therein not misleading in any material respect or that any
statement made in the Prospectus (as then amended or supplemented, if amended
or supplemented) is or may be untrue in any material respect or that the
Prospectus (as then amended or supplemented, if amended or supplemented)
omits or may omit to state a material fact or a fact necessary to be stated
therein in order to make the statements therein, in light of the
circumstances under which they were made, not misleading in any material
respect.
(g) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982, as amended, with respect to the transactions
herein contemplated, the Selling Shareholder agrees to deliver to you prior
to or on the Closing Date a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement specified
by Treasury Department regulations in lieu thereof).
7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement
thereto, or filed pursuant to Rule 424 under the
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Act, complied when so filed in all material respects with the provisions of
the Act. The Commission has not issued any order preventing or suspending
the use of any Prepricing Prospectus.
(b) The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto or any Abbreviated Registration Statement shall become
effective, and the Prospectus and any supplement or amendment thereto when
filed with the Commission under Rule 424(b) under the Act, complied or will
comply in all material respects with the provisions of the Act and, in the
case of such registration statement or Abbreviated Registration Statement,
did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or in the case of
such Prospectus, did not or will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that this representation
and warranty does not apply to statements in or omissions from the
registration statement or the Prospectus made in reliance upon and in
conformity with information relating to any Underwriter furnished to the
Company in writing by or on behalf of any Underwriter through you expressly
for use therein.
(c) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable,
are free of any preemptive or similar rights and have been issued and sold in
compliance with all federal and state securities laws; the Shares to be
issued and sold by the Company have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and free
of any preemptive or similar rights; and the capital stock of the Company
conforms in all material respects to the description thereof in the
Registration Statement and the Prospectus.
(d) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Ohio with full corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and the Prospectus,
and is duly registered and qualified to conduct its business and is in good
standing in each jurisdiction or place where the nature of its properties or
the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify would not have a material
adverse effect on the condition (financial or other), business, prospects,
properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse
Effect").
(e) All the Company's subsidiaries (as defined in the Act), including,
without limitation, the Partnerships (as defined below), are listed in
Exhibit 21.1 to the Registration Statement and are referred to herein
individually as a "Subsidiary" and collectively as the "Subsidiaries." Each
Subsidiary that is a corporation (a "Corporate Subsidiary") has been duly
incorporated and is validly existing and in good standing in the jurisdiction
of its incorporation, with full corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus and is duly registered and
qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify would not have a Material Adverse Effect.
All the outstanding shares of capital stock of each Corporate Subsidiary have
been duly authorized and validly issued, are fully paid and nonassessable,
and are wholly-owned by the Company directly or indirectly through one or
more of the other Subsidiaries, free and clear of any lien, adverse
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claim, security interest, equity or other encumbrance, except as disclosed in
the Registration Statement and the Prospectus (or any amendment or supplement
thereto).
(f) Each of the partnerships in which the Company or a Subsidiary
holds a general partnership interest or is the managing general partner
(collectively, the "Partnerships") has been duly organized and is an existing
partnership under the laws of the jurisdiction of its organization, with the
partnership power and authority to own, lease and operate its properties and
to conduct its business as currently operated and conducted and is duly
qualified to conduct its business as a foreign partnership in each
jurisdiction in which the nature of its properties or the conduct of its
business requires such qualification, except where the failure so to qualify
does not have a Material Adverse Effect. The partnership interests held
directly or indirectly by the Company are owned free and clear of any lien,
adverse claim, security interest, equity or other encumbrance, except as
disclosed in the Prospectus. To the knowledge of the Company, each
partnership agreement pursuant to which the Company or a Subsidiary holds a
general partnership interest in a Partnership is in full force and effect and
constitutes the legal, valid and binding agreement of the parties thereto,
enforceable against such parties in accordance with the terms thereof, except
as enforcement thereof may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles. There has been no material breach of or
default under, and no event which with notice or lapse of time would
constitute a material breach of or default under, such agreements by the
Company or any Subsidiary or, to the Company's knowledge, any other party to
such agreements.
(g) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries or any of
their respective properties is subject, that are required to be described in
the Registration Statement or the Prospectus but are not described as
required. There are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement
or the Prospectus or to be filed as an exhibit to the Registration Statement
that are not described or filed as required by the Act. Neither the Company
nor any of the Subsidiaries is involved in any strike, job action or labor
dispute, and to the Company's knowledge, no such action or dispute is
threatened.
(h) Neither the Company nor any of the Subsidiaries is (i) in
violation of its articles of incorporation or regulations or other
organizational documents, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries or of any decree of any court or governmental agency or body
having jurisdiction over the Company or any of the Subsidiaries, or (ii) in
default in the performance of any material obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness
or in any material agreement, indenture, lease or other material instrument
to which the Company or any of the Subsidiaries is a party or by which any of
them or any of their respective properties is bound.
(i) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the consummation
by the Company of the transactions contemplated hereby (i) requires any
consent, approval, authorization or other order of, or registration or filing
with, any court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required for the registration
of the Shares under the Act and the Exchange Act, all of which have been or
will be effected in accordance with this Agreement, or such as are required
under the securities or Blue Sky laws of various jurisdictions) or conflicts
or will conflict with or constitutes or will constitute a breach of, or a
default under, the articles of incorporation or regulations or other
organizational documents of the Company or any of the Subsidiaries or (ii)
conflicts or will conflict with or constitutes or will
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constitute a breach of, or a default under, any agreement, indenture, lease
or other instrument to which the Company or any of the Subsidiaries is a
party or by which the Company or any of the Subsidiaries or any of their
respective properties is bound which is material to the Company and its
Subsidiaries taken as a whole, or violates or will violate any statute, law,
regulation or filing or judgment, injunction, order or decree applicable to
the Company or any of the Subsidiaries or any of their respective properties,
or will result in the creation or imposition of any material lien, charge or
encumbrance upon any property or assets of the Company or any of the
Subsidiaries pursuant to the terms of any agreement or instrument to which
any of them is a party or by which any of them may be bound or to which any
of their respective properties or assets is subject.
(j) The accountants, Ernst & Young LLP and Deloitte & Touche LLP, who
have certified or shall certify the financial statements filed or to be filed
as part of the Registration Statement or the Prospectus (or any amendment or
supplement thereto), are independent public accountants as required by the
Act.
(k) The historical financial statements, together with related notes
forming part of the Registration Statement and the Prospectus (and any
amendment or supplement thereto), comply in all material respects with the
requirements of the Act and present fairly, in all material respects, the
consolidated financial position, results of operations and changes in
partners' equity and cash flows of the Company and the Subsidiaries on the
basis stated in the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related notes
have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and
data set forth in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) are accurately presented in all material
respects and prepared on a basis consistent with such financial statements
and the books and records of the Company.
(l) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement; the
execution and delivery of, and the performance by the Company of its
obligations under, this Agreement have been duly and validly authorized by
the Company, and this Agreement has been duly executed and delivered by the
Company and constitutes the valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
as rights to indemnity and contribution hereunder may be limited by federal
or state securities laws or principles of public policy and subject to the
qualification that the enforceability of the Company's obligations hereunder
may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and by general equitable principles.
(m) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto),
neither the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, that is
material to the Company and the Subsidiaries taken as a whole, and there has
not been any material change in the capital stock, or material increase in
the short-term or long-term debt, of the Company or any of the Subsidiaries,
or any material adverse change in the condition (financial or other),
business, prospects, properties, net worth or results of operations of the
Company and the Subsidiaries taken as a whole.
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(n) Each of the Company and the Subsidiaries has good and marketable
title to all property (real and personal) described in the Prospectus as
being owned by it, free and clear of all liens, claims, security interests or
other encumbrances except such as are described in the Registration Statement
and the Prospectus or in a document filed as an exhibit to the Registration
Statement or such as (i) do not materially affect the value of such property
or (ii) would not have a Material Adverse Effect, and all the property
described in the Prospectus as being held under lease by the Company or any
of the Subsidiaries is held by it under valid, subsisting and enforceable
leases with such exceptions as do not materially interfere with the use made
of such property.
(o) The Company has not distributed and, prior to the later to occur
of the Closing Date and completion of the distribution of the Shares, will
not distribute any offering material in connection with the offering and sale
of the Shares other than the Registration Statement, the Prepricing
Prospectus, the Prospectus or other materials, if any, permitted by the Act.
(p) Each of the Company and the Subsidiaries has such permits,
licenses, franchises, authorizations and clearances ("Permits") of
governmental and regulatory authorities as are necessary to own, lease and
operate its properties and to conduct its business in the manner described in
the Prospectus, including, without limitation, such Permits as are required
under such federal and state healthcare laws as are applicable to the Company
and the Subsidiaries and their respective businesses, subject to such
qualifications as may be set forth in the Prospectus and except where the
failure to have such Permits would not have a Material Adverse Effect;
subject to such qualifications as may be set forth in the Prospectus, each of
the Company and the Subsidiaries has fulfilled and performed all its material
obligations with respect to the Permits, and no event has occurred which
allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the rights
of the holder of any Permit, subject in each case to such qualification as
may be set forth in the Prospectus. Except as described in the Prospectus,
none of the Permits contains any restriction that is materially burdensome to
the Company and the Subsidiaries taken as a whole. The Company's and each
Subsidiary's business practices do not violate any federal or state laws
regarding physician ownership of (or financial relationship with) and
referral to entities providing healthcare related goods or services, or laws
requiring disclosure of financial interests held by physicians in entities to
which they may refer patients for the provisions of health care related goods
or services.
(q) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectus as being owned by any of them or
necessary for the conduct of their respective businesses, and the Company is
not aware of any claim to the contrary or any challenge by any other person
to the rights of the Company and the Subsidiaries with respect to the
foregoing.
(r) The property, assets and operations of the Company and the
Subsidiaries comply in all material respects with all applicable federal,
state and local laws, rules, orders, decrees, judgments, injunctions,
licenses, permits or regulations relating to environmental matters (the
"Environmental Laws"), except to the extent that the lack of compliance with
such Environmental Laws would not, singularly or in the aggregate, have a
Material Adverse Effect. To the Company's knowledge, none of the Company's
or any Subsidiary's property, assets or operations is the subject of any
federal, state or local investigation evaluating whether any remedial action
is needed to respond to a release of any substance regulated by or form the
basis of liability under any Environmental Laws (a "Hazardous Material") into
the environment. Neither the Company nor any Subsidiary has received any
notice or claim, nor are there any pending or, to the Company's best
knowledge, threatened or reasonably anticipated lawsuits against it with
respect to
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violations of an Environmental Law or in connection with the release of any
Hazardous Material into the environment. Neither the Company nor any
Subsidiary has any material contingent liability in connection with any
release of Hazardous Material into the environment.
(s) The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged; all
policies of insurance insuring the Company or any of the Subsidiaries or
their respective businesses, assets, employees, officers and directors are in
full force and effect; the Company and the Subsidiaries are in compliance
with the terms of such policies and instruments in all material respects; and
there are no material claims by the Company or any of the Subsidiaries under
any such policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause.
(t) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets
is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(u) Neither the Company nor any Subsidiary nor, to the Company's
knowledge, any employee or agent of the Company or any Subsidiary has made
any payment of funds of the Company or any Subsidiary or received or retained
any funds in violation of any law, rule or regulation, which payment, receipt
or retention of funds is of a character required to be disclosed in the
Prospectus.
(v) The Company and the Subsidiaries have filed all federal, state,
local and foreign tax returns and tax forms required to be filed, other than
those filings being contested in good faith; such returns and forms are
complete and correct in all material respects; and all taxes shown by such
returns or otherwise assessed that are due or payable have been paid, except
such taxes as are being contested in good faith and as to which adequate
reserves have been provided. All payroll withholdings required to be made by
the Company with respect to employees have been made. The charges, accruals
and reserves on the books of the Company and the Subsidiaries in respect of
any tax liability for any year not finally determined are adequate to meet
any assessments or reassessments for additional taxes; and there have been no
tax deficiencies asserted and, to the knowledge of the Company, no tax
deficiency might be reasonably asserted or threatened against the Company or
any of the Subsidiaries that could, singularly or in the aggregate, have a
Material Adverse Effect.
(w) No holder of any security of the Company has any right to require
registration of Common Shares or any other security of the Company because of
the filing of the registration statement or the consummation of the
transactions contemplated by this Agreement and, except as disclosed in the
Prospectus under the caption "Description of Capital Stock -- Registration
Rights Agreement," no person has the right to require registration under the
Act of any Common Shares or other securities of the Company. No person has
the right, contractual or otherwise, to cause the Company to permit such
person to underwrite the sale of any of the Shares. Except as described in
or contemplated by the Prospectus, there are no outstanding options, warrants
or other rights calling for the issuance of, and there are no commitments,
plans or arrangements to issue, any shares of capital stock of the Company or
any
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Subsidiary or any security convertible into or exchangeable or exercisable
for capital stock of the Company or any Subsidiary.
(x) Neither the Company nor any of the Subsidiaries is, nor upon the
sale of the Shares to be issued and sold by the Company hereunder and
application of the net proceeds from such sale as described in the Prospectus
under the caption "Use of Proceeds" will be, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(y) The Company is in compliance with all provisions of Florida
Statutes Section 517.075 and the regulations thereunder relating to issuers
doing business with Cuba.
8. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDER. The Selling
Shareholder represents and warrants to each Underwriter that:
(a) The Selling Shareholder now has or has the right to acquire, and
on the Closing Date and any Option Closing Date will have, valid and
marketable title to the Shares to be sold by the Selling Shareholder, free
and clear of any lien, claim, security interest or other encumbrance,
including, without limitation, any restriction on transfer or other defect in
title.
(b) The Selling Shareholder now has, and on the Closing Date will
have, full legal right, power and authorization, and any approval required by
law (except such as may be required under the Act, the Exchange Act or state
securities or Blue Sky laws governing the purchase and distribution of the
Shares), to sell, assign, transfer and deliver such Shares in the manner
provided in this Agreement, and upon delivery of and payment for such Shares
hereunder, the several Underwriters will acquire valid and marketable title
to such Shares, free and clear of any lien, claim, security interest, or
other encumbrance, restriction on transfer or other defect in title.
(c) This Agreement and the Custody Agreement have been duly
authorized, and in the case of this Agreement, when executed and delivered on
behalf of the Selling Shareholder in accordance with the Custody Agreement,
have been duly executed and delivered by or on behalf of the Selling
Shareholder and are the valid and binding agreements of the Selling
Shareholder enforceable against the Selling Shareholder in accordance with
their respective terms, except as rights to indemnity and contribution
hereunder may be limited by federal or state securities laws or principles of
public policy and except as enforcement hereof and thereof may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights generally and by
general equitable principles.
(d) Neither the execution and delivery of this Agreement or the
Custody Agreement by or on behalf of the Selling Shareholder nor the
consummation of the transactions herein or therein contemplated by or on
behalf of the Selling Shareholder requires any consent, approval,
authorization or order of, or filing or registration with, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may be required under the Act, the Exchange Act or
state securities or Blue Sky laws governing the purchase and distribution of
the Shares) or conflicts or will conflict with or constitutes or will
constitute a material breach of, or default under, or violates or will
violate, any material agreement, indenture or other instrument to which the
Selling Shareholder is a party or by which the Selling Shareholder is or may
be bound or to which any of the Selling Shareholder's property or assets is
subject, or any statute, law, rule, regulation, ruling, judgement,
injunction, order or decree applicable to the Selling Shareholder or to any
property or assets of the Selling Shareholder.
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(e) The Selling Shareholder has reviewed the Registration Statement
and the Prospectus. The Registration Statement does not contain an untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not misleading,
and the Prospectus and any amendment or supplement thereto does not contain
an untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make statements therein, in
light of the circumstances under which they were made, not misleading.
(f) The representation and warranties of the Selling Shareholder in
the Custody Agreement are, and on the Closing Date will be, true and correct.
(g) The Selling Shareholder has not taken, directly or indirectly,
any action designed to or that might reasonably be expected to cause or
result in stabilization or manipulation of the price of the Common Shares to
facilitate the sale or resale of the Shares, except for the lock-up
arrangements described in the Prospectus.
9. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify
and hold harmless each of you and each other Underwriter and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any Prepricing Prospectus or
in the Registration Statement or the Prospectus or in any amendment or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or expenses arise out of or are
based upon any untrue statement or omission or alleged untrue statement or
omission which has been made therein or omitted therefrom in reliance upon
and in conformity with the information relating to such Underwriter furnished
in writing to the Company by or on behalf of any Underwriter through you
expressly for use in connection therewith; PROVIDED, HOWEVER, that the
indemnification contained in this paragraph (a) with respect to any
Prepricing Prospectus shall not inure to the benefit of any Underwriter (or
to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of
Shares by such Underwriter to any person if (i) a copy of the Prospectus
shall not have been delivered or sent to such person within the time required
by the Act and the untrue statement or alleged untrue statement or omission
or alleged omission of a material fact contained in such Prepricing
Prospectus was corrected in the Prospectus and (ii) the Company has delivered
the Prospectus to the several Underwriters in requisite quantity on a timely
basis to permit such delivery or sending. The foregoing indemnity agreement
shall be in addition to any liability which the Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company, and the Company shall
assume the defense thereof, including the employment of counsel and payment
of all fees and expenses. Such Underwriter or any such controlling person
shall have the right to employ separate counsel in any such action, suit or
proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or such
controlling person unless (i) the Company has agreed in writing to pay such
fees and expenses, (ii) the Company has failed to assume the defense and
employ counsel or (iii) the named parties to any such action, suit or
proceeding (including any impleaded parties) include both such Underwriter or
such controlling person and the Company and such Underwriter
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or such controlling person shall have been advised by its counsel that
representation of such indemnified party and the Company by the same counsel
would be inappropriate under applicable standards of professional conduct
(whether or not such representation by the same counsel has been proposed)
due to actual or potential differing interests between them (in which case
the Company shall not have the right to assume the defense of such action,
suit or proceeding on behalf of such Underwriter or such controlling person).
It is understood, however, that if the Company is obligated to pay the fees
and expenses of Underwriters' counsel under the preceding sentence, then the
Company shall, in connection with any one such action, suit or proceeding or
separate but substantially similar or related actions, suits or proceedings
in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to no more than one local counsel per
jurisdiction) at any time for all such Underwriters and controlling persons
not having actual or potential differing interests with you or among
themselves, which firm shall be designated in writing by Smith Barney Inc.
and shall be reasonably acceptable to the Company, and that all such fees and
expenses shall be reimbursed as they are incurred. The Company shall not be
liable for any settlement of any such action, suit or proceeding effected
without its written consent, but if settled with such written consent, or if
there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Company agrees to indemnify and hold harmless any Underwriter
and any such controlling person, to the extent provided in the preceding
paragraph, from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
(c) The Selling Shareholder agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the
same extent as the indemnity from the Company to each Underwriter set forth
in Section 9(a) hereof (but subject to Section 9(g) hereof). In case any
action or claim shall be brought or asserted against any Underwriter or any
such controlling person in respect of which indemnity may be sought against
the Selling Shareholder pursuant to this paragraph (c), the Selling
Shareholder shall have the rights and duties given to the Company, and each
Underwriter and any such controlling person shall have the rights and duties
given to the Underwriters, under paragraph (b) above. The foregoing
indemnity agreement shall be in addition to any liability which the Selling
Shareholder may otherwise have.
(d) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, the Selling Shareholder and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, to the same extent as the indemnity from the Company to each
Underwriter set forth in Section 9(a) hereof, but only with respect to
information relating to such Underwriter furnished in writing to the Company
by or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Company, any of its directors, any such officer, the
Selling Shareholder or any such controlling person based on the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto, and in respect of which indemnity may be sought against
any Underwriter pursuant to this paragraph (d), such Underwriter shall have
the rights and duties given to the Company by paragraph (b) above (except
that if the Company shall have assumed the defense thereof such Underwriter
shall not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at such Underwriter's expense), and the Company, its directors, any
such officer, the Selling Shareholder and any such controlling person shall
have the rights and duties given to the Underwriters by paragraph (b) above.
The foregoing indemnity agreement shall be in addition to any liability which
the Underwriters may otherwise have.
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(e) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a), (c) or (d) hereof
in respect of any losses, claims, damages, liabilities or expenses referred
to therein, then an indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Shareholder on the one hand
and the Underwriters on the other hand from the offering of the Shares, or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Company and the Selling Shareholder on the one hand and the
Underwriters on the other hand 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 benefits
received by the Company and the Selling Shareholder on the one hand and the
Underwriters on the other hand shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses)
received by the Company and the Selling Shareholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus; provided
that, in the event that the Underwriters shall have purchased any Additional
Shares hereunder, any determination of the relative benefits received by the
Company and the Selling Shareholder, and the Underwriters from the offering
of the Shares shall include the net proceeds (before deducting expenses)
received by the Company and the Selling Shareholder, and the underwriting
discounts and commissions received by the Underwriters, from the sale of such
Additional Shares, in each case computed on the basis of the respective
amounts set forth in the notes to the table on the cover page of the
Prospectus. The relative fault of the Company and the Selling Shareholder on
the one hand and the Underwriters on the other hand 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 and the Selling
Shareholder on the one hand or the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(f) The Company, the Selling Shareholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations
referred to in paragraph (e) above. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities and
expenses referred to in paragraph (e) above shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating any claim or defending any such action, suit or proceeding.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price of the Shares underwritten by it and distributed to the public exceeds
the amount of any damages which such Underwriter 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 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 9 are
several in proportion to the respective numbers of Firm Shares set forth
opposite their names in Schedule I hereto (or such numbers of Firm Shares
increased as set forth in Section 12 hereof) and not joint.
(g) Notwithstanding any other provision of this Section 9, the
liability of the Selling Shareholder for indemnification or contribution
under this Section 9 shall not exceed an amount equal to
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the number of Shares sold by the Selling Shareholder hereunder multiplied by
the purchase price per share set forth in Section 2 hereof.
(h) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding.
(i) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Shareholder,
respectively, set forth in this Agreement shall remain operative and in full
force and effect, regardless of (i) any investigation made by or on behalf of
any Underwriter or any person controlling any Underwriter, the Company, its
directors or officers, the Selling Shareholder or any person controlling the
Company, (ii) acceptance of any Shares and payment therefor hereunder, and
(iii) any termination of this Agreement. A successor to any Underwriter or
any person controlling any Underwriter, or to the Company, its directors or
officers, the Selling Shareholder or any person controlling the Company,
shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 9.
10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment
thereto or an Abbreviated Registration Statement to be declared effective
before the offering of the Shares may commence, the registration statement or
such post-effective amendment or Abbreviated Registration Statement shall
have become effective not later than 5:30 P.M., New York City time, on the
date hereof, or at such later date and time as shall be consented to in
writing by you, and all filings, if any, required by Rules 424 and 430A under
the Act shall have been timely made.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting the condition (financial or other), business,
properties, net worth, or results of operations of the Company not
contemplated by the Prospectus, which in your reasonable opinion, as
Representatives of the several Underwriters, would materially adversely
affect the market for the Shares, or (ii) any event or development relating
to or involving the Company, any officer or director of the Company or the
Selling Shareholder, which makes any statement made in the Prospectus untrue
or which, in the reasonable opinion of the Company and its counsel or the
Underwriters and their counsel, requires the making of any addition to or
change in the Prospectus in order to state a material fact required by the
Act or any other law to be stated therein or necessary in order to make the
statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your reasonable
opinion, as Representatives of the several Underwriters, materially adversely
affect the market for the Shares.
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(c) You shall have received on the Closing Date an opinion of Vorys,
Sater, Seymour and Pease, counsel for the Company, JMAC Properties, Inc.
("JMAC Properties") and the Selling Shareholder, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Ohio with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto);
(ii) JMAC Properties is a corporation duly incorporated and validly
existing and in good standing under the laws of the State of Ohio, with
full corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and
the Prospectus (and any amendment or supplement thereto); and all the
outstanding shares of capital stock of JMAC Properties have been duly
authorized and validly issued, are fully paid and nonassessable, and are
owned of record by the Company, free and clear of any perfected security
interest or, to such counsel's knowledge, any other lien, adverse claim,
equity or other encumbrance, except as disclosed in the Registration
Statement and the Prospectus (or any amendment or supplement thereto);
(iii) The partnership interests in the Partnerships held by JMAC
Properties are, to such counsel's knowledge, owned free and clear of any
lien, adverse claim, security interest, equity or other encumbrance, except
as disclosed in the Prospectus. To such counsel's knowledge, each
partnership agreement pursuant to which JMAC Properties holds a general
partnership interest in a Partnership constitutes the legal, valid and
binding agreement of JMAC Properties enforceable against JMAC Properties in
accordance with the terms thereof, except as enforcement thereof may be
limited by bankruptcy, insolvency or other similar laws affecting
creditors' rights generally and by general equitable principles;
(iv) The authorized capital stock of the Company is as set forth
under the caption "Capitalization" in the Prospectus, and the authorized
capital stock of the Company conforms in all material respects as to legal
matters to the description contained in the Prospectus under the caption
"Description of Capital Stock";
(v) All the shares of capital stock of the Company outstanding
prior to the issuance of the Shares have been duly authorized and validly
issued, are fully paid and nonassessable and were issued and sold in
compliance with all applicable federal and state securities laws;
(vi) The Shares to be issued and sold to the Underwriters by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable and free of (A) any
preemptive rights arising under the Company's articles of incorporation or
the Ohio General Corporation Law or (B) to the knowledge of such counsel,
similar rights that entitle or will entitle any person to acquire any
shares of capital stock of the Company upon the issuance and sale of the
Shares by the Company;
(vii) The form of certificate for the Shares conforms in all
material respects to the requirements of the Ohio General Corporation Law;
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(viii) The Registration Statement and all post-effective
amendments, if any, have become effective under the Act and, to the
knowledge of such counsel, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose are pending before or contemplated by the Commission; and any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
accordance with Rule 424(b);
(ix) The Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver the Shares to be sold
by it to the Underwriters as provided herein, and this Agreement has been
duly authorized, executed and delivered by the Company and is a valid,
legal and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as enforcement of rights to
indemnity or contribution hereunder may be limited by federal or state
securities laws or principles of public policy and subject to the
qualification that the enforceability of the Company's obligations
hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors' rights generally or by general equitable principles;
(x) To the knowledge of such counsel, neither the Company nor JMAC
Properties is in violation of its articles of incorporation or regulations
or other organizational documents or in default in the performance of any
material obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness made an exhibit to the
Registration Statement;
(xi) Neither the offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement, compliance by the
Company with the provisions hereof nor consummation by the Company of the
transactions contemplated hereby conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the
articles of incorporation or regulations or other organizational documents
of the Company or JMAC Properties or any agreement, indenture, lease or
other instrument to which the Company or JMAC Properties is a party or by
which the Company or JMAC Properties or any of their respective properties
is bound that is an exhibit to the Registration Statement or to the
knowledge of such counsel will result in the creation or imposition of any
material lien, charge or encumbrance upon any property or assets of the
Company or JMAC Properties, nor will any such action result in any
violation of any existing law, regulation, ruling (assuming compliance
with all applicable state securities and Blue Sky laws), judgment,
injunction, order or decree known to such counsel and applicable to the
Company or JMAC Properties or any of their respective properties;
(xii) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency or official is required on the
part of the Company (except such as have been obtained under the Act and
the Exchange Act or such as may be required under state securities or Blue
Sky laws governing the purchase and distribution of the Shares) for the
valid issuance and sale of the Shares to the Underwriters as contemplated
by this Agreement;
(xiii) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements and
the notes thereto and the schedules and other financial and statistical
data included therein, as to which such counsel need not express any
opinion) comply as to form in all material respects with the requirements
of the Act;
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(xiv) To the knowledge of such counsel, (A) there are no legal or
governmental proceedings pending or threatened against the Company or JMAC
Properties or to which the Company or JMAC Properties or any of their
respective properties is subject, which are required to be described in
the Registration Statement or Prospectus (or any amendment or supplement
thereto) that are not described as required and (B) there are no
agreements, contracts, indentures, leases or other instruments to which the
Company or JMAC Properties is a party that are required to be described in
the Registration Statement or the Prospectus (or any amendment or
supplement thereto) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required, as the case may be;
(xv) Each of the Company and JMAC Properties has full corporate
power and authority and all necessary Permits (except where the failure
to so have any such Permits, individually or in the aggregate, would not
have a Material Adverse Effect) to own its properties and to conduct its
business as now being conducted as described in the Prospectus;
(xvi) The statements in the Registration Statement and Prospectus
under the captions "History and Organization--Reorganization Transactions,"
"Management--Incentive Stock Plan," "Description of Capital Stock" and
"Shares Eligible for Future Sale," insofar as they are descriptions of
contracts, agreements or other legal documents, or refer to statements of
law or legal conclusions, are accurate in all material respects and present
fairly the information required to be shown;
(xvii) Except as described in the Prospectus, such counsel does
not know of any holder of any securities of the Company or any other person
who has the right, contractual or otherwise, to cause the Company to sell
or otherwise issue to them, or to permit them to underwrite the sale of,
any of the Shares or the right to have any Common Shares or other securities
of the Company included in the Registration Statement or the right, as a
result of the filing of the Registration Statement, to require the Company
to register under the Act any Common Shares or other securities of the
Company;
(xviii) Neither the Company nor JMAC Properties is an "investment
company" or a person "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended;
(xix) This Agreement and the Custody Agreement have each been duly
executed and delivered by or on behalf of the Selling Shareholder and are
valid and binding agreements of the Selling Shareholder, enforceable
against the Selling Shareholder in accordance with their terms, except (A)
as enforcement of rights to indemnity or contribution hereunder and
thereunder may be limited by federal or state securities laws or principles
of public policy and (B) subject to the qualification that the
enforceability of its obligations hereunder and thereunder may be limited
by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium
and other laws relating to or affecting creditors' rights generally or by
general equitable principles;
(xx) To the knowledge of such counsel, the Selling Shareholder has
the corporate power and authority to execute this Agreement and the Custody
Agreement and to perform its agreements hereunder and thereunder; and the
Selling Shareholder owns the Shares to be sold by it pursuant to this
Agreement free and clear of any adverse claim; and
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(xxi) To the knowledge of such counsel, the execution and delivery
of this Agreement and the Custody Agreement by the Selling Shareholder and
the consummation of the transactions contemplated hereby and thereby will
not conflict with, violate, result in a breach of or constitute a default
under the terms or provisions of any material agreement, indenture,
mortgage or other instrument known such counsel to which the Selling
Shareholder is a party or by which it or any of its assets or property is
bound, or any court order or decree or any law, rule, or regulation known
to such counsel to be applicable to the Selling Shareholder or to any of
the property or assets of the Selling Shareholder.
In addition, such counsel shall state that although such counsel has
not undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements in the Registration Statement,
such counsel has participated in the preparation of the Registration
Statement and the Prospectus, including review and discussion of the contents
thereof, and nothing has come to the attention of such counsel that has
caused it to believe that the Registration Statement, at the time the
Registration Statement became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or that
the Prospectus, as of its date and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading, or that any amendment or supplement to the
Prospectus, as of its date, and as of the Closing Date or the Option Closing
Date, as the case may be, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements and the notes
thereto and the schedules and other financial and statistical data included
in the Registration Statement or the Prospectus).
In rendering their opinion as aforesaid, counsel may rely upon (A) an
opinion or opinions, each dated the Closing Date, of other counsel retained
by them or the Company as to laws of any jurisdiction other than the federal
laws of the United States or the State of Ohio provided that (1) each such
local counsel is acceptable to the Representatives, (2) such reliance is
expressly authorized by each opinion so relied upon and a copy of each such
opinion is delivered to the Representatives and is, in form and substance,
reasonably satisfactory to them and counsel for the Underwriters and (3)
counsel shall state in their opinion that they believe that they and the
Underwriters are justified in relying thereon and (B) as to matters of fact,
to the extent they deem proper, certificates of responsible officers of the
Company, JMAC Properties, the Selling Shareholder and public officials; and
such opinion may state that such counsel has assumed for the purposes of the
opinions in paragraphs (ix) and (xix) above as to this Agreement being the
valid, binding and enforceable obligation of the Company and this Agreement
and the Custody Agreement being the valid, binding and enforceable
obligations of the Selling Shareholder that the internal laws of the State of
New York and the judicial interpretations thereof (which law this Agreement
and the Custody Agreement specify as the governing law with respect hereto
and thereto) do not differ, in any respect material to such opinion, from the
internal laws of the State of Ohio and the judicial interpretations thereof.
(d) You shall have received on the Closing Date an opinion of Bricker
and Eckler, counsel for the Subsidiaries other than JMAC Properties, dated
the Closing Date and addressed to you, as Representatives of the several
Underwriters, that:
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(i) Each Subsidiary other than JMAC Properties, with respect to which
no opinion is given, that is a corporation is a corporation duly
incorporated and validly existing and in good standing under the laws
of the jurisdiction of its organization, with full corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus
(and any amendment or supplement thereto); and all the outstanding shares
of capital stock of each of the Subsidiaries other than JMAC Properties,
as to which no opinion is given, that is a corporation have been duly
authorized and validly issued, are fully paid and nonassessable, and are
owned of record by the Company directly, or indirectly through one or more
of the other Subsidiaries, free and clear of any perfected security interest
or, to such counsel's knowledge, any other lien, adverse claim, equity or
other encumbrance, except as disclosed in the Registration Statement and
the Prospectus (or any amendment or supplement thereto);
(ii) Each Subsidiary that is a Partnership has been duly organized and
is an existing partnership under the laws of the jurisdiction of its
organization, with the partnership power and authority to own, lease and
operate its properties and to conduct its business as currently operated
and conducted. The partnership interests in the Partnerships held
directly or indirectly by any Subsidiary are, to such counsel's knowledge,
owned free and clear of any lien, adverse claim, security interest, equity
or other encumbrance, except as disclosed in the Prospectus. To such
counsel's knowledge, each partnership agreement pursuant to which a
Subsidiary holds a general partnership interest in a Partnership is in full
force and effect and constitutes the legal, valid and binding agreement of
such Subsidiary, enforceable against such Subsidiary in accordance with the
terms thereof, except as enforcement thereof may be limited by bankruptcy,
insolvency or other similar laws affecting creditors' rights generally and
by general equitable principles;
(iii) To the knowledge of such counsel, none of the Subsidiaries other
than JMAC Properties, with respect to which no opinion is given, is in
violation of its articles of incorporation or regulations or other
organizational documents or in default in the performance of any material
obligation, agreement or condition contained in any bond, debenture, note
or other evidence of indebtedness made an exhibit to the Registration
Statement;
(iv) Neither the offer, sale or delivery of the Shares, the execution,
delivery or performance of this Agreement, compliance by the Company with
the provisions hereof nor consummation by the Company of the transactions
contemplated hereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the articles of incorporation
or regulations or other organizational documents of any of the Subsidiaries
other than JMAC Properties, with respect to which no opinion is given, or
any agreement, indenture, lease or other instrument to which any of the
Subsidiaries other than JMAC Properties, with respect to which no opinion
is given, is a party or by which any of the Subsidiaries other than JMAC
Properties, with respect to which no opinion is given, or any of their
respective properties is bound that is an exhibit to the Registration
Statement or to the knowledge of such counsel will result in the creation
or imposition of any material lien, charge or encumbrance upon any property
or assets of any of the Subsidiaries other than JMAC Properties, with
respect to which no opinion is given, nor will any such action result in
any violation of any existing law, regulation, ruling (assuming compliance
with all applicable state securities and Blue Sky laws), judgment,
injunction, order or decree known to such counsel and applicable to any of
the Subsidiaries other than JMAC Properties, with respect to which no
opinion is given, or any of their respective properties;
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(v) To the knowledge of such counsel, (A) there are no legal or
governmental proceedings pending or threatened against any of the
Subsidiaries other than JMAC Properties, with respect to which no opinion
is given, or to which any of the Subsidiaries other than JMAC Properties,
with respect to which no opinion is given, or any of their respective
properties is subject, which are required to be described in the
Registration Statement or Prospectus (or any amendment or supplement
thereto) that are not described as required and (B) there are no
agreements, contracts, indentures, leases or other instruments to which
any of the Subsidiaries other than JMAC Properties, with respect to which
no opinion is given, are a party that are required to be described in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto) or to be filed as an exhibit to the Registration Statement that
are not described or filed as required, as the case may be;
(vi) Each of the Subsidiaries other than JMAC Properties, with respect
to which no opinion is given, has full corporate power and authority and
all necessary Permits (except where the failure to so have any such
Permits, individually or in the aggregate, would not have a Material Adverse
Effect) to own its properties and to conduct its business as now being
conducted as described in the Prospectus;
(vii) None of the Subsidiaries other than JMAC Properties, with
respect to which no opinion is given, is an "investment company" or a
person "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended; and
(viii) The statements in the Registration Statement and Prospectus
under the captions "History and Organization - History," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources," "Business - Regulations"
and "Certain Transactions," insofar as they are descriptions of contracts,
agreements or other legal documents, or refer to statements of law or legal
conclusions, are accurate in all material respects and present fairly the
information required to be shown.
In addition, such counsel shall state that although such counsel has
not undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements in the Registration Statement,
such counsel has participated in the preparation of the Registration
Statement and the Prospectus, including review and discussion of the contents
thereof, and nothing has come to the attention of such counsel that has
caused it to believe that the Registration Statement, at the time the
Registration Statement became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or that
the Prospectus, as of its date and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading, or that any amendment or supplement to the
Prospectus, as of its date, and as of the Closing Date or the Option Closing
Date, as the case may be, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements and the notes
thereto and the schedules and other financial and statistical data included
in the Registration Statement or the Prospectus).
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In rendering their opinion as aforesaid, counsel may rely upon (A) an
opinion or opinions, each dated the Closing Date, of other counsel retained
by the Company as to laws of any jurisdiction other than the federal laws of
the United States or the State of Ohio PROVIDED that (1) each such local
counsel is acceptable to the Representatives, (2) such reliance is expressly
authorized by each opinion so relied upon and a copy of each such opinion is
delivered to the Representatives and is, in form and substance, reasonably
satisfactory to them and counsel for the Underwriters and (3) counsel shall
state in their opinion that they believe that they and the Underwriters are
reasonably justified in relying thereon and (B) as to matters of fact, to the
extent they deem proper, certificates of responsible officers of the Company,
the Subsidiaries, the Selling Shareholder and public officials.
(e) You shall have received on the Closing Date an opinion of Dewey
Ballantine, counsel for the Underwriters, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, with
respect to the matters referred to in clauses (vi) (other than subclause (B)
thereof), (viii), (ix), (xiii) and the penultimate paragraph of Section 10(c)
hereof and such other related matters as you may request. In rendering their
opinion, Dewey Ballantine may rely as to matters of Ohio law upon the opinion
of Vorys, Sater, Seymour and Pease.
(f) You shall have received letters addressed to you and dated the
date hereof from Ernst & Young LLP and Deloitte & Touche LLP, independent
certified public accountants, substantially in the forms heretofore approved
by you, and you shall have received a letter addressed to you and dated the
Closing Date from Ernst & Young LLP, independent certified public
accountants, substantially in the form heretofore approved by you.
(g)(i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been instituted or, to the knowledge of the Company, contemplated by the
Commission at or prior to the Closing Date and any request of the Commission
for additional information (to be included in the registration statement or
the prospectus or otherwise) shall have been complied with; (ii) there shall
not have been any material change in the capital stock of the Company nor any
material increase in the short-term or long-term debt of the Company from
that set forth or contemplated in the Registration Statement or the
Prospectus (or any amendment or supplement thereto); (iii) there shall not
have been, since the respective dates as of which information is given in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto), except as may otherwise be stated in the Registration Statement and
Prospectus (or any amendment or supplement thereto), any material adverse
change in the condition (financial or other), business, prospects,
properties, net worth or results of operations of the Company; (iv) the
Company and the Subsidiaries shall not have any liabilities or obligations,
direct or contingent (whether or not in the ordinary course of business),
that are material to the Company and the Subsidiaries, taken as a whole,
other than those reflected in or contemplated by the Registration Statement
or the Prospectus (or any amendment or supplement thereto); and (v) all the
representations and warranties of the Company contained in this Agreement
shall be true and correct in all material respects on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), as to the matters
set forth in this Section 10(g) and in Section 10(h) hereof.
(h) The Company shall have performed or complied in all material
respects with all of its agreements herein contained and required to be
performed or complied with by it hereunder at or prior to the Closing Date.
24
<PAGE>
(i) You shall have received a certificate dated the Closing Date
signed by the chief accounting officer of the Company substantially in the
form heretofore approved by you, respecting the Company's compliance with the
financial covenants contained in financing agreements to which the Company is
a party.
(j) All the representations and warranties of the Selling Shareholder
contained in this Agreement shall be true and correct in all material
respects on and as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date, and you shall have received a certificate,
dated the Closing Date and signed by or on behalf of the Selling Shareholder
as to the matters set forth in this Section 10(j) and in Section 10(k) hereof.
(k) The Selling Shareholder shall have performed or complied in all
material respects with all of its agreements herein contained and required to
be performed or complied with by it hereunder at or prior to the Closing Date.
(l) The Shares shall have been approved for quotation subject to
notice of issuance on the Nasdaq National Market.
(m) The Sellers shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have reasonably
requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you, as Representatives of the
Underwriters, and counsel for the Underwriters.
Any certificate or document signed by any officer of the Company or by
or on behalf of the Selling Shareholder and delivered to you, as
Representatives of the several Underwriters, or to counsel for the
Underwriters, shall be deemed a representation or warranty by the Company or
the Selling Shareholder, as the case may be, to each Underwriter as to the
statements made therein.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of any Option
Closing Date of the conditions set forth in this Section 10, except that, if
any Option Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (g) and paragraphs
(i), (j) and (m) shall be dated the Option Closing Date in question and the
opinions called for by paragraphs (c), (d) and (e) shall be revised to
reflect the sale of Additional Shares.
11. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it
of its obligations hereunder: (i) the preparation, printing or reproduction,
and filing with the Commission of the registration statement (including
financial statements and exhibits thereto), each Prepricing Prospectus, the
Prospectus, and each amendment or supplement to any of them; (ii) the
printing (or reproduction) and delivery (including postage, air freight
charges and charges for counting and packaging) of such copies of the
registration statement, each Prepricing Prospectus, the Prospectus, and all
amendments or supplements to any of them as may be reasonably requested for
use in connection with the offering and sale of the Shares; (iii) the
preparation, printing, authentication, issuance and delivery of certificates
for the Shares, including any stamp taxes in connection with the offering of
the Shares; (iv) the printing (or reproduction) and delivery of this
Agreement, the preliminary and supplemental Blue Sky Memoranda and all other
agreements or documents
25
<PAGE>
printed (or reproduced) and delivered in connection with the offering of the
Shares; (v) the registration of the Common Shares under the Exchange Act and
the listing of the Shares on the Nasdaq National Market; (vi) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states as provided in Section 5(g)
hereof (including the reasonable fees (not to exceed $15,000 in the
aggregate, including fees paid pursuant to (vii) below), expenses and
disbursements of counsel for the Underwriters relating to the preparation,
printing or reproduction, and delivery of the preliminary and supplemental
Blue Sky Memoranda and such registration and qualification); (vii) the filing
fees and the reasonable fees (not to exceed $15,000 in the aggregate,
including fees paid pursuant to (vi) above) and expenses of counsel for the
Underwriters in connection with any filings required to be made with the
National Association of Securities Dealers, Inc. in connection with the
offering; and (viii) the transportation and other expenses incurred by or on
behalf of representatives of the Company (other than employees of Smith
Barney Inc., J.C. Bradford & Co. or any other Underwriter) in connection with
presentations to prospective purchasers of the Shares; (ix) the fees and
expenses of the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company and the Selling
Shareholder; and (x) the performance by the Company of its other obligations
under this Agreement.
12. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii)
if, at the time this Agreement is executed and delivered, it is necessary for
the registration statement or a post-effective amendment thereto or an
Abbreviated Registration Statement to be declared effective before the
offering of the Shares may commence, when notification of the effectiveness
of the registration statement or such post-effective amendment or Abbreviated
Registration Statement has been released by the Commission. Until such time
as this Agreement shall have become effective, it may be terminated by the
Company, by notifying you, or by you, as Representatives of the several
Underwriters, by notifying the Company.
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they have agreed to purchase hereunder, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate
number of Shares which the Underwriters are obligated to purchase on the
Closing Date, each non-defaulting Underwriter shall be obligated, severally,
in the proportion which the number of Firm Shares set forth opposite its name
in Schedule I hereto bears to the aggregate number of Firm Shares set forth
opposite the names of all non-defaulting Underwriters or in such other
proportion as you may specify in accordance with Section 20 of the Master
Agreement Among Underwriters of Smith Barney, Harris Upham & Co. Incorporated
(predecessor of Smith Barney Inc.), to purchase the Shares which such
defaulting Underwriter or Underwriters agreed, but failed or refused, to
purchase. If any Underwriter or Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase on the Closing
Date and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares which the
Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or parties approved by you
and the Company are not made within 36 hours after such default, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter or any Seller. In any such case which does not result in
termination of this Agreement, either you or the Company shall have the right
to postpone the Closing Date, but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and
the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed
in Schedule I hereto who, with your approval and the
26
<PAGE>
approval of the Company, purchases Shares which a defaulting Underwriter
agreed, but failed or refused, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Sellers, by notice to the Company and the
Attorneys-in-Fact, if prior to the Closing Date or any Option Closing Date
(if different from the Closing Date and then only as to the Additional
Shares), as the case may be, (i) trading in securities generally on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market shall have been suspended or materially limited, (ii) a general
moratorium on commercial banking activities in New York shall have been
declared by either federal or state authorities, or (iii) there shall have
occurred any outbreak or escalation of hostilities or other international or
domestic calamity, crisis or change in political, financial or economic
conditions, the effect of which on the financial markets of the United States
is such as to make it, in your reasonable judgment, impracticable or
inadvisable to commence or continue the offering of the Shares at the
offering price to the public set forth on the cover page of the Prospectus or
to enforce contracts for the resale of the Shares by the Underwriters.
Notice of such termination may be given by telegram, telecopy or telephone
and shall be subsequently confirmed by letter.
14. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the
inside front cover page and the statements in the first and third paragraphs
under the caption "Underwriting" in any Prepricing Prospectus and in the
Prospectus constitute the only information furnished by or on behalf of the
Underwriters through you as such information is referred to in Sections 7(b)
and 9 hereof.
15. MISCELLANEOUS. Except as otherwise provided in Sections 5, 12 and
13 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company, at the office of the
Company at 919 Old Henderson Road, Columbus, Ohio 43220, Attention: Alan B.
Satterwhite, with a copy to Vorys, Sater, Seymour and Pease, 52 East Gay
Street, Columbus, Ohio 43215, Attention: Susan E. Brown, Esq.; (ii) if to
the Selling Shareholder, at 150 E. Wilson, Bridge Road, Suite 230,
Worthington, Ohio 43085 Attention: Michael H. Thomas, with a copy to Vorys,
Sater, Seymour and Pease, 52 East Gay Street, Columbus, Ohio 43215,
Attention: Russell R. Rosler; or (iii) if to you, as Representatives of the
several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New
York, New York 10013, Attention: Manager, Investment Banking Division, with a
copy to Dewey Ballantine, 1301 Avenue of the Americas, New York, New York
10019, Attention: Frederick W. Kanner, Esq.
27
<PAGE>
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors, its officers who sign the
Registration Statement, the Selling Shareholder and the controlling persons
referred to in Section 9 hereof and, to the extent provided herein, their
respective successors and assigns and no other person shall acquire or have
any right under or by virtue of this Agreement. Neither the term "successor"
nor the term "successors and assigns" as used in this Agreement shall include
a purchaser from any Underwriter of any of the Shares in his status as such
purchaser.
16. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
28
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
KARRINGTON HEALTH, INC.
By: ___________________________________
JMAC, INC.
By: ___________________________________
Confirmed as of the date first
above-mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
J.C. BRADFORD & CO.
AS REPRESENTATIVES OF THE SEVERAL UNDERWRITERS
By: SMITH BARNEY INC.
By: ___________________________________
Managing Director
29
<PAGE>
SCHEDULE I
KARRINGTON HEALTH, INC.
Number of
Underwriter Firm Shares
----------- -----------
Smith Barney Inc. . . . . . . . . . . . . . . . . .
J.C. Bradford & Co. . . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . 3,000,000
---------
---------
<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 Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-03491) and related Prospectus of Karrington Health,
Inc., dated July 16, 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
July 16, 1996
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Form S-1 Registration
Statement No. 333-03491 of Karrington Health, Inc. 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
July 16, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF BERNADINE P. HEALY
In reference to the Registration Statement on Form S-1 and the related
Prospectus of Karrington Health, Inc. (File No. 333-03491), I hereby consent
to the references to me under the caption "MANAGEMENT - Executive Officers
and Directors" of such Registration Statement and confirm that I have agreed
to join the Board of Directors of Karrington Health, Inc. upon the
consummation of the offering contemplated by such Registration Statement.
Notwithstanding the foregoing, nothing contained herein shall be construed as
an admission that the undersigned is a "person who. . . is named in the
registration statement as becoming or about to become a director. . ." for
purposes of Section 11(a)(3) of the Securities Act of 1933, as amended.
/s/ BERNADINE P. HEALY
-----------------------
Bernadine P. Healy
Columbus, Ohio
June 11, 1996
<PAGE>
EXHIBIT 23.5
CONSENT OF DAVID H. HOAG
In reference to the Registration Statement on Form S-1 and the related
Prospectus of Karrington Health, Inc. (File No. 333-03491), I hereby consent
to the references to me under the caption "MANAGEMENT - Executive Officers
and Directors" of such Registration Statement and confirm that I have agreed
to join the Board of Directors of Karrington Health, Inc. upon the
consummation of the offering contemplated by such Registration Statement.
Notwithstanding the foregoing, nothing contained herein shall be construed as
an admission that the undersigned is a "person who. . . is named in the
registration statement as becoming or about to become a director. . ." for
purposes of Section 11(a)(3) of the Securities Act of 1933, as amended.
/s/ DAVID H. HOAG
-----------------
David H. Hoag
Columbus, Ohio
June 11, 1996
<PAGE>
EXHIBIT 23.6
CONSENT OF JOHN H. McCONNELL
In reference to the Registration Statement on Form S-1 and the related
Prospectus of Karrington Health, Inc. (File No. 333-03491), I hereby consent
to the references to me under the caption "MANAGEMENT - Executive Officers
and Directors" of such Registration Statement and confirm that I have agreed
to join the Board of Directors of Karrington Health, Inc. upon the
consummation of the offering contemplated by such Registration Statement.
Notwithstanding the foregoing, nothing contained herein shall be construed as
an admission that the undersigned is a "person who. . . is named in the
registration statement as becoming or about to become a director. . ." for
purposes of Section 11(a)(3) of the Securities Act of 1933, as amended.
/s/ JOHN H. McCONNELL
---------------------
John H. McConnell
Columbus, Ohio
June 11, 1996
<PAGE>
EXHIBIT 23.7
CONSENT OF CHARLES H. McCREARY
In reference to the Registration Statement on Form S-1 and the related
Prospectus of Karrington Health, Inc. (File No. 333-03491), I hereby consent
to the references to me under the caption "MANAGEMENT - Executive Officers
and Directors" of such Registration Statement and confirm that I have agreed
to join the Board of Directors of Karrington Health, Inc. upon the
consummation of the offering contemplated by such Registration Statement.
Notwithstanding the foregoing, nothing contained herein shall be construed as
an admission that the undersigned is a "person who. . . is named in the
registration statement as becoming or about to become a director. . ." for
purposes of Section 11(a)(3) of the Securities Act of 1933, as amended.
/s/ CHARLES H. McCREARY
-----------------------
Charles H. McCreary
Columbus, Ohio
June 11, 1996
<PAGE>
EXHIBIT 23.8
CONSENT OF JAMES V. PICKETT
In reference to the Registration Statement on Form S-1 and the related
Prospectus of Karrington Health, Inc. (File No. 333-03491), I hereby consent
to the references to me under the caption "MANAGEMENT - Executive Officers
and Directors" of such Registration Statement and confirm that I have agreed
to join the Board of Directors of Karrington Health, Inc. upon the
consummation of the offering contemplated by such Registration Statement.
Notwithstanding the foregoing, nothing contained herein shall be construed as
an admission that the undersigned is a "person who. . . is named in the
registration statement as becoming or about to become a director. . ." for
purposes of Section 11(a)(3) of the Securities Act of 1933, as amended.
/s/ JAMES V. PICKETT
--------------------
James V. Pickett
Columbus, Ohio
June 11, 1996
<PAGE>
EXHIBIT 23.9
CONSENT OF HAROLD A. POLING
In reference to the Registration Statement on Form S-1 and the related
Prospectus of Karrington Health, Inc. (File No. 333-03491), I hereby consent
to the references to me under the caption "MANAGEMENT - Executive Officers
and Directors" of such Registration Statement and confirm that I have agreed
to join the Board of Directors of Karrington Health, Inc. upon the
consummation of the offering contemplated by such Registration Statement.
Notwithstanding the foregoing, nothing contained herein shall be construed as
an admission that the undersigned is a "person who. . . is named in the
registration statement as becoming or about to become a director. . ." for
purposes of Section 11(a)(3) of the Securities Act of 1933, as amended.
/s/ HAROLD A. POLING
--------------------
Harold A. Poling
Columbus, Ohio
June 11, 1996
<PAGE>
EXHIBIT 23.10
CONSENT OF ROBERT D. WALTER
In reference to the Registration Statement on Form S-1 and the related
Prospectus of Karrington Health, Inc. (File No. 333-03491), I hereby consent
to the references to me under the caption "MANAGEMENT - Executive Officers
and Directors" of such Registration Statement and confirm that I have agreed
to join the Board of Directors of Karrington Health, Inc. upon the
consummation of the offering contemplated by such Registration Statement.
Notwithstanding the foregoing, nothing contained herein shall be construed as
an admission that the undersigned is a "person who. . . is named in the
registration statement as becoming or about to become a director. . ." for
purposes of Section 11(a)(3) of the Securities Act of 1933, as amended.
/s/ ROBERT D. WALTER
--------------------
Robert D. Walter
Columbus, Ohio
June 11, 1996
