KARRINGTON HEALTH INC, S-1/A, 1996-06-18

KARRINGTON HEALTH INC
S-1/A, 1996-06-18
NURSING & PERSONAL CARE FACILITIES

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1996
REGISTRATION NO. 333-03491

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1
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>

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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.

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<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 18, 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 4,182 954 1,303
General and administrative........................................................ 170 634 1,705 268 575
Depreciation and amortization..................................................... 505 844 1,088 241 318
Write-off of intangible asset..................................................... -- -- 492 -- --
------ ------- ------- ------ ------
Total........................................................................... 2,583 4,932 7,467 1,463 2,196
------ ------- ------- ------ ------
Operating income (loss)............................................................. (277) 332 (723) (4) (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) $(1,851) $ (303) $ (551)
------ ------- ------- ------ ------
------ ------- ------- ------ ------
Pro forma net loss per common share (1)............................................. $ (.43) $ (.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)....................................................... $(1,868) $(1,868) $ 1,571
Total assets.................................................................... 30,342 30,342 63,647
Long-term obligations and deferred taxes, less current portion.................. 21,753 22,853 20,690
Equity.......................................................................... 5,380 4,280 38,648
</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 1989, Richard R. Slager, the Company's Chief Executive Officer and
President, and Alan B. Satterwhite, the Company's Chief Operating Officer and
the Chief Financial Officer, formed DevelopMed Associates, Inc., an Ohio
corporation ("DMA"), for the purpose of developing an assisted living residence
business. In 1991, DMA entered into a strategic alliance with JMAC, an
investment company owned by John H. McConnell and John P. McConnell, the founder
and the Chief Executive Officer, respectively, of Worthington Industries, Inc.,
pursuant to which alliance DMA and JMAC Properties, Inc., an Ohio corporation
("JMAC Properties"), which is a wholly-owned subsidiary of JMAC, formed the
Company's predecessor, Karrington Operating Company, an Ohio general partnership
("Karrington Operating"). Prior to the consummation of the Reorganization
Transactions (as defined below), JMAC Properties owned a 66 2/3% equity interest
in Karrington Operating, and DMA owned a 33 1/3% equity interest. To date, the
Company's business has been conducted through Karrington Operating.

REORGANIZATION TRANSACTIONS

Immediately prior to the effective time of the Registration Statement of
which this Prospectus forms a part, (i) JMAC will transfer to the Company all of
its shares of JMAC Properties in exchange for 66 2/3% of the pre-offering
outstanding Common Shares of the Company and the shareholders of DMA will
transfer all of their shares of DMA to the Company in exchange for 33 1/3% of
the pre-offering outstanding Common Shares of the Company and (ii) the size of
the Board of Directors will be increased to 11, divided into three classes.
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)....................... -- 5,380 39,748
Partners' equity........................................................... 5,380 -- --
Retained earnings (deficiency)............................................. -- (1,100) (1,100)
------- --------- -----------
Total equity............................................................. 5,380 4,280 38,648
------- --------- -----------
Total capitalization................................................... $27,133 $26,033 $59,338
------- --------- -----------
------- --------- -----------
</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 4,182 954 1,303
General and administrative......................... 39 84 170 634 1,705 268 575
Depreciation and amortization...................... -- 95 505 844 1,088 241 318
Write-off of intangible asset...................... -- -- -- -- 492 -- --
---- ----- ------ ------- ------- ------ ------
Total............................................ 39 400 2,583 4,932 7,467 1,463 2,196
---- ----- ------ ------- ------- ------ ------
Operating income (loss).............................. (38 ) (184) (277) 332 (723) (4) (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) $(1,851) $ (303) $ (551)
---- ----- ------ ------- ------- ------ ------
---- ----- ------ ------- ------- ------ ------
Pro forma net loss per common share (1).............. $ (.43) $ (.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) $(1,193) $(1,868) $(1,868) $ 1,571
Total assets........................... 3,186 9,938 14,883 16,292 26,766 30,342 30,342 63,647
Long-term obligations and deferred
taxes, less current portion........... 2,193 8,753 14,472 16,778 18,250 21,753 22,853 20,690
Equity (deficit)....................... 542 256 (728) (1,763) 5,931 5,380 4,280 38,648
</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.

(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 62.0 65.4 67.0
General and administrative........................... 7.4 12.0 25.3 18.4 29.6
Depreciation and amortization........................ 21.9 16.1 16.1 16.5 16.4
Write-off of intangible asset........................ -- -- 7.3 -- --
--------- --------- --------- --------- ---------
Total expenses..................................... 112.0 93.7 110.7 100.3 113.0
--------- --------- --------- --------- ---------
Operating income (loss)................................ (12.0)% 6.3% (10.7)% (0.3)% (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 $349,000, or 36.6%, to $1.3 million
in the first quarter of 1996 from $954,000 in the first quarter of 1995. As a
percentage of total revenues, residence operations expenses increased from 65.4%
in the first quarter of 1995 to 67.0% in the same period of 1996. This increase
is primarily attributable to the opening of a new residence in Shaker Heights,
Ohio in October 1995 and an Alzheimer's residence in Columbus, Ohio in February
1996, as operations

16
<PAGE>
expenses are historically higher as a percent of total revenues during the first
year of operation of a residence. Excluding these two residences, operations
expenses would have been 61.9% of total revenues in the first quarter of 1996.

General and administrative expenses increased $307,000, or 114%, to $575,000
in the first quarter of 1996 from $268,000 in the first quarter of 1995,
primarily due to increased compensation, payroll taxes and related benefits of
$216,000 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 $77,000, or 32.2%, to $318,000 in
the first quarter of 1996 from $241,000 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 $729,000, or 21.1%, to $4.2 million
in 1995 from $3.5 million in 1994, primarily due to the 17.6% increase in
resident days. As a percentage of total revenues, residence operations expenses
decreased from 65.6% in 1994 to 62.0% in 1995. This decrease is primarily
attributable to the second full year of operations at the Tucker Creek residence
where the average occupancy percentage increased to 93.7% in 1995 from 63.2% in
1994.

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

Depreciation and amortization increased $244,000, or 28.8%, to $1,088,000 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 Consolidated Financial Statements
($131,000), the opening of the Shaker Heights residence ($48,000) and the
Company's move to its new headquarters in July 1995.

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

17
<PAGE>
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 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

18
<PAGE>

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
$5.4 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 $1.9 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 has developed 15 residences in its target markets, six of which
are open and nine of which are under construction and scheduled to open in late
1996 or in the first half of 1997. These 15 residences are located in Ohio,
Pennsylvania, Indiana, Colorado and New Mexico. As part of its nationwide
expansion strategy, the Company has sites for 13 residences under contract in
these states, as well as in Michigan and North Carolina. The Company has begun
predevelopment activities in New York, Kentucky and Illinois.

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

In addition to its own development activities, the Company has entered into
a joint development relationship with Sisters of Charity Health Care 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

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

22
<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

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

The following table sets forth certain information regarding Karrington
residences in operation or under construction as of 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.

25
<PAGE>

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.

26
<PAGE>
The Company's construction strategies include the development of national
purchasing capabilities for major building components and the retention of
several regional contractors engaged to construct its residences. The Company
believes these approaches will help reduce construction costs or mitigate the
rate of cost increases due to inflation, increase product quality, and shorten
construction periods that result from increased familiarity with the
architectural, engineering and construction design of the Company's prototype
residences.

ARCHITECTURAL DESIGNS

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

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

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

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

MARKETING

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

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

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

REGULATION

The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities, which requirements vary from state to state. These
requirements address, among other things: personnel education, training and
records; facility services, including administration of medication and limited
nursing services; physical plant specifications; furnishing of residents' units;
food and housekeeping services; emergency evacuation plans; and residents'
rights and responsibilities. In several states in which the Company operates or
intends to operate, assisted living residences also require a certificate of
need before the residences can be opened. In most states, assisted living
residences are subject to state or local fire and building codes and food
service licensure requirements. Like other health care residences, assisted
living residences are subject to periodic survey or inspection by governmental
authorities. From time to time in the ordinary course of business, the Company
receives survey reports. The Company reviews such reports and takes appropriate
corrective action. Inspection deficiencies are resolved through a plan of
correction, although the reviewing agency typically is authorized to take action
against a licensed facility where deficiencies are noted in the survey process.
Such action may include imposition of fines, imposition of a provisional or
conditional license or suspension or revocation of a license or other sanctions.

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

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

The Company currently is not a Medicare or Medicaid provider. Under some
state licensure laws, and for the convenience of its residents, some of the
Company's assisted living residences maintain contracts with certain health care
providers and practitioners, including pharmacies, visiting nurse, social
service and home health organizations, through which health care providers make
their health care products or services available to residents. Some of the
services furnished by these contract parties may be covered by the Medicare
programs.

COMPETITION

The long-term care industry is highly competitive. The Company believes the
assisted living sector of long- term care, in which it operates, will become
even more competitive in the future. The Company competes with numerous other
companies providing similar long-term care alternatives such as home health care
agencies, community-based service programs, retirement communities and
convalescent centers, and other assisted living providers. The Company expects
that, as the provision

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

PROPRIETARY INFORMATION

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

EMPLOYEES

As of 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.

29
<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.

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

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

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

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

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

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

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

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

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

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

31
<PAGE>

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

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

COMMITTEES OF THE BOARD OF DIRECTORS

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

COMPENSATION COMMITTEE. Upon its creation, the Compensation Committee will
make recommendations to the full Board of Directors concerning salary and bonus
compensation and benefits for executive officers of the Company and will
administer the Incentive Stock Plan with respect to executive officers. The
Compensation Committee will consist of at least three 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.

32
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

INCENTIVE STOCK PLAN

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

OPTION GRANTS

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

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

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

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE INCENTIVE STOCK PLAN

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

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

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

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

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

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

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

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

37
<PAGE>
CERTAIN TRANSACTIONS

In December, 1995, the Company entered into a loan agreement with JMAC, an
investment company owned by John H. McConnell and John P. McConnell, the founder
and Chief Executive Officer, respectively, of Worthington Industries, Inc.,
pursuant to which JMAC agreed to provide up to $8.0 million in loans to the
Company during a commitment period expiring December 31, 1996. Borrowings under
the agreement are subordinated to all obligations of the Company to financial
institutions. The loans bear interest at 15% per annum, payable annually. If not
sooner paid, all amounts advanced under the agreement are due January 1, 2000,
or earlier upon the occurrence of certain events. The purpose of the loans is to
provide the Company with equity funds as required by third party lenders for
construction of additional Karrington residences. The agreement contains
customary representations and covenants of the Company and certain conditions to
JMAC's obligation to lend funds. As of 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 by Vorys, Sater, Seymour and Pease, Columbus, Ohio, and for the
Underwriters by Dewey Ballantine, New York, New York.

CHANGE IN ACCOUNTANTS

On November 7, 1995, the Company replaced Deloitte & Touche LLP with Ernst &
Young LLP as the Company's independent certified public accountants. The reports
of Deloitte & Touche LLP on the consolidated financial statements of the Company
as of December 31, 1994 and for each of the two years in the period then ended
did not contain an adverse opinion or disclaimer of opinion and was not
qualified or modified as to 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
June 17, 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
Pre-opening costs............................. -- 381,770 431,816
Prepaid expenses.............................. 121,018 98,821 114,537
-------------- -------------- --------------
Total current assets........................ 365,955 1,392,616 1,340,947
Property and equipment -- net (NOTE 2).......... 14,844,963 24,879,363 28,571,074
Other assets -- net (NOTE 3).................... 1,081,176 494,463 430,120
-------------- -------------- --------------
Total assets................................ $ 16,292,094 $ 26,766,442 $ 30,342,141
-------------- -------------- --------------
-------------- -------------- --------------
<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) 5,930,907 5,380,213 --
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.................................. 5,380,213
Retained earnings (deficiency)................ (1,100,000)
-------------- -------------- -------------- --------------
Total liabilities and owners' equity............ $ 16,292,094 $ 26,766,442 $ 30,342,141 $ 5,380,213
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</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 4,182,312 954,056 1,303,527
General and administrative........ 170,319 634,016 1,704,694 268,481 574,894
Depreciation and amortization..... 505,125 844,420 1,087,797 240,663 318,158
Write-off of intangible asset..... -- -- 492,288 -- --
------------- -------------- -------------- ------------- -------------
Total expenses.................. 2,583,128 4,932,126 7,467,091 1,463,200 2,196,579
------------- -------------- -------------- ------------- -------------
Operating income (loss)............. (277,241) 332,344 (723,235) (4,378) (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) $ (1,851,280) $ (303,204) $ (550,694)
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
Unaudited pro forma information
(NOTE 10):
Net loss per share................ $ (.43) $ (.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........................................................................................ (1,851,280)
--------------
Balance at December 31, 1995...................................................................... 5,930,907
Net loss (unaudited)............................................................................ (550,694)
--------------
Balance at March 31, 1996 (unaudited)............................................................. $ 5,380,213
--------------
--------------
</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) $ (1,851,280) $ (303,204) $ (550,694)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Write-off of intangible asset................ -- -- 492,288 -- --
Depreciation and amortization................ 505,125 844,420 1,087,797 240,663 318,158
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 (133,524) (51,527) (205,815)
INVESTING ACTIVITIES
Increase in assets whose use is limited........ -- -- (239,000) -- --
Purchases of property and equipment............ (5,205,831) (2,043,109) (10,023,395) (706,714) (3,291,406)
Payments of pre-opening costs.................. (337,395) (27,881) (417,592) (68,447) (154,469)
Payments for organization costs and other...... (32,535) 16,923 (50,320) (16,129) (45,282)
------------ ------------ ------------- ----------- ------------
Net cash used in investing activities...... (5,575,761) (2,054,067) (10,730,307) (791,290) (3,491,157)
FINANCING ACTIVITIES
Proceeds from mortgages........................ 4,828,695 4,468,654 14,324,119 108,789 2,512,691
Repayment of mortgages......................... -- (3,802,002) (7,474,272) (8,112) (37,515)
Proceeds from JMAC debentures.................. 833,595 1,051,000 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 direct response marketing expenses, 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. The effect of this change was to
increase amortization expense by $130,785 in 1995, and by $33,277 and $22,431 in
the first quarters of 1996 and 1995, respectively. Accumulated amortization at
December 31, 1995 and March 31, 1996 was $61,047 and $165,471, 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.

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)
ORGANIZATION COSTS

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

ADVERTISING EXPENSE

Advertising expenditures are expensed when incurred except for direct
response advertising which is capitalized to pre-opening costs. Advertising
expenditures were approximately $253,000, $250,000, and $276,000 for 1993, 1994
and 1995, respectively. Of these amounts $108,000, $16,000 and $99,000 were
capitalized in the respective periods.

INCOME TAXES

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

IMPACT OF CERTAIN ACCOUNTING STANDARDS

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

UNAUDITED FINANCIAL STATEMENTS

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

F-10
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 at
December 31, 1994 (SEE NOTE 2)...................................... 342,826 -- --
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 $ 494,463 $ 430,120
------------- ------------- -------------
------------- ------------- -------------
</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 generally will have a 20% to 35% ownership interest in each of the
residences. Construction is expected to be funded by a combination of equity
contributions and mortgages. As of December 31, 1995 construction had begun on
two residences in Albuquerque, New Mexico and three other sites were under
development.

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

F-13
<PAGE>
KARRINGTON HEALTH, INC.
AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.

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.............................................. *
Legal fees and expenses................................................... *
Accountants' fees and expenses............................................ *
Blue sky qualification fees and expenses.................................. *
Transfer agent fees....................................................... *
Miscellaneous............................................................. *
---------
Total................................................................. $ *
---------
---------
</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;

(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 intends to purchase insurance coverage which
will insure directors and officers against certain liabilities which might be
incurred by them in such capacity.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Registrant was organized in April, 1996, to facilitate this offering and to
become the successor to Karrington Operating Company upon the consummation of
the Reorganization Transactions described in the Prospectus. JMAC has entered
into a Reorganization Agreement with Registrant dated May 8, 1996, pursuant to
which it has agreed to acquire 2,900,000 Common Shares of the Company in
exchange for all of its shares of JMAC Properties. Each of Richard R. Slager,
Alan B. Satterwhite and Gregory M. Barrows have also entered into the
Reorganization Agreement, and they have agreed to acquire 717,750, 717,750 and
14,500, respectively, Common Shares of Registrant in exchange for their shares
of DMA. The Reorganization Agreement was entered into, and the shares subject to
the Agreements will be issued, without registration under the Securities Act of
1933 in reliance upon the exemption provided by Section 4(2) of that Act.

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. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Columbus, State of Ohio, on June 18, 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. 1 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) June 18, 1996

/S/ ALAN B. SATTERWHITE* Director, Chief Operating Officer and Chief
------------------------------------ Financial Officer (PRINCIPAL FINANCIAL AND
Alan B. Satterwhite ACCOUNTING OFFICER) June 18, 1996

/S/ JOHN S. CHRISTIE* Director
------------------------------------
John S. Christie June 18, 1996

/S/ MICHAEL H. THOMAS* Director
------------------------------------
Michael H. Thomas June 18, 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 3.1

AMENDED ARTICLES

KARRINGTON HEALTH, INC.

FIRST: The name of the corporation shall be Karrington Health, Inc.

SECOND: The place in Ohio where the principal office of the
corporation is to be located is in the City of Columbus, County of Franklin.

THIRD: The purpose for which the corporation is formed is to engage
in any lawful act or activity for which corporations may be formed under
Sections 1701.01 to 1701.98 of the Ohio Revised Code.

FOURTH: The authorized number of shares of the corporation shall be
thirty million (30,000,000), of which twenty-eight million (28,000,000) shares
shall be Common Shares, without par value, and two million (2,000,000) shares
shall be Preferred Shares, without par value.

Each outstanding Common Share shall entitle the holder thereof to one
vote on each matter properly submitted to the shareholders for their vote,
consent, waiver, release or other action. Except as otherwise required by law,
the holders of Preferred Shares shall not be entitled to vote. No shareholder
of the corporation shall have, as a matter of right, the right to vote
cumulatively in the election of directors.

The directors of the corporation are authorized to adopt amendments to
the Amended Articles in respect of any unissued or treasury Preferred Shares and
thereby to fix or change, to the full extent now or hereafter permitted by Ohio
law: the division of such shares into series and the designation and authorized
number of shares of each series; the dividend rate; the dates of payment of
dividends and the dates from which they are cumulative; liquidation price;
redemption rights and price; sinking fund requirements; conversion rights;
restrictions on the issuance of shares of any class or series; and such other
rights, preferences and limitations as shall not be inconsistent with this
ARTICLE FOURTH.

FIFTH: The directors of the corporation shall have the power to
cause the corporation from time to time and at any time to purchase, hold, sell,
transfer or otherwise deal with (A) shares of any class or series issued by it,
(B) any security or other obligation of the corporation which may confer upon
the holder thereof the right to convert the same into shares of any class or
series authorized by the articles of the corporation, and (C) any security or
other obligation which may confer upon the holder

<PAGE>

thereof the right to purchase shares of any class or series authorized by the
articles of the corporation. The corporation shall have the right to
repurchase, if and when any shareholder desires to sell, or on the happening of
any event is required to sell, shares of any class or series issued by the
corporation. The authority granted in this ARTICLE FIFTH of these Amended
Articles shall not limit the plenary authority of the directors to purchase,
hold, sell, transfer or otherwise deal with shares of any class or series,
securities, or other obligations issued by the corporation or authorized by its
articles.

SIXTH: No shareholder of the corporation shall have, as a matter of
right, the pre-emptive right to purchase or subscribe for shares of any class,
now or hereafter authorized, or to purchase or subscribe for securities or other
obligations convertible into or exchangeable for such shares or which by
warrants or otherwise entitle the holders thereof to subscribe for or purchase
any such share.

SEVENTH: These Amended Articles take the place of and supersede the
original Articles of Incorporation of Karrington Health, Inc.

-2-

<PAGE>

EXHIBIT 3.2

CODE OF REGULATIONS

KARRINGTON HEALTH, INC.

INDEX

ARTICLE ONE

MEETINGS OF SHAREHOLDERS

Section 1.01. Annual Meetings . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02. Calling of Meetings . . . . . . . . . . . . . . . . . . . 1
Section 1.03. Place of Meetings . . . . . . . . . . . . . . . . . . . . 1
Section 1.04. Notice of Meetings. . . . . . . . . . . . . . . . . . . . 1
Section 1.05. Waiver of Notice. . . . . . . . . . . . . . . . . . . . . 2
Section 1.06. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.07. Votes Required. . . . . . . . . . . . . . . . . . . . . . 2
Section 1.08. Order of Business . . . . . . . . . . . . . . . . . . . . 2
Section 1.09. Shareholders Entitled to Vote . . . . . . . . . . . . . . 3
Section 1.10. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.11. Inspectors of Election. . . . . . . . . . . . . . . . . . 3

ARTICLE TWO

DIRECTORS

Section 2.01. Authority and Qualifications. . . . . . . . . . . . . . . 3
Section 2.02. Number of Directors and Term of Office. . . . . . . . . . 4
Section 2.03. Election. . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.04. Nominations . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.05. Removal . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.06. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.07. Meetings. . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.08. Notice of Meetings. . . . . . . . . . . . . . . . . . . . 5
Section 2.09. Waiver of Notice. . . . . . . . . . . . . . . . . . . . . 6
Section 2.10. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.11. Executive Committee . . . . . . . . . . . . . . . . . . . 6
Section 2.12. Compensation. . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.13. By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . 7

<PAGE>

ARTICLE THREE

OFFICERS

Section 3.01. Officers. . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.02. Tenure of Office. . . . . . . . . . . . . . . . . . . . . 7
Section 3.03. Duties of the Chairman of the Board . . . . . . . . . . . 8
Section 3.04. Duties of the President . . . . . . . . . . . . . . . . . 8
Section 3.05. Duties of the Vice Presidents . . . . . . . . . . . . . . 8
Section 3.06. Duties of the Secretary . . . . . . . . . . . . . . . . . 8
Section 3.07. Duties of the Treasurer . . . . . . . . . . . . . . . . . 8

ARTICLE FOUR

Section 4.01. Certificates. . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.02. Transfers . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.03. Transfer Agents and Registrars. . . . . . . . . . . . . . 9
Section 4.04. Lost, Wrongfully Taken or Destroyed Certificates. . . . . 9
Section 4.05. Uncertificated Shares . . . . . . . . . . . . . . . . . .10

ARTICLE FIVE

INDEMNIFICATION AND INSURANCE

Section 5.01. Mandatory Indemnification . . . . . . . . . . . . . . . .10
Section 5.02. Court-Approved Indemnification. . . . . . . . . . . . . .11
Section 5.03. Indemnification for Expenses. . . . . . . . . . . . . . .11
Section 5.04. Determination Required. . . . . . . . . . . . . . . . . .11
Section 5.05. Advances for Expenses . . . . . . . . . . . . . . . . . .12
Section 5.06. Article FIVE Not Exclusive. . . . . . . . . . . . . . . .13
Section 5.07. Insurance . . . . . . . . . . . . . . . . . . . . . . . .13
Section 5.08. Certain Definitions . . . . . . . . . . . . . . . . . . .13
Section 5.09. Venue . . . . . . . . . . . . . . . . . . . . . . . . . .13

ARTICLE SIX

MISCELLANEOUS

Section 6.01. Amendments. . . . . . . . . . . . . . . . . . . . . . . .14
Section 6.02. Action by Shareholders or Directors Without a Meeting . .14

<PAGE>

CODE OF REGULATIONS

KARRINGTON HEALTH, INC.

ARTICLE ONE

MEETINGS OF SHAREHOLDERS

SECTION 1.01. ANNUAL MEETINGS. The annual meeting of the
shareholders for the election of directors, for the consideration of reports to
be laid before such meeting and for the transaction of such other business as
may properly come before such meeting, shall be held on the fourth Tuesday in
April in each year or on such other date as may be fixed from time to time by
the directors.

SECTION 1.02. CALLING OF MEETINGS. Meetings of the shareholders may
be called only by the chairman of the board, the president, or, in case of the
president's absence, death, or disability, the vice president authorized to
exercise the authority of the president; the secretary; the directors by action
at a meeting, or a majority of the directors acting without a meeting; or the
holders of at least fifty percent (50%) of all shares outstanding and entitled
to vote thereat.

SECTION 1.03. PLACE OF MEETINGS. All meetings of shareholders shall
be held at the principal office of the corporation, unless otherwise provided by
action of the directors. Meetings of shareholders may be held at any place
within or without the State of Ohio.

SECTION 1.04. NOTICE OF MEETINGS.

(A) Written notice stating the time, place and purposes of a meeting
of the shareholders shall be given either by personal delivery or by mail not
less than seven nor more than ninety days before the date of the meeting, (1) to
each shareholder of record entitled to notice of the meeting, (2) by or at the
direction of the president or the secretary. If mailed, such notice shall be
addressed to the shareholder at his address as it appears on the records of the
corporation. Notice of adjournment of a meeting need not be given if the time
and place to which it is adjourned are fixed and announced at such meeting. In
the event of a transfer of shares after the record date for determining the
shareholders who are entitled to receive notice of a meeting of shareholders, it
shall not be necessary to give notice to the transferee. Nothing herein
contained shall prevent the setting of a record date in the manner provided by
law, the Articles or the Regulations for the determination of shareholders who
are entitled to receive notice of or to vote at any meeting of shareholders or
for any purpose required or permitted by law.

<PAGE>

(B) Following receipt by the president or the secretary of a request
in writing, specifying the purpose or purposes for which the persons properly
making such request have called a meeting of the shareholders, delivered either
in person or by registered mail to such officer by any persons entitled to call
a meeting of shareholders, such officer shall cause to be given to the
shareholders entitled thereto notice of a meeting to be held on a date not less
than seven nor more than one hundred twenty days after the receipt of such
request, as such officer may fix. If such notice is not given within ninety
days after the receipt of such request by the president or the secretary, then,
and only then, the persons properly calling the meeting may fix the time of
meeting and give notice thereof in accordance with the provisions of the
Regulations.

(C) A shareholder seeking to bring business before an annual meeting
of the shareholders may do so only in accordance with Rule 14a-8 under the
Securities Exchange Act of 1934, as amended, or any successor rule or
regulation. The chairman of the annual meeting may refuse to acknowledge the
proposal of any person to bring business before the annual meeting not made in
compliance with the foregoing procedure and applicable federal securities laws.

SECTION 1.05. WAIVER OF NOTICE. Notice of the time, place and
purpose or purposes of any meeting of shareholders may be waived in writing,
either before or after the holding of such meeting, by any shareholders, which
writing shall be filed with or entered upon the records of such meeting. The
attendance of any shareholder, in person or by proxy, at any such meeting
without protesting the lack of proper notice, prior to or at the commencement of
the meeting, shall be deemed to be a waiver by such shareholder of notice of
such meeting.

SECTION 1.06. QUORUM. At any meeting of shareholders, the holders of
a majority of the voting shares of the corporation then outstanding and entitled
to vote thereat, present in person or by proxy, shall constitute a quorum for
such meeting. The holders of a majority of the voting shares represented at a
meeting, whether or not a quorum is present, or the chairman of the board, the
president, or the officer of the corporation acting as chairman of the meeting,
may adjourn such meeting from time to time, and if a quorum is present at such
adjourned meeting any business may be transacted as if the meeting had been held
as originally called.

SECTION 1.07. VOTES REQUIRED. At all elections of directors the
candidates receiving the greatest number of votes shall be elected. Unless
otherwise required by Ohio law, the Articles or the Regulations, the affirmative
vote of a majority of the shares of the corporation present, in person or by
proxy, at a meeting of shareholders and entitled to vote on the subject matter
shall be the act of the shareholders.

SECTION 1.08. ORDER OF BUSINESS. The order of business at any
meeting of shareholders shall be determined by the officer of the corporation
acting as chairman of such meeting unless otherwise determined by a vote of the
holders of a majority of the voting shares of the corporation then outstanding,
present in person or by proxy, and entitled to vote at such meeting.

SECTION 1.09. SHAREHOLDERS ENTITLED TO VOTE. Each shareholder of
record on the books of the corporation on the record date for determining the
shareholders who are entitled

<PAGE>

to vote at a meeting of shareholders shall be entitled at such meeting to one
vote for each share of the corporation standing in his name on the books of the
corporation on such record date. The directors may fix a record date for the
determination of the shareholders who are entitled to receive notice of and to
vote at a meeting of shareholders, which record date shall not be a date earlier
than the date on which the record date is fixed and which record date may be a
maximum of ninety days preceding the date of the meeting of shareholders.

SECTION 1.10. PROXIES. At meetings of the shareholders, any
shareholder of record entitled to vote thereat may be represented and may vote
by a proxy or proxies appointed by an instrument in writing signed by such
shareholder, but such instrument shall be filed with the secretary of the
meeting before the person holding such proxy shall be allowed to vote
thereunder. No proxy shall be valid after the expiration of eleven months after
the date of its execution, unless the shareholder executing it shall have
specified therein the length of time it is to continue in force.

SECTION 1.11. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the directors may appoint inspectors of election to act at such
meeting or any adjournment thereof; if inspectors are not so appointed, the
officer of the corporation acting as chairman of any such meeting may make such
appointment. In case any person appointed as inspector fails to appear or act,
the vacancy may be filled only by appointment made by the directors in advance
of such meeting or, if not so filled, at the meeting by the officer of the
corporation acting as chairman of such meeting. No other person or persons may
appoint or require the appointment of inspectors of election.

ARTICLE TWO

DIRECTORS

SECTION 2.01. AUTHORITY AND QUALIFICATIONS. Except where the law,
the Articles or the Regulations otherwise provide, all authority of the
corporation shall be vested in and exercised by its directors. Directors need
not be shareholders of the corporation.

SECTION 2.02. NUMBER OF DIRECTORS AND TERM OF OFFICE.

(A) Until changed in accordance with the provisions of the
Regulations, the number of directors of the corporation shall be eleven.
Directors shall be divided into three (3) classes each of which shall consist of
such number of directors, not less than three, as may be determined by the
shareholders or directors in the manner described in paragraphs (B) and (C) of
this Section. The number of directors in each class need not be uniform. At
the time these Regulations are adopted, three persons shall be elected to serve
as directors for one year and until their successors are elected, four persons
shall be elected to serve as directors for two years and until their successors
are elected and four persons shall be elected to serve as directors for three
years and until their successors are elected. At each annual meeting of
shareholders beginning

<PAGE>

with the 1997 annual meeting a class of directors shall be elected to serve a
term of three years to succeed the class of directors whose terms shall expire
in that year so that the term of office of only one class of directors shall
expire in each such year; provided, however, that each director elected at any
time shall hold office until his successor is duly elected and qualified or
until his earlier resignation, removal from office, or death.

(B) The number of directors may be fixed or changed at a meeting of
the shareholders called for the purpose of electing directors at which a quorum
is present, only by the affirmative vote of the holders of not less than a
majority of the voting shares which are represented at the meeting, in person or
by proxy, and entitled to vote on such proposal.

(C) The directors may fix or change the number of directors and may
fill any director's office that is created by an increase in the number of
directors.

(D) No reduction in the number of directors shall of itself have the
effect of shortening the term of any incumbent director.

SECTION 2.03. ELECTION. At each annual meeting of the shareholders
for the election of directors, the successors to the directors whose term shall
expire in that year shall be elected, but if the annual meeting is not held or
if one or more of such directors are not elected thereat, they may be elected at
a special meeting called for that purpose. The election of directors shall be
by ballot whenever requested by the presiding officer of the meeting or by the
holders of a majority of the voting shares outstanding, entitled to vote at such
meeting and present in person or by proxy, but unless such request is made, the
election shall be viva voce.

SECTION 2.04. NOMINATIONS. Nominations for the election of directors
may be made by the board of directors of the corporation or a committee by the
board or by any shareholder entitled to vote in the election of directors
generally. Any shareholder entitled to vote in the election of directors
generally may nominate one or more persons for election as directors at a
meeting at which directors are to be elected only if written notice of such
shareholder's intent to make such nomination or nominations has been given to
the Secretary of the corporation. Such notice shall be delivered to the
principal executive offices of the corporation not later than the date on which
a shareholder proposal would be required to be delivered under Section 1.04(C)
hereof. Each such notice shall set forth: (A) the name and address of the
shareholder who intends to make the nomination and of the person or persons to
be nominated; (B) a representation that the shareholder is a holder of record of
shares of the corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (C) a description of all arrangements or understandings between
the shareholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the shareholder; (D) such other information regarding each nominee
proposed by such shareholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, by the
board of directors of the corporation; and (E) the consent of each nominee to
serve as a director of the corporation if so elected. The chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.

<PAGE>

SECTION 2.05. REMOVAL. A director or directors may be removed from
office only for cause and only by the vote of the holders of shares entitling
them to exercise not less than a majority of the voting power of the corporation
to elect directors in place of those to be removed. In case of any removal, a
new director may be elected at the same meeting for the unexpired term of each
director removed. Failure to elect a director to fill the unexpired term of any
director removed shall be deemed to create a vacancy in the board.

SECTION 2.06. VACANCIES. The remaining directors, though less than a
majority of the whole authorized number of directors, may, by the vote of a
majority of their number, fill any vacancy in the board for the unexpired term.
A vacancy in the board exists within the meaning of this Section 2.06 in case
the shareholders increase the authorized number of directors but fail at the
meeting at which such increase is authorized, or an adjournment thereof, to
elect the additional directors provided for, or in case the shareholders fail at
any time to elect the whole authorized number of directors.

SECTION 2.07. MEETINGS. A meeting of the directors shall be held
immediately following the adjournment of each annual meeting of shareholders at
which directors are elected, and notice of such meeting need not be given. The
directors shall hold such other meetings as may from time to time be called, and
such other meetings of directors may be called only by the chairman of the
board, the president, or any two directors. All meetings of directors shall be
held at the principal office of the corporation in Columbus, Ohio or at such
other place, within or without the State of Ohio, as the directors may from time
to time determine by a resolution. Meetings of the directors may be held
through any communications equipment if all persons participating can hear each
other and participation in a meeting pursuant to this provision shall constitute
presence at such meeting.

SECTION 2.08. NOTICE OF MEETINGS. Notice of the time and place of
each meeting of directors for which such notice is required by law, the
Articles, the Regulations or the By-Laws shall be given to each of the directors
by at least one of the following methods:

(A) In a writing mailed not less than three days before such meeting
and addressed to the residence or usual place of business of a
director, as such address appears on the records of the
corporation; or

(B) By telegraph, cable, radio, wireless, or a writing sent or
delivered to the residence or usual place of business of a
director as the same appears on the records of the corporation,
not later than the day before the date on which such meeting is
to be held; or

Notice given to a director by any one of the methods specified in the
Regulations shall be sufficient, and the method of giving notice to all
directors need not be uniform. Notice of any meeting of directors may be given
only by the chairman of the board, the president or the secretary of the
corporation. Any such notice need not specify the purpose or purposes of the

<PAGE>

meeting. Notice of adjournment of a meeting of directors need not be given if
the time and place to which it is adjourned are fixed and announced at such
meeting.

SECTION 2.09. WAIVER OF NOTICE. Notice of any meeting of directors
may be waived in writing, either before or after the holding of such meeting, by
any director, which writing shall be filed with or entered upon the records of
the meeting. The attendance of any director at any meeting of directors without
protesting, prior to or at the commencement of the meeting, the lack of proper
notice, shall be deemed to be a waiver by him of notice of such meeting.

SECTION 2.10. QUORUM. A majority of the whole authorized number of
directors shall be necessary to constitute a quorum for a meeting of directors,
except that a majority of the directors in office shall constitute a quorum for
filling a vacancy in the board. The act of a majority of the directors present
at a meeting at which a quorum is present is the act of the board, except as
otherwise provided by law, the Articles or the Regulations.

SECTION 2.11. EXECUTIVE COMMITTEE. The directors may create an
executive committee or any other committee of directors, to consist of not less
than three directors, and may authorize the delegation to such executive
committee or other committees of any of the authority of the directors, however
conferred, other than that of filling vacancies among the directors or in the
executive committee or in any other committee of the directors.

Such executive committee or any other committee of directors shall
serve at the pleasure of the directors, shall act only in the intervals between
meetings of the directors, and shall be subject to the control and direction of
the directors. Such executive committee or other committee of directors may act
by a majority of its members at a meeting or by a writing or writings signed by
all of its members.

Any act or authorization of any act by the executive committee or any
other committee within the authority delegated to it shall be as effective for
all purposes as the act or authorization of the directors. No notice of a
meeting of the executive committee or of any other committee of directors shall
be required. A meeting of the executive committee or of any other committee of
directors may be called only by the president or by a member of such executive
or other committee of directors. Meetings of the executive committee or of any
other committee of directors may be held through any communications equipment if
all persons participating can hear each other and participation in such a
meeting shall constitute presence thereat.

SECTION 2.12. COMPENSATION. Directors shall be entitled to receive
as compensation for services rendered and expenses incurred as directors, such
amounts as the directors may determine.

SECTION 2.13. BY-LAWS. The directors may adopt, and amend from time
to time, By-Laws for their own government, which By-Laws shall not be
inconsistent with the law, the Articles or the Regulations.

<PAGE>

ARTICLE THREE

OFFICERS

SECTION 3.01. OFFICERS. The officers of the corporation to be
elected by the directors shall be a president, a secretary, a treasurer, and, if
desired, one or more vice presidents and such other officers and assistant
officers as the directors may from time to time elect. The directors may elect
a chairman of the board, who must be a director. Officers need not be
shareholders of the corporation, and may be paid such compensation as the board
of directors may determine. Any two or more offices may be held by the same
person, but no officer shall execute, acknowledge, or verify any instrument in
more than one capacity if such instrument is required by law, the Articles, the
Regulations or the By-Laws to be executed, acknowledged, or verified by two or
more officers.

SECTION 3.02. TENURE OF OFFICE. The officers of the corporation hold
office at the pleasure of the directors. Any officer of the corporation may be
removed, either with or without cause, at any time, by the affirmative vote of a
majority of all the directors then in office; such removal, however, shall be
without prejudice to the contract rights, if any, of the person so removed.

SECTION 3.03. DUTIES OF THE CHAIRMAN OF THE BOARD. The chairman of
the board, if any, shall preside at all meetings of the directors. He shall
have such other powers and duties as the directors shall from time to time
assign to him.

SECTION 3.04. DUTIES OF THE PRESIDENT. The president shall be the
chief executive officer of the corporation and shall exercise supervision over
the business of the corporation and shall have, among such additional powers and
duties as the directors may from time to time assign to him, the power and
authority to sign all certificates evidencing shares of the corporation and all
deeds, mortgages, bonds, contracts, notes and other instruments requiring the
signature of the president of the corporation. It shall be the duty of the
president to preside at all meetings of shareholders.

SECTION 3.05. DUTIES OF THE VICE PRESIDENTS. In the absence of the
president or in the event of his inability or refusal to act, the vice
president, if any (or in the event there be more than one vice president, the
vice presidents in the order designated, or in the absence of any designation,
then in the order of their election), shall perform the duties of the president,
and when so acting, shall have all the powers of and be subject to all
restrictions upon the president. The vice presidents shall perform such other
duties and have such other powers as the directors may from time to time
prescribe.

SECTION 3.06. DUTIES OF THE SECRETARY. It shall be the duty of the
secretary, or of an assistant secretary, if any, in case of the absence or
inability to act of the secretary, to keep minutes of all the proceedings of the
shareholders and the directors and to make a proper record of the same; to
perform such other duties as may be required by law, the Articles or the

<PAGE>

Regulations; to perform such other and further duties as may from time to time
be assigned to him by the directors or the president; and to deliver all books,
paper and property of the corporation in his possession to his successor, or to
the president.

SECTION 3.07. DUTIES OF THE TREASURER. The treasurer, or an
assistant treasurer, if any, in case of the absence or inability to act of the
treasurer, shall receive and safely keep in charge all money, bills, notes,
choses in action, securities and similar property belonging to the corporation,
and shall do with or disburse the same as directed by the president or the
directors; shall keep an accurate account of the finances and business of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, stated capital and shares, together with such
other accounts as may be required and hold the same open for inspection and
examination by the directors; shall give bond in such sum with such security as
the directors may require for the faithful performance of his duties; shall,
upon the expiration of his term of office, deliver all money and other property
of the corporation in his possession or custody to his successor or the
president; and shall perform such other duties as from time to time may be
assigned to him by the directors.

ARTICLE FOUR

SECTION 4.01. CERTIFICATES. Certificates evidencing ownership of
shares of the corporation shall be issued to those entitled to them. Each
certificate evidencing shares of the corporation shall bear a distinguishing
number; the signatures of the chairman of the board, the president, or a vice
president, and of the secretary or an assistant secretary (except that when any
such certificate is countersigned by an incorporated transfer agent or
registrar, such signatures may be facsimile, engraved, stamped or printed); and
such recitals as may be required by law. Certificates evidencing shares of the
corporation shall be of such tenor and design as the directors may from time to
time adopt and may bear such recitals as are permitted by law.

SECTION 4.02. TRANSFERS. Where a certificate evidencing a share or
shares of the corporation is presented to the corporation or its proper agents
with a request to register transfer, the transfer shall be registered as
requested if:

(A) An appropriate person signs on each certificate so presented or
signs on a separate document an assignment or transfer of shares evidenced by
each such certificate, or signs a power to assign or transfer such shares, or
when the signature of an appropriate person is written without more on the back
of each such certificate; and

(B) Reasonable assurance is given that the indorsement of each
appropriate person is genuine and effective; the corporation or its agents may
refuse to register a transfer of shares unless the signature of each appropriate
person is guaranteed by a commercial bank or trust

<PAGE>

company having an office or a correspondent in the City of New York or by a firm
having membership in the New York Stock Exchange; and

(D) The corporation or its agents are not otherwise required or
permitted to refuse to register such transfer.

SECTION 4.03. TRANSFER AGENTS AND REGISTRARS. The directors may
appoint one or more agents to transfer or to register shares of the corporation,
or both.

SECTION 4.04. LOST, WRONGFULLY TAKEN OR DESTROYED CERTIFICATES.
Except as otherwise provided by law, where the owner of a certificate
evidencing shares of the corporation claims that such certificate has been lost,
destroyed or wrongfully taken, the directors must cause the corporation to issue
a new certificate in place of the original certificate if the owner:

(A) So requests before the corporation has notice that such original
certificate has been acquired by a bona fide purchaser; and

(B) Files with the corporation, unless waived by the directors, an
indemnity bond, with surety or sureties satisfactory to the corporation, in such
sums as the directors may, in their discretion, deem reasonably sufficient as
indemnity against any loss or liability that the corporation may incur by reason
of the issuance of each such new certificate; and

SECTION 4.05. UNCERTIFICATED SHARES. Anything contained in this
Article FOUR to the contrary notwithstanding, the directors may provide by
resolution that some or all of any or all classes and series of shares of the
corporation shall be uncertificated shares, provided that such resolution shall
not apply to (A) shares of the corporation represented by a certificate until
such certificate is surrendered to the corporation in accordance with applicable
provisions of Ohio law or (B) any certificated security of the corporation
issued in exchange for an uncertificated security in accordance with applicable
provisions of Ohio law. The rights and obligations of the holders of
uncertificated shares and the rights and obligations of the holders of
certificates representing shares of the same class and series shall be
identical, except as otherwise expressly provided by law.

<PAGE>

ARTICLE FIVE

INDEMNIFICATION AND INSURANCE

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, 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), 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 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.

SECTION 5.02. COURT-APPROVED INDEMNIFICATION. Anything contained in
the Regulations or elsewhere to the contrary notwithstanding:

(A) the corporation shall not indemnify any officer or director of
the corporation who was a party to any completed action or suit instituted 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 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, in respect of
any claim, issue or matter asserted in such action or suit as to which he shall
have been adjudged to be liable for acting with reckless disregard for the best
interests of the corporation or misconduct (other than negligence) in the
performance of his duty to the corporation unless and only to the extent that
the Court of Common Pleas of Franklin County, Ohio or the court in which such
action or suit was brought shall determine upon application that, despite such
adjudication of liability, and in view of all the circumstances of the case, he
is fairly and reasonably entitled to such indemnity as such Court of Common
Pleas or such other court shall deem proper; and

<PAGE>

(B) the corporation shall promptly make any such unpaid
indemnification as is determined by a court to be proper as contemplated by
this Section 5.02.

SECTION 5.03. INDEMNIFICATION FOR EXPENSES. Anything contained in
the Regulations or elsewhere to the contrary notwithstanding, to the extent that
an officer or director of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
Section 5.01, or in defense of any claim, issue or matter therein, he shall be
promptly indemnified by the corporation against expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs) actually and reasonably incurred by him in connection therewith.

SECTION 5.04. DETERMINATION REQUIRED. Any indemnification required
under Section 5.01 and not precluded under Section 5.02 shall be made by the
corporation only upon a determination that such indemnification of the officer
or director is proper in the circumstances because he has met the applicable
standard of conduct set forth in Section 5.01. Such determination may be made
only (A) by a majority vote of a quorum consisting of directors of the
corporation who were not and are not parties to, or threatened with, any such
action, suit or proceeding, or (B) if such a quorum is not obtainable or if a
majority 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, or
(C) by the shareholders, or (D) by the Court of Common Pleas of Franklin County,
Ohio or (if the corporation is a party thereto) the court in which such action,
suit or proceeding was brought, if any; any such determination may be made by a
court under division (D) of this Section 5.04 at any time [including, without
limitation, any time before, during or after the time when any such
determination may be requested of, be under consideration by or have been denied
or disregarded by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by the shareholders under
division (C) of this Section 5.04]; and no failure for any reason to make any
such determination, and no decision for any reason to deny any such
determination, by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by shareholders under
division (C) of this Section 5.04 shall be evidence in rebuttal of the
presumption recited in Section 5.01. Any determination made by the
disinterested directors under division (A) or by independent legal counsel under
division (B) of this Section 5.04 to make indemnification in respect of any
claim, issue or matter asserted in an action or suit threatened or brought by or
in the right of the corporation shall be promptly communicated to the person who
threatened or brought such action or suit, and within ten (10) days after
receipt of such notification such person shall have the right to petition the
Court of Common Pleas of Franklin County, Ohio or the court in which such action
or suit was brought, if any, to review the reasonableness of such determination.

SECTION 5.05. ADVANCES FOR EXPENSES. Expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs) incurred in defending any action, suit or proceeding referred to in
Section 5.01 shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding to or on behalf of the officer or
director promptly as such expenses are incurred by him, but only if such officer
or director shall first agree, in writing, to repay all amounts so paid in
respect of any claim, issue or

<PAGE>

other matter asserted in such action, suit or proceeding in defense of which he
shall not have been successful on the merits or otherwise:

(A) if it shall ultimately be determined as provided in Section 5.04
that he is not entitled to be indemnified by the corporation as provided under
Section 5.01; or

(B) if, in respect of any claim, issue or other matter asserted by or
in the right of the corporation in such action or suit, he shall have been
adjudged to be liable for acting with reckless disregard for the best interests
of the corporation or misconduct (other than negligence) in the performance of
his duty to the corporation, unless and only to the extent that the Court of
Common Pleas of Franklin County, Ohio or the court in which such action or suit
was brought shall determine upon application that, despite such adjudication of
liability, and in view of all the circumstances, he is fairly and reasonably
entitled to all or part of such indemnification.

SECTION 5.06. ARTICLE FIVE NOT EXCLUSIVE. The indemnification
provided by this Article FIVE shall not be exclusive of, and shall be in
addition to, any other rights to which any person seeking indemnification may be
entitled under the Articles, the Regulations, any agreement, a vote of
shareholders or disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be an officer or
director of the corporation and shall inure to the benefit of the heirs,
executors, and administrators of such a person.

SECTION 5.07. INSURANCE. The 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 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, or agent of another corporation (domestic or foreign, nonprofit or for
profit), 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
obligation or the power to indemnify him against such liability under the
provisions of this Article FIVE. Insurance may be purchased from or maintained
with a person in which the corporation has a financial interest.

SECTION 5.08. CERTAIN DEFINITIONS. For purposes of this Article
FIVE, and as examples and not by way of limitation:

(A) A person claiming indemnification under this Article FIVE shall
be deemed to have been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 5.01, or in defense of any
claim, issue or other matter therein, if such action, suit or proceeding shall
be terminated as to such person, with or without prejudice, without the entry of
a judgment or order against him, without a conviction of him, without the
imposition of a fine upon him and without his payment or agreement to pay any
amount in settlement thereof (whether or not any such termination is based upon
a judicial or other determination of the lack of merit of the claims made
against him or otherwise results in a vindication of him); and

<PAGE>

(B) References to an "other enterprise" shall include employee
benefit plans; references to a "fine" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee or agent with respect to
an employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" within the meaning of that term as used in this Article FIVE.

SECTION 5.09. VENUE. Any action, suit or proceeding to determine a
claim for indemnification under this Article FIVE may be maintained by the
person claiming such indemnification, or by the corporation, in the Court of
Common Pleas of Franklin County, Ohio. The corporation and (by claiming such
indemnification) each such person consent to the exercise of jurisdiction over
its or his person by the Court of Common Pleas of Franklin County, Ohio in any
such action, suit or proceeding.

ARTICLE SIX

MISCELLANEOUS

SECTION 6.01. AMENDMENTS.

(A) The Regulations may be amended, or new regulations may be
adopted, at a meeting of the shareholders held for such purpose, only by the
affirmative vote of the holders of shares entitling them to exercise not less
than a majority of the voting power of the corporation on such proposal.

(B) Division (A) of this Section 6.01 notwithstanding, the
shareholders shall have no right to (1) amend or repeal, in any respect,
Sections 1.02, 2.02, 2.03 or 2.05, Article FIVE, this Division (B) of Section
6.01 or Division (B) of Section 6.02 of these Regulations; or (2) adopt, amend
or repeal any other provision which would modify or circumvent Sections 1.02,
2.02, 2.03 or 2.05, Article FIVE, this Division (B) of Section 6.01 or Division
(B) of Section 6.02 of these Regulations, unless, in each case, the holders of
not less than sixty-six and two-thirds percent (66 2/3 %) of the total voting
power of the corporation shall have voted in favor of such action.

SECTION 6.02. ACTION BY SHAREHOLDERS OR DIRECTORS WITHOUT A MEETING.

(A) Anything contained in the Regulations to the contrary
notwithstanding, except as provided in Division (B) of this Section 6.02, any
action which may be authorized or taken at a meeting of the shareholders or of
the directors or of a committee of the directors, as the case may be, may be
authorized or taken without a meeting with the affirmative vote or approval

<PAGE>

of, and in a writing or writings signed by, all the shareholders who would be
entitled to notice of a meeting of the shareholders held for such purpose, or
all the directors, or all the members of such committee of the directors,
respectively, which writings shall be filed with or entered upon the records of
the corporation.

(B) Notwithstanding the provisions of Division (A) of this Section
6.02, from and after the date of the closing of the initial public offering of
the common shares of the corporation registered pursuant to the Securities Act
of 1933, as amended, the Regulations may be amended, or new regulations adopted,
by the shareholders only at a meeting of the shareholders held for such purpose.

<PAGE>

EXHIBIT 5.1

June 17, 1996

Board of Directors
Karrington Health, Inc.
919 Old Henderson Road
Columbus, Ohio 43220

Gentlemen:

We are familiar with the proceedings taken and proposed to be taken by
Karrington Health, Inc., an Ohio corporation (the "Company"), in connection with
the issuance and sale by the Company of up to 3,450,000 of its common shares,
without par value (the "Common Shares").

We have collaborated in the preparation of the Registration Statement
on Form S-3 (the "Registration Statement") filed by the Company with the
Securities and Exchange Commission for the registration of the sale of such
Common Shares under the Securities Act of 1933, as amended. In connection
therewith, we have examined, among other things, such records and documents as
we have deemed necessary in order to express the opinions hereinafter set forth.

Based upon the foregoing, we are of the opinion that the Company is a
duly incorporated and legally existing corporation under the laws of the State
of Ohio. We are also of the opinion, based upon the foregoing and assuming
compliance with applicable federal and state securities laws, that when the
Common Shares to be issued and sold by the Company have been delivered by the
Company against payment of the purchase price therefor, as specified in the
Registration Statement when it shall become effective, said Common Shares will
be validly issued and outstanding, fully paid and non-assessable.

<PAGE>

Karrington Health, INC.
June 17, 1996
Page 2

We hereby consent to the reference to our firm under the caption
"Legal Matters" in the Registration Statement.

Very truly yours,

VORYS, SATER, SEYMOUR AND PEASE

<PAGE>

EXHIBIT 10.1

KARRINGTON HEALTH, INC.

1996 INCENTIVE STOCK PLAN

SECTION l. PURPOSES. The purposes of the Karrington Health, Inc. 1996
Incentive Stock Plan are to promote the interests of Karrington Health, Inc. and
its shareholders by (a) attracting and retaining exceptional executive personnel
and other key employees of, and advisors and consultants to, and directors of
the Company and its Subsidiaries; (b) motivating such employees, advisors and
consultants and Eligible Directors by means of performance-related incentives to
achieve longer-range performance goals; and (c) providing all long-term
employees of the Company and its Subsidiaries with the opportunity to
participate in the long-term growth and financial success of the Company.

SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall
have the meanings set forth below:

"Award" shall mean any Option; stock appreciation right ("Stock
Appreciation Right"), as described in Section 10, which may be awarded either in
tandem with Options ("Tandem Stock Appreciation Rights") or on a stand-alone
basis ("Nontandem Stock Appreciation Rights"); Restricted Stock Award;
Performance Award or unrestricted Common Shares ("Unrestricted Shares"), as
described in Section 12, but shall not include any Director Option.

"Award Agreement" shall mean any written agreement, contract or other
instrument or document evidencing any Award which may, but need not, be executed
or acknowledged by a Participant.

"Board" shall mean the Board of Directors of the Company.

"Cash Account" shall mean an account established for each Participant to
which amounts withheld through payroll deductions shall be credited to purchase
Shares under the provisions of Section 11.

"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.

"Committee" shall mean: (a) until a registration statement for an initial
public offering of the Company's Shares shall become effective, the full Board
and (b) after such a registration statement shall become effective, a committee
of the Board designated by the Board to administer the Plan which shall satisfy
the requirements contained in Section 1.162-27(c)(4) of the Final Regulations
and which shall be composed of not less than the minimum number of persons from
time to time required by Rule 16b-3, each of whom shall be (i) a person from
time to time permitted by the rules promulgated under Section 16 of the Exchange
Act in order for grants of Awards to be exempt transactions under said Section
16 and (ii) receiving remuneration in no other capacity than as a director,
except as permitted under Section 1.162-27(e)(3) of the Final Regulations.

<PAGE>

"Company" shall mean Karrington Health, Inc., together with any successor
thereto.

"Covered Employee" shall mean any individual who, on the last day of the
Company's taxable year, is

(a) the chief executive officer of the Company or is acting in such
capacity; or

(b) among the four highest compensated officers (other than the chief
executive officer).

For this purpose, whether an individual is the chief executive officer or one of
the four highest compensated officers of the Company shall be determined
pursuant to the executive compensation disclosure rules under the Exchange Act.

"Director Option" shall mean a Non-Qualified Stock Option granted to each
Eligible Director pursuant to Section 6(e) without any action by the Board or
the Committee.

"Eligible Director" shall mean, on any date, a person who is serving as a
member of the Board but shall not include a person who is an Employee of the
Company or a Subsidiary.

"Employee" shall mean (a) an employee of the Company or of any Subsidiary;
and (b) except with respect to an Incentive Stock Option and a Right to
Purchase, an advisor or consultant to the Company or to any Subsidiary.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

"Fair Market Value" shall mean the fair market value of the property or
other item being valued, as determined by the Committee in its sole discretion,
provided that the fair market value of Common Shares shall be determined by
reference to the most recent closing price quotation or, if none, the average of
the bid and asked prices, as reported as of the most recent available date with
respect to the sale of Common Shares on any quotation system approved by the
National Association of Securities Dealers then reporting sales of Common Shares
or on any national securities exchange on which the Common Shares are then
listed.

"Final Regulations" shall mean the final regulations promulgated by the
Internal Revenue Service under Section 162(m) of the Code.

"Incentive Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is intended to meet
the requirements of Section 422 of the Code or any successor provision thereto.

"Non-Qualified Stock Option" shall mean a right to purchase Shares from the
Company that is granted under Section 6 of the Plan and that is not intended to
be an Incentive Stock Option.

-2-

<PAGE>

"Offering" shall mean an opportunity provided by the Committee to purchase
Shares under the provisions of Section 11. Offerings may be consecutive or
concurrent, as determined by the Committee. The Committee shall designate the
maximum number of Shares that may be purchased under each Offering. Shares not
sold under one Offering may be offered again in any subsequent Offering.

"Offering Effective Date" shall mean the first business day of the month
designated by the Committee as the start of the Offering Period applicable to an
Offering.

"Offering Period" shall mean the duration of an Offering, as designated by
the Committee. The Offering Period for any Offering shall not exceed 12 months.

"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option but shall not include a Director Option.

"Participant" shall mean any Employee selected by the Committee to receive
an Award under the Plan. In addition, for purposes of Section 11, the term
"Participant" shall include any Employee who has satisfied the requirements of
such section to acquire Shares under the Plan.

"Performance Award" shall mean any right granted under Section 8 of the
Plan.

"Person" shall mean any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, government or political
subdivision thereof or other entity.

"Plan" shall mean the Karrington Health, Inc. 1996 Incentive Stock Plan.

"Restricted Stock" shall mean any Share granted under Section 7 of the
Plan.

"Right to Purchase" shall mean an option to purchase Shares granted to a
Participant who elects to participate in an Offering under the provisions of
Section 11. A Right to Purchase granted for an Offering shall terminate
following the close of business on the Right to Purchase Date for that Offering
to the extent that such Right to Purchase is not exercised on such Right to
Purchase Date.

"Right to Purchase Date" shall mean the last business day of an Offering
Period to purchase Shares under the provisions of Section 11.

"Rule l6b-3" shall mean Rule 16b-3 as promulgated and interpreted by the
SEC under the Exchange Act, or any successor rule or regulation thereto as in
effect from time to time.

"SEC" shall mean the Securities and Exchange Commission or any successor
thereto and shall include the staff thereof.

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"Shares" shall mean Common Shares, without par value, of the Company or
such other securities of the Company as may be designated by the Committee from
time to time.

"Share Account" shall mean an account established for each Participant who
exercises a Right to Purchase under Section 11. A Participant's Share Account
will be credited with the number of Shares purchased on each Right to Purchase
Date and debited for the number of Shares withdrawn by the Participant after
such date.

"Subsidiary" shall mean any corporation which, on the date of
determination, qualified as a subsidiary corporation of the Company under
Section 424(f) of the Code. In addition, the term "Subsidiary" shall include
any trade or business which is under common control with the Company, as
determined under Section 414(c) of the Code.

"Substitute Awards" shall mean Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by a company acquired by
the Company or with which the Company combines.

"Ten Percent Shareholder" shall mean any shareholder who, at the time an
Incentive Stock Option is granted to such shareholder, owns [within the meaning
of Section 425(d) of the Code] more than ten percent of the voting power of all
classes of stock of the Company or a Subsidiary.

"Year of Service" shall mean each 12 consecutive month period, beginning on
an Employee's date of hire with the Company or a Subsidiary (and anniversaries
of such date), during which an Employee is employed by the Company or a
Subsidiary. For this purpose, all service with the Company or a Subsidiary
prior to the effective date of this Plan (as provided in Section 15) shall be
included. Further, periods of service with the Company or a Subsidiary which
are interrupted by a termination of employment (not including any authorized
leave of absence) shall not be aggregated.

SECTION 3. ADMINISTRATION.

(a) The Plan shall be administered by the Committee. Subject to the
terms of the Plan and applicable law, and in addition to other express powers
and authorizations conferred on the Committee by the Plan, the Committee shall
have full power and authority to: (i) designate Participants; (ii) determine
the type or types of Awards to be granted to an eligible Employee;
(iii) determine the number of Shares to be covered by, or with respect to which
payments, rights or other matters are to be calculated in connection with
Awards; (iv) determine the terms and conditions of any Award; (v) determine
whether, to what extent and under what circumstances Awards may be settled or
exercised in cash, Shares, other securities, other Awards or other property or
canceled, forfeited or suspended; (vi) determine whether, to what extent and
under what circumstances cash, Shares, other securities, other Awards, other
property and other amounts payable with respect to an Award shall be deferred
either automatically or at the election of the holder thereof or of the
Committee; (vii) interpret and administer the Plan and any instrument or
agreement relating to, or Award made under, the Plan; (viii) establish, amend,
suspend or waive such rules and regulations and appoint such agents as it shall
deem appropriate

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<PAGE>

for the proper administration of the Plan; and (ix) make any other determination
and take any other action that the Committee deems necessary or desirable for
the administration of the Plan. Notwithstanding anything else contained in the
Plan to the contrary, neither the Committee nor the Board shall have any
discretion regarding whether an Eligible Director shall receive a Director
Option pursuant to Section 6(e) or regarding the terms of any Director Option,
including, without limitation, the number of Shares subject to such Director
Option, the timing of the grant or the exercisability of such Director Option or
the exercise price per Share of such Director Option.

(b) Unless otherwise expressly provided in the Plan, all
designations, determinations, interpretations and other decisions under or with
respect to the Plan or any Award shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive and binding
upon all Persons, including the Company, any subsidiary, any Participant, any
holder or beneficiary of any Award, any stockholder and any Employee.

SECTION 4. SHARES AVAILABLE FOR THE PLAN.

(a) SHARES AVAILABLE. Subject to adjustment as provided in Section
4(b), the number of Shares available for issuance under the Plan shall be
550,000. If, after the effective date of the Plan, any Shares covered by an
Award or Director Option granted under the Plan, or to which such an Award or
Director Option relates, or any Shares issued under Section 11, are forfeited,
or if an Award or Director Option otherwise terminates or is canceled without
the delivery of Shares, then the Shares which may be issued under this Plan, to
the extent of any such settlement, forfeiture, termination or cancellation,
shall again be, or shall become, Shares available for issuance, to the extent
permissible under Rule l6b-3. In the event that any Option, Director Option or
other Award granted hereunder is exercised through the delivery of Shares, the
number of Shares available under the Plan shall be increased by the number of
Shares surrendered, to the extent permissible under Rule l6b-3.

(b) ADJUSTMENTS. In the event that any dividend or other
distribution (whether in the form of Shares, other securities or other
property), recapitalization, stock split, reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, or exchange
of Shares or other securities of the Company, issuance of warrants or other
rights to purchase Shares or other securities of the Company, or other similar
corporate transaction or event affects the Shares such that an adjustment is
necessary in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Committee shall proportionately adjust any or all (as necessary) of (i) the
number of Shares or other securities of the Company (or number and kind of other
securities or property) which may be issued under this Plan; (ii) the number of
Shares or other securities of the Company (or number and kind of other
securities or property) subject to outstanding Awards; (iii) the number of
Shares or other securities of the Company (or number and kind of other
securities or property) and the purchase price per Share subject to purchase
under Section 11 hereof; and (iv) the grant or exercise price with respect to
any Award; provided, in each case, that with respect to Awards of Incentive
Stock Options, no such adjustment shall be authorized to the extent that such
authority would cause the Plan to violate Section 422(b)(l) of the Code, as from
time to time amended. If, pursuant to the preceding sentence, an adjustment is
made to

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outstanding Options held by Participants, a corresponding adjustment shall be
made to outstanding Director Options and if, pursuant to the preceding sentence,
an adjustment is made to the number of Shares authorized for issuance under the
Plan, a corresponding adjustment shall be made to the number of Shares subject
to each Director Option thereafter granted pursuant to Section 6(e).

(c) SOURCES OF SHARES. Any Shares issued pursuant to the terms of
this Plan may consist, in whole or in part, of authorized and unissued Shares or
of Treasury Shares.

SECTION 5. ELIGIBILITY FOR AWARDS AND DIRECTOR OPTIONS. Any Employee,
including any officer or employee-director of the Company or any Subsidiary, who
is not a member of the Committee, shall be eligible to be designated a
Participant for purposes of receiving an Award under the Plan. Each Eligible
Director shall receive nondiscretionary Director Options in accordance with, and
only in accordance with, Section 6(e) hereof.

SECTION 6. OPTIONS AND DIRECTOR OPTIONS.

(a) GRANT. Subject to the provisions of the Plan, the Committee
shall have sole and complete authority to determine the Employees to whom
Options shall be granted, the number of Shares to be covered by each Option, the
option price therefor and the conditions and limitations applicable to the
exercise of the Option. The Committee shall have the authority to grant
Incentive Stock Options or to grant Non-Qualified Stock Options or to grant both
types of options. In the case of Incentive Stock Options, the terms and
conditions of such grants shall be subject to, and comply with, such rules as
may be prescribed by Section 422 of the Code, as from time to time amended, and
any regulations implementing such statute, including, without limitation, the
requirements of Code Section 422(d) which limit the aggregate Fair Market Value
of Shares for which Incentive Stock Options are exercisable for the first time
to $100,000 per calendar year. Each provision of the Plan and of each written
option agreement relating to an Option designated as an Incentive Stock Option
shall be construed so that such Option qualifies as an Incentive Stock Option,
and any provision that cannot be so construed shall be disregarded.

(b) EXERCISE PRICE. The Committee shall establish the exercise price
at the time each Option is granted, which price, except in the case of Options
that are substitute Awards, shall not be less than 100% of the per Share Fair
Market Value on the date of grant. Notwithstanding any provision contained
herein, in the case of an Incentive Stock Option, the exercise price at the time
such Incentive Stock Option is granted to any Employee who, at the time of such
grant, is a Ten Percent Shareholder, shall not be less than 110% of the per
Share Fair Market Value on the date of grant.

(c) EXERCISE. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Award Agreement or thereafter; provided,
in the case of an Incentive Stock Option, a Participant may not exercise such
Incentive Stock Option after (i) the date which is ten years (five years in the
case of a Participant who is a Ten Percent Stockholder) after the date on which
such Incentive Stock Option is granted; or (ii) the date which is three months
[twelve months in the case of a

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Participant who becomes disabled, as defined in Section 22(e)(3) of the Code, or
who dies] after the date on which he ceases to be an Employee of the Company or
a Subsidiary. The Committee may impose such conditions with respect to the
exercise of Options, including without limitation, any relating to the
application of federal or state securities laws, as it may deem necessary or
advisable. The Committee shall have the right to accelerate the exercisability
of any Option or outstanding Option in its discretion.

(d) PAYMENT. No Shares shall be delivered pursuant to any exercise
of an Option until payment in full of the option price therefor is received by
the Company. Such payment may be made in cash, or its equivalent or, if and to
the extent permitted by the Committee, by exchanging Shares owned by the
optionee (which are not the subject of any pledge or other security interest) or
by a combination of the foregoing, provided that the combined value of all cash
and cash equivalents and the Fair Market Value of any such Shares so tendered to
the Company as of the date of such tender is at least equal to such option
price.

(e) DIRECTOR OPTIONS. Notwithstanding anything else contained herein
to the contrary:

(i) on the first business day after the date a registration
statement for an initial public offering of the Company's Shares shall
become effective, each Eligible Director who is serving as a member of
the Board on that date shall receive a grant of a Director Option to
purchase 6,000 Shares at an exercise price per Share equal to the
public offering price per share of the Shares included in such initial
public offering;

(ii) each Eligible Director who becomes a member of the
Board after the date a registration statement for an initial public of
the Company's Shares shall become effective, shall receive, on the
first business day after he becomes an Eligible Director, a grant of a
Director Option to purchase 6,000 Shares at an exercise price per
Share equal to the Fair Market Value on the date of grant; and

(iii) on the first business day after each annual meeting of
shareholders of the Company beginning with the annual meeting in 1997,
each Eligible Director who is serving as a member of the Board on such
date and who is not receiving a Director Option pursuant to (ii) above
on such date, shall receive a grant of a Director Option to purchase
2,000 Shares at an exercise price per Share equal to the Fair Market
Value on the date of grant.

A Director Option shall be exercisable during a period beginning six months
after the date of grant and ending on the earlier to occur of the following two
dates: (A) the tenth anniversary of the date of grant of such Director Option
or (B) three months [twelve months in the case of an Eligible Director who
becomes disabled, as defined in Section 22(e)(3) of the Code, or who dies] after
the date the Eligible Director ceases to be a member of the Board, except that
if the Eligible Director ceases to be a member of the Board after having been
convicted of, or pled guilty or nolo contendere to, a felony, his Director
Option shall be canceled on the date he ceases to be a

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member of the Board. An Eligible Director may pay the exercise price of a
Director Option in the manner described in Section 6(d).

SECTION 7. RESTRICTED STOCK.

(a) GRANT. Subject to the provisions of the Plan, the Committee
shall have sole and complete authority to determine the Employees to whom Shares
of Restricted Stock shall be granted, the number of Shares of Restricted Stock
to be granted to each Participant, the duration of the period during which, and
the conditions under which, the Restricted Stock will vest and no longer be
subject to forfeiture to the Company and the other terms and conditions of such
Awards. The Committee shall have the right to accelerate the vesting of any
Restricted Stock or outstanding Restricted Stock in its discretion.

(b) TRANSFER RESTRICTIONS. Until the lapse of applicable
restrictions, Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered except as provided in the Plan or the applicable
Award Agreements. Certificates issued in respect of Shares of Restricted Stock
shall be registered in the name of the Participant and deposited by such
Participant, together with a stock power endorsed in blank, with the Company.
Upon the lapse of the restrictions applicable to such Shares of Restricted
Stock, the Company shall deliver such certificates to the Participant or the
Participant's legal representative.

(c) PAYMENT OF DIVIDENDS. Dividends paid on any Shares of Restricted
Stock may be paid directly to the Participant, or may be reinvested in
additional Shares of Restricted Stock, as determined by the Committee in its
sole discretion.

SECTION 8. PERFORMANCE AWARDS.

(a) GRANT. The Committee shall have sole and complete authority to
determine the Employees who shall receive a Performance Award denominated in
cash or Shares; (i) valued, as determined by the Committee, in accordance with
the achievement of such performance goals during such performance periods as the
Committee shall establish; and (ii) payable at such time and in such form as the
Committee shall determine.

(b) TERMS AND CONDITIONS. Subject to the terms of the Plan and any
applicable Award Agreement, the Committee shall determine the performance goals
to be achieved during any performance period, the length of any performance
period, the amount of any Performance Award and the amount and kind of any
payment or transfer to be made pursuant to any Performance Award.

(c) PAYMENT OF PERFORMANCE AWARDS. Performance Awards may be paid in
a lump sum or in installments following the close of the performance period or,
in accordance with procedures established by the Committee, on a deferred basis.

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SECTION 9. CODE SECTION 162(m) LIMITATIONS.

(a) GENERAL LIMITATIONS. Any Awards issued under this Plan to
Covered Employees must satisfy the requirements of this Section 9.

(b) REQUIREMENTS FOR ALL AWARDS. Any Award issued to a Covered
Employee shall constitute qualified performance-based compensation. For this
purpose, an Award shall constitute qualified performance-based compensation to
the extent that:

(i) it is granted by the Committee on account of the
attainment of one or more preestablished, objective performance goals
established by the Committee, in accordance with the provisions of
Section 1.162-27(e)(2) of the Final Regulations;

(ii) the material terms of the performance goal under which
the Award is issued are disclosed to and subsequently approved by the
stockholders of the Company, in accordance with the provisions of
Section 1.162-27(e)(4) of the Final Regulations; and

(iii) the Committee certifies, in writing, prior to the
payment of any compensation under the Award, that the performance
goals and any other material terms were in fact satisfied.

(c) SPECIAL RULES FOR OPTIONS. The grant of an Option to a Covered
Employee under this Plan shall satisfy the requirements of Section 9(b)(i) above
to the extent that the following requirements are satisfied:

(i) subject to the provisions of Section 4(b), no Covered
Employee shall receive Options for more than 50,000 Shares over any
five-year period. For this purpose, to the extent that any Option is
canceled [as described in Section 1.162-27(e)(2)(vi)(B) of the Final
Regulations], such canceled Option shall continue to be counted
against the maximum number of Shares for which Options may be granted
to a Covered Employee under the Plan; and

(ii) under the terms of the Option, the amount of
compensation that the Covered Employee may receive is based solely on
an increase in the value of the Shares after the grant of the Option,
unless the grant of such Option is contingent upon the attainment of a
performance goal that otherwise satisfies the requirements of Section
9(b)(i) above.

SECTION 10. STOCK APPRECIATION RIGHTS.

(a) GRANTS OF STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation
Rights may be awarded by the Committee in connection with any Option granted
under the Plan, either at the time the Option is granted or thereafter at any
time prior to the exercise, termination or

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expiration of the Option. Nontandem Stock Appreciation Rights may also be
granted by the Committee at any time. At the time of grant of a Nontandem Stock
Appreciation Right, the Committee shall specify the number of Shares covered by
such right and the base price of Shares to be used in connection with the
calculation described in Section 10(d) below. The base price of a Nontandem
Stock Appreciation Right shall be not less than 100% of the per Share Fair
Market Value on the date of grant. Stock Appreciation Rights shall be subject
to such terms and conditions not inconsistent with the other provisions of this
Plan as the Committee shall determine.

(b) LIMITATIONS ON EXERCISE. A Tandem Stock Appreciation Right shall
be exercisable only to the extent that the related Option is exercisable and
shall be exercisable only for such period as the Committee may determine (which
period may expire prior to the expiration date of the related Option). Upon the
exercise of all or a portion of Tandem Stock Appreciation Rights, the related
Option shall be canceled with respect to an equal number of Shares. Shares
subject to Options, or portions thereof, surrendered upon exercise of a Tandem
Stock Appreciation Right, shall not be available for subsequent awards under the
Plan. A Nontandem Stock Appreciation Right shall be exercisable during such
period as the Committee shall determine.

(c) SURRENDER OR EXCHANGE OF TANDEM STOCK APPRECIATION RIGHTS. A
Tandem Stock Appreciation Right shall entitle the Participant to surrender to
the Company unexercised the related Option, or any portion thereof, and to
receive from the Company in exchange therefor that number of Shares having an
aggregate Fair Market Value equal to (i) the excess of (A) the Fair Market Value
of one (1) Share as of the date the Tandem Stock Appreciation Right is exercised
over (B) the exercise price per share specified in such Option, multiplied by
(ii) the number of Shares subject to the Option, or portion thereof, which is
surrendered. Cash shall be delivered in lieu of any fractional shares.

(d) EXERCISE OF NONTANDEM STOCK APPRECIATION RIGHTS. The exercise of
a Nontandem Stock Appreciation Right shall entitle the employee to receive from
the Company that number of Shares having an aggregate Fair Market Value equal to
(i) the excess of (A) the Fair Market Value of one (1) Share as of the date on
which the Nontandem Stock Appreciation Right is exercised over (B) the base
price of the Shares covered by the Nontandem Stock Appreciation Right,
multiplied by (ii) the number of Shares covered by the Nontandem Stock
Appreciation Right, or the portion thereof being exercised. Cash shall be
delivered in lieu of any fractional shares.

(e) SETTLEMENT OF STOCK APPRECIATION RIGHTS. As soon as is
reasonably practicable after the exercise of a Stock Appreciation Right, the
Company shall (i) issue, in the name of the Participant, stock certificates
representing the total number of full Shares to which the Participant is
entitled pursuant to Section 10(c) or 10(d) hereof, and cash in an amount equal
to the Fair Market Value, as of the date of exercise, of any resulting
fractional shares, and (ii) if the Committee causes the Company to elect to
settle all or part of its obligations arising out of the exercise of the Stock
Appreciation Right in cash pursuant to Section 10(f), deliver to the

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Participant an amount in cash equal to the fair market value, as of the date of
exercise, of the Shares it would otherwise be obligated to deliver.

(f) CASH SETTLEMENT. The Committee, in its discretion, may cause the
Company to settle all or any part of its obligation arising out of the exercise
of a Stock Appreciation Right by the payment of cash in lieu of all or part of
the Shares it would otherwise be obligated to deliver in an amount equal to the
Fair Market Value of such Shares on the date of Exercise.

SECTION 11. STOCK PURCHASE PLAN.

(a) ELIGIBILITY. Each Employee who has at least one Year of Service
on an Offering Effective Date shall be eligible to participate in the Offering
which is applicable to such Offering Effective Date. Nothing contained herein
and no rules and regulations prescribed by the Committee shall permit or deny
participation in any Offering contrary to the requirements of the Code
(including, without limitation, Sections 423(b)(3), 423(b)(4) and 423(b)(8)
thereof). Nothing contained herein and no rules and regulations prescribed by
the Committee shall permit any Participant to be granted a Right to Purchase:

(i) if, immediately after such Right to Purchase is
granted, such Participant would own, and/or hold outstanding options
or rights to purchase, shares of the Company or of any Subsidiary,
possessing five percent (5%) or more of the total combined voting
power or value of all classes of shares of the Company or such
Subsidiary; or

(ii) which permits a Participant's rights to purchase Shares
under all employee stock purchase plans of the Company and of its
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand
Dollars ($25,000.00) of Fair Market Value of Shares (determined as of
the date such right is granted) for each calendar year in which such
right is outstanding at any time.

For purposes of clause (a)(i) above, the provisions of Section 424(d) of the
Code shall apply in determining the stock ownership of each Participant. For
purposes of clause (a)(ii) above, the provisions of Section 423(b)(8) of the
Code shall apply in determining whether a Participant's Rights to Purchase and
other rights are permitted to accrue at a rate in excess of the permitted rate.

(b) PURCHASE PRICE. The purchase price for a Share under each
Offering shall be determined by the Committee prior to the Offering Effective
Date and shall be stated as a percentage of the Fair Market Value of a Share on
either the Right to Purchase Date or the Offering Effective Date, whichever is
the lesser, but the purchase price shall not be less than the lesser of eighty-
five percent (85%) of the per share Fair Market Value of the Shares as of the
Offering Effective Date or eighty-five percent (85%) of the per share Fair
Market Value of the Shares as of the Right to Purchase Date for the Offering.

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(c) PARTICIPATION IN OFFERINGS. Except as may be otherwise provided
for herein, each Employee who is eligible for and elects to participate in an
Offering shall be granted Rights to Purchase for as many full Shares as he may
elect to purchase during that Offering, to be paid by payroll deductions during
such period. The Committee shall establish administrative rules and regulations
regarding the payroll deduction process for this Section 11, including, without
limitation, minimum and maximum permissible deductions; the timing for initial
elections, changes in elections and suspensions of elections during an Offering
Period and the complete withdrawal by a Participant from an Offering. Amounts
withheld through payroll deductions under this paragraph shall be credited to
each Participant's Cash Account. Such amounts will be delivered to a custodian
for the Plan and held pending the purchase of Shares as described in paragraph
(e) of this Section 11. All amounts held in a Participant's Cash Account shall
bear interest at a rate as may be agreed upon by the Committee and the custodian
of the Plan. If a Participant withdraws entirely from an Offering (pursuant to
rules established by the Committee), his Cash Account balance will not be used
to purchase Shares on the Right to Purchase Date. Instead, the portion of the
Cash Account equal to the Participant's payroll deductions under the Plan during
the Offering Period will be refunded to the Participant without interest
(notwithstanding any provision contained herein). Such a Participant will not
be eligible to re-enroll in that Offering, but may resume participation on the
Offering Effective Date for the next Offering. In addition, the Committee may
impose such other restrictions on the right to withdraw from Offerings as it may
deem appropriate.

(d) GRANT OF RIGHTS TO PURCHASE. Rights to Purchase with respect to
Shares shall be granted to Participants who elect to participate in an Offering.
Such Rights to Purchase may be exercised on the Right to Purchase Date
applicable to the Offering. The number of Shares subject to Rights to Purchase
on each Right to Purchase Date shall not exceed the number of Shares authorized
for issuance during the applicable Offering.

(e) EXERCISE OF RIGHTS TO PURCHASE. Each Right to Purchase shall be
exercised on the applicable Right to Purchase Date. Each Participant
automatically and without any act on his part will be deemed to have exercised a
Right to Purchase on each Right to Purchase Date to the extent that the amount
in his Cash Account on such Right to Purchase Date is sufficient to purchase
whole Shares. Fractional Shares will not be issued under the Plan. Any
remaining amount credited to a Participant's Cash Account which is not
sufficient to purchase a whole Share shall remain in such Participant's Cash
Account for use in the next Offering unless withdrawn by the Participant. The
Company shall deliver to the custodian of the Plan as soon as practicable after
each Right to Purchase Date a certificate for the total number of whole Shares
purchased by all Participants on such Right to Purchase Date. The custodian
shall allocate the proper number of Shares to the Share Account of each
Participant. If the aggregate Cash Account balances of all Participants on any
Right to Purchase Date exceeds the amount required to purchase all of the Shares
subject to Rights to Purchase on that Right to Purchase Date, then the Shares
subject to Rights to Purchase shall be allocated pro rata among the Participants
in the proportion that the number of Shares subject to Rights to Purchase bears
to the number of Shares that could have been purchased with such aggregate
amount available, if an unlimited number of Shares were available for purchase.
Any balances remaining in Participants' Cash Accounts due to over

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subscription will remain in the Participants' Cash Accounts for use in the next
Offering unless withdrawn by the Participant.

(f) WITHDRAWALS FROM SHARE ACCOUNTS AND DIVIDEND REINVESTMENT. A
Participant may withdraw the Shares credited to his Share Account on a first-in-
first-out basis. The Committee shall establish rules and regulations governing
such withdrawals. All cash dividends paid, if any, with respect to the Shares
credited to a Participant's Share Account shall be added to the Participant's
Cash Account and thereby shall be applied to exercise Rights to Purchase for
whole Shares on the Right to Purchase Date next succeeding the date such cash
dividends are paid by the Company. An election to leave Shares with the
custodian shall constitute an election to apply the cash dividends with respect
to such Shares to the exercise of Rights to Purchase hereunder. Shares so
purchased shall be applied to the Shares credited to each Participant's Share
Account.

(g) TERMINATION OF EMPLOYMENT. If the employment of a Participant
terminates for any reason, including death, disability, retirement or other
cause, his participation in this Section 11 of the Plan shall automatically and
without any act on his part terminate as of the date of termination of his
employment. As soon as practicable following the Participant's termination of
employment, the Company shall refund to such Participant (or beneficiary, in the
case of the Participant's death) any amount in his Cash Account which
constitutes payroll deductions, without interest, and the custodian shall
deliver to such Participant a share certificate issued in his name for the
number of whole Shares credited to his Share Account through prior Offerings.

SECTION 12. UNRESTRICTED SHARES.

(a) AWARD OF UNRESTRICTED SHARES. The Committee may cause the
Company to grant Unrestricted Shares to Employees at such time or times, in such
amounts and for such reasons as the Committee, in its sole discretion, shall
determine. No payment shall be required for Unrestricted Shares.

(b) DELIVERY OF UNRESTRICTED SHARES. The Company shall issue, in the
name of each Employee to whom Unrestricted Shares have been granted, stock
certificates representing the total number of Unrestricted Shares granted to the
Employee, and shall deliver such certificates to the Employee as soon as
reasonably practicable after the date of grant or on such later date as the
Committee shall determine at the time of grant.

SECTION 13. AMENDMENT AND TERMINATION.

(a) AMENDMENTS TO THE PLAN. The Board may amend, alter, suspend,
discontinue or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without stockholder approval if such approval is necessary to
comply with any tax or regulatory requirement, including for these purposes any
approval requirement which is a prerequisite for exemptive relief from Section
16(b) of the Exchange Act for which or with which the Board deems it necessary
or desirable to qualify or comply; and, provided further, that no amendment

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may be made to Section 6(e) or any other provision of the Plan relating to
Director Options within six months of the last date on which any such provision
was amended, other than to comport with changes in the Code or the rules
thereunder. Notwithstanding anything to the contrary herein, the Committee may
amend the Plan, subject to any stockholder approval required under Rule l6b-3,
in such manner as may be necessary so as to have the Plan conform with local
rules and regulations in any jurisdiction outside the United States.

(b) AMENDMENTS TO AWARDS. Subject to the provisions of Section 9,
the Committee may waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate any Award therefore granted,
prospectively or retroactively; provided that any such waiver, amendment,
alteration, suspension, discontinuance, cancellation or termination that would
impair the rights of any Participant or any holder or beneficiary of any Award
therefore granted shall not to that extent be effective without the consent of
the affected Participant, holder or beneficiary.

(c) CANCELLATION OF AWARD. Any provision of this Plan (except
Section 9) or any Award Agreement to the contrary notwithstanding, the Committee
may cause any Award granted hereunder to be canceled in consideration of the
granting to the holder of an alternative Award having a Fair Market Value equal
to the Fair Market Value of such canceled Award.

SECTION 14. GENERAL PROVISIONS.

(a) NONTRANSFERABILITY.

(i) Each Award, each Director Option and each Right to
Purchase, and each right under any Award, any Director Option or any
Right to Purchase, shall be exercisable during the Participant's or
the Eligible Director's lifetime only by the Participant or the
Eligible Director or, if permissible under applicable law, by the
Participant's or the Eligible Director's guardian or legal
representative or a transferee receiving such Award, Director Option
or Right to Purchase pursuant to a qualified domestic relations order
("QDRO"), as determined by the Committee.

(ii) No Award, Director Option or Right to Purchase that
constitutes a "derivative security," for purposes of Section 16 of the
Exchange Act, may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant or Eligible
Director otherwise than by will or by the laws of descent and
distribution or pursuant to a QDRO, and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance shall be
void and unenforceable against the Company or any Subsidiary; provided
that the designation of a beneficiary shall not constitute an
assignment, alienation, pledge, attachment, sale, transfer or
encumbrance.

(b) NO RIGHTS TO AWARDS. No Employee, Participant or other Person
shall have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of

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<PAGE>

Employees, Participants or holders or beneficiaries of Awards. The terms and
conditions of Awards need not be the same with respect to each recipient.

(c) SHARE CERTIFICATES. All certificates for Shares or other
securities of the Company or any Subsidiary delivered under the Plan shall be
subject to such stop transfer orders and other restrictions as the Committee may
deem advisable under the Plan or the rules, regulations and other requirements
of the SEC, any stock exchange or national securities association upon which
such Shares or other securities are then listed and any applicable federal or
state laws; and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.

(d) WITHHOLDING. A Participant or Eligible Director may be required
to pay to the Company or any Subsidiary and the Company or any Subsidiary shall
have the right and is hereby authorized to withhold from any Award, Director
Option or Share otherwise issued under the Plan, from any payment due or
transfer made under any Award or any Director Option or otherwise under the
Plan, or from any compensation or other amount owing to a Participant or
Eligible Director, the amount of any applicable withholding taxes in respect of
an Award, a Director Option or a Share otherwise issued under the Plan, its
exercise or any payment or transfer under an Award, under a Director Option or
otherwise under the Plan and to take such other action as may be necessary in
the opinion of the Company to satisfy all obligations for the payment of such
taxes. With respect to Participants who are not subject to Section 16 of the
Exchange Act, the withholding may be in the form of cash, shares, other
securities, other Awards or other property as the Committee may allow. With
respect to Participants and Eligible Directors who are subject to Section 16 of
the Exchange Act, the withholding shall be in cash or in any other property
permitted by Rule 16b-3 as the Committee may allow. The Committee may provide
for additional cash payments to Participants or Eligible Directors to defray or
offset any tax arising from the grant, vesting, exercise or payments of any
Award or Share otherwise issued under this Plan.

(e) AWARD AGREEMENTS. Each Award hereunder shall be evidenced by an
Award Agreement which shall be delivered to the Participant and shall specify
the terms and conditions of the Award and any rules applicable thereto,
including but not limited to the effect on such Award of the death, retirement
or other termination of employment of a Participant and the effect, if any, of a
change in control of the Company.

(f) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained
in the Plan shall prevent the Company or any Subsidiary from adopting or
continuing in effect other compensation arrangements, which may, but need not,
provide for the grant of options, restricted stock, shares and other types of
awards provided for hereunder (subject to stockholder approval if such approval
is required), and such arrangements may be either generally applicable or
applicable only in specific cases.

(g) NO RIGHT TO EMPLOYMENT. Eligibility for participation in this
Plan or the grant of an Award shall not be construed as giving a Participant the
right to be retained in the employ of the Company or any Subsidiary. Further,
the Company or a Subsidiary may at any time

-15-

<PAGE>

dismiss a Participant from employment, free from any liability or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Award
Agreement.

(h) NO RIGHTS AS SHAREHOLDER. Subject to the provisions of the Plan
and/or the applicable Award, no Participant or holder or beneficiary of any
Award or Director Option shall have any rights as a shareholder with respect to
any Shares to be distributed under the Plan until he or she has become the
holder of such Shares. Notwithstanding the foregoing, in connection with each
grant of Restricted Stock hereunder, the applicable Award shall specify if and
to what extent the Participant shall not be entitled to the rights of a
shareholder in respect of such Restricted Stock.

(i) GOVERNING LAW. The validity, construction and effect of the Plan
and any rules and regulations relating to the Plan and any Award Agreement shall
be determined in accordance with the laws of the State of Ohio.

(j) SEVERABILITY. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction
or as to any Person or Award, or would disqualify the Plan or any Award under
any law deemed applicable by the Committee, such provision shall be construed or
deemed amended to conform to the applicable laws, or if it cannot be construed
or deemed amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Award, such provision shall be stricken
as to such jurisdiction, Person or Award and the remainder of the Plan and any
such Award shall remain in full force and effect.

(k) OTHER LAWS. The Committee may refuse to issue or transfer any
Shares or other consideration under the Plan if, acting in its sole discretion,
it determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary in
connection with the issuance of such Shares shall be promptly refunded to the
relevant Participant, holder or beneficiary. Without limiting the generality of
the foregoing, no Award granted hereunder shall be construed as an offer to sell
securities of the Company, and no such offer shall be outstanding, unless and
until the Committee in its sole discretion has determined that any such offer,
if made, would be in compliance with all applicable requirements of the U.S.
federal securities laws.

(l) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Subsidiary and a Participant
or any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Subsidiary pursuant to the Plan, such rights
shall be no greater than the right of any unsecured general creditor of the
Company or any Subsidiary

(m) RULE 16b-3 COMPLIANCE. With respect to persons subject to
Section 16 of the Exchange Act, transactions under this Plan are intended to
comply with all applicable terms

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<PAGE>

and conditions of Rule 16b-3 and any successor provisions. To the extent that
any provision of the Plan or action by the Committee fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee.

(n) HEADINGS. Headings are given to the sections and subsections of
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.

(o) NO IMPACT ON BENEFITS. Plan Awards or Shares otherwise issued
under this Plan shall not be treated as compensation for purposes of calculating
an Employee's rights under any employee benefit plan.

(p) INDEMNIFICATION. Each person who is or shall have been a member
of the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit or proceeding to which he may be made a party or in
which he may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him in settlement
thereof, with the Company's approval, or paid by him in satisfaction of any
judgment in any such action, suit or proceeding against him, provided he shall
give the Company an opportunity, at its own expense, to handle and defend the
same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall not be exclusive and shall be
independent of any other rights of indemnification to which such persons may be
entitled under the Company's Certificate of Incorporation or By-laws, by
contract, as a matter of law, or otherwise.

SECTION 15. TERM OF THE PLAN.

(a) EFFECTIVE DATE. The Plan shall be effective as of June 3, 1996,
the date of its approval by the sole shareholder of the Company.

(b) EXPIRATION DATE. No Award or Right to Purchase shall be granted
under the Plan after June 3, 2006, the ten year anniversary of the effective
date of the Plan. Unless otherwise expressly provided in the Plan or in an
applicable Award Agreement, any Award granted hereunder may, and the authority
of the Board or the Committee to amend, alter, adjust, suspend, discontinue or
terminate any such Award or to waive any conditions or rights under any such
Award shall, continue after June 3, 2006.

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<PAGE>

EXHIBIT 10.6

LETTER OF INTENT

This Letter of Intent is executed by and between Sisters of Charity Health
Care Systems, Inc. ("SCHCS"), an Ohio not-for-profit corporation, and
DevelopMed Operating Company, an Ohio general partnership, dba Karrington
Communities, this 29th day of April, 1996 to signify their intentions with
regard to a certain "Term Sheet: Assisted Living Facility Development Joint
Venture" (the "Term Sheet"), revision of June 14, 1995, as amended from time to
time by agreement of the parties, a copy of which is attached hereto and
expressly made a part hereof. This Letter of Intent shall inure to the benefit
of and shall obligate each party's successors and assigns, to the extent that
assignment may be permitted by the organizational documents of the various
entities, in the same manner and to the same extent as each party hereto is
subject to benefits and obligations hereunder.

The parties agree that the Term Sheet contains terms and conditions that
were negotiated between the parties in good faith and which were intended to
govern the course and development of the relationship between the parties with
respect to the development, construction and management of certain facilities.
The parties further agree that it is their intention to enter into negotiations
in good faith and exercise their best efforts to undertake the activities and
perform the tasks contemplated by the Term Sheet.

The parties agree and acknowledge that certain operating agreements,
management agreements and other organizational documents will need to be drafted
and adopted in order to effectuate the Term Sheet with respect to the
development, construction and management of the facilities contemplated by the
Term Sheet. The parties further agree that each of these agreements or
organizational documents shall be drafted, developed, adopted and construed in
conformity with the Term Sheet.

Each party hereto further represents and warrants that the person executing
this Letter of Intent on its behalf is authorized to do so by its Board of
Trustees or its general partners and that each party intends to be bound by the
terms and conditions of this Letter of Intent.

NOW, THEREFORE, in consideration of the mutual promises contained herein
and for other good valuable consideration, the parties have executed this Letter
of Intent as of the first date written above.

DEVELOPMED OPERATING COMPANY SISTERS OF CHARITY HEALTH CARE
SYSTEMS INC.

By: /s/ Alan B. Satterwhite By: /s/Celestia Kochel, SC
----------------------------------- -------------------------------------

Its: Treasurer/Chief Financial Officer Its: President
---------------------------------- ------------------------------------

<PAGE>

REVISED 4/29/96

TERM SHEET: ASSISTED LIVING FACILITY DEVELOPMENT
JOINT VENTURE

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

PARTICIPANT: Sisters of Charity Health Care System ("SCHCS"),
Catholic Health Corporation ("CHC"), (together
"Founding Systems"), Subsidiary Health Care
Corporations of SCHCS and/or CHC ("Qualified
Subsidiaries"), and DevelopMed Operating Company
("DMOC").

Other Catholic Health Care Systems and/or
Affiliates may be considered as Joint Venture
Participants.

PURPOSE OF JOINT VENTURE: The Participants expect to develop, finance, and
operate 6 assisted living facilities ("Projects")
in markets targeted by the Founding Systems over
the next 3 years, which shall constitute the Term
of this agreement. Specific Projects shall be
subject to the review and concurrence of DMOC for
inclusion in the Joint Venture. Additional
projects developed during the Term of this
agreement shall be governed by the terms of this
agreement.

COMMITMENT PROCESS: All preliminary Project review and analysis -
including feasibility studies, site analysis,
market review, etc. - shall be jointly conducted
by the Participants. All direct costs initially
shall be shared 80% by the Founding Systems and
Qualified Subsidiaries and 20% by DMOC. Once all
preliminary development, market and financial
feasibility analyses are completed, a final
development decision will be made (a "Go/No Go
Decision"). At that point, the Participants will
continue to contribute any required equity on a
pro rata basis according to the Ownership
provisions specified below. At the earlier of a)
loan commitment, or b) construction start, all
remaining equity contributions shall be funded.
Final financing terms shall be consistent with the
initial feasibility analysis (i.e., equity
contribution levels, interest rates, amortization,
etc.) but exact terms and financing
structure/sources will be negotiated by the
Founding Systems and subject to majority
shareholder approval.

<PAGE>

CORPORATE STRUCTURE: Each Project shall be separately incorporated in a
unified structure ("Newco"). However, the
Founding Systems may create a separate real estate
company ("Newco RE") with a lease payment
structure as indicated under "Lease Payments"
below. If a separate real estate company is
created, the ownership shall be apportioned on a
pro rata basis among all shareholders.

The preferred form of corporate organization shall
be a Limited Liability Corporation ("LLC") unless
prohibited or discouraged by State law.

INITIAL CAPITALIZATION: Each Project shall have eligible Project Costs as
defined below:
(a) acquisition of land and improvements;
(b) construction of improvements;
(c) acquisition of furniture, fixtures, and
equipment;
(d) site preparation, architectural and
engineering fees, approvals, title, legal
financing and other development costs;
(e) interest on any loans funded for up to 6
months beyond expected fill-up;
(f) Working capital equal to certain start-up and
staffing costs (as well as a $25,000 charity
care reserve) until Project reaches
anticipated break-even;
(g) a Development Fee of $250,000 per Project of
more than 53 units) payable as follows:
1) 1/4 as indicated on Appendix V;
2) 1/4 at loan closing;
3) 1/4 at completion of construction;
and
4) 1/4 at positive Cash Flow (defined
as EBITDA minus Debt Service
Payments for one quarter)
(h) DMOC may receive an Incentive Development
Fee based on performance up to $40,000 as
follows:

1) $15,000 for obtaining a
permanent CO ahead of schedule
and for completing Project below
budget;
2) $10,000 for achieving positive
EBITDA by the end of month 7
following opening; and
3) $15,000 for achieving positive
EBDA by month 9 following
opening and maintaining positive
EBDA through months 9-12
following opening.

The Participants agree to contribute in aggregate
no less than 10% and not more than 30% of Project
Costs to fund any specific Project as Equity. The
exact percentage shall be determined at the Go/No
Go Decision Point.

<PAGE>

Founding Systems shall be responsible for
obtaining construction and/or permanent loans.
All loans shall be non-recourse to DMOC and
include commercially reasonable terms and
conditions. Where appropriate, the Participants
agree to pursue tax-exempt financing for eligible
Projects on a "best efforts" basis and to make
such alterations to the development and marketing
plans of any Project to so qualify, provided such
alterations are feasible and economic.

OWNERSHIP: The Founding Systems shall own AT LEAST 51% of all
shares of Newco. Qualified Subsidiaries shall
have the right to purchase up to 29.1% of any
Project. DMOC shall own the lesser of (a) 19.9%
or (b) shares equaling the Development Fee.

DEVELOPMENT AGENT: DMOC shall be sole development agent of the joint
venture. DMOC shall be paid a Development Fee and
Incentive Development Fee as outlined above.

MANAGER AND MANAGEMENT
AGREEMENT: DMOC shall be the initial Managing Agent employed
by Newco. The Management Agreement shall run for
a minimum of 10 years; provided, however, that in
the event that DMOC sells its ownership interests
in a Project to The Founding Systems and/or The
Qualified Subsidiaries for any of the reasons
enumerated elsewhere in this agreement, then the
obligations of The Founding Systems under the
Management Agreement shall be terminated
immediately, and The Founding Systems shall have
the right to select another manager for that
Project. The Management Agreement shall also
specify the Manager's duties, responsibilities,
and performance standards. Standards will
include: minimum occupancy levels, maximum bad
debt expense, etc. Compensation for the Manager
under the Joint Venture shall be as follows:

(a) a fixed annual fee (the "Base Management
Fee") of five percent (5%) payable in
monthly installments as a percentage
of Operating Revenue.

<PAGE>

(b) an incentive fee (the "Incentive Management
Fee") for each project of an additional 1.00%
of Operating Revenue payable annually
provided (i) average annual occupancy exceeds
95%, (ii) EBITDA exceeds 30% of Total
Revenues for the year; and (iii) no events of
default under the Management Agreement;
provided, however, that if, at the beginning
of the Project, the Founding Systems adopt a
budget and rate structure that, in the
reasonable opinion of the Parties, make the
30% of Total Revenue threshold included in
(ii) above unachievable, then the Parties
shall in good faith negotiate a new incentive
threshold.

All management fees shall be fully subordinated to
debt service and/or lease payments.

The Project administrator shall be a DMOC
employee, paid for by the Facility and subject to
Majority Shareholder approval.

If DMOC is terminated for cause under the
Management Agreement, the Founding Systems and/or
the Qualified Subsidiaries shall purchase DMOC's
shares for a specific Project at FMV. ("FMV"
shall be defined under this JV in accordance with
the Oakwood Agreement, except that during the
first two years of any Project JV, the purchase
price shall be the lower of contributed equity or
FMV.) If DMOC is not renewed as Manager, the
Founding Systems and/or the Qualified Subsidiaries
shall also purchase DMOC shares in a specific
Project at 100% of FMV.

The Management Agreement shall be automatically
renewed for 5-year terms, unless the Founding
Systems elect to terminate DMOC's management
contract and acquire DMOC's shares at FMV.

A key provision in the management agreement shall
be as follows:

"Consistent with its own mission and philosophy,
DMOC in its role as caregiver, employer and
corporate citizen will support the mission and
Relationship Principles (See Appendix I) of the
Founding Systems. In keeping with assurances of
appropriate care of residents, in their living and
in their dying, DMOC will not advocate, allow or
condone euthanasia or assisted-suicide, even were
these practices to be legalized."

LEASE PAYMENTS: If the majority shareholders elect to restructure,
Newco shall make Lease Payments to "Newco RE" at
the earlier of (a)

<PAGE>

actual Fill-Up (i.e., 92% occupancy) or (b)
depletion of capitalized interest under initial
mortgage loan.

Annual Lease Payments (unless Recapitalization or
sale/leaseback occurs) shall be an annual return
equivalent to the 10-year U.S. Treasury Note plus
3.5% computed annually on original Project Costs.

All Lease Payments shall be a general obligation
of Newco.

RECAPITALIZATION TO
SALE/LEASEBACK: Upon a majority Shareholder vote, Newco may sell
or assign the real estate, Newco RE and/or its
rights to its lease payments to a qualified
investor provided that:

(a) the proceeds of any such sale or assignment
shall fully extinguish any mortgage loans of
Newco and Newco RE;
(b) any proceeds of any such sale or assignment
in excess of any loans outstanding are
distributed proportionately to the
shareholders of Newco and/or Newco RE;
(c) Newco shall have received the certificate of
a nationally recognized investment banking
firm that such sale or assignment transaction
is a fair and commercially reasonable
transaction and adequately reflects the value
of Newco's lease payments and the underlying
real estate and other asset values of Newco
and/or Newco RE:
(d) Newco shall have pro forma lease payment
coverage of at least 1.35x for the FY
immediately succeeding any recapitalization;
(e) the minimum lease terms (with guaranteed
renewal options) shall not be less than 25
years; and
(f) any lease agreement shall not restrict
Newco's ability to retain DMOC as Manager.

NON-COMPETE: DMOC and its affiliates covenant:
(a) so long as DMOC is a shareholder and/or
Manager in any Newco, DMOC or its affiliates
shall not be an owner, manager, or have any
other business or pecuniary interest in any
assisted living or long-term care facility in
the Market Area (to be defined as the Primary
Service Area ("PSA") in any market
feasibility analysis) of any Project
Facility; and
(b) for the next 3 years, DMOC or its affiliates
shall not develop, own, or operate an
Assisted Living Facility in any Market Area
outlined in Appendix II (see attached) unless
such assisted living facility is developed,
owned and operated according to the terms of
the Joint Venture outlined herein. (Projects
carved out of the non-compete

<PAGE>

areas also are specified in Appendix II. The
list may be amended by mutual consent of the
Parties.)

Founding Systems covenant:

(a) for the next 3 years, not to enter into any
assisted living facility development activities in
Market Areas (i.e., PSA) where the Joint Venture
owns and operates an ALF without first offering
DMOC the opportunity to pursue the new ALF under
the then existing Joint Venture structure and
terms.

FRANCHISE FEE: Newco shall be able to advertise the Project as an
affiliated organization of the Founding Systems and/or
the relevant Qualified Subsidiary. After break-even,
the Founding Systems shall receive an annual Franchise
Fee of 0.5% of Operating Revenues. Such fee shall be
subordinated to debt service and/or lease payments as
well as to the Base Management Fee and shall be
excluded in calculating any performance targets or
incentive payments. Payment of the Franchise Fee shall
rank pari passu with the Incentive Management Fee.

GUARANTEE FEE: If the Founding Systems agree to unconditionally
guarantee debt service or lease payments that results
in lower financing costs, Newco shall pay the Founding
Systems a 1% annual guarantee fee (subject to the last
paragraph in this section and computed on the par
amount of outstanding debt guaranteed) for as long as
such guarantee is in effect. Any Guarantee Fee shall
be subordinated to debt service and/or lease payments
as well as to the Base Management Fee and shall be
excluded in calculating any performance targets or
incentive payments. Subject to the next paragraph,
payment of the Guarantee Fee shall rank pari passu with
the Incentive Management Fee.

The Parties agree that the Guarantee Fee shall be equal
to the demonstrated percentage interest reduction
computed on the par amount of outstanding debt
guaranteed, up to a maximum of 1.0% of the debt
guaranteed. By way of illustration, if it can be
demonstrated that a Guarantee by the Founding Systems
results in an interest rate reduction of 0.5% (50 basis
points) on the borrowing costs of the Project, the
Guarantee Fee would equal 0.5% of the par amount of
outstanding debt guaranteed. If the Guarantee by the
Founding Systems results in an interest rate reduction
of 1.25% (125 basis points) on the borrowing costs of
the Project, the Guarantee Fee would be capped at 1.0%
of the par amount of outstanding debt guaranteed.

<PAGE>

ANCILLARY SERVICES: Subject to applicable law, Newco shall use its "best
efforts" to contract services such as home health care,
rehabilitative or restorative services, and other
health services through the Participating Subsidiaries
or Founding Systems.

Subject to applicable law, the Founding Systems and
Qualified Subsidiaries shall use their "best efforts"
to promote the Project(s) located within their
respective market areas.

TERMINATION/BUY-OUT: At the ten year anniversary (and at the five year
anniversary of each succeeding renewal period) of the
completion of any Project: (i) the Founding Systems
and/or the Qualified Subsidiaries shall have the option
to purchase at FMV the outstanding shares of DMOC i any
Newco; and (ii) DMOC shall have the option to require
the Founding Systems to purchase at FMV the outstanding
shares of DMOC in any Newco, in which case the Founding
Systems may offer to the Qualified Subsidiaries the
right to participate in such purchase.

CHARITY CARE: Charity Care shall equal 1% of Operating Revenues
unless waived by all shareholders. The Founding
Systems reserve the right to support or purchase
additional Charity Care at any facility at their sole
option. The Founding Systems shall contribute an
amount equal to the Franchise Fee and one-half of any
Guarantee Fee to a Fund or Foundation centrally
administered by the Founding Systems which can only be
used to pay for charity care or other like purposes at
any JV Project facility. The participants agree to
develop guidelines for the actual expenditure or
allocation of charity care funds at JV project
facilities.

DISPUTE RESOLUTION: The Participants agree to submit certain material
disputes ("Material Disputes"), as enumerated in
Appendix III attached, arising out of the development,
operations, and/or financing of any Project to Dispute
Resolution as outlined below.

The procedures for Dispute Resolution are as follows:

1. Any shareholder may call a meeting of all
shareholders to adjudicate a Material Dispute upon
30 days' notice. (The shareholder calling the
meeting is hereafter referred to as the "Disputing
Shareholder".);
2. If the Material Dispute cannot be adjudicated
pursuant to the shareholders' meeting, the
Disputing Shareholder may call for non-binding
arbitration within 30 days following the
shareholders' meeting;

<PAGE>

3. If at the end of 30 days following the rendering
of the arbitrator's decision, the shareholders
still cannot agree on a resolution of the Material
Dispute, the Disputing Shareholder shall offer its
shares in the Project for purchase to the Founding
Systems who shall purchase the shares at FMV.

4. Any shareholder requesting 2 Dispute Resolutions
in a 12-month period or 5 Dispute Resolutions on a
cumulative basis during the life of the Project,
shall be required to tender its shares in the
Project for purchase to any of the Founding
Systems who shall purchase the shares at FMV.

Any direct costs of arbitration will be paid by the
Project. Any and all fees for outside advisors or
legal counsel retained by or on behalf of the Disputing
Shareholder shall be paid by the Disputing Shareholder
who shall hold the Project harmless from such expenses.

NAME OR IDENTIFICATION: Upon sale to any of the Participants or to a third
party, any reference to the Facility associated with
any one of the Participants' proprietary names or
trademarks shall be removed and stricken.

<PAGE>

APPENDIX I

SCHCS Relationship Principles

POLICY

All Sisters of Charity sponsored Institutions contemplating affiliations and/or
joint venture agreements with parties who are not Catholic will articulate those
theological and biblical principles which have shaped the mission and philosophy
of the Sisters of Charity. Essential in negotiating an agreement is the mutual
understanding by all parties of the common value integral to the mission.
Further, the agreement should include a clear understanding that the
Relationship Principles will be integrated into an ongoing evaluation process.

PRINCIPLE I:

The Sisters of Charity sponsored Institutions and their affiliates or joint
venture partners share Respect for Human Rights and a high regard for the
dignity and sacredness of life at all stages.

PRINCIPLE II:

The Sisters of Charity sponsored Institutions and their affiliates or joint
venture partners advocate the exercise of Value-Oriented Management that is
evidenced in the quality of both the work life and the work place.

PRINCIPLE III:

The Sisters of Charity sponsored Institutions and their affiliates or joint
venture partners express a commitment to Excellence and Quality Service that not
only reflects but adds to the current state of the Service.

PRINCIPLE IV:

The Sisters of Charity sponsored Institutions and their affiliates or joint
venture partners provide for assurance of Appropriate Use and Development of
Resources through proper exercise of financial, legal, and moral
responsibilities.

<PAGE>

APPENDIX II

AREAS OF NON-COMPETE

SISTERS OF CHARITY HEALTH CARE SYSTEM (SCHCS)

COLORADO

- - Entire State

NEBRASKA

- - Grand Island

- - Kearney

- - Lincoln

OHIO

- - Cincinnati*

- - Dayton*

*Governed by Oakwood Agreement

NEW MEXICO

- - Albuquerque, including Bernililo, Sandoval and Valencia

CATHOLIC HEALTH CORPORATION (CHC)

CALIFORNIA

- - San Francisco Bay area

- - Sacramento commercial area

<PAGE>

APPENDIX II
PAGE 2

WESTERN OREGON

- - I-5 Portland to Medford (20 miles on each side)

IDAHO

- - Boise commercial area

ILLINOIS

- - Wheeling, Arlington Heights and Schaumburg areas of NW Cook county

- - DMOC's Right of First Refusal:

During the term of the attached Agreement, the Founding Systems shall
not enter into any assisted living facility development activities in
Wheeling, Arlington Heights or Schaumburg areas of Northwest Cook
County, Illinois, without first offering DMOC the opportunity to
pursue the new ALF under the then existing Joint Venture Structure and
terms.

COLORADO

- - Grand Junction and Durango

IOWA

- - Des Moines, commercial area

NEBRASKA

- - Omaha, commercial area

MISSOURI

- - Joplin

WISCONSIN

- - South Milwaukee

- - Merrill

<PAGE>

APPENDIX II
PAGE 3

FRANCISCAN HEALTH SYSTEM (FHS)

In the event that FHS becomes a part of or affiliates with the Founding Systems,
the market area within a 6-mile radius of the following facilities would also be
included as non-compete market areas.

PENNSYLVANIA

- - St. Joseph Hospital, 250 College Ave., Lancaster, PA 17604

- - St. Mary's Hospital, Langhorne-Newton Road, Langhorne, PA 19047

- - St. Joseph Hospital, 215 N. 12 St., P.O. Box 316, Reading, PA 19603

DELAWARE

- - St. Francis Hospital, Inc., 7th and Clayton Sts., P.O. Box 2500,
Wilmington, DE 19805-0500

NEW JERSEY

- - St. Francis Medical Center, 601 Hamilton Ave., Trenton, NJ 08629-1986

MARYLAND

- - St. Joseph Hospital, 7620 York Rd., Towson, MD 21204

KARRINGTON PROJECTS EXCLUDED FROM NON-COMPETE AREAS

NONE

Additional sites upon mutual consent of the Parties.

<PAGE>

APPENDIX III

MATERIAL DISPUTE RESOLUTION

A material dispute is a conflict between the members that has a substantial
negative effect on a member's mission, values, or organizational philosophy or
the financial performance of the Project. The Founding Systems' mission and
philosophy are enumerated in Appendix I attached and made a part hereof.
Karrington's mission and philosophy are enumerated in Appendix IV attached and
made a part hereof.

"Material Disputes" may include the following:

- Sale, refinancing or recapitalization of a Project.

- Retention of operating days cash on hand above 45 days operating
expenses

- The funding or reserving of capital expenditures (other than
extraordinary repairs or mandated improvements or repairs) in excess
of $400/unit/year on an annual or rolling forward cumulative basis

- Substantial change in services provided or in rate structure

- Related party operating transactions between the Project and other
Founding Systems or Qualified Subsidiaries which are not executed on
an "arms's length" basis

- Changes in corporate form or tax status of Newco

The Dispute Resolution Process is not intended to be triggered by unanticipated
adverse changes of market forces or conditions, or by actions taken by
Members/Shareholders in response to such occurrences.

<PAGE>

APPENDIX IV

KARRINGTON COMMUNITIES

MISSION STATEMENT

"Dedicated to Excellence in Preserving Personal Dignity, Individually,
Independence and Quality of Life."

PHILOSOPHY

OUR GOLDEN RULE:

- Treat everyone as we want to be treated.

EARNINGS:

- Provide favorable returns to investors with consistent growth on
invested capital.

COMMUNICATION:

- Provide timely and informative communications to our residents,
employees, investors and community at all times.

ASSOCIATES:

- Give positive recognition to all deserving associates.

- All associates have the opportunity to improve through continuing
education and training in a secure and rewarding environment.

- Insure fair compensation related directly to performance using
incentives, profit sharing, and recognition.

- Strive to promote qualified individuals from within when positions
become available.

- No job is too small for a Karrington associate if it benefits our
residents.

RESIDENTS:

- A resident's needs are always our number one focus and priority.

- Preservation of personal dignity and quality of life is paramount.

- Fulfilling our commitments to each resident is imperative.

<PAGE>

APPENDIX IV
(cont'd)

ORGANIZATION:

- Each residence is a profit center, integral to the success of the
Company.

- Each residence promotes, encourages, and assists other Karrington
Residences.

- Administrators have the responsibility and authority to accomplish the
Company's goals, objectives, and philosophies.

- Unnecessary "home office" procedures will not be established.

- Each residence implements its own operating procedures that are
flexible but consistent with Karrington philosophies and goals.

- We maintain a small home office staff with its primary focus on the
support of each residence.

CITIZENSHIP:

- Karrington associates are good citizens and conduct business in a
professional and ethical manner.

- Karrington associates participate in community affairs and support
worthy causes.

- Each Karrington associate recognizes they represent the Company 24
hours a day.

<PAGE>

APPENDIX V

CHI PAYMENT SCHEDULE

PAYMENT
PHASE (FEES TO BE PAID AT COMMENCEMENT OF PHASE)
- ------------------------------------------------------------------------------------------------------------

<S> <C>
INTRODUCTORY PHASE
Meeting between DMO and local affiliate to discuss Expenses only
parameters of the project

PHASE I - SITE SELECTION $20,000 plus expenses
Preliminary Market Study (demographics, competitors, etc.)
Determine zoning process
Determine traffic patterns
Identify site
Preliminary Site Analysis
Site Layout
Analyze demographics of market area
Determine traffic count
Analyze comparable real estate sales
Executive approval of site
Send out purchase agreement
Negotiate purchase agreement

PHASE II - SITE DEVELOPMENT $20,000 plus expenses
Prepare Business Plan
Verify utilities
Order surveys
Order soil studies & environmental tests
Develop preliminary site plan
Meet with City
Order title insurance commitment
Lead architect through schematic design
Review title commitment
Prepare final site plan
Prepare architect agreement
Perform building code & licensure review
Lead architect through design development
Coordinate engineers
Prepare interior design agreement
Get pre-construction estimate
Review design development plans
Get executive approval of plans

PHASE III - ZONING & PRE-CONSTRUCTION $22,500 plus expenses
Review all zoning codes
Attend all zoning meetings
Make all zoning submittals
Lead architect through construction document preparation
Identify general contractor
Coordinate with Owners' vendors (Best, D.A.D., etc.)
Review interior finish presentation
Coordinate with utility companies
Apply for building permit
Begin contractor bidding process
Oversee Value-engineering
Negotiate G.M.P.
Coordinate groundbreaking ceremony
Close on the land
Receive building permits

</TABLE>

<PAGE>

EXHIBIT 21.1

LIST OF SUBSIDIARIES
(AFTER GIVING EFFECT TO REORGANIZATION TRANSACTIONS)

Karrington Health, Inc. ("KHI")

- DevelopMed Associates, Inc. ("DMA") (an Ohio corporation owned
100% by KHI)

- JMAC Properties, Inc. ("JMAC") (an Ohio corporation owned 100% by
KHI)

- Karrington Operating Company ("KOC") (an Ohio general
partnership owned 100% by DMA and JMAC) (d/b/a Karrington
Communities)

- DevelopMed of Bexley Limited Partnership (d/b/a Karrington
of Bexley)*

- DevelopMed of Arlington Limited Partnership (d/b/a
Karrington on the Scioto)*

- DevelopMed of Worthington Limited Partnership (d/b/a
Karrington at Tucker Creek)*

- Karrington Acquisition, Inc. (an Ohio corporation owned 100%
by KOC)

*Each an Ohio limited partnership owned 100% by KOC and JMAC

<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. 1 to the Registration
Statement (Form S-1 No. 333-03491) and related Prospectus of Karrington Health,
Inc., dated June 18, 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
June 17, 1996

<PAGE>

Exhibit 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 1 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
June 17, 1996

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Karrington
Health, Inc. Amendment No. 1 to Form S-1 for the year ended December 31, 1995
and the three month period ended March 31, 1996 and is qualified in its entirety
by reference to such statements.
</LEGEND>

<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 144,833 43,253
<SECURITIES> 0 0
<RECEIVABLES> 767,192 751,341
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,392,616 1,340,947
<PP&E> 26,194,284 30,070,650
<DEPRECIATION> 1,314,921 1,499,576
<TOTAL-ASSETS> 26,766,442 30,342,141
<CURRENT-LIABILITIES> 2,585,642 3,208,842
<BONDS> 18,249,893 21,753,086
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 5,930,907 5,380,213
<TOTAL-LIABILITY-AND-EQUITY> 26,766,442 30,342,141
<SALES> 0 0
<TOTAL-REVENUES> 6,743,856 1,944,170
<CGS> 0 0
<TOTAL-COSTS> 4,182,312 1,303,527
<OTHER-EXPENSES> 3,390,308 876,553
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,022,516 314,784
<INCOME-PRETAX> (1,851,280) (550,694)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,851,280) (550,694)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,851,280) (550,694)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0

</TABLE>