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PROSPECTUS
STERLING HOUSE CORPORATION
$35,000,000 6.75% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006
(INTEREST PAYABLE JUNE 30 AND DECEMBER 30)
1,561,106 SHARES COMMON STOCK, NO PAR VALUE
This Prospectus relates to $35,000,000 aggregate principal amount of
Convertible Subordinated Debentures due 2006 (the "Debentures") of Sterling
House Corporation, a Kansas corporation (the "Company"), issued in a private
placement on May 17, 1996 (the "Debenture Offering") and the 1,561,106 shares of
common stock, no par value (the "Common Stock"), of the Company that are
issuable upon conversion of the Debentures, subject to adjustment under certain
circumstances. The Debentures or the shares of Common Stock issued upon
conversion of the Debentures may be offered from time to time for the account of
holders of Debentures named herein (the "Selling Debentureholders"). See "Plan
of Distribution." The Company will not receive any proceeds from this offering.
The aggregate principal amount of Debentures that may be offered by the
Selling Debentureholders pursuant to this Prospectus is $35,000,000. Information
concerning such Selling Debentureholders may change from time to time and will
be set forth in Supplements to this Prospectus. Accordingly, the aggregate
principal amount of Debentures offered hereby may increase or decrease. As of
the date of this Prospectus, the aggregate principal amount of Debentures
outstanding is $35,000,000.
The Debentures are convertible into Common Stock at any time after the
effectiveness of the registration statement of which this Prospectus is a part
and at or prior to maturity, unless previously redeemed, at a conversion price
of $22.42 per share, subject to adjustment under certain circumstances. Prior to
this offering, there has not been any public market for the Debentures, although
the Debentures have been eligible for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. The Common Stock is
traded on the American Stock Exchange ("AMEX") under the symbol "SGH." On
November 18, 1996, the last reported sale price of the Common Stock, as reported
by AMEX, was $8 3/4 per share.
The Debentures are redeemable, in whole or in part, at the option of the
Company, for cash, at any time on or after July 15, 1999 on at least 30 days'
notice at the redemption prices set forth herein plus accrued interest. See
"Description of Debentures."
The Debentures are unsecured obligations of the Company and are subordinated
in right of payment to all existing and future Senior Indebtedness (as defined)
of the Company. The Indenture (as defined) does not restrict the incurrence of
Senior Indebtedness or other Indebtedness (as defined) by the Company or any
subsidiary. At September 30, 1996 the Company had approximately $4,900,000 of
Senior Indebtedness.
SEE "RISK FACTORS" COMMENCING ON PAGE 3 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE DEBENTURES AND THE COMMON
STOCK.
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.
The Company has been advised by the Selling Debentureholders that the
Selling Debentureholders, acting as principals for their own account, directly,
through agents designated from time to time, or through dealers or underwriters
also to be designated, may sell all or a portion of the Debentures or shares of
Common Stock offered hereby from time to time on terms to be determined at the
time of sale. The aggregate proceeds to the Selling Debentureholders from the
sale of Debentures and Common Stock offered by the Selling Debentureholders
hereby will be the purchase price of such Debentures or Common Stock less any
commissions, if any. For information concerning indemnification arrangements
between the Company and the Selling Debentureholders, see "Plan of
Distribution."
The Selling Debentureholders and any broker-dealers, agents or underwriters
that participate with the Selling Debentureholders in the distribution of the
Debentures or shares of Common Stock may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended (the "Securities Act"), in
which event any commissions received by such broker-dealers, agents or
underwriters and any profit on the resale of the Debentures or shares of Common
Stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
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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 COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS NOVEMBER 19, 1996
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AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the United States Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company may be
inspected at the public reference facilities of the Commission located at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at the New York
Regional Office of the Commission, Seven World Trade Center, Suite 1300, New
York, New York 10048, and at the Chicago Regional Office of the Commission, 500
West Madison Street, Suite 1400, Chicago, Illinois 60621. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a World Wide Web site on the
Internet at HTTP:\\WWW.SEC.GOV that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act, with respect to the
registration of the Debentures and the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus or in any document incorporated by reference herein
as to the contents of any contract or other documents referred to herein or
therein are not necessarily complete and, in each instance, reference is made to
the copy of such documents filed as an exhibit to the Registration Statement or
such other documents, which may be obtained from the Commission as indicated
above upon payment of the fees prescribed by the Commission. Each such statement
is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission, are incorporated herein by reference: (i) the Company's 1995 Annual
Report on Form 10-K for the fiscal year ended December 31, 1995; (ii) the
Company's Current Report on Form 8-K dated April 8, 1996 and Amendment No. 1
thereto on Form 8-K/A dated June 10, 1996; (iii) the Company's Current Report on
Form 8-K dated June 10, 1996; (iv) the Company's Current Report on Form 8-K
dated August 12, 1996 and Amendment No. 1 thereto on Form 8-K/A dated October
15, 1996; (v) the Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, June 30, and September 30, 1996; (vi) the Company's Proxy
Statement dated March 31, 1996 related to the Annual Meeting of Shareholders
held on May 24, 1996; and (vii) the description of the Company's Capital Stock
contained in the Company's Registration Statement on Form 8-A dated October 26,
1995. In addition, each document filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to termination of the offering of the Debentures or Common Stock shall
be deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date such document is filed with the Commission.
Any statement contained herein, or any document, all or a portion of which
is incorporated or deemed to be incorporated by reference herein, shall be
deemed to be modified or superseded for purposes of the Registration Statement
and this Prospectus to the extent that a statement contained herein, or in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute part of the Registration Statement or this Prospectus. All
information appearing in this Prospectus is qualified in its entirety by the
information and financial statements (including notes thereto) appearing in the
documents incorporated herein by reference. This Prospectus incorporates
documents by reference which are not presented herein or delivered herewith.
These documents (other than exhibits thereto) are available without charge, upon
written or oral request by any person to whom this Prospectus has been
delivered, from R. Gail Knott, Chief Financial Officer, Sterling House
Corporation, 453 South Webb Road, Suite 500, Wichita, Kansas 67207, telephone
(316) 684-8300.
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RISK FACTORS
AN INVESTMENT IN THE DEBENTURES OR THE COMMON STOCK OFFERED HEREBY INVOLVES
VARIOUS RISKS. PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY CONSIDER EACH OF THE
FOLLOWING RISKS, IN CONJUNCTION WITH THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, BEFORE PURCHASING THE DEBENTURES OR THE COMMON STOCK IN THIS
OFFERING.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY,
INCLUDING, WITHOUT LIMITATION, RISKS ASSOCIATED WITH THE COMPANY'S ABILITY TO
DEVELOP, CONSTRUCT, ACQUIRE OR FRANCHISE ADDITIONAL ASSISTED LIVING RESIDENCES
IN ACCORDANCE WITH THE COMPANY'S DEVELOPMENT SCHEDULE, MANAGEMENT OF QUARTER TO
QUARTER RESULTS, AND OTHER RISKS DETAILED IN THESE "RISK FACTORS." UPDATED
INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE
SECURITIES ACT AND THE EXCHANGE ACT.
HISTORY OF, AND ANTICIPATED, LOSSES
Newly opened residences typically operate at a loss during the first six
months of operations. In addition, the development and construction of
residences involves substantial capital expenditures over a typical six- to
nine-month construction period. As a result of the Company's development,
construction and management start-up activities, the Company has experienced net
losses in each year since its inception. For the years ended December 31, 1993,
1994 and 1995 and the nine-month periods ended September 30, 1995 and 1996 the
Company incurred net losses of approximately $162,000, $494,000, $2,183,000,
$686,000 and $841,000, respectively. The success of the Company's future
operations is directly tied to the expansion of its operational base. There can
be no assurance that the Company will not experience unforeseen expenses,
difficulties, complications and delays which could result in greater than
anticipated operating losses or otherwise materially adversely affect the
Company's financial condition and results of operations.
ABILITY TO DEVELOP, CONSTRUCT, ACQUIRE OR FRANCHISE ADDITIONAL ASSISTED LIVING
RESIDENCES
As of September 30, 1996, the Company's operations consisted of 50
residences which were either managed and/or franchised by the Company. The
Company's prospects for growth are directly affected by its ability to develop,
construct and, to a lesser extent, acquire and franchise additional assisted
living residences. As part of the Company's overall development plan, the
Company has 33 residences under construction, 16 of which the Company
anticipates opening during the remainder of 1996. In addition, the Company has
purchase commitments for an additional 30 parcels of real estate for residences
under development. The success of the Company's growth strategy will also depend
upon, among other factors, the Company's ability to obtain governmental licenses
and approvals, and the competitive environment for development and acquisitions.
The nature of such licenses and approvals and the timing and likelihood of
obtaining them vary widely by location and by the types of services to be
offered at the residence. The Company has developed and constructed 37
company-owned residences and 7 of the franchised residences using its own
construction management resources. However, to satisfy its future development
and construction plans, the Company may recruit third party developers and
general contractors. There is no assurance that the Company will be able to
recruit a sufficient number of such persons or that the Company will be able to
effectively monitor and administer their development and construction
activities. As a result of these various risks, there can be no assurance that
the Company will be successful in developing, constructing, acquiring or
franchising any additional residences or that any developed or acquired
residences will, if completed, be successful. Moreover, there can be no
assurance that the Company will be able to successfully manage its anticipated
rapid expansion or that such rapid expansion will not have a material adverse
effect on the Company's financial condition or results of operations. See "The
Company--Expansion" and "--Properties."
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NEED FOR ADDITIONAL FINANCING
The Company estimates that its existing working capital and financing
commitments will provide adequate capital to fund the Company's development,
construction and, to a lesser extent, acquisition of additional assisted living
residences over the next twelve months, including, as part of its overall
development plan, the 33 residences under construction and the 30 residences to
be developed on the sites for which the Company has purchase commitments.
However, additional financing may be necessary in order to meet the Company's
development plan if such plan is modified or if certain assumptions of the
development plan prove to be inaccurate. There can be no assurance that the
Company will generate sufficient cash flow to fund its future working capital
and debt service requirements or growth. In such event, the Company would have
to seek additional financing through debt or equity offerings, bank borrowings,
sale/leaseback transactions with real estate investment trusts or otherwise.
There can be no assurance that any future financing will be available to the
Company or, if available, that the terms will be acceptable to the Company.
The Company's fixed payment obligations will significantly increase as the
Company pursues its development plan. Failure to meet these obligations may
result in the Company being in default of its financing agreements and, as a
consequence, the Company may lose its ability to operate any individual
residence or other residences which may be cross-collateralized. There can be no
assurance that the Company will generate sufficient cash flow to meet its
obligations. In addition, the Company anticipates that future development of
residences may be financed with construction loans and, therefore, there is a
risk that, upon completion of construction, permanent financing for newly
developed residences may not be available or may be available only on terms that
are unfavorable or unacceptable to the Company.
GEOGRAPHIC CONCENTRATION OF RESIDENCES
Substantially all of the residences, including residences under construction
and development, are located in Kansas, Oklahoma, Texas, Florida, Ohio and
Colorado. Until the Company's operations become more geographically dispersed,
the Company will be more susceptible to downturns in local and regional
economies and changes in state or local regulation because such conditions and
events could affect a relatively high percentage of the total number of
residences currently in operation or under construction and development. As a
result of such factors, there can be no assurance that such geographic
concentration will not have a material adverse effect on the Company's financial
condition or results of operations. See "The Company--Properties."
CONSTRUCTION RISKS
Delays are common in the construction industry. Disruptive events may
include shortages of, or inability to obtain, labor or materials, the inability
of the general contractor or subcontractors to perform under their contracts,
strikes, adverse weather conditions, changes in federal, state or local laws or
regulations, and other factors or circumstances presently unknown to or
unanticipated by the Company. The Company may have little control over such
events, and such events may adversely affect the cost and completion time of any
development project, including the risk that development opportunities may
become uneconomical or may be abandoned. Any of these or other factors could
result in cost overruns and could delay, or even prevent, completion of one or
more additional residences.
ENVIRONMENTAL LIABILITY RISKS ASSOCIATED WITH REAL PROPERTY
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and cleanup
costs incurred by such parties in connection with the contamination. Such laws
typically impose cleanup responsibility and liability without
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regard to whether the owner knew of or caused the presence of the contaminants,
and the liability under such laws has been interpreted to be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to sell or lease such property or to borrow using such property as
collateral. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such substances at the disposal or treatment facility,
whether or not such facility is owned or operated by such person. Finally, the
owner of a site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from a
site.
The Company has conducted, or is in the process of conducting, environmental
assessments of all of the undeveloped sites and sites currently under
construction as well as 37 of the Company's current residences. The completed
assessments have not revealed any environmental liability that the Company
believes would have a material adverse effect on the Company's business, assets
or results of operations, nor is the Company aware of any such environmental
liability. The Company has not conducted environmental assessments with respect
to four of the Company's present residences. It is possible that there are
material environmental liabilities of which the Company is unaware. The Company
believes that the residences are in compliance in all material respects with all
federal, state and local laws, ordinances and regulations regarding hazardous or
toxic substances or petroleum products. The Company has not been notified by any
governmental authority, and is not otherwise aware, of any material
non-compliance, liability or claim relating to hazardous or toxic substances or
petroleum products in connection with any of the present residences.
DEPENDENCE ON SENIOR MANAGEMENT
The Company depends, and will continue to depend, upon the services of Mr.
Timothy J. Buchanan, its Chief Executive Officer and Chairman of the Board, and
Mr. Steven L. Vick, its President. The Company has entered into employment
agreements with these two executives and has obtained key employee insurance
policies covering the lives of Messrs. Buchanan and Vick in the amounts of $1.0
million each. The loss of the services of either or both of such officers or the
Company's inability to attract additional management personnel in the future
could have a material adverse effect on the Company's financial condition or
results of operations.
STAFFING AND LABOR COSTS
The Company competes with other providers of long-term care with respect to
attracting and retaining qualified or skilled personnel. The Company is
dependent upon its ability to continue to attract and retain management
personnel who will be responsible for the day-to-day operations of each
residence. The Company is also dependent upon the available labor pool of low
wage employees. The Company is also subject to the Fair Labor Standards Act,
which governs such matters as minimum wage, overtime, and other working
conditions. A shortage of nurses and/or trained personnel, or other general
inflationary pressures, may require the Company to enhance its wage and benefits
package in order to compete. No assurance can be given that the Company's labor
costs will not increase, or that, if they do increase, they can be matched by
corresponding increases in resident revenues.
GOVERNMENT REGULATION
Health care is an area of extensive and frequent regulatory change. The
assisted living industry for long-term care is relatively new, and, accordingly,
the manner and extent to which it is regulated at the federal, state and local
levels is evolving. Changes in the laws or new interpretations of existing laws
may
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have a significant effect on methods and costs of doing business, and the amount
of reimbursement from governmental and other third party payors. The Company
will be subject to varying degrees of regulation and licensing by health or
social service agencies and other regulatory authorities in the various states
and localities where it operates or intends to operate.
The success of the Company will depend in part upon its ability to satisfy
the 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,
regulatory developments such as mandatory increases in the scope and quality of
care to be offered to residents and revisions in licensing and certification
standards. However, there can be no assurance that federal, state or local laws
or regulatory procedures which might adversely impact the Company's business,
financial condition, results of operations or prospects will not be imposed or
expanded.
The sale of franchises is regulated by the Federal Trade Commission and by
certain state agencies located in jurisdictions other than those states where
the Company currently conducts franchise operations. Principally, these
regulations require that certain written disclosures be made prior to the sale
of a franchise. In addition, some states have relationship laws which prescribe
the basis for terminating a franchisee's rights and regulate both the
franchisor's and its franchisees' post-termination rights and obligations. There
can be no assurance that changes in such regulations will not have an adverse
impact upon the ability of the Company to continue its franchising activities.
The Company and its activities are subject to zoning, health and other state
and local government regulations. Zoning variances or use permits are often
required for construction. Severely restrictive regulations could impair the
ability of the Company to open additional residences at desired locations or
could result in costly delays. Several residences have been financed by assisted
living residence revenue bonds. In order to continue to qualify for favorable
tax treatment of the interest payable on such bonds, the residences must comply
with certain federal income tax requirements, principally pertaining to the
maximum income level of a specified portion of the residents. Failure to satisfy
these requirements constitutes an event of default under the bonds, thereby
accelerating their maturity.
Certain states provide for Medicaid reimbursement for assisted living
services pursuant to Medicaid Waiver Programs permitted by the federal
government. Historically, the Company has not provided services in states with a
Medicaid Waiver Program; however, effective September 25, 1996, the Company
became certified as a Medicaid provider in the state of Texas. As a provider of
services under the Medicaid Waiver Program, the Company is subject to all of the
requirements of such program, including the fraud and abuse laws, violations of
which may result in civil and criminal penalties and exclusions from further
participation in the Medicaid Waiver Program. The Company intends to comply with
all applicable laws, including the fraud and abuse laws; however, there can be
no assurance that administrative or judicial interpretation of existing laws or
regulations will not have a material adverse impact on the Company's results of
operations or financial condition. See "The Company--Government Regulation."
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
The Company currently, and for the foreseeable future, expects to rely
primarily on the ability of its residents to pay for the Company's charges from
their own and their families' financial resources. Inflation or other
circumstances which adversely affect the ability of seniors to pay for assisted
living services could have an adverse effect on the Company. In the event that
the Company encounters difficulty in attracting seniors with adequate resources
to pay for the Company's services, the Company would be adversely affected.
COMPETITION
The Company competes principally on the basis of price, quality, level and
range of services offered, as well as the appearance and design of its
residences. While the Company believes that its residences are
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distinctive in design and operating concept, it is aware of other companies with
similar or competitive concepts. The long-term care industry is highly
competitive and the Company expects that the assisted living industry, in
particular, will become more competitive in the future. The Company competes
with numerous companies providing similar long-term care alternatives, such as
home health agencies, life care at home, community-based service programs,
retirement communities and convalescent centers. While there presently are few
assisted living residences existing in the markets the Company serves, the
Company expects that, as assisted living becomes increasingly recognized as an
alternative form of long-term care, competition will grow from new market
entrants focusing primarily on assisted living. Nursing facilities that provide
long-term care services are also a potential source of competition to the
Company. Moreover, in the implementation of the Company's expansion program, the
Company expects to face competition for development sites and potential
acquisition of existing assisted living residences. 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 that the Company will not encounter increased
competition in the future which could limit its ability to attract residents or
expand its business and could have a material adverse effect on the Company's
financial condition, results of operations and prospects. See "The
Company--Competition."
DISRUPTION OF FRANCHISE ACTIVITIES
Historically, the Company has franchised two franchisee groups with respect
to residences, three of which are under development or construction. For the
foreseeable future, the Company intends to continue to offer franchises to a
select number of qualified franchisees. The success of the Company's franchise
activities is dependent upon the individual development and operational efforts
of these franchisees and a continuing cooperative relationship between the
Company and its franchisees. If any of the franchisees are unsuccessful in their
operations or commit acts that are detrimental to the reputation of the Sterling
House-Registered Trademark- concept or if the Company's business relationship
with any one or more of the franchisees should deteriorate, then there could be
a disruption in additional franchising activity, a decrease in franchise related
revenues or an increase in the Company's related franchise costs, which could
have a material adverse effect on the Company's results of operations or
financial condition.
LIABILITIES AND INSURANCE
The business of providing health care services 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 similar legal theories.
Such lawsuits generally involve large claims and are expensive to defend. The
Company maintains liability insurance intended to cover such claims and the
Company believes that its insurance is in keeping with 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. A successful uninsured claim
or a successful claim which exceeds the Company's coverage could have a material
adverse effect upon the Company's financial condition or results of operations.
Claims against the Company, regardless of their merit or eventual outcome, may
also have a material adverse effect upon the Company's ability to attract
residents or expand its business and would require management to devote time to
matters unrelated to the operation of the Company's business. In addition, the
Company's insurance policies must be renewed annually. There can be no assurance
that the Company will be able to obtain liability insurance coverage in the
future or that, if such coverage is available, it will be available on
acceptable terms.
CONTROL BY INSIDERS
Messrs. Buchanan and Vick, the Chief Executive Officer and Chairman of the
Board, and President, respectively, and Dr. D. Ray Cook and Mr. Ronald L.
Mercer, directors of the Company, beneficially own an aggregate of approximately
47% of the outstanding Common Stock of the Company (36% if all of the
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Debentures are converted into Common Stock). Accordingly, they may be in a
position to control the election of the Company's directors, to thereby control
the policies and operations of the Company, and to determine the outcome of
corporate transactions, or other matters submitted for stockholder approval.
These matters include, without limitation, mergers, consolidations, the sale of
all or substantially all of the Company's assets and other changes in control of
the Company. In addition, the Company's 1995 Stock Option Plan (the "1995 Stock
Option Plan") authorizes the issuance of options to purchase up to 237,000
shares of Common Stock to employees and directors of the Company. The Company
has granted options to purchase 172,250 shares of Common Stock under the 1995
Stock Option Plan, of which options to purchase 3,449 shares of Common Stock
have been exercised. The Company has also granted an aggregate of 72,000 options
to certain directors of the Company outside of the 1995 Stock Option Plan. The
issuance of additional shares of Common Stock to management pursuant to the
exercise of options granted under the 1995 Stock Option Plan or to directors
pursuant to the exercise of options granted outside of the 1995 Stock Option
Plan would further increase the number of shares held by present management and
principal stockholders.
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws contain, among other
things, provisions establishing a classified Board of Directors, authorizing
shares of preferred stock with respect to which the Board of Directors has the
power to fix the rights, preferences, privileges and restrictions without any
further vote or action by the stockholders, and requiring a super-majority vote
of stockholders in order to remove directors in certain instances, amend the
Articles of Incorporation and approve certain business combinations with respect
to a "related person." The Company is also subject to the Kansas Control
Acquisition Act (the "Control Act") which is intended to discourage hostile
takeovers of Kansas based corporations primarily through the imposition of
procedural hurdles that prevent certain types of acquiring stockholders from
gaining immediate voting power over shares acquired in significant amounts. The
application of the Control Act and/or the provisions of the Company's Articles
of Incorporation and Bylaws could delay, deter or prevent a merger,
consolidation, tender offer, or other business combination or change of control
involving the Company that some or a majority of the Company's stockholders
might consider to be in their personal best interests, including offers or
attempted takeovers that might otherwise result in such stockholders receiving a
premium over the market price for the Common Stock, and may adversely affect the
market price of, and the voting and other rights of, the holders of Common
Stock. The Company has not issued, and currently has no plans to issue, shares
of preferred stock.
SHARES ELIGIBLE FOR FUTURE SALE
The Company presently has a total of 5,038,449 shares of Common Stock
outstanding. Of these shares, 2,205,449 shares are freely tradeable without
restriction or limitation under the Securities Act, except for shares owned by
"affiliates" (as that term is defined under the rules and regulations under the
Securities Act) of the Company. The remaining 2,833,000 shares are "restricted"
securities within the meaning of Rule 144 under the Securities Act. Unless
registered under the Securities Act prior thereto, these restricted shares will
not be eligible to be sold publicly until approximately October 26, 1997. There
are also 237,000 shares of Common Stock issuable pursuant to the 1995 Stock
Option Plan. The Company has made a one-time grant of non-qualified options
under the 1995 Stock Option Plan to purchase 37,000 shares of Common Stock at
$0.10 per share to certain executive officers and key employees (excluding
Messrs. Buchanan and Vick). These options vested immediately and are exercisable
in three 20% increments at the end of each six-month period subsequent to
October 26, 1995 and the remaining 40% will become exercisable on October 26,
1997. As of September 30, 1996, options to purchase 3,449 shares of Common Stock
have been exercised. The Company has also granted incentive stock options under
the 1995 Stock Option Plan to purchase 135,250 shares of Common Stock to certain
executive officers and employees. These incentive stock options vest and become
exercisable in three 33.33% increments on each of the three anniversaries of the
date of grant. There are also 72,000 shares of Common Stock issuable
8
<PAGE>
pursuant to options granted outside of the 1995 Stock Option Plan to the
Company's four outside directors on November 20, 1995. These options vested
immediately and are exercisable in three 33.33% increments commencing on
November 20, 1996 and on each of the next two anniversaries of the date of
grant. No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sales, will have on the market
price of the Common Stock from time to time. The sale of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock.
ABSENCE OF PUBLIC MARKET
Prior to this offering, there has been no public market for the Debentures,
although the Debentures have been eligible for trading in the PORTAL market. The
Company does not intend to apply for listing of the Debentures on any national
securities exchange or Nasdaq. It is unlikely that an active or liquid trading
market will develop or be sustained for the Debentures. After completion of this
offering, the market price of the Common Stock into which the Debentures are
convertible could be subject to significant fluctuations in response to various
factors and events, including the liquidity of the market for the Common Stock,
variations in the Company's operating results, the Company's ability to meet
market expectations, new statutes or regulations or changes in the
interpretation of existing statutes or regulations affecting the health care
industry generally or assisted living residence businesses in particular. In
addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies. These market fluctuations also may adversely affect the
market price of the Common Stock. See "Plan of Distribution" and "Description of
Debentures."
SUBORDINATION OF DEBENTURES
The Debentures are unsecured obligations of the Company and are subordinated
in right of payment to all existing and future Senior Indebtedness of the
Company. The Indenture does not restrict the incurrence of Senior Indebtedness
or other Indebtedness by the Company or any subsidiary. At September 30, 1996,
the Company had approximately $4,900,000 of Senior Indebtedness. See
"Description of Debentures--Subordination of Debentures."
DIVIDEND POLICY
The Company has never paid any cash dividends and, for the foreseeable
future, the Company expects to retain all earnings to finance the future
expansion and development of its business. Any future payment of cash dividends
will depend, among other factors, upon the earnings, capital requirements,
operating and financial condition of the Company, other relevant factors, and,
more importantly, upon compliance with various financial covenants contained in
future financing agreements to which the Company may become a party, the effect
of which is to make the payment of dividends unlikely during the foreseeable
future.
9
<PAGE>
THE COMPANY
GENERAL
The Company constructs, owns, operates, manages and franchises Sterling
House-Registered Trademark- assisted living residences, providing a wide range
of health care, assisted living care and services to the frail elderly. Assisted
living care is an emerging segment of the long-term care industry serving the
rapidly growing elderly population who may require assistance with the
activities of daily living, such as dressing, bathing and eating ("ADLs"), or
routine skilled nursing services. The Company's operations provide elderly
residents with a broad range of cost-effective health care and personal support
services on a 24-hour basis, enabling them to maintain an independent and
dignified lifestyle in a residential homelike setting.
The Company was co-founded in 1991 by Timothy J. Buchanan, Chief Executive
Officer and Chairman of the Board, and Steven L. Vick, President, and has
actively expanded its assisted living operations through the development,
operation and selective franchising of Sterling House-Registered Trademark-
residences. At September 30, 1996, the Company had in operation 41 assisted
living residences with 1,372 units and also franchised or managed 9 other
assisted living residences. The Company also had under construction or
development a total of 63 residences; 1 building with 42 units in Kansas, 5
buildings with 194 units in Oklahoma, 19 buildings with 746 units in Texas, 18
buildings with 772 units in Florida, 13 buildings with 539 units in Ohio, and 7
buildings with 310 units in Colorado. Sterling House-Registered Trademark-
residences are located primarily in select affluent suburban areas as well as
small to medium sized communities with populations in excess of 10,000.
The Company is following its plan to construct, develop, manage, and, to a
lesser extent, acquire additional assisted living residences in states which the
Company believes possess attractive demographic and favorable regulatory
environments. As of September 30, 1996, all of the Company's residences were
100% private pay and did not rely on government reimbursement for revenue.
Effective October 1996, the Company began accepting residents in the state of
Texas for which the Company will receive Medicaid reimbursement under the Texas
Medicaid Waiver Program; however, the Company expects to continue to focus
primarily on private pay residents. In support of continued expansion, the
Company has opened regional offices in Edmond, Oklahoma; Lewisville, Texas;
Denton, Texas; and Stuart, Florida.
The Company is a Kansas corporation, with its principal executive office
located at 453 South Webb Road, Suite 500, Wichita, Kansas 67207.
INDUSTRY
The long-term care industry encompasses a broad range of accommodations and
health care services that are provided primarily to seniors. Home-based care,
congregate living or retirement centers and care in family member's homes
provide viable options for those seniors needing limited services on an as-
needed basis. However, services in congregate or retirement centers are often
limited to meals and housekeeping.
As people age, their need for assistance often increases, and care in the
residential type setting of an assisted living residence may be preferable and
more cost effective than home based or nursing home care options. Assisted
living services typically include assistance with supportive services such as
housekeeping, meals and laundry, as well as personal care such as bathing,
dressing and mobility, and routine nursing services such as medication
assistance and health monitoring. Generally, residents of assisted living
residences require higher levels of care than those residents in congregate or
retirement settings, but require lower levels of care than skilled nursing home
patients. For seniors in need of continuous unscheduleable 24 hours a day
attendance by a skilled nurse or practitioner, a skilled nursing facility may be
required.
The aging of the U.S. population as well as other social trends contribute
to the growth of the assisted living industry. Those seniors age 85 and over are
considered the prime market for assisted living facilities.
10
<PAGE>
The U.S. Census Bureau estimates that the number of these individuals will
increase from 3.1 million in 1990, to over 4.3 million by the year 2000.
According to the U.S. General Accounting Office, in 1991 there were over 7.0
million people in the U.S. who needed assistance with ADLs, and the number of
people needing such assistance is expected to double by the year 2020.
Historically, the philosophy and structure of the long-term care industry
have focused on meeting the medical needs of seniors in a clinical setting, and
the government reimbursement structure, through Medicaid and Medicare, has
primarily been based on the more expensive "medical-model" of care. As the
population of seniors and the cost of health care continues to dramatically
increase, and the demand for cost-containment of long-term health care
intensifies, both public and private payors will actively seek alternatives. The
Company believes that these and other pressures and trends will increase the
demand for the assisted living model of care and housing, and that seniors will
find the home-like residential setting a more preferred alternative.
STERLING HOUSE-REGISTERED TRADEMARK- SERVICES
Sterling House-Registered Trademark- provides a broad range of healthcare
and support services to residents on an individualized basis in a comfortable
home-like atmosphere. With building features such as residentially scaled
spaces, private apartments including locking doors, living area, bedroom area,
private bath, individual temperature controls and kitchenettes, the residents'
apartments are viewed as their home, in which they receive services. The broad
range of services offered by the Company include, without limitation, personal
care, support services, supplemental services, dementia care and nursing
services, all available 24 hours a day and designed to respond to the residents'
individual needs, enabling them to maintain a dignified more independent
lifestyle. Services are delivered in an "unbundled" manner through the Sterling
House-Registered Trademark- "Personalized Service Plans" targeted specifically
at each resident's individual needs and preferences.
In designing each resident's Personalized Service Plan, the Company
periodically assesses the needs and desires of a resident by conducting
interviews with the resident and, if appropriate, family members and medical
personnel. A service assessment matrix is utilized to establish a point score
which represents the resident's position within the Company's range of care and
services, and thereby determining the resulting charge for services within the
Company's four levels of pricing. Additionally, the Company offers a variety of
apartment layouts including studio, one bedroom and one bedroom deluxe designs.
The resulting combination of apartment types and service pricing determines each
resident's total monthly charge for housing and services.
STERLING HOUSE-REGISTERED TRADEMARK- OPERATIONS
Each Sterling House-Registered Trademark- residence is managed by a Director
who is responsible for the overall day-to-day operations including oversight of
the quality of care, compliance with state regulations and corporate policies,
marketing and community relations, and financial and budgetary performance. The
Director is responsible for all professional and non-professional staff employed
on either a full- or part-time basis, as well as independent contractors.
Routine nursing services are provided by nurses who are typically employed by
the Company. On occasion, certain nursing services may be delegated by the nurse
to trained members of the staff. The Company consults with outside providers,
such as pharmacists and dieticians, to assist residents with services such as
medication review and menu planning to meet special dietary needs. Personal
care, dietary services, housekeeping and laundry services are performed
primarily by staff members who are either full- or part-time and are trained to
perform a variety of services.
The Company's residences are divided into regional districts. There are
currently two in Kansas, three in Oklahoma, three in Texas, two in Florida, and
one in Ohio, each of which is supervised by a District Manager. The Company
maintains regional offices in Oklahoma, Texas and Florida in addition to its
headquarters in Wichita, Kansas. Additional districts as well as regional
offices will be added as additional
11
<PAGE>
locations are developed. Each District Manager is responsible for managing the
overall operations of the Sterling House-Registered Trademark- residences within
his or her district, as well as monitoring and supervising Directors in his or
her district to assure continued compliance with quality of care, financial
performance, state regulations and corporate policies and procedures. They also
work in conjunction with the Company's Regional Marketing Representatives during
the stabilization period for each residence to assist and oversee the Directors
in developing and maintaining an active and effective marketing program.
Regional Marketing Representatives implement corporate marketing plans from
residence start-up through stabilization and provide training, direction and
assistance to Directors and staff for community relations, marketing and census
retention. Each Regional Marketing Representative makes presentations to groups
and organizations on the Sterling House-Registered Trademark- philosophy and
develops working relationships with local and regional administrative and health
care related professionals. Corporate direction and support in all areas of
operations for Directors, Regional Marketing Representatives and District and
Regional Managers are provided by the executive and support staffs who work out
of the Company's headquarters. Accounting services, data processing, accounts
payable, payroll services and human resources are all provided at the Company's
headquarters.
COMPETITION
The Company competes with numerous other companies and long-term care
providers offering similar services such as home health agencies, life care at
home, community based service programs, retirement communities and convalescent
centers. The long-term care industry, generally, is highly competitive and the
Company expects that assisted living in particular will become increasingly
competitive. While the Company believes that presently there is generally a
moderate number of assisted living facilities in the markets where the Company
intends to operate, as assisted living receives increased attention and more
states include assisted living in their Medicaid Waiver Programs, as well as
additional sources of capital and financing become available, competition will
grow from new market entrants, as well as other existing providers focusing on
assisted living.
Historically, the Company's residences have been 100% private pay; however,
effective September 25, 1996, the Company became certified as a Medicaid
provider in the state of Texas. The Company expects to continue to focus
primarily on private pay residents. The Company believes its low cost of
operations will allow it to operate and compete in this market segment.
Competition for residents among assisted living providers is typically based
on the quality of service, pricing, population, living environment, range of
services and location. In addition, certain of the Company's competitors are
larger than the Company and have or may obtain greater resources than those of
the Company. The Company's competitors consist primarily of long-term care
providers and other assisted living providers operating in similar geographic
areas. The Company believes that there is moderate competition for the lower to
middle income portions of the private pay market the Company serves.
GOVERNMENT REGULATION
Currently, assisted living residences are not specifically regulated as such
by the federal government. However, the Company's assisted living residences are
subject to certain state regulations and licensing requirements. For example,
residences located in the State of Kansas are licensed by the Kansas Department
of Health and Environment as assisted living facilities, residences located in
the State of Oklahoma are licensed by the Oklahoma State Department of Health as
residential care facilities, residences in Texas are licensed as personnel care
facilities and residences in Florida are licensed as adult congregate living
facilities and extended congregate care facilities. Assisted living is a
relatively new concept as compared to other forms of long-term care (e.g.,
nursing homes) and, as a result, its regulation by government is still evolving
and is currently minimal in comparison with regulations imposed upon other
12
<PAGE>
licensed health care operators. While regulations and licensing requirements
vary significantly from state to state, they generally include requirements
relating to matters such as licensure, fire safety, sanitation, staff training,
staffing levels, and living accommodations such as size of rooms, number of
bathrooms and ventilation, as well as other regulatory requirements related more
specifically to certain of the health care services provided by the Company.
The Company believes that its residences are in substantial compliance with
all applicable regulatory requirements. However, in the ordinary course of
business, a residence could be cited for deficiencies. In such cases, the
Company expects to take appropriate and timely corrective action to eliminate
such deficiencies.
Medicaid provides insurance for certain financially or medically needy
persons, regardless of age, and is funded jointly by federal, state and local
governments. However, without a Medicaid Waiver Program, states can only use
federal Medicaid funds for long-term nursing facilities. Under the Medicaid
Waiver Program, states apply to the Health Care Financing Administration for a
waiver to use Medicaid funds to support community-based options for the low
income elderly that need long-term care. These waivers permit states to
reallocate a portion of Medicaid funding from nursing facility care to other
forms of care such as assisted living. Historically, the Company has not
provided services in states with a Medicaid Waiver Program; however, effective
September 25, 1996, the Company became certified as a Medicaid provider in the
state of Texas. As a provider of services under the Medicaid Waiver Program, the
Company is subject to all of the requirements of such program, including the
fraud and abuse laws, violations of which may result in civil and criminal
penalties and exclusions from further participation in the Medicaid Waiver
Program.
The success of the Company will be dependent, in part, upon its ability to
satisfy applicable regulations and requirements and to maintain any required
licenses. The Company's operations could also be adversely affected by, among
other things, regulatory changes such as mandatory increases in the scope and
quality of care to be provided to residents and revisions in licensing and
certification standards.
In order to comply with the terms of the revenue bonds used to finance eight
of the Company's residences, the Company is required to lease a minimum of 20%
of the apartments in each such residence to low or moderate income persons as
defined pursuant to the Internal Revenue Code of 1986, as amended.
The Company is subject to the Fair Labor Standards Act, which governs such
matters as minimum wage, overtime and other working conditions. A portion of the
Company's personnel is paid at rates related to the federal minimum wage and
accordingly, increases in the minimum wage will result in an increase in the
Company's labor costs.
The sale of franchises is regulated by the Federal Trade Commission and by
certain state agencies located in jurisdictions other than those states where
the Company currently operates. Principally, these regulations require that
certain written disclosures be made prior to the offer for sale of a franchise.
The disclosure documents are subject to state review and registration
requirements and must be periodically updated, not less frequently than
annually. In addition, some states have relationship laws which prescribe the
basis for terminating a franchisee's rights and regulate both the Company's and
its franchisees' post-termination rights and obligations.
EXPANSION
Sterling House-Registered Trademark- residences generally range in size from
33 - 50 apartments and are carefully designed to minimize walking distance in a
comfortable and easy to navigate layout. Each residence provides a distinctive
residential home-like atmosphere, unlike the "institutional" or "hotel" feel
common to many traditional skilled nursing and large congregate care facilities,
yet is designed to be an efficient, economical
13
<PAGE>
health care delivery setting. The Company locates residences in a variety of
markets, including select affluent suburban areas and small to medium size
communities with populations in excess of 10,000.
The Company is currently developing new residences in Kansas, Oklahoma,
Texas, Florida, Ohio and Colorado. As of September 30, 1996, the Company had
under construction 33 residences containing 1,309 units; 1 in Kansas with 42
units, 4 in Oklahoma with 148 units, 17 in Texas with 667 units, 7 in Florida
with 294 units and 4 in Ohio with 158 units. Additionally, the Company has under
development and land purchase commitments for a total of 30 residences, 1 in
Oklahoma, 2 in Texas, 11 in Florida, 7 in Colorado and 9 in Ohio.
The Company develops and constructs residences utilizing a combination of
both its in-house construction subsidiary and outside developers and
contractors. Currently the Company has retained a third party developer in
Florida and has also retained nonaffiliated general contractors for construction
of properties in Florida and Ohio and some properties in Texas. The Company
anticipates that it will continue to use this combination of in-house and third
party contractors to facilitate its continued expansion. All aspects relating to
development, including site selection, plans, specifications, costs, architect
selection, bonding issues and budget compliance are approved by the Company and
typically managed from its headquarters. The Company estimates construction time
for a new residence to be approximately six to nine months, and once opened,
estimates that it will take approximately nine months to achieve a stabilized
occupancy level of 95% or higher.
TRADEMARKS, PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION
The Company is the registered owner of the service mark "Sterling
House-Registered Trademark-" (Reg. No. 1,827,828) as recorded on the principal
register of the United States Patent and Trademark Office. The service mark
registration will expire on March 22, 2004. The Company expects that it will
renew its service mark at that time. The Company also claims a copyright in all
policy and procedures notebooks, operations manuals, architectural plans,
advertisements and other similar materials developed for use in and promotion of
the Sterling House-Registered Trademark- residence system and in the trade dress
protection of the physical residences.
EMPLOYEES
As of September 30, 1996, the Company had approximately 750 employees,
approximately 300 of whom were employed in full-time positions. The Company has
no collective bargaining agreements with any of its employees. The Company
believes that its labor relations are good.
14
<PAGE>
PROPERTIES
The following chart sets forth, as of September 30, 1996, the location,
number of units, ownership, the quarterly period during which operations
commenced and those under construction or development for the Company's
residences:
<TABLE>
<CAPTION>
COMMENCED
LOCATION UNITS OWNERSHIP OPERATIONS
- ----------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
OWNED OR LEASED
- -----------------------------------
Augusta, KS 21 Owned 4th Qtr. 1991
Wichita, KS 26 Leased 3rd Qtr. 1993
Abilene, KS 26 Owned 4th Qtr. 1993
Bethany, OK 26 Leased 1st Qtr. 1994
Junction City, KS 26 Owned 1st Qtr. 1994
McPherson, KS 33 Leased 2nd Qtr. 1994
Emporia, KS 26 Owned 3rd Qtr. 1994
Salina, KS 33 Leased 3rd Qtr. 1994
Arkansas City, KS 33 Owned 4th Qtr. 1994
Great Bend, KS 33 Leased 1st Qtr. 1995
Ponca City, OK 33 Leased 1st Qtr. 1995
Dodge City, KS 35 Leased 3rd Qtr. 1995
Bartlesville, OK 33 Leased 3rd Qtr. 1995
Midwest City, OK 33 Leased 4th Qtr. 1995
Derby, KS 26 Leased 1st Qtr. 1996
Wellington, KS 26 Leased 1st Qtr. 1996
Hays, KS 33 Leased 1st Qtr. 1996
Enid, OK 33 Leased 1st Qtr. 1996
Shawnee, OK 33 Leased 1st Qtr. 1996
Stillwater, OK 33 Leased 1st Qtr. 1996
Oklahoma City, OK - 89th St. 33 Leased 1st Qtr. 1996
Chickasha, OK 33 Leased 1st Qtr. 1996
Edmond, OK 37 Leased 2nd Qtr. 1996
Norman, OK 33 Leased 2nd Qtr. 1996
Duncan, OK 33 Leased 2nd Qtr. 1996
Lawton, OK 37 Leased 2nd Qtr. 1996
Broken Arrow, OK 37 Owned 2nd Qtr. 1996
Denton, TX 37 Owned 2nd Qtr. 1996
Ennis, TX 33 Owned 2nd Qtr. 1996
Corsicana, TX 33 Owned 2nd Qtr. 1996
Paris, TX 37 Owned 2nd Qtr. 1996
Palestine, TX 37 Leased 2nd Qtr. 1996
Liberal, KS 45 Owned 3rd Qtr. 1996
Waxahachie, TX 37 Leased 3rd Qtr. 1996
Texarkana, TX 37 Leased 3rd Qtr. 1996
Muskogee, OK 37 Leased 3rd Qtr. 1996
Claremore, OK 37 Leased 3rd Qtr. 1996
Oklahoma City, OK - 122nd St. 37 Leased 3rd Qtr. 1996
Ada, OK 37 Owned 3rd Qtr. 1996
Stuart, FL 42 Leased 3rd Qtr. 1996
Vero Beach, FL 42 Leased 3rd Qtr. 1996
---------
Total Units 1,372
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
COMMENCED
LOCATION UNITS OWNERSHIP OPERATIONS
- ----------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
MANAGED OR FRANCHISED
- -----------------------------------
Olathe, KS - I 37 Franchised 4th Qtr. 1992
Topeka, KS 37 Franchised 2nd Qtr. 1994
Pratt, KS 44 Managed 3rd Qtr. 1994
Lenexa, KS 38 Franchised 4th Qtr. 1994
Lawrence, KS 37 Franchised 2nd Qtr. 1995
Leawood, KS 37 Franchised 3rd Qtr. 1995
Olathe, KS - II 42 Franchised 4th Qtr. 1995
Colorado Springs, CO 37 Franchised 3rd Qtr. 1996
Coffeyville, KS 37 Managed 4th Qtr. 1996
---------
Total Units 346
<CAPTION>
UNDER CONSTRUCTION UNITS RESIDENCES
- ----------------------------------- --------- ------------
<S> <C> <C> <C>
Kansas 42 1
Oklahoma 148 4
Texas 667 17
Florida 294 7
Ohio 158 4
--------- ------------
Total 1,309 33
<CAPTION>
UNDER DEVELOPMENT RESIDENCES
- ----------------------------------- ------------
<S> <C> <C> <C>
Oklahoma 1
Texas 2
Florida 11
Colorado 7
Ohio 9
------------
Total 30
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES
Because of the Company's historic losses, the Company has experienced a
deficiency of earnings to fixed charges throughout its existence. There was a
deficiency of earnings to fixed charges for the period from April 15, 1991
(Inception) to December 31, 1991 of approximately $70,000, deficiencies of
approximately $55,000, $147,000, $527,000 and $1,427,000 for the years ended
December 31, 1992, 1993, 1994 and 1995, respectively, and a deficiency of
approximately $1,559,000 for the nine-month period ended September 30, 1996. For
the purposes of calculating the ratio of earnings to fixed charges, earnings
before interest and taxes has been added to fixed charges and that sum has been
divided by such fixed charges. Fixed charges consist principally of interest on
debt, amortization of deferred debt issuance costs and the interest component of
rental expenses.
USE OF PROCEEDS
The proceeds from the sale of the Debentures and shares of Common Stock
offered hereby are solely for the account of the Selling Debentureholders.
Accordingly, the Company will receive none of the proceeds from sales thereof.
SELLING DEBENTUREHOLDERS
The Debentures being offered hereby were acquired by the Selling
Debentureholders in connection with a private placement of the Debentures by the
Company on May 17, 1996 pursuant to Rule 144A, and
16
<PAGE>
Regulation D under the Securities Act or in permitted resale transactions from
the initial purchasers of the Debentures (the "Initial Purchasers") or holders
acquiring such Debentures from prior holders thereof in further permitted resale
transactions. The following table sets forth information concerning the
principal amount of Debentures beneficially owned by such Selling
Debentureholders which may be offered from time to time pursuant to this
Prospectus. Other than as a result of the ownership of Debentures or Common
Stock, none of the Selling Debentureholders has had any material relationship
with the Company within the past three years, except as noted herein. The table
has been prepared based upon information furnished to the Company by the Trustee
(as defined) for the Debentures, by Depository Trust Company (the "Depository"),
and by or on behalf of the Selling Debentureholders.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF DEBENTURES OF DEBENTURES PERCENT OF OUTSTANDING
NAME BENEFICIALLY OWNED THAT MAY BE SOLD DEBENTURES
- ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
[To be set forth in Prospectus Supplements]
</TABLE>
Information concerning the Selling Debentureholders may change from time to
time and will be set forth in Prospectus Supplements. As of the date of this
Prospectus, the aggregate principal amount of Debentures outstanding is
$35,000,000.00.
Because the Selling Debentureholders may offer all or some of the Debentures
and shares of Common Stock issued upon conversion thereof pursuant to the
offering contemplated by this Prospectus, and because there are currently no
agreements, arrangements or understandings with respect to the sale of any of
the Debentures or shares of Common Stock that will be held by the Selling
Debentureholders after completion of this offering, no estimate can be given as
to the principal amount of Debentures or shares of Common Stock that will be
held by the Selling Debentureholders after completion of this offering. See
"Plan of Distribution."
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from this offering. The
Company has been advised by the Selling Debentureholders that the Selling
Debentureholders may sell all or a portion of the Debentures and shares of
Common Stock offered hereby from time to time on terms to be determined at the
times of such sales. The Selling Debentureholders may also make private sales
directly or through a broker or brokers. Alternatively, any of the Selling
Debentureholders may from time to time offer the Debentures or shares of Common
Stock through underwriters, including any of the Initial Purchasers, dealers or
agents, who may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Debentureholders and the purchasers
of the Debentures or shares of Common Stock for whom they may act as agent. To
the extent required, the aggregate principal amount of Debentures and number of
shares of Common Stock to be sold, the names of the Selling Debentureholders,
the purchase price, the name of any such agent, dealer or underwriter and any
applicable commissions with respect to a particular offer will be set forth in
an accompanying Prospectus Supplement. The aggregate proceeds to the Selling
Debentureholders from the sale of the Debentures and Common Stock offered by the
Selling Debentureholders hereby will be the purchase price of such Debentures
and shares of Common Stock less any commissions. There is no assurance that the
Selling Debentureholders will sell any or all of the Debentures or shares of
Common Stock offered hereby.
The Debentures and the shares of Common Stock issued upon conversion of the
Debentures may be sold from time to time in one or more transactions at fixed
offering prices, which may be changed, or at
17
<PAGE>
varying prices determined at the time of sale or at negotiated prices. Such
prices will be determined by the holders of such securities or by agreement
between such holders and underwriters or dealers who may receive fees or
commissions in connection therewith.
The Company does not intend to apply for listing of the Debentures on any
national securities exchange or on Nasdaq. The Company does not anticipate that
an active market for the Debentures will develop.
In order to comply with the securities laws of certain states, if
applicable, the Debentures and shares of Common Stock will be sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the Debentures and shares of Common Stock may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
The Selling Debentureholders and any broker-dealers, agents or underwriters
that participate with the Selling Debentureholders in the distribution of the
Debentures or shares of Common Stock may be deemed to be "underwriters" within
the meaning of the Securities Act, in which event any commissions received by
such broker-dealers, agents or underwriters and any profit on the resale of the
Debentures or shares of Common Stock purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
The Debentures were originally sold to the Initial Purchasers on May 17,
1996 in a private placement at a purchase price of 100% of their principal
amount. Under certain circumstances, the Company agreed to indemnify and hold
the Initial Purchases and certain subsequent holders of the Debentures harmless
against certain liabilities under the Securities Act that could arise in
connection with the sale of the Debentures by the Initial Purchasers or such
subsequent holders.
The Company will pay all expenses incident to this offering and sale of the
Debentures and Common Stock to the public other than underwriting discounts and
selling commissions and fees.
DESCRIPTION OF DEBENTURES
The Debentures were issued under an Indenture dated as of May 23, 1996 (the
"Indenture") between the Company and Fleet National Bank, as the trustee under
the Indenture (the "Trustee"). The terms of the Debentures include those stated
in the Indenture and those made a part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended.
The following is a summary of certain provisions of the Indenture and does
not purport to be complete and is qualified in its entirety by reference to the
detailed provisions of the Indenture, including the definitions of certain terms
therein to which reference is hereby made, for a complete statement of such
provisions. Wherever particular provisions or sections of the Indenture or terms
defined therein are referred to herein, such provisions, sections or definitions
are incorporated herein by reference.
GENERAL
The Debentures are unsecured general obligations of the Company, subject to
the rights of holders of Senior Indebtedness of the Company, and will mature on
June 30, 2006. The Debentures are limited to $35,000,000 aggregate principal
amount and bear interest semiannually on June 30 and December 30 of each year
commencing December 30, 1996 at the rate per annum of 6.75%. The first payment
will be for the period from the date of original issuance to December 30, 1996.
The Company will pay interest on the Debentures to the persons who are
registered holders of Debentures at the close of business on June 15 or December
15 preceding the interest payment date. Principal (and premium, if any) and
interest will be payable, the Debentures will be convertible and exchangeable,
and transfers thereof will be registerable, at the office or agency of the
Company maintained for such purposes, initially at the offices of the Trustee.
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The Company may pay principal and interest by check and may mail an interest
check to a holder's registered address. Holders must surrender Debentures to a
Paying Agent to collect principal payments.
The Trustee currently acts as Paying Agent, Registrar and Conversion Agent.
The Company may change any Paying Agent, Registrar, Conversion Agent or
co-registrar upon prior written notice to the Trustee and may act in any such
capacity itself.
DELIVERY AND FORM OF DEBENTURES
Those Debentures initially sold to qualified institutional buyers (as
defined in Rule 144A under the Securities Act, were issued in global form (the
"Rule 144A Global Debentures") and were deposited on May 23, 1996 with the
Depository and registered in the name of Cede & Co., as nominee of the
Depository. Those Debentures that were initially sold to institutional
accredited investors were initially issued in fully registered form. The Rule
144A Global Debentures to be resold as set forth herein will be initially issued
in global form (the "New Global Debentures") and will be deposited on or about
the date of effectiveness of this Registration Statement on behalf of the
Depository and registered in the name of Cede & Co. Beneficial interests in the
Rule 144A Global Debentures and the New Global Debentures may be exchanged for
definitive securities in accordance with the terms of the Indenture.
A holder may transfer or exchange Debentures in accordance with the
Indenture. No service charge will be made for any registration of transfer,
exchange or conversion of Debentures, except for any tax or other governmental
charges that may be imposed in connection therewith. The Registrar need not
transfer or exchange any Debentures selected for redemption. Also, in the event
of a partial redemption, it need not transfer or exchange any Debentures for a
period of 15 days before selecting Debentures to be redeemed. The Indenture does
not contain any provision requiring the Company to repurchase the Debentures at
the option of the holders thereof in the event of a leveraged buyout,
recapitalization or similar restructuring of the Company, even though the
Company's creditworthiness and the market value of the Debentures may decline
significantly as a result of such transaction. The Indenture does not protect
holders of the Debentures against any decline in credit quality, whether
resulting from any such transaction or from any other cause. The registered
holder of a Debenture may be treated as its owner for all purposes.
CONVERSION RIGHTS
The holders of the Debentures are entitled at any time after the
Registration Date and prior to maturity, subject to prior redemption, to convert
the Debentures or portions thereof (which are $1,000 or multiples thereof) into
shares of Common Stock at the conversion price set forth in the Debenture
(subject to adjustments as described below.) No payment or adjustment will be
made for accrued interest on a converted Debenture. If any Debenture not called
for redemption is converted between a record date for the payment of interest
and the next succeeding interest payment date, such Debenture must be
accompanied by funds equal to the interest payable to the registered holder on
such interest payment date on the principal amount so converted. The Company
will not issue fractional interests in shares of Common Stock upon conversion of
the Debentures and, instead, will deliver a check for the fractional share based
upon the market value of the Common Stock on the last trading day prior to the
conversion date. If the Debentures are called for redemption, conversion rights
will expire at the close of business on the redemption date, unless the Company
defaults in payment due upon such redemption.
The conversion price is subject to adjustments, as set forth in the
Indenture, in certain events, including the payment of dividends or
distributions on the Company's Common Stock in shares of capital stock;
subdivisions or combinations of the Common Stock into a greater or smaller
number of shares; reclassification of the shares resulting in an issuance of any
shares of the Company's capital stock; distribution of rights or warrants to all
holders of Common Stock entitling them to purchase Common Stock at less than the
current price at that time; and the distribution to all holders of Common Stock
of
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assets, excluding certain cash dividends and distributions, or debt securities
or any rights or warrants to purchase securities of the Company; provided,
however, that no adjustment will be required if holders of the Debentures
received notice of and are allowed to participate in such transactions. No
adjustment will be required for rights to purchase Common Stock pursuant to a
Company plan for reinvestment of dividends or interest, or for a change in the
par value of the Common Stock. To the extent that Debentures become convertible
into cash, no adjustment will be required thereafter as to cash. No adjustment
in the conversion prices need be made unless such adjustment would require a
change of at least one percent (1%) in the conversion price; however, any
adjustment that would otherwise be required to be made shall be carried forward
and taken into account in any subsequent adjustment. The Company may voluntarily
reduce the conversion price for a period of time.
If the Company pays dividends on the Common Stock in shares of capital stock
or subdivides or combines the Common Stock or issues by reclassification of its
Common Stock any shares of its capital stock or merges with, or transfers or
leases substantially all of its assets to, another corporation or trust, the
holders of the Debentures then outstanding will be entitled thereafter to
convert such Debentures into the kind and amount of shares of capital stock,
other securities, cash or other assets which they would have owned immediately
after such event had such Debentures been converted before the effective date of
the transaction.
Any Debentures called for redemption, unless surrendered for conversion on
or before the close of business on the redemption date, are subject to being
purchased from the holder of such Debentures at the redemption price by one or
more investment banks or other purchasers who may agree with the Company to
purchase such Debentures and convert them into Common Stock of the Company.
In the event of a taxable distribution to holders of Common Stock which
results in an adjustment of the conversion price, the holders of the Debentures
may, in certain circumstances, be deemed to have received a distribution subject
to United States federal income tax as a dividend.
SUBORDINATION OF DEBENTURES
The indebtedness evidenced by the Debentures is subordinated and junior in
right of payment to the extent set forth in the Indenture to the prior payment
in full of amounts then due on all Senior Indebtedness. No payment shall be made
by the Company on account of principal of (or premium, if any) or interest on
the Debentures or on account of the purchase or other acquisition of Debentures,
if there shall have occurred and be continuing a default with respect to any
Senior Indebtedness permitting the holders to accelerate the maturity thereof,
or with respect to the payment of any Senior Indebtedness and such default shall
be the subject of a judicial proceeding or the Company shall have received
notice of such default from certain authorized persons, unless and until such
default or event of default shall have been cured or waived or shall have ceased
to exist. By reason of these provisions, in the event of default on any Senior
Indebtedness, whether now outstanding or hereafter issued, payments of principal
of (and premium, if any) and interest on the Debentures may not be permitted to
be made until such Senior Indebtedness is paid in full, or the event of default
on such Senior Indebtedness is cured or waived.
Upon any acceleration of the principal of the Debentures or any distribution
of assets of the Company upon any receivership, dissolution, winding-up,
liquidation, reorganization or similar proceedings of the Company, whether
voluntary or involuntary, or in bankruptcy or insolvency, all amounts due or to
become due upon all Senior Indebtedness must be paid in full before the holders
of the Debentures or the Trustee are entitled to receive or retain any assets so
distributed in respect of the Debentures. By reason of this provision, in the
event of insolvency, holders of the Debentures may recover less, ratably, than
holders of Senior Indebtedness.
"Senior Indebtedness" is defined to mean the principal, premium, if any,
unpaid interest on and all other amounts payable under or in respect of
Indebtedness of the Company for money borrowed. There is no limit on the amount
of Senior Indebtedness that the Company may incur.
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OPTIONAL REDEMPTION
The Debentures are subject to redemption, as a whole or in part, at any time
or from time to time commencing after July 15, 1999 at the option of the Company
on at least 30 days' and not more than 60 days' prior notice by mail. The
redemption prices (expressed as a percentage of principal amount) are as follows
for the 12-month period beginning after July 15 of the following years:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ------------------------------------------------------------- -------------
<S> <C>
1999......................................................... 102%
2000......................................................... 101%
2001 and thereafter.......................................... 100%
</TABLE>
MODIFICATION OF THE INDENTURE
Under the Indenture, with certain exceptions, the rights and obligations of
the Company with respect to the Debentures and the rights of holders of the
Debentures may only be modified by the Company and the Trustee with the written
consent of the holders of at least 66 2/3% in principal amount of the
outstanding Debentures. However, without the consent of each holder of any
Debenture affected, an amendment, waiver or supplement may not: (i) reduce the
amount of Debentures whose holders must consent to an amendment; (ii) reduce the
rate or change the time of payment of interest on any Debenture; (iii) reduce
the principal of or change the fixed maturity of any Debenture; (iv) make any
Debenture payable in money other than that stated in the Debenture; (v) change
the provisions of the Indenture regarding the right of a majority of the
Debentureholders to waive defaults under the Indenture or impair the right of
any Debentureholder to institute suit for the enforcement of any payment of
principal of and interest on the Debentures on and after their respective due
dates; or (vi) make any change that adversely affects the right to convert any
Debenture.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The following is a summary of certain provisions of the Indenture relating
to events of default, notice and waiver.
The following are Events of Default under the Indenture with respect to the
Debentures: (i) default in the payment of interest on the Debentures when due
and payable which continues for 30 days; (ii) default in the payment of
principal (and premium, if any) on the Debentures when due and payable, at
maturity, upon redemption or otherwise, which continues for five business days;
(iii) failure to perform any other covenant of the Company contained in the
Indenture or the Debentures which continues for 60 days after notice as provided
in the Indenture; (iv) acceleration of any indebtedness for money borrowed
(including obligations under leases required to be capitalized on the balance
sheet of the lessee under generally accepted accounting principles but not
including any indebtedness or obligation for which recourse is limited to
property purchased) in an aggregate principal amount in excess of $1,000,000,
whether existing on the date of the execution of the Indenture or thereafter
created, if such acceleration is not annulled within ten days after written
notice to the Company of such acceleration; and (v) certain events of
bankruptcy, insolvency or reorganization relating to the Company.
If an Event of Default occurs and is continuing with respect to the
Debentures, either the Trustee or the holders of at least a majority in
principal amount of the Debentures may declare all of the Debentures to be due
and payable immediately.
The Company will not (i) declare or pay any dividends or make any
distribution to holders of its capital stock or (ii) purchase, redeem or
otherwise acquire or retire for value any of its Common Stock, or any warrants,
rights or options, to purchase or acquire any shares of its Common Stock (other
than the
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Debentures or any other convertible indebtedness of the Company that is neither
secured nor subordinated to the Debentures), if at the time any of the
aforementioned Events of Default has occurred and is continuing or would exist
immediately after giving effect to such action.
Pursuant to the terms of the Indenture, the Trustee may require indemnity
satisfactory to it before it enforces the Indenture or the Debentures. Subject
to certain limitations, holders of a majority in principal amount of the
Debentures may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Debentureholders notice of any default (except a
default in payment of principal or interest) if it determines that withholding
notice is in their interests. The Company is required to file with the Trustee
annually an officers' statement as to the absence of defaults in fulfilling any
of its obligations under the Indenture.
No consent of Debentureholders is required for the Company to consolidate
with or merge into or transfer or transfer substantially all of its assets to
another corporation or trust which assumes the obligations of the Company under
the Indenture and Debentures or for any reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code; nor is any such consent of
Debentureholders required for any amendment of the Indenture or the Debentures
by the Company and the Trustee to cure any ambiguity, defect or inconsistency,
or to provide for uncertificated Debentures in addition to certified Debentures,
or to make any change that does not adversely affect the right of any
Debentureholder.
The Debentures may not be sold or otherwise transferred except in accordance
with the provisions set forth in the Indenture.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Indenture provides that the Company may not merge or consolidate with,
or sell or convey all, or substantially all, of its assets to another person
unless such person is a company or a trust; such person assumes by supplemental
indenture all the obligations of the Company under the Debentures and the
Indenture; and immediately after the transaction no default or Event of Default
shall exist.
MARKETABILITY
The Debentures are a new issue of securities with no established trading
market. The Company does not intend to list the Debentures on Nasdaq or on any
national securities exchange. No assurance can be given as to the liquidity of
the trading market for the Debentures. See "Risk Factors."
GOVERNING LAW
The Indenture and the Debentures will be governed by and construed in
accordance with the laws of the State of New York.
REGISTRATION RIGHTS AGREEMENT
The Company has agreed to use its best efforts, subject to the receipt of
necessary information from the purchasers, to prepare and file with the
Commission a registration statement with respect to the resale of the Debentures
and the Conversion Shares from time to time in the over-the-counter market, in
privately negotiated transactions or, with respect to the Conversion Shares
only, on the AMEX, as the case may be, and to cause the registration statement
to become effective not later than November 19, 1996. The Company has also
agreed to prepare and file such amendments and supplements to the registration
statement as may be necessary to keep the registration statement effective until
all the Debentures and the Conversion Shares have been sold thereby or until the
Debentures and the Conversion Shares are no longer, by reason of Rule 144(k) of
the Securities Act or any other rule of similar effect, required to be
registered for the sale thereof by the Purchasers.
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LEGAL MATTERS
Certain legal matters relating to the validity of the Debentures and the
Common Stock offered hereby will be passed upon for the Company by Klenda,
Mitchell, Austerman & Zuercher, L.L.C., 1600 Epic Center, 301 North Main Street,
Wichita, Kansas 67202-4888.
EXPERTS
The consolidated financial statements of Sterling House Corporation, the
combined financial statements of Sterling Franchise Acquisition Group and the
financial statements of High Plains Senior Living, Inc. incorporated by
reference in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, to the extent indicated in their
reports thereon incorporated herein by reference. Such financial statements have
been incorporated herein by reference in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY ANY SELLING DEBENTUREHOLDER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Risk Factors.............................................................. 3
The Company............................................................... 10
Ratio of Earnings to Fixed Charges........................................ 16
Use of Proceeds........................................................... 16
Selling Debentureholders.................................................. 16
Plan of Distribution...................................................... 17
Description of Debentures................................................. 18
Legal Matters............................................................. 23
Experts................................................................... 23
</TABLE>
[LOGO]
STERLING
HOUSE
CORPORATION
$35,000,000 6.75% CONVERTIBLE
SUBORDINATED DEBENTURES
DUE 2006
1,561,106 SHARES
COMMON STOCK
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PROSPECTUS
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NOVEMBER 19, 1996
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