<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1997.
REGISTRATION NO. 333-34851
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ALTERNATIVE LIVING SERVICES, INC.
(Exact name of Registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 8361 39-1771281
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer I.D. No.)
of incorporation or
registration) Classification Code Number)
</TABLE>
450 NORTH SUNNYSLOPE ROAD, SUITE 300
BROOKFIELD, WISCONSIN 53005
(414) 789-9565
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
WILLIAM F. LASKY, PRESIDENT
450 NORTH SUNNYSLOPE ROAD, SUITE 300
BROOKFIELD, WISCONSIN 53005
(414) 789-9565
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
ALAN C. LEET, ESQ. RICHARD S. FORMAN, ESQ.
ROGERS & HARDIN LLP STROOCK & STROOCK & LAVAN LLP
229 PEACHTREE STREET, N.E. 2029 CENTURY PARK EAST
2700 INTERNATIONAL TOWER SUITE 1800
ATLANTA, GEORGIA 30303 LOS ANGELES, CALIFORNIA 90067
(404) 522-4700 (310) 556-5800
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the merger described herein and after the effective date of this
Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
[ALTERNATIVE LIVING SERVICES LOGO]
September 22, 1997
Dear Stockholder:
A Special Meeting of Stockholders (the "Special Meeting") of Alternative
Living Services, Inc. ("ALS") will be held on Thursday, October 23, 1997, at
2:00 p.m., local time, at the O'Hare Hilton Hotel, O'Hare International Airport,
Chicago, Illinois 60666.
At this Special Meeting, you will be asked to consider and vote upon the
following: (1) the approval and adoption of an Agreement and Plan of Merger,
dated as of July 30, 1997, as amended as of September 2, 1997 (as so amended,
the "Merger Agreement"), by and among ALS, Tango Merger Corporation, a wholly
owned subsidiary of ALS ("Merger Sub"), and Sterling House Corporation
("Sterling") pursuant to which, among other things: (i) Merger Sub will be
merged with and into Sterling and Sterling will become a wholly owned subsidiary
of ALS (the "Merger"), (ii) each outstanding share of Sterling common stock, no
par value (the "Sterling Common Stock"), together with the associated Series A
Junior Participating Preferred Stock Purchase Right, will be converted into the
right to receive 1.1 shares (the "Exchange Ratio") of ALS common stock, $.01 par
value per share (the "ALS Common Stock"), (iii) ALS will assume all outstanding
options under the Sterling House Corporation 1995 Stock Option Plan, as amended
(the "Sterling Option Plan"), and all other outstanding Sterling options
(together, the "Sterling Options"), which Sterling Options will be converted
into options to acquire 1.1 shares of ALS Common Stock for each share of
Sterling Common Stock underlying the Sterling Options (the "Merger Options"),
and (iv) the 6.75% Convertible Subordinated Debentures due 2006 of Sterling (the
"Sterling Debentures") will be assumed by ALS pursuant to a supplemental
indenture and will become convertible into a number of shares of ALS Common
Stock equal to the product of the Exchange Ratio and the number of shares of
Sterling Common Stock issuable upon conversion of the Sterling Debentures; (2)
the approval of certain amendments to the Amended and Restated Bylaws of ALS,
including amending the bylaw provision regarding filling vacancies arising on
the ALS Board of Directors, adding a bylaw provision establishing an executive
committee of the ALS Board of Directors and amending the bylaw provision
regarding amendments to the ALS Bylaws (collectively, the "ALS Bylaw
Amendments"); and (3) such other business as may properly come before the
Special Meeting.
The ALS Board of Directors has unanimously approved the Merger Agreement
described in the attached material and the transactions contemplated thereby and
has determined that the Merger is fair to and in the best interests of ALS and
its stockholders. Approval of the ALS Bylaw Amendments by the ALS stockholders
is a condition to Sterling's obligation to consummate the Merger. The Board of
Directors recommends that the stockholders of ALS vote in favor of the Merger
Agreement and the ALS Bylaw Amendments. However, you are urged to carefully
consider all aspects of the proposed Merger discussed in the attached Joint
Proxy Statement/Prospectus, as the proposed Merger will result in the issuance
of up to approximately 30% of the total shares of ALS Common Stock to be
outstanding after the Merger.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to, among
other things, the actions to be taken by ALS stockholders at the Special Meeting
and a proxy card. The Joint Proxy Statement/Prospectus more fully describes the
proposed Merger and the ALS Bylaw Amendments and includes information about ALS
and Sterling and also serves as a Prospectus for ALS with respect to the shares
of ALS Common Stock to be issued in connection with the Merger.
<PAGE> 3
All stockholders are cordially invited to attend the Special Meeting in
person. However, whether or not you plan to attend the Special Meeting, please
complete, sign, date and return your proxy in the enclosed postage paid
envelope. If you attend the Special Meeting, you may vote in person if you wish,
even though you have previously returned your proxy. It is important that your
shares be represented and voted at the Special Meeting.
Sincerely,
/s/ WILLIAM F. LASKY
-------------------------------------
William F. Lasky
President and Chief Executive Officer
2
<PAGE> 4
[ALTERNATIVE LIVING SERVICES LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on October 23, 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Alternative Living Services, Inc., a Delaware corporation ("ALS"),
will be held on Thursday, October 23, 1997, at 2:00 p.m., local time, at the
O'Hare Hilton Hotel, O'Hare International Airport, Chicago, Illinois 60666, to
consider and vote upon the following matters described in the accompanying Joint
Proxy Statement/Prospectus:
1. The approval and adoption of an Agreement and Plan of Merger, dated
as of July 30, 1997, as amended as of September 2, 1997 (as so amended, the
"Merger Agreement"), by and among ALS, Tango Merger Corporation, a wholly
owned subsidiary of ALS ("Merger Sub"), and Sterling House Corporation
("Sterling"), pursuant to which, among other things: (i) Merger Sub will be
merged with and into Sterling, and Sterling will become a wholly owned
subsidiary of ALS (the "Merger"), (ii) each outstanding share of Sterling
common stock, no par value (the "Sterling Common Stock"), together with the
associated Series A Junior Participating Preferred Stock Purchase Right,
will be converted into the right to receive 1.1 shares (the "Exchange
Ratio") of ALS common stock, $.01 par value per share (the "ALS Common
Stock"), (iii) ALS will assume all of the outstanding options under the
Sterling House Corporation 1995 Stock Option Plan, as amended (the
"Sterling Option Plan"), and all other outstanding Sterling options, and
(iv) the 6.75% Convertible Subordinated Debentures due 2006 of Sterling
(the "Sterling Debentures") will be assumed by ALS pursuant to a
supplemental indenture and will become convertible into a number of shares
of ALS Common Stock equal to the product of the Exchange Ratio and the
number of shares of Sterling Common Stock issuable upon conversion of the
Sterling Debentures;
2. The approval of certain amendments to the Amended and Restated
Bylaws of ALS ("ALS Bylaws"), including amending the bylaw provision
regarding filling vacancies arising on the ALS Board of Directors, adding a
bylaw provision establishing an executive committee of the ALS Board of
Directors and amending the bylaw provision regarding amendments to the ALS
Bylaws; and
3. The transaction of such other business as may properly come before
the Special Meeting or any adjournment or postponement thereof.
Only ALS stockholders of record at the close of business on September 19,
1997 are entitled to notice of, and to vote at, the Special Meeting, or at any
adjournment or postponement thereof.
By order of the Board of Directors,
/s/ WILLIAM F. LASKY
-------------------------------------
William F. Lasky
President and Chief Executive Officer
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF
YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN
IF YOU HAVE PREVIOUSLY SENT IN YOUR PROXY.
<PAGE> 5
[STERLING HOUSE (R) LOGO]
September 22, 1997
Dear Stockholder:
A Special Meeting of Stockholders (the "Special Meeting") of Sterling House
Corporation ("Sterling") will be held on Thursday, October 23, 1997, at 1:00
p.m., local time, at the O'Hare Hilton Hotel, O'Hare International Airport,
Chicago, Illinois 60666.
At this Special Meeting, you will be asked to vote upon the following: (1)
approval and adoption of an Agreement and Plan of Merger, dated as of July 30,
1997, as amended as of September 2, 1997 (as so amended, the "Merger
Agreement"), among Alternative Living Services, Inc. ("ALS"), Tango Merger
Corporation, a wholly owned subsidiary of ALS ("Merger Sub"), and Sterling
pursuant to which, among other things: (i) Merger Sub will be merged with and
into Sterling, and Sterling will become a wholly owned subsidiary of ALS (the
"Merger"), and (ii) each share of common stock, no par value (the "Sterling
Common Stock"), of Sterling, together with the associated Series A Junior
Participating Preferred Stock Purchase Right (the "Right"), will be converted
into the right to receive 1.1 shares (the "Exchange Ratio") of common stock,
$.01 par value per share (the "ALS Common Stock"), of ALS; and (2) such other
business as may properly come before the Special Meeting.
The number of shares of ALS Common Stock to be issued in the Merger has
been determined according to an Exchange Ratio of 1.1 shares of ALS Common Stock
for each outstanding share of Sterling Common Stock. In addition, all
outstanding options under the Sterling House Corporation 1995 Stock Option Plan,
as amended (the "Sterling Option Plan"), and all other outstanding Sterling
options are being assumed by ALS as of the effective time of the Merger, and
converted into options to acquire shares of ALS Common Stock. Finally, the 6.75%
Convertible Subordinated Debentures due 2006 of Sterling (the "Sterling
Debentures") will be assumed by ALS pursuant to a supplemental indenture and
will become convertible into a number of shares of ALS Common Stock equal to the
product of the Exchange Ratio and the number of shares of Sterling Common Stock
issuable upon conversion of the Sterling Debentures.
The Merger is structured to be a tax free reorganization in which neither
ALS nor Sterling or its stockholders will recognize taxable gain, and will be
accounted for as a "pooling of interests" business combination.
The Sterling Board of Directors has unanimously approved the Merger
Agreement described in the attached material and the transactions contemplated
thereby and has determined that the Merger is fair to and in the best interests
of Sterling and its stockholders. After careful consideration, the Board of
Directors recommends that the stockholders of Sterling vote in favor of the
Merger Agreement. However, you are urged to carefully consider all aspects of
the proposed Merger discussed in the attached Joint Proxy Statement/Prospectus,
as the proposed Merger will result in the stockholders of Sterling owning
approximately 30% of the total shares of ALS Common Stock to be outstanding
after the Merger.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to, among
other things, the actions to be taken by Sterling stockholders at the Special
Meeting and a proxy card. The Joint Proxy Statement/Prospectus more fully
describes the proposed Merger and includes information about ALS and Sterling.
<PAGE> 6
All stockholders are cordially invited to attend the Special Meeting in
person. However, whether or not you plan to attend the Special Meeting, please
complete, sign, date and return your proxy in the enclosed postage paid
envelope. If you attend the Special Meeting, you may vote in person if you wish,
even though you have previously returned your proxy. It is important that your
shares be represented and voted at the Special Meeting.
Sincerely,
/s/ TIMOTHY J. BUCHANAN
-------------------------
Timothy J. Buchanan
Chairman of the Board and
Chief Executive Officer
2
<PAGE> 7
[STERLING HOUSE (R) LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on October 23, 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Sterling House Corporation, a Kansas corporation ("Sterling"), will
be held on Thursday, October 23, 1997, at 1:00 p.m., local time, at the O'Hare
Hilton Hotel, O'Hare International Airport, Chicago, Illinois 60666, to consider
and vote upon the following matters described in the accompanying Joint Proxy
Statement/Prospectus:
1. The approval and adoption of an Agreement and Plan of Merger, dated
as of July 30, 1997, as amended as of September 2, 1997 (as so amended, the
"Merger Agreement"), by and among Alternative Living Services, Inc.
("ALS"), Tango Merger Corporation, a wholly owned subsidiary of ALS
("Merger Sub"), and Sterling pursuant to which, among other things: (i)
Merger Sub will be merged with and into Sterling, and Sterling will become
a wholly owned subsidiary of ALS (the "Merger"), (ii) each outstanding
share of common stock, no par value (the "Sterling Common Stock"), of
Sterling, together with the associated Series A Junior Participating
Preferred Stock Purchase Right, will be converted into the right to receive
1.1 shares (the "Exchange Ratio") of common stock, $.01 par value per share
(the "ALS Common Stock"), of ALS, (iii) ALS will assume all outstanding
options under the Sterling House Corporation 1995 Stock Option Plan and all
other outstanding Sterling options, and (iv) the 6.75% Convertible
Subordinated Debentures due 2006 of Sterling (the "Sterling Debentures")
will be assumed by ALS pursuant to a supplemental indenture and will become
convertible into a number of shares of ALS Common Stock equal to the
product of the Exchange Ratio and the number of shares of Sterling Common
Stock issuable upon conversion of the Sterling Debentures; and
2. The transaction of such other business as may properly come before
the Special Meeting or any adjournment or postponement thereof.
Only Sterling stockholders of record at the close of business on September
19, 1997 are entitled to notice of, and to vote at, the Special Meeting, or at
any adjournment or postponement thereof.
By order of the Board of Directors,
/s/ TIMOTHY J. BUCHANAN
-----------------------
Timothy J. Buchanan
Chairman of the Board and
Chief Executive Officer
<PAGE> 8
ALTERNATIVE LIVING SERVICES, INC.
AND
STERLING HOUSE CORPORATION
JOINT PROXY STATEMENT
---------------------
ALTERNATIVE LIVING SERVICES, INC.
PROSPECTUS
---------------------
This Joint Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Tango Merger Corporation ("Merger Sub"), a wholly owned subsidiary
of Alternative Living Services, Inc. ("ALS"), with and into Sterling House
Corporation ("Sterling") and the issuance of up to 7,401,619 shares of ALS
common stock, $.01 par value per share (the "ALS Common Stock"), in connection
therewith. As a result of the Merger, Sterling will become a wholly owned
subsidiary of ALS. In connection with the Merger, ALS has filed a Registration
Statement on Form S-4 with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), covering an aggregate of up to 7,401,619 shares of the ALS
Common Stock issuable in the Merger to holders of shares of Sterling common
stock, no par value (the "Sterling Common Stock"). In connection with the
Merger, (i) each outstanding share of Sterling Common Stock together with the
associated Series A Junior Participating Preferred Stock Purchase Right (the
"Right") issued pursuant to the Rights Agreement dated as of June 25, 1997
between Sterling and ChaseMellon Stockholder Services, L.L.C. will be exchanged
for 1.1 shares (the "Exchange Ratio") of ALS Common Stock (the "Merger Shares"),
(ii) the outstanding options to purchase Sterling Common Stock (the "Options")
under the Sterling House Corporation 1995 Stock Option Plan, as amended (the
"Sterling Option Plan"), and all other outstanding options to purchase Sterling
Common Stock (together, the "Sterling Options") will be assumed by ALS and will
constitute options to acquire a number of shares of ALS Common Stock (the
"Merger Options") equal to the product of the Exchange Ratio and the number of
shares of Sterling Common Stock issuable upon the exercise of such Sterling
Options, and (iii) the 6.75% Convertible Subordinated Debentures due 2006 of
Sterling (the "Sterling Debentures") will be assumed by ALS pursuant to a
supplemental indenture and will be convertible into a number of shares of ALS
Common Stock equal to the product of the Exchange Ratio and the number of shares
of Sterling Common Stock issuable upon conversion of the Sterling Debentures. As
of September 19, 1997, there are 5,045,236 shares of Sterling Common Stock
outstanding, 369,514 shares of Sterling Common Stock issuable upon the exercise
of outstanding Sterling Options and 1,561,106 shares of Sterling Common Stock
issuable upon the conversion of the outstanding Sterling Debentures.
The Joint Proxy Statement/Prospectus also relates to a proposal to secure
the approval of holders of the ALS Common Stock of certain amendments to the
Amended and Restated Bylaws of ALS ("ALS Bylaws"), including amending the bylaw
provision regarding filling vacancies arising on the ALS Board of Directors,
adding a bylaw provision establishing an executive committee of the ALS Board of
Directors and amending the bylaw provision regarding amendments to the ALS
Bylaws (collectively, the "ALS Bylaw Amendments"). Approval of the ALS Bylaw
Amendments by the holders of ALS Common Stock is a condition to Sterling's
obligation to consummate the Merger.
This Joint Proxy Statement/Prospectus is being furnished to holders of ALS
Common Stock in connection with the solicitation of proxies by ALS's Board of
Directors for use at the Special Meeting of Stockholders of ALS (the "ALS
Special Meeting") to be held on Thursday, October 23, 1997 at the O'Hare Hilton
Hotel, O'Hare International Airport, Chicago, Illinois 60666 commencing at 2:00
p.m., local time, and at any adjournment or postponement thereof.
This Joint Proxy Statement/Prospectus also is being furnished to holders of
Sterling Common Stock in connection with the solicitation of proxies by
Sterling's Board of Directors for use at the Special Meeting of Stockholders of
Sterling (the "Sterling Special Meeting") to be held on Thursday, October 23,
1997 at the O'Hare Hilton Hotel, O'Hare International Airport, Chicago, Illinois
60666 commencing at 1:00 p.m., local time, and at any adjournment or
postponement thereof.
This Joint Proxy Statement/Prospectus also constitutes the prospectus of ALS
filed as part of the Registration Statement of ALS on Form S-4 relating to the
ALS Common Stock issuable to the holders of all outstanding shares of Sterling
Common Stock as of the effective time of the Merger. All information herein with
respect to ALS has been furnished by ALS, and all information herein with
respect to Sterling has been furnished by Sterling. This Joint Proxy
Statement/Prospectus is first being mailed to stockholders of ALS and Sterling
on or about September 23, 1997.
The ALS Common Stock is traded on the American Stock Exchange ("AMEX") under
the symbol "ALI." On July 30, 1997, the last trading date prior to the public
announcement of the signing of the Merger Agreement, the closing sale price of
the ALS Common Stock was $21.625 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY ALS AND STERLING STOCKHOLDERS BEFORE VOTING ON THE
MATTERS MORE FULLY DESCRIBED HEREIN.
---------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS
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 JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS SEPTEMBER 22, 1997
<PAGE> 9
AVAILABLE INFORMATION
ALS and Sterling are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
ALS and Sterling and the Registration Statement on Form S-4 (together with any
amendments or supplements thereto, the "Registration Statement") of which this
Joint Proxy Statement/Prospectus is a part and exhibits and schedules thereto
can be inspected and copied (at prescribed rates) at the Public Reference
section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048, and the Citicorp
Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511. In addition,
registration statements and certain other documents filed with the Commission by
ALS and Sterling through the Commission's Electronic Data Gathering, Analysis
and Retrieval ("EDGAR") system are publicly available through the Commission's
site on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR. The ALS Common Stock and
Sterling Common Stock are listed on the AMEX and certain reports, proxy
statements and other information concerning ALS and Sterling can also be
inspected at the offices of the AMEX at 86 Trinity Place, New York, New York
10006.
ALS has filed with the Commission the Registration Statement under the
Securities Act with respect to the Merger Shares (as defined herein) offered
hereby. This Joint Proxy Statement/Prospectus omits certain information
contained in the Registration Statement and reference is made to the
Registration Statement and the exhibits and schedules thereto for further
information with respect to ALS, Sterling and the Merger. Statements contained
herein concerning the provisions of any documents are not necessarily complete,
and in each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement or incorporated herein by reference. Each
such statement is qualified in its entirety by such reference.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. Certain
statements contained in this Joint Proxy Statement/Prospectus under "RISK
FACTORS," "THE MERGER -- Reasons for the Merger; Recommendations of the Boards
of Directors," "BUSINESS OF STERLING," "STERLING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" in ALS's Annual Report on Form 10-K, as amended, for
the year ended December 31, 1996 incorporated herein by reference (the "1996 ALS
Form 10-K") and under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in ALS's Quarterly Reports on Form 10-Q for
the three months ended March 31, 1997 and June 30, 1997 incorporated herein by
reference (the "March 31, 1997 ALS Form 10-Q" and "June 30, 1997 ALS Form 10-Q,"
respectively), in addition to certain statements contained elsewhere in this
Joint Proxy Statement/Prospectus or in the 1996 ALS Form 10-K, the March 31,
1997 ALS Form 10-Q or the June 30, 1997 ALS Form 10-Q, are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and are thus prospective in nature. Such forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
future results or trends to differ materially from future results or trends
expressed or implied by such forward-looking statements. The most significant of
such risks, uncertainties and other factors are discussed under the heading
"RISK FACTORS," beginning on page 17 of this Joint Proxy Statement/Prospectus
and prospective investors are urged to carefully consider such factors.
---------------------
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the Merger,
and, if given or made, such information or representation must not be relied
upon as having been authorized by ALS or Sterling. Neither the delivery hereof
nor any distribution of securities made hereunder shall, under any
circumstances, create an implication that there has been no change in the facts
herein set forth since the date hereof. This Joint Proxy Statement/Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy the
shares of ALS Common Stock offered by this Joint Proxy Statement/Prospectus or a
solicitation of a proxy in any jurisdiction where, or to any person to whom, it
is unlawful to make such an offer or solicitation.
---------------------
Crossings(R) and WovenHearts(R) are registered service marks of ALS and ALS
claims service mark protection in the marks Wynwood and Clare Bridge. Sterling
House(R) is a registered service mark of Sterling.
i
<PAGE> 10
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH REPORTS,
PROXY STATEMENTS AND OTHER INFORMATION FILED BY ALS, OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED HEREIN BY
REFERENCE, ARE AVAILABLE WITHOUT CHARGE UPON THE WRITTEN OR ORAL REQUEST FROM
THE CHIEF FINANCIAL OFFICER OF ALS, 450 NORTH SUNNYSLOPE ROAD, SUITE 300,
BROOKFIELD, WISCONSIN 53005, TELEPHONE (414) 789-9565. IN ORDER TO ENSURE
DELIVERY OF THE DOCUMENTS PRIOR TO THE ALS SPECIAL MEETING OR THE STERLING
SPECIAL MEETING, ANY REQUEST SHOULD BE MADE NO LATER THAN FIVE DAYS PRIOR TO THE
ALS SPECIAL MEETING OR THE STERLING SPECIAL MEETING, RESPECTIVELY.
The following documents or portions thereof, filed by ALS with the
Commission under the Exchange Act and the Securities Act, are incorporated
herein by reference:
(a) ALS's Registration Statement on Form 8-A, declared effective by
the Commission on August 5, 1996;
(b) ALS's Annual Report on Form 10-K for the year ended December 31,
1996, as amended;
(c) ALS's Quarterly Reports on Form 10-Q for the quarter ended March
31, 1997 and for the quarter ended June 30, 1997;
(d) ALS's Current Report on Form 8-K, filed with the Commission on May
30, 1997; and
(e) ALS's Current Report on Form 8-K, filed with the Commission on
August 13, 1997 (the "ALS Merger 8-K").
All documents filed by ALS pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date hereof and prior to the date of the later of
the Sterling Special Meeting or the ALS Special Meeting shall be deemed to be
incorporated by reference in this Joint Proxy Statement/Prospectus and to be a
part of this Joint Proxy Statement/Prospectus from the date of filing thereof.
Any statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Joint Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statements
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Joint Proxy Statement/Prospectus.
ii
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... i
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........... ii
JOINT PROXY STATEMENT/PROSPECTUS SUMMARY.................... 1
General................................................... 1
The Companies............................................. 1
The Meetings.............................................. 3
The Merger................................................ 4
ALS Selected Historical Consolidated Financial Data....... 10
Sterling Selected Historical Consolidated Financial
Data................................................... 12
Summary Unaudited Pro Forma Combined Financial Data....... 13
COMPARATIVE PER SHARE DATA.................................. 14
COMPARATIVE MARKET DATA..................................... 15
CAPITALIZATION.............................................. 16
RISK FACTORS................................................ 17
Uncertainties Related to the Merger....................... 17
Substantial Debt and Operating Lease Payment
Obligations............................................ 17
History of Operating Losses............................... 17
Ability to Continue Growth; Ability to Manage Rapid
Expansion and Business Diversification................. 18
Development and Construction Risks........................ 18
Risks Associated With Acquisitions........................ 19
Need for Additional Financing; Risk of Rising Interest
Rates.................................................. 19
Residence Management, Staffing and Labor Costs............ 20
Competition............................................... 20
Joint Ventures and Related Mandatory Purchase
Obligations............................................ 21
Government Regulation..................................... 21
Liability and Insurance................................... 22
Dependence on Attracting Seniors with Sufficient Resources
to Pay................................................. 22
Environmental Liability Risks Associated with Real
Property............................................... 22
Anti-Takeover Provisions.................................. 23
Shares Eligible for Future Sale........................... 23
THE MEETINGS, VOTING AND PROXIES............................ 24
Special Meeting of Stockholders of ALS.................... 24
Special Meeting of Stockholders of Sterling............... 25
THE MERGER.................................................. 27
Background of the Merger; Material Contacts............... 27
Reasons for the Merger; Recommendations of the Boards of
Directors.............................................. 30
Opinions of Financial Advisors............................ 33
Interests of Certain Persons in the Merger................ 41
Accounting Treatment...................................... 42
Certain Federal Tax Considerations........................ 42
Governmental and Regulatory Approvals..................... 44
Resales of ALS Common Stock; Affiliates................... 45
Absence of Dissenters' Rights............................. 45
MANAGEMENT AND OPERATIONS OF THE COMBINED COMPANY FOLLOWING
THE MERGER................................................ 46
General................................................... 46
Board of Directors After the Merger....................... 46
</TABLE>
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<TABLE>
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<S> <C>
Executive Committee....................................... 47
Executive Officers After the Merger; Employment and Other
Agreements............................................. 48
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS...... 49
Effective Time of the Merger.............................. 49
Manner and Basis of Converting Sterling Common Stock and
Sterling Options....................................... 49
Sterling Debentures....................................... 51
Employee Benefit Plans.................................... 52
Stockholder Voting Agreements............................. 52
Conduct of Sterling's and ALS's Business Prior to the
Merger; No Solicitation................................ 52
Conditions to the Merger.................................. 54
Termination or Amendment of the Merger Agreement.......... 55
PROPOSED AMENDMENTS TO THE ALS BYLAWS....................... 56
Amendment to Provision Regarding Vacancies on the ALS
Board of Directors..................................... 57
Adoption of Provision Establishing ALS Executive
Committee.............................................. 57
Amendment to Provision Regarding Amendment to ALS
Bylaws................................................. 58
BUSINESS OF STERLING........................................ 60
General................................................... 60
Industry.................................................. 60
Sterling House Services................................... 61
Sterling House Operations................................. 61
Competition............................................... 62
Funding for Assisted Living Care.......................... 62
Government Regulation..................................... 63
Expansion................................................. 63
Trademarks, Patents, Copyrights and Proprietary
Information............................................ 64
Employees................................................. 64
Properties................................................ 64
Legal Proceedings......................................... 67
STERLING DIVIDEND POLICY.................................... 67
STERLING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 68
General................................................... 68
Results of Operations..................................... 70
Liquidity and Capital Resources........................... 74
Impact of Inflation....................................... 75
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF STERLING.................................... 75
COMPARISON OF RIGHTS OF STERLING AND ALS STOCKHOLDERS....... 77
Description of the Common Stock........................... 77
Description of the Preferred Stock........................ 77
Rights Plan............................................... 78
Amendment of Organizational Documents..................... 81
Board of Directors........................................ 81
Indemnification........................................... 82
Extraordinary Transactions................................ 83
Dividends................................................. 84
LEGAL MATTERS............................................... 84
EXPERTS..................................................... 84
</TABLE>
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<TABLE>
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<S> <C>
ADDITIONAL INFORMATION...................................... 85
Stockholder Proposals..................................... 85
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 86
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDICES:
APPENDIX A: Agreement and Plan of Merger, dated July 30,
1997, as amended....................................... A-1
APPENDIX B: Opinion of McDonald & Company Securities,
Inc. .................................................. B-1
APPENDIX C: Opinion of Schroder & Co. Inc. .............. C-1
</TABLE>
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<PAGE> 14
JOINT PROXY STATEMENT/PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes appearing elsewhere in this Joint
Proxy Statement/Prospectus and in the documents incorporated in this Joint Proxy
Statement/Prospectus by reference. Stockholders of ALS and Sterling should
carefully review the matters set forth under "Risk Factors" before voting upon
the matters to be considered by such stockholders.
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
Alternative Living Services, Inc., a Delaware corporation ("ALS"), in connection
with the solicitation of proxies by the Board of Directors of ALS for use at the
Special Meeting of Stockholders of ALS (the "ALS Special Meeting") which is
scheduled to be held on October 23, 1997. This Joint Proxy Statement/Prospectus
is also being furnished to stockholders of Sterling House Corporation, a Kansas
corporation ("Sterling"), in connection with the solicitation of proxies by the
Board of Directors of Sterling, for use at the Special Meeting of Stockholders
of Sterling (the "Sterling Special Meeting") which is scheduled to be held on
October 23, 1997. At the ALS Special Meeting and at the Sterling Special
Meeting, the stockholders of ALS and Sterling, respectively, will be asked to
consider and vote upon the proposed merger (the "Merger") of Tango Merger
Corporation, a Kansas corporation and a wholly owned subsidiary of ALS ("Merger
Sub"), with and into Sterling pursuant to the terms of the Agreement and Plan of
Merger dated as of July 30, 1997, as amended as of September 2, 1997, by and
among ALS, Merger Sub and Sterling (as so amended, the "Merger Agreement"). As a
result of the Merger, Sterling will become a wholly owned subsidiary of ALS. The
Merger Agreement is included in this Joint Proxy Statement/Prospectus as
Appendix A and is incorporated herein by this reference. In connection with the
Merger, (i) each share of common stock, no par value, of Sterling (the "Sterling
Common Stock") together with the associated Series A Junior Participating
Preferred Stock Purchase Right (the "Right") will be converted into the right to
receive, and become exchangeable for, 1.1 (the "Exchange Ratio") shares (in the
aggregate, the "Merger Shares") of common stock, par value $.01 per share, of
ALS (the "ALS Common Stock"); (ii) all outstanding options to acquire Sterling
Common Stock (the "Options") under the Sterling House Corporation 1995 Stock
Option Plan, as amended (the "Sterling Option Plan"), and all other outstanding
options to purchase Sterling Common Stock (collectively, the "Sterling Options")
will be assumed by ALS and will be converted into options to purchase shares of
ALS Common Stock (the "Merger Options"); and (iii) the 6.75% Convertible
Subordinated Debentures due 2006 of Sterling (the "Sterling Debentures") will be
assumed by ALS and will become convertible into ALS Common Stock. Pursuant to
the Merger Agreement, and based on Sterling's capitalization as of September 19,
1997, 5,549,760 shares of ALS Common Stock will be issued in exchange for all
outstanding shares of Sterling Common Stock, up to 406,465 shares of ALS Common
Stock will be issuable upon exercise of the Merger Options and 1,717,217 shares
of ALS Common Stock will be issuable upon the conversion of the Sterling
Debentures. The Joint Proxy Statement/Prospectus also relates to a proposal to
secure the approval of holders of the ALS Common Stock of certain amendments to
the Amended and Restated Bylaws of ALS ("ALS Bylaws"), including amending the
bylaw provision regarding filling vacancies arising on the ALS Board of
Directors, adding a bylaw provision establishing an executive committee of the
ALS Board of Directors and amending the bylaw provision regarding amendments to
the ALS Bylaws (collectively, the "ALS Bylaw Amendments"). Approval of the ALS
Bylaw Amendments by the holders of ALS Common Stock is a condition to Sterling's
obligation to consummate the Merger. This Joint Proxy Statement/ Prospectus
constitutes the prospectus of ALS with respect to the Merger Shares. The
information in this Joint Proxy Statement/Prospectus concerning ALS and Sterling
has been furnished by each of such entities, respectively.
THE COMPANIES
ALS. Alternative Living Services, Inc. is a national assisted living
company operating 102 residences with an aggregate capacity of 4,542 residents
as of August 15, 1997. Of these residences, ALS owns 53, leases 40, holds equity
interests in and operates three and manages an additional six. ALS provides a
full range of
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<PAGE> 15
assisted living services in its residences for the frail elderly and
free-standing specialty care residences for individuals with Alzheimer's disease
and other dementias. ALS and its predecessor have operated assisted living
residences since 1981 and specialty dementia care residences since 1985.
ALS provides a broad continuum of personal care (such as assistance with
bathing, toileting, dressing, eating and ambulation), support services (such as
housekeeping, laundry and transportation) and health care (such as medication
administration and health monitoring) to its residents. In addition, ALS offers
a wide range of specialized services, including behavior management and
environmental adaptation programs, to residents who suffer from Alzheimer's
disease and other dementias. All of these services are provided on a 24-hour
basis in "home-like" settings which emphasize privacy, individual choice and
independence. ALS operates four distinct assisted living product lines (Clare
Bridge, Wynwood, Crossings and WovenHearts), each serving a particular segment
of the private pay elderly population. Each assisted living product line is
designed to permit residents to age in place by meeting their personal and
health care needs across a range of pricing options.
ALS intends to continue to aggressively expand its operations primarily
through the development and construction of additional residences and, to a
lesser extent, through selective acquisitions. As of August 15, 1997, ALS has 43
residences under construction in 12 states and 44 residences under development
(i.e., the site is under control and development activities, such as site
permitting, preparation of surveys and architectural plans and negotiation of
construction contracts, have commenced) in nine states.
ALS's operating strategy is to achieve and sustain a strong competitive
position within its chosen markets as well as to continue to enhance the
performance of its operations. ALS believes that its multiple product lines
afford it a significant competitive advantage as they enable ALS to offer an
evolving continuum of care and services, including specialty care services, and
offer such care and services to the frail elderly and individuals with
Alzheimer's disease and other dementias across a range of pricing options,
thereby serving both the upper and moderate income segments of the elderly
population. ALS also seeks to enhance its current operations by (i) maintaining
and improving occupancy rates at its residences; (ii) managing resident service
fees; (iii) providing increasingly higher levels of health care services to its
residents as they age in place; and (iv) improving operating efficiencies.
ALS's executive offices are located at 450 North Sunnyslope Road, Suite
300, Brookfield, Wisconsin 53005, and its telephone number is (414) 789-9565.
Unless the context otherwise requires, references in this Joint Proxy
Statement/Prospectus to "ALS" shall mean Alternative Living Services, Inc., its
"Predecessor," as described in Note 1 to "-- ALS Selected Historical
Consolidated Financial Data" appearing elsewhere herein, and its subsidiaries.
Sterling. Sterling is a long-term care provider offering a wide range of
assisted living care and services to the frail elderly through the ownership,
operation, management and franchising of Sterling House assisted living
residences. Sterling'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 home-like setting. Sterling House residents typically pay for
Sterling's services from their own or their family's resources. Sterling's
residences are located primarily in small to medium size communities with
populations in excess of 10,000 and in select affluent suburban areas.
Sterling was co-founded in 1991 by Timothy J. Buchanan, Sterling's Chairman
and Chief Executive Officer, and Steven L. Vick, Sterling's President, and has
expanded its assisted living operations primarily through the development,
construction, acquisition and franchising of Sterling House residences.
Following the completion of Sterling's initial public offering on October 26,
1995, Sterling owned or leased 14 residences containing 417 units all of which
were located in Kansas and Oklahoma. As of August 15, 1997, Sterling had in
operation 88 assisted living residences containing 3,296 units and had an
additional 74 residences under construction or development. In addition, as of
August 15, 1997, Sterling managed and/or its franchisees operated 13 residences
containing 488 units.
As part of its growth strategy, Sterling will continue to expand its
assisted living operations primarily through the development and construction,
and, to a lesser extent, the acquisition and franchising of assisted
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<PAGE> 16
living residences in states Sterling believes possess attractive demographic and
favorable regulatory environments. In support of its continued expansion,
Sterling has opened regional operating offices in Colorado, Florida, Ohio and
Oklahoma, and regional development and construction offices in North Carolina
and Texas.
Sterling's principal executive office is located at 453 S. Webb Road, Suite
500, Wichita, Kansas 67207, and its telephone number is (316) 684-8300.
Unless the context otherwise requires, references in this Joint Proxy
Statement/Prospectus to "Sterling" shall mean Sterling House Corporation and its
subsidiaries.
Merger Sub. Merger Sub is a Kansas corporation recently organized by ALS
for the purpose of effecting the Merger. It has no material assets and has not
engaged in any activities except in connection with the Merger. Merger Sub's
executive offices are located at 450 North Sunnyslope Road, Suite 300,
Brookfield, Wisconsin 53005, and its telephone number is (414) 789-9565.
THE MEETINGS
Special Meeting of Stockholders of ALS. The ALS Special Meeting will be
held on Thursday, October 23, 1997 at 2:00 p.m. local time at the O'Hare Hilton
Hotel, O'Hare International Airport, Chicago, Illinois 60666. The purpose of the
meeting is to consider and vote upon: (1) the approval and adoption of the
Merger Agreement (the "ALS Merger Proposal") pursuant to which, among other
things (i) Merger Sub will be merged with and into Sterling, and Sterling will
become a wholly owned subsidiary of ALS, (ii) each share of Sterling Common
Stock and the associated Right will be converted into the right to receive 1.1
shares of ALS Common Stock, (iii) ALS will assume the Sterling Options and the
Sterling Options will be converted into the Merger Options, and (iv) ALS will
assume the Sterling Debentures which will thereupon become convertible into ALS
Common Stock; (2) the approval of the ALS Bylaw Amendments (the "ALS Bylaw
Proposal"); and (3) the transaction of such other business as may properly come
before the ALS Special Meeting. The ALS Merger Proposal and the ALS Bylaw
Proposal are referred to together as the "ALS Proposals".
Only stockholders of record at the close of business on September 19, 1997
(the "ALS Record Date") are entitled to notice of, and to vote at, the ALS
Special Meeting, or at any adjournment or postponement thereof. As of the ALS
Record Date, there were outstanding and entitled to vote 13,001,546 shares of
ALS Common Stock. The presence, either in person or by properly executed proxy,
of the holders of a majority of the outstanding shares of ALS Common Stock is
necessary to constitute a quorum at the ALS Special Meeting. If, however, a
majority of shares of ALS Common Stock is not present or represented by proxy at
the ALS Special Meeting, the stockholders entitled to vote thereat, present in
person or by proxy, can adjourn the meeting from time to time, until a quorum of
voting shares is present. Approval of the ALS Merger Proposal requires the
affirmative vote of a majority of the votes cast in person or by proxy on the
ALS Merger Proposal, provided that a quorum is present. Approval of the ALS
Bylaw Proposal requires the affirmative vote of a majority of the outstanding
shares of ALS Common Stock present and entitled to vote on the ALS Bylaw
Proposal, provided that a quorum is present. See "THE MEETINGS, VOTING AND
PROXIES."
Certain stockholders of ALS, including most of the ALS directors, holding
an aggregate of 3,349,297 shares of ALS Common Stock, or approximately 26% of
the shares of ALS Common Stock outstanding as of the ALS Record Date, have given
an irrevocable proxy to Sterling directing Sterling to vote their shares in
favor of the ALS Proposals. See "TERMS OF THE MERGER AGREEMENT AND RELATED
TRANSACTIONS."
The holders of ALS Common Stock are not entitled to dissenters' or
appraisal rights under the Delaware General Corporate Law (the "DGCL").
Special Meeting of Stockholders of Sterling. The Sterling Special Meeting
will be held on Thursday, October 23, 1997 at 1:00 p.m. local time at the O'Hare
Hilton Hotel, O'Hare International Airport, Chicago, Illinois 60666. The purpose
of the meeting is to consider and vote upon: (1) the approval and adoption of
the Merger Agreement (the "Sterling Proposal"); and (2) the transaction of such
other business as may properly come before the Sterling Special Meeting.
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<PAGE> 17
Only stockholders of record at the close of business on September 19, 1997
(the "Sterling Record Date") are entitled to notice of, and to vote at, the
Sterling Special Meeting, or at any adjournment or postponement thereof. As of
the Sterling Record Date, there were outstanding and entitled to vote 5,045,236
shares of Sterling Common Stock. Approval of the Sterling Proposal requires the
affirmative vote of the holders of a majority of the outstanding shares of
Sterling Common Stock entitled to vote on the Sterling Proposal as of the
Sterling Record Date. The presence, either in person or by properly executed
proxy, of the holders of a majority of the outstanding shares of Sterling Common
Stock is necessary to constitute a quorum at the Sterling Special Meeting. If,
however, a majority of shares of Sterling Common Stock is not present or
represented by proxy at the Sterling Special Meeting, the stockholders entitled
to vote thereat, present in person or by proxy, can adjourn the meeting from
time to time, until a quorum of voting shares is present. See "THE MEETINGS,
VOTING AND PROXIES."
Certain stockholders of Sterling, including Sterling's Chief Executive
Officer and its President and a member of Sterling's Board of Directors, holding
an aggregate of 2,297,858 shares of Sterling Common Stock, or approximately 46%
of the shares of Sterling Common Stock outstanding, as of the Sterling Record
Date, have given an irrevocable proxy to ALS directing ALS to vote their shares
in favor of the Sterling Proposal. See "TERM OF THE MERGER AGREEMENT AND RELATED
TRANSACTIONS."
The holders of Sterling Common Stock are not entitled to dissenters' or
appraisal rights under the Kansas General Corporation Code (the "KGCC").
THE MERGER
Terms of the Merger. At the time the Merger becomes effective, Merger Sub
will merge with and into Sterling, with Sterling remaining as the surviving
corporation (the "Surviving Corporation") and a wholly owned subsidiary of ALS,
and, based on the number of shares of Sterling Common Stock outstanding on
September 19, 1997, all outstanding shares of Sterling Common Stock will be
converted into the right to receive an aggregate of 5,549,760 shares of ALS
Common Stock. The Sterling Option Plan and the Sterling Options will be assumed
by ALS at the time the Merger becomes effective and, based on the number of
Sterling Options outstanding on September 19, 1997, converted into the Merger
Options exercisable for an aggregate of 406,465 shares of ALS Common Stock. See
"-- Sterling Options" below. No fractional shares will be issued by ALS in the
Merger.
Conversion of Sterling Common Stock into ALS Common Stock. By operation of
the Merger, each outstanding share of Sterling Common Stock on the date of
consummation of the Merger will be converted into the right to receive 1.1
shares of ALS Common Stock. Based upon the number of shares of ALS Common Stock
and Sterling Common Stock outstanding as of September 19, 1997, there will be
18,551,306 shares of ALS Common Stock outstanding immediately after the
Effective Date, of which approximately 30% will be held by the former holders of
Sterling Common Stock.
Market Price Data. The ALS Common Stock is listed on the American Stock
Exchange ("AMEX") under the symbol "ALI." The Sterling Common Stock is listed on
the AMEX under the symbol "SGH."
On July 30, 1997, the last trading day prior to the public announcement of
the signing of the Merger Agreement, the closing sale prices of ALS Common Stock
and Sterling Common Stock as reported on the AMEX were $21.625 and $18.25 per
share, respectively. Following the Merger, ALS Common Stock will continue to be
traded on the AMEX under the symbol "ALI." Sterling stockholders are urged to
obtain current price information for ALS Common Stock in connection with their
consideration of the Merger Agreement and the transactions contemplated thereby.
See "COMPARATIVE PER SHARE DATA" and "COMPARATIVE MARKET DATA."
ALS has never paid cash dividends on the ALS Common Stock. Sterling has
never paid cash dividends on the Sterling Common Stock. Following the Merger, it
is expected that the Board of Directors of ALS will continue the policy of not
paying cash dividends in order to retain earnings for reinvestment in the
business of the combined company.
Reasons for the Merger. In discussions that led to the signing of the
Merger Agreement, management of ALS and Sterling identified a number of
potential joint benefits which could result from the Merger, including
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<PAGE> 18
the two companies' complementary operating philosophies and culture, the
expanded national focus of the combined company, the combined company's improved
ability to manage growth and expansion through the combined management teams and
corporate infrastructure, greater geographic and demographic diversification,
and increased liquidity for the stockholders of the combined company. In
addition, the ALS Board of Directors considered certain additional factors,
including Sterling's management team's strong operating and development
background, industry know-how and market awareness in its geographic markets,
the ability to integrate the Sterling House residence prototype as a fifth ALS
product line, Sterling's strong presence in geographic markets not presently
served by ALS and the enhanced construction and development capabilities
provided by Sterling's construction subsidiary. The Sterling Board of Directors
identified certain additional reasons in support of the Merger, including the
possibility of achieving economies of scale and administrative cost savings,
significant ongoing involvement of Sterling management as well as significant
representation on the Board of Directors of the combined company, and the
opportunity for Sterling stockholders to realize a price/earnings multiple
expansion through ownership of shares of the combined company. See "THE
MERGER -- Reasons for the Merger; Recommendations of the Boards of Directors"
and "-- Opinions of the Financial Advisors."
Recommendation of the ALS Board of Directors. The Board of Directors of
ALS has unanimously approved the Merger Agreement, the transactions contemplated
thereby and the ALS Bylaw Amendments and has determined that the Exchange Ratio
is fair and in the best interests of ALS and its stockholders. The ALS Board of
Directors recommends that the stockholders of ALS vote in favor of the ALS
Proposals. See "THE MERGER -- Reasons for the Merger; Recommendations of the
Boards of Directors" and "-- Opinions of Financial Advisors."
Opinion of ALS's Financial Advisor. McDonald & Company Securities, Inc.
("McDonald") has acted as a financial advisor to ALS in connection with the
Merger and on July 28, 1997 delivered its oral opinion to the Board of Directors
of ALS to the effect that, as of the date of such opinion, the Exchange Ratio
was fair, from a financial point of view, to ALS and the ALS stockholders.
McDonald subsequently confirmed its oral opinion by delivery of its written
opinion dated as of the date of the Joint Proxy Statement/Prospectus. The full
text of the written opinion of McDonald, which sets forth the assumptions made,
matters considered and limitations on the review undertaken, is attached as
Appendix B to this Joint Proxy Statement/Prospectus and should be read carefully
in its entirety. See "THE MERGER -- Opinions of Financial Advisors."
Recommendation of the Sterling Board of Directors. The Board of Directors
of Sterling has unanimously approved the Merger Agreement and the transactions
contemplated thereby and has determined that the Merger is fair and in the best
interests of Sterling and its stockholders. The Sterling Board of Directors
recommends that the stockholders of Sterling vote in favor of the Sterling
Proposal. See "THE MERGER -- Reasons for the Merger; Recommendation of the
Boards of Directors."
Opinion of Sterling's Financial Advisor. On July 30, 1997, Schroder & Co.
Inc. ("Schroders") delivered its oral opinion to the Sterling Board of Directors
to the effect that, as of the date of such opinion, the Exchange Ratio was fair,
from a financial point of view, to holders of Sterling Common Stock. Schroders
subsequently confirmed its July 30, 1997 oral opinion by delivery of its written
opinion dated July 30, 1997, which written opinion was confirmed as of the date
of this Joint Proxy Statement/Prospectus. The full text of the written opinion
of Schroders and its written confirmation dated September 22, 1997, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is attached as Appendix C to this Joint Proxy Statement/Prospectus.
Holders of Sterling Common Stock are urged to read carefully and in its entirety
the opinion of Schroders. See "THE MERGER -- Opinions of Financial Advisors."
Effective Time. The Merger will become effective upon the filing of the
Certificate of Merger contemplated by the Merger Agreement with the Secretary of
State of the State of Kansas (the "Effective Time"). Assuming all conditions to
the Merger are met or waived prior thereto, it is anticipated that the Effective
Time will occur on or about October 23, 1997 (the "Effective Date"), following
the ALS Special Meeting and the Sterling Special Meeting.
Manner and Basis of Converting Shares. Promptly after the Effective Time,
ALS will mail to all holders of record of Sterling Common Stock a letter of
transmittal with instructions for use by such holders in
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<PAGE> 19
surrendering certificates representing shares of Sterling Common Stock in
exchange for certificates representing Merger Shares. No fractional shares will
be issued by ALS in the Merger. In lieu of any such fractional shares, each
holder of Sterling Common Stock who would otherwise be entitled to a fractional
share of ALS Common Stock upon surrender of certificates for exchange will be
paid an amount in cash (without interest) equal to such holder's proportionate
interest in the net proceeds from the sale or sales in the open market by ALS's
exchange agent, on behalf of all such holders, of the aggregate fractional
shares of the ALS Common Stock issued pursuant to the Merger Agreement. See
"TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS -- Manner and Basis of
Converting Sterling Common Stock and Sterling Options."
Sterling Options. Pursuant to the Merger Agreement, the Sterling Options
will be assumed by ALS and converted into the right to acquire 1.1 shares of ALS
Common Stock for each share of Sterling Common Stock underlying the Sterling
Options. Otherwise each Merger Option shall continue to have, and be subject to,
the same terms and conditions set forth in the Sterling Options. At the
Effective Time, the Sterling Options will vest and become immediately and fully
exercisable. The per share exercise price for the shares of ALS Common Stock
issuable upon exercise of each Merger Option will be equal to the quotient
determined by dividing the exercise price per share at which such Sterling
Option was exercisable immediately prior to the Effective Date by 1.1. See
"TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS -- Manner and Basis of
Converting Sterling Common Stock and Sterling Options."
Assumption of Sterling Debentures. In connection with the Merger, the
Sterling Debentures will be assumed by ALS pursuant to a supplemental indenture
and will thereupon become convertible into a number of shares of ALS Common
Stock equal to the product of the Exchange Ratio and the number of shares of
Sterling Common Stock issuable upon conversion of the Sterling Debentures.
Conditions to the Merger, Termination or Amendment of the Merger
Agreement. Consummation of the Merger is subject to the satisfaction or waiver
of various conditions which, if not fulfilled or waived, permit termination of
the Merger Agreement. The Merger Agreement may be terminated under certain other
circumstances, including (i) termination by mutual consent of ALS and Sterling
and (ii) termination by either ALS or Sterling if the Merger is not consummated
on or before March 31, 1998 unless extended under certain circumstances to June
30, 1998. See "TERMS OF THE MERGER AGREEMENT AND RELATED
TRANSACTIONS -- Conditions to the Merger" and "-- Termination or Amendment of
the Merger Agreement."
Amendments to ALS Bylaws. Among the conditions to Sterling's obligation to
consummate the Merger is approval of the ALS Bylaw Amendments by the holders of
ALS Common Stock. The ALS Bylaw Amendments, among other things, (i) provide that
vacancies on the ALS Board of Directors arising with respect to the three
nominees to the ALS Board designated by the Sterling Board of Directors, or
their respective successors (the "Sterling Representatives"), at any time prior
to the 1999 annual meeting of ALS stockholders, shall be nominated on behalf of
the ALS Board, filled or selected by a majority vote of the remaining Sterling
Representatives, subject to approval of the ALS Board of Directors; (ii)
establish a three person executive committee of the ALS Board of Directors
comprised of the Chairman of the Board, the Chief Executive Officer and the
President of ALS, which committee shall have certain authority to act for and on
behalf of the ALS Board of Directors; and (iii) provide that certain provisions
of the ALS Bylaws may be amended, modified, repealed or replaced only by either
(A) the stockholders of ALS or (B) the ALS Board of Directors, provided that
such action is approved by a majority of the Sterling Representatives. If
approved, the ALS Bylaw Amendments shall become effective at the Effective Time,
and shall only become effective if the Merger is consummated.
Effects of Termination. Under the terms of the Merger Agreement, if the
Merger Agreement is terminated under certain circumstances, either ALS or
Sterling will be entitled to a termination fee of $8.0 million. In addition,
concurrently with the execution of the Merger Agreement, ALS and Sterling
entered into a Cross Option Agreement pursuant to which Sterling granted to ALS
an irrevocable option to purchase newly issued shares of Sterling Common Stock
in an amount equal to 19.9% of the shares of Sterling Common Stock outstanding
as of July 30, 1997, and ALS granted to Sterling an irrevocable option to
purchase newly
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issued shares of ALS Common Stock in an amount equal to 19.9% of the shares of
ALS Common Stock outstanding as of July 30, 1997. The respective options may
only be exercised by ALS or Sterling, respectively, if the Merger Agreement
becomes terminable or is terminated by ALS or Sterling under circumstances which
would entitle ALS or Sterling, respectively, to the above-described termination
fee under the Merger Agreement. See "TERMS OF THE MERGER AGREEMENT AND RELATED
TRANSACTIONS -- Termination or Amendment of the Merger."
The Merger Agreement may be amended by the parties thereto, provided such
amendment is in writing, at any time before or after the approval and adoption
of the Merger Agreement by the stockholders of Sterling and ALS. After such
approval and adoption has been obtained, no amendment of any of the agreements
executed in connection with the Merger may be made which by law requires the
further approval of the stockholders, without obtaining such further approval.
See "TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS -- Termination or
Amendment of the Merger."
Interests of Certain Persons in the Merger.
ALS. In considering the recommendations of the ALS Board of Directors with
respect to the ALS Proposals and the transactions contemplated thereby, ALS
stockholders should be aware that certain members of the ALS Board of Directors
and management have certain interests in the Merger that are in addition to
interests of ALS stockholders generally. Certain stockholders of ALS, including
most of the ALS directors, holding an aggregate of 3,349,297 shares of ALS
Common Stock, or approximately 26% of the shares of ALS Common Stock outstanding
as of the ALS Record Date, have given a proxy to Sterling directing Sterling to
vote their shares in favor of the ALS Proposals. See "TERMS OF THE MERGER
AGREEMENT AND RELATED TRANSACTIONS" and "THE MERGER -- Interests of Certain
Persons in the Merger."
Sterling. In considering the recommendations of the Sterling Board of
Directors with respect to the Sterling Proposals and the transactions
contemplated thereby, Sterling stockholders should be aware that certain members
of the Sterling Board of Directors and management have certain interests in the
Merger that are in addition to interests of Sterling stockholders generally.
Certain of these persons may have participated in the negotiation and
consideration of the Merger Agreement as well as certain of the arrangements
described below. The Sterling Board was aware that such arrangements may give
these individuals interest in the Merger that are in addition to the interests
of stockholders generally and concluded that such additional interests did not
affect the negotiation of the terms of the Merger in a manner that conflicted
with or was adverse to the interests of stockholders generally. Certain
stockholders of Sterling, including Sterling's Chief Executive Officer,
President and a member of Sterling's Board of Directors, holding an aggregate of
2,297,858 shares of Sterling Common Stock, or approximately 46% of the shares of
Sterling Common Stock outstanding as of the Sterling Record Date, have given a
proxy to ALS directing ALS to vote their shares in favor of the Sterling
Proposal. See "TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS" and "THE
MERGER -- Interests of Certain Persons in the Merger."
Comparison of Rights Under Applicable Law. The rights of stockholders of
Sterling are currently governed by applicable Kansas law, the Sterling Restated
and Amended Articles of Incorporation (the "Sterling Restated Articles of
Incorporation") and the Sterling Restated and Amended Bylaws (the "Sterling
Bylaws"). Holders of Sterling Common Stock immediately prior to the Effective
Time will become stockholders of ALS, and from and after the Effective Time,
their rights as stockholders of ALS will be governed by applicable Delaware law,
the ALS Restated Certificate of Incorporation (the "ALS Certificate of
Incorporation") and the ALS Bylaws. There are certain differences between the
rights of stockholders of ALS and Sterling under Delaware and Kansas law and
under the Sterling Restated Articles of Incorporation and Sterling Bylaws and
the ALS Certificate of Incorporation and ALS Bylaws. See "COMPARISON OF RIGHTS
OF STERLING AND ALS STOCKHOLDERS."
Management and Operations After the Merger. At the Effective Time, the ALS
Board of Directors will be comprised of the seven individuals currently serving
on the ALS Board plus three individuals designated by the Sterling Board of
Directors, namely Timothy J. Buchanan, D. Ray Cook, M.D., and Steven L. Vick
(the
7
<PAGE> 21
"Sterling Nominees"). If any of the Sterling Nominees are unable or unwilling to
serve as a director of ALS at the Effective Time, such individual or individuals
shall be replaced by an individual or individuals designated by the Board of
Directors of Sterling provided that such nominees are approved by the Board of
Directors of ALS. Following the Effective Time and continuing through the 1999
Annual Meeting of Stockholders of ALS, if any vacancy on the Board of Directors
of ALS arises with respect to any Sterling Representative, any nominee selected
to fill such vacancy shall be nominated on behalf of the ALS Board of Directors
by a majority vote of the remaining Sterling Representatives provided that such
nominee is approved by the Board of Directors of ALS.
At the Effective Time, Timothy J. Buchanan, Sterling's Chairman of the
Board and Chief Executive Officer, will become President of ALS, Steven L. Vick,
Sterling's President, will remain President of Sterling and will become Chief
Operating Officer of ALS upon his relocation to Brookfield, Wisconsin no later
than one year following the Effective Time, Mark W. Ohlendorf, Sterling's Chief
Financial Officer, will become a Senior Vice President of ALS and most of the
other members of Sterling management are expected to join the ALS management
team. ALS's executive officers and management will otherwise remain unchanged
following the Merger. See "MANAGEMENT AND OPERATIONS OF THE COMBINED COMPANY
FOLLOWING THE MERGER" and "PROPOSED AMENDMENTS TO THE ALS BYLAWS."
Accounting Treatment. The Merger is intended to qualify as a "pooling of
interests" business combination for financial reporting purposes. See "THE
MERGER -- Accounting Treatment."
Certain Federal Income Tax Considerations. Subject to the limitations and
qualifications described in the discussion of the Merger below, including
certain opinions to be rendered as conditions precedent to the consummation of
the Merger by Rogers & Hardin LLP, counsel to ALS, and Stroock & Stroock & Lavan
LLP, counsel to Sterling, treatment of the Merger for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), will generally have the
following consequences for federal income tax purposes: (i) no gain or loss will
be recognized by holders of Sterling Common Stock upon their receipt in the
Merger solely of ALS Common Stock in exchange therefor; (ii) the aggregate basis
for tax purposes of the ALS Common Stock received in the Merger by holders of
Sterling Common Stock will be the same as the aggregate basis of the Sterling
Common Stock surrendered in exchange therefor; and (iii) the holding period of
the ALS Common Stock received in the Merger by holders of Sterling Common Stock
will include the period for which the Sterling Common Stock surrendered in
exchange therefor was held, provided that the Sterling Common Stock is held as a
capital asset as of the Effective Date. The conversion of the Sterling Options
granted in connection with the performance of services into the Merger Options
will not result in the recognition of income, gain or loss for federal income
tax purposes by the holders of the Sterling Options. See "THE MERGER -- Certain
Federal Income Tax Considerations."
Governmental and Regulatory Approvals. Under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the rules
promulgated thereunder by the Federal Trade Commission (the "FTC"), the Merger
cannot be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the applicable waiting
period has expired; however, no assurance can be given that unforeseen delays
will not occur in the issuance of such new licenses and permits. ALS and
Sterling have filed appropriate notification and report forms under the HSR Act
with the FTC and the Antitrust Division.
Under applicable law, Sterling may be required to give notification of the
Merger to various state and federal governmental entities and apply for new
licenses and permits. Sterling believes that it will be able to obtain any such
licenses upon application therefor in the ordinary course; however, no assurance
can be given that unforeseen delays will not occur in the issuance of such
licenses and permits. ALS and Sterling are aware of no other governmental or
regulatory approvals required for consummation of the Merger, other than
compliance with applicable federal and state securities laws.
Resale Restrictions. All shares of ALS Common Stock received by Sterling
stockholders in the Merger will be freely transferable, except that shares of
ALS Common Stock received by persons who are deemed to be "affiliates" (as such
term is used in Rule 145 under the Securities Act) of Sterling or ALS at the
time of
8
<PAGE> 22
the Special Meetings may be resold by them only in certain permitted
circumstances under the Securities Act, other applicable securities laws and
rules, and in accordance with restrictions related to pooling of interests
accounting treatment. See "THE MERGER -- Resales of ALS Common Stock;
Affiliates."
Dissenters' Rights.
Sterling. Under the KGCC, holders of the Sterling Common Stock are not
entitled to dissenters' or appraisal rights in connection with the Merger.
ALS. Under the DGCL, holders of the ALS Common Stock are not entitled to
dissenters' or appraisal rights in connection with the Merger.
Risk Factors. In considering whether to approve the Merger Agreement and
the transactions contemplated thereby, ALS and Sterling stockholders should
consider certain risk factors, including: (i) uncertainties related to the
Merger; (ii) substantial debt and operating lease payment obligations of the
combined company; (iii) the combined company's ability to continue growth and
manage rapid expansion; (iv) development and construction risk; (v) need for
additional financing and risk of rising interest rates; (vi) risks associated
with joint ventures and related mandatory purchase obligations; (vii) risks
associated with competition and government regulation; and (viii) environmental
liability risks associated with real property. See "RISK FACTORS."
9
<PAGE> 23
ALS SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data (i) for the
three years ended December 31, 1996, 1995 and 1994 and at December 31, 1996,
1995 and 1994 are derived from the audited historical consolidated financial
statements of ALS, (ii) for the period from December 14, 1993 (inception) to
December 31, 1993 and at December 31, 1993 are also derived from the audited
historical consolidated financial statements of ALS and (iii) for the six month
periods ended June 30, 1997 and 1996 and at June 30, 1997 are derived from
unaudited historical consolidated financial statements of ALS. The unaudited ALS
financial statements include all adjustments, consisting of normal recurring
accruals, that ALS considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results of
ALS for the six months ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1997. The
selected consolidated historical financial data of the Predecessor presented
below for the years ended December 31, 1993 and 1992 are derived from the
unaudited consolidated financial statements of ALS's Predecessor for those
years. The financial information set forth below should be read in conjunction
with ALS's consolidated financial statements, related notes and other financial
information incorporated by reference in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, FISCAL YEARS ENDED DECEMBER 31,
----------------- --------------------------------------------------------
ALS ALS PREDECESSOR
----------------- ------------------------------------ -----------------
1997 1996 1996 1995 1994 1993(1) 1993(1) 1992(1)
------- ------- ------- ------- ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues............................ $35,164 $12,075 $39,599 $10,464 $4,957 $147 $2,641 $2,544
Operating expenses:
Residence operations........................ 22,540 7,961 25,710 7,207 2,934 87 1,672 1,596
Lease expense............................... 7,006 1,915 6,053 890 697 19 563 547
General and administrative.................. 5,066 3,311 7,933 2,599 1,458 41 423 421
Depreciation and amortization............... 2,484 941 2,994 814 258 6 101 83
Non-recurring charge........................ -- 976 976 -- -- -- -- --
------- ------- ------- ------- ------ ---- ------ ------
Total operating expenses............. 37,096 15,104 43,666 11,510 5,347 153 2,759 2,647
------- ------- ------- ------- ------ ---- ------ ------
Operating loss....................... (1,932) (3,029) (4,067) (1,046) (390) (6) (118) (103)
------- ------- ------- ------- ------ ---- ------ ------
Other income (expense):
Interest expense, net....................... (994) (1,325) (3,740) (813) (301) (8) (48) (27)
Equity in losses of unconsolidated
affiliates................................ (137) (47) (52) (438) (1) -- -- --
Minority interest in losses of consolidated
subsidiaries.............................. 2,307 12 76 112 49 -- -- --
Other, net.................................. (8) 13 (28) 439 -- -- -- --
------- ------- ------- ------- ------ ---- ------ ------
Total other expenses, net............ 1,168 (1,347) (3,744) (700) (253) (8) (48) (27)
------- ------- ------- ------- ------ ---- ------ ------
Loss before income taxes...................... $ (764) $(4,376) $(7,811) $(1,746) $ (643) $(14) $ (166) $ (130)
Provision for income taxes.................... -- -- -- -- -- -- -- --
------- ------- ------- ------- ------ ---- ------ ------
Net loss...................................... $ (764) $(4,376) $(7,811) $(1,746) $ (643) $(14) $ (166) $ (130)
======= ======= ======= ======= ====== ==== ====== ======
Net loss per share............................ $ (0.06) $ (0.59) $ (0.79) $ (0.30) $(0.22)
======= ======= ======= ======= ======
Weighted average number of shares
outstanding................................. 12,996 7,458 9,889 5,863 2,959
======= ======= ======= ======= ======
</TABLE>
10
<PAGE> 24
<TABLE>
<CAPTION>
AT
JUNE 30, AT DECEMBER 31,
-------- ----------------------------------------------------------
ALS ALS PREDECESSOR
-------- -------------------------------------- -----------------
1997 1996 1995 1994 1993(1) 1993(1) 1992(1)
-------- -------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 15,440 $ 25,796 $ 2,998 $ 311 $ 196 $ -- $ 2
Working capital (deficit)................. (9,611) 13,180 1,207 (1,212) (338) (369) (152)
Total assets.............................. 230,323 126,536 39,357 14,424 2,543 759 525
Long-term obligations, net of current
maturities.............................. 116,156 28,649 17,101 6,356 57 134 --
Stockholders' equity...................... $ 65,130 $ 65,894 $19,343 $ 4,559 $ 325 $ 349 $ 300
</TABLE>
- ---------------
(1) ALS was organized in December 1993. In connection with the initial
capitalization of ALS, substantially all of the tangible assets of two
operating companies were contributed to ALS (collectively, referred herein
as the "Predecessor"). Statement of Operations data for periods prior to
December 14, 1993 reflect the results of operations of the Predecessor.
Statement of Operations data for ALS for 1993 are for the period from
December 14, 1993 (inception) through December 31, 1993. Per share amounts
for the Predecessor, for periods prior to the inception of ALS, are not
presented as they would not provide comparable or meaningful information.
11
<PAGE> 25
STERLING SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected consolidated historical financial data (i) for the
year ended December 31, 1992 and at December 31, 1992, has been derived from
unaudited consolidated financial statements of Sterling, (ii) for the years
ended December 31, 1996, 1995, 1994, and 1993 and at December 31, 1996, 1995,
1994 and 1993, have been derived from audited consolidated financial statements
of Sterling and (iii) for the six months ended June 30, 1997 and 1996 and at
June 30, 1997 have been derived from the unaudited consolidated financial
statements of Sterling. The unaudited interim financial statements of Sterling
include all adjustments, consisting of normal recurring accruals, that Sterling
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the six months
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1997. This data should be read
in conjunction with, and is qualified in its entirety by, the "Sterling
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements, related notes and other financial
information of Sterling included elsewhere herein.
<TABLE>
<CAPTION>
JUNE 30, FISCAL YEARS ENDED DECEMBER 31,
----------------- --------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Resident service fees.............................. $17,460 $ 5,754 $15,576 $ 2,297 $ 361 $ 344 $ 286
Construction services.............................. 40 63 167 1,217 1,056 -- --
Other.............................................. 298 134 295 1,084 855 332 20
------- ------- ------- ------- ------ ------ ------
Total operating revenue..................... 17,798 5,951 16,038 4,598 2,272 676 306
Operating expenses:
Resident operations................................ 11,030 3,797 10,267 1,510 251 213 197
Cost of construction services...................... 21 28 63 1,069 870 -- --
Lease expense...................................... 4,410 1,115 2,982 55 -- -- --
General and administrative......................... 2,259 1,191 3,147 1,810 1,162 504 88
Depreciation and amortization...................... 1,320 471 1,229 460 88 25 23
Non-recurring expenses............................. -- -- -- 413 -- -- --
------- ------- ------- ------- ------ ------ ------
Total operating expenses.................... 19,040 6,602 17,688 5,317 2,371 742 308
------- ------- ------- ------- ------ ------ ------
Operating loss....................................... (1,242) (651) (1,650) (719) (99) (66) (2)
------- ------- ------- ------- ------ ------ ------
Other income (expense):
Interest income.................................... 527 534 1,043 204 7 -- --
Interest expense................................... (153) (333) (534) (375) (103) (72) (60)
Other, net......................................... (16) (20) 5 39 -- -- --
Equity in losses of unconsolidated affiliates...... -- -- -- (279) (298) (9) --
Minority interest in losses of consolidated
subsidiaries..................................... 525 -- -- 48 (1) -- --
------- ------- ------- ------- ------ ------ ------
Total other income (expense)................ 883 181 514 (363) (395) (81) (60)
------- ------- ------- ------- ------ ------ ------
Loss before income taxes and extraordinary item...... (359) (470) (1,136) (1,082) (494) (147) (55)
(Provision) benefit for income taxes................. 97 139 410 75 -- (15) (7)
------- ------- ------- ------- ------ ------ ------
Loss before extraordinary item....................... (262) (331) (726) (1,007) (494) (162) (62)
Extraordinary item:
Loss from early retirement of financing agreement,
net of tax benefit of $747....................... -- -- -- (1,176) -- -- --
------- ------- ------- ------- ------ ------ ------
Net loss............................................. $ (262) $ (331) $ (726) $(2,183) $ (494) $ (162) $ (62)
======= ======= ======= ======= ====== ====== ======
Net loss per share
Loss before extraordinary item..................... $ (0.05) $ (0.07) $ (0.14) $ (0.36) $(0.22) $(0.07) $(0.03)
Extraordinary item................................. -- -- -- (0.42) -- -- --
------- ------- ------- ------- ------ ------ ------
Net loss per share................................... $ (0.05) $ (0.07) $ (0.14) $ (0.78) $(0.22) $(0.07) $(0.03)
======= ======= ======= ======= ====== ====== ======
Weighted average shares outstanding.................. 5,040 5,035 5,037 2,787 2,281 2,281 2,281
======= ======= ======= ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $13,920 $39,923 $ 7,116 $ 9,218 $ (511) $ (134) $ (137)
Total assets......................................... 82,825 72,373 77,818 43,093 3,736 798 697
Long-term obligations, net of current maturities..... 41,399 39,702 39,589 6,562 1,009 621 576
Stockholders' equity (deficit)....................... $24,284 $24,881 $24,510 $25,205 $ (794) $ (300) $ (138)
</TABLE>
12
<PAGE> 26
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary unaudited pro forma condensed combined financial data
presents summary unaudited pro forma statement of operations data for the three
years ended December 31, 1996, 1995 and 1994 and six months ended June 30, 1997
after giving effect to the Merger of ALS and Sterling as if such Merger were
consummated on January 1, 1994, and unaudited pro forma selected balance sheet
data at June 30, 1997 and December 31, 1996, after giving effect to the Merger
as if the Merger were consummated on each such date, in each case using the
pooling of interests method of accounting. The summary unaudited pro forma
statement of operations data for the year ended December 31, 1996 and for the
six months ended June 30, 1997 have been adjusted to give effect to significant
transactions which were completed during 1996 and 1997 by ALS and Sterling as
more fully explained in the "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS."
The following summary unaudited pro forma condensed combined financial data
is provided for comparative purposes only and should be read in conjunction with
the unaudited pro forma condensed combined financial statements and notes
thereto appearing elsewhere herein and the separate audited consolidated
financial statements and related notes thereto of ALS incorporated herein by
reference and of Sterling included elsewhere in this Joint Proxy
Statement/Prospectus. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS" and "INDEX TO FINANCIAL STATEMENTS." The following summary unaudited
pro forma condensed combined financial data does not purport to be indicative of
the results which actually would have occurred if the Merger and transactions
reflected in such data had been consummated on the dates indicated in the notes
to the Unaudited Pro Forma Condensed Combined Financial Statements or which may
be obtained in the future.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED FISCAL YEARS ENDED DECEMBER 31,
JUNE 30, -------------------------------
1997 1996 1995 1994
---------- --------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues..................................... $52,962 $ 67,367 $15,062 $ 7,229
Operating expenses:
Residence operations................................. 33,570 43,047 8,760 3,185
Lease expense........................................ 11,416 13,974 945 697
General and administrative........................... 7,346 12,924 5,847 3,490
Depreciation and amortization........................ 3,804 3,639 1,274 346
Non-recurring charge................................. -- 976 -- --
------- -------- ------- -------
Total operating expenses..................... 56,136 74,560 16,826 7,718
------- -------- ------- -------
Operating loss............................... (3,174) (7,193) (1,764) (489)
------- -------- ------- -------
Other income (expense):
Interest expense, net................................ (1,108) (2,949) (985) (397)
Equity in losses of unconsolidated affiliates........ (137) (57) (717) (299)
Minority interest in losses of consolidated
subsidiaries...................................... 2,832 54 160 48
Other, net........................................... (24) 20 478 --
------- -------- ------- -------
Total other income (expenses), net........... 1,563 (2,932) (1,064) (648)
------- -------- ------- -------
Loss before income taxes............................... (1,611) (10,125) (2,828) (1,137)
------- -------- ------- -------
Provision for income taxes............................. -- -- -- --
------- -------- ------- -------
Net loss from continuing operations.................... $(1,611) $(10,125) $(2,828) $(1,137)
======= ======== ======= =======
Net loss per share..................................... $ (0.09) $ (0.55) $ (0.32) $ (0.21)
======= ======== ======= =======
Weighted average number of common shares outstanding... 18,540 18,339 8,929 5,468
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
1997 1996
----------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 27,982 $ 87,520
Working capital............................................. 539 64,599
Total assets................................................ 313,148 254,355
Long-term obligations, net of current maturities............ 157,555 118,362
Stockholders' equity........................................ $ 85,977 $ 87,064
</TABLE>
13
<PAGE> 27
COMPARATIVE PER SHARE DATA
The following table sets forth (i) the historical net loss per common share
and the historical book value per common share data of the ALS Common Stock;
(ii) the historical net loss per common share and the historical book value per
common share data of the Sterling Common Stock; (iii) the unaudited pro forma
net loss per share and the unaudited pro forma book value per share of ALS
Common Stock after giving effect to the Merger on a "pooling of interests"
basis; and (iv) the unaudited pro forma net loss per equivalent share, and the
unaudited pro forma book value per equivalent share of Sterling Common Stock
based on the Exchange Ratio of 1.1 shares of ALS Common Stock for each share of
Sterling Common Stock at the Effective Time of the Merger. See "TERMS OF THE
MERGER AGREEMENT AND RELATED TRANSACTIONS -- Manner and Basis of Converting
Sterling Common Stock and Sterling Options." The pro forma data does not purport
to be indicative of the results of future operations or the results that would
have occurred had the Merger been consummated at the beginning of the periods
presented. The information set forth below should be read in conjunction with
the financial statements and notes thereto of ALS and Sterling included or
incorporated by reference herein and the unaudited pro forma combined condensed
financial statements and notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus. Neither ALS nor Sterling paid any cash dividends during
the periods presented.
<TABLE>
<CAPTION>
ALS AND
HISTORICAL STERLING PRO FORMA
----------------- PRO FORMA EQUIVALENT FOR ONE
ALS STERLING COMBINED STERLING SHARE
------ -------- ---------- ------------------
<S> <C> <C> <C> <C>
BOOK VALUE PER SHARE AT:
June 30, 1997...................................... $ 5.01 $ 4.82 $ 4.66 $ 5.13
December 31, 1996.................................. 5.07 4.86 4.72 5.19
NET LOSS PER SHARE BEFORE EXTRAORDINARY ITEMS:
Six Months ended June 30, 1997..................... $(0.06) $(0.05) $(0.09) $(0.10)
Year ended December 31, 1996....................... (0.79) (0.14) (0.55) (0.61)
Year ended December 31, 1995....................... (0.30) (0.36) (0.32) (0.35)
Year ended December 31, 1994....................... (0.22) (0.22) (0.21) (0.23)
</TABLE>
14
<PAGE> 28
COMPARATIVE MARKET DATA
The ALS Common Stock has been listed on the AMEX since August 6, 1996 under
the trading symbol "ALI." The following table sets forth, for the periods
indicated, the high and low sales prices per share of ALS Common Stock, as
reported on the AMEX:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Quarter Ended September 30, 1996 (commencing August 6,
1996)..................................................... $15 1/8 $12 7/8
Quarter Ended December 31, 1996............................. 15 1/4 10 7/8
YEAR ENDING DECEMBER 31, 1997
Quarter Ended March 31, 1997................................ 17 7/8 11 7/8
Quarter Ended June 30, 1997................................. 23 1/2 14 5/8
Quarter Ending September 30, 1997 (through September 19,
1997)..................................................... 26 1/2 20 13/16
</TABLE>
On July 30, 1997, the last trading day prior to the announcement of the
signing of the Merger Agreement, the reported last sales price for the ALS
Common Stock on the AMEX was $21.625 per share. Based on such closing sales
price, the market value of the consideration proposed to be offered for each
share of Sterling Common Stock in the Merger (1.1 shares of ALS Common Stock)
was $23.7875. At September 19, 1997, there were 154 holders of record of ALS
Common Stock.
The Sterling Common Stock has been listed on the AMEX since October 26,
1995 under the trading symbol "SGH." The following table sets forth, for the
periods indicated, the high and low sales prices per share of Sterling Common
Stock, as reported on the AMEX:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Quarter Ended December 31, 1995 (commencing October 26,
1995)..................................................... $13 $ 9 7/16
YEAR ENDED DECEMBER 31, 1996
Quarter Ended March 31, 1996................................ 19 3/8 9 3/8
Quarter Ended June 30, 1996................................. 19 3/4 17
Quarter Ended September 30, 1996............................ 19 1/8 15
Quarter Ended December 31, 1996............................. 17 8 1/2
YEAR ENDING DECEMBER 31, 1997
Quarter Ended March 31, 1997................................ 12 8 5/8
Quarter Ended June 30, 1997................................. 16 3/8 10 7/8
Quarter Ending September 30, 1997 (through September 19,
1997)..................................................... 27 5/8 16 1/2
</TABLE>
On July 30, 1997, the last trading day prior to the public announcement of
the signing of the Merger Agreement, the reported last sales price of the
Sterling Common Stock on the AMEX was $18.25 per share. As of September 19,
1997, there were 85 holders of record of Sterling Common Stock.
15
<PAGE> 29
CAPITALIZATION
The following table sets forth the short term debt and the consolidated
capitalization of ALS (i) at June 30, 1997, and (ii) on a pro forma basis at
June 30, 1997 to give effect to the Merger. The table should be read in
conjunction with ALS's consolidated financial statements and notes thereto
included in the 1996 ALS Form 10-K, the June 30, 1997 ALS Form 10-Q, each
incorporated by reference herein, and the "UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------------
ACTUAL PRO FORMA
-------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt...................... $ 548 $ 759
Notes payable............................................. 21,056 21,056
-------- --------
Total short-term debt............................. 21,604 21,815
-------- --------
Long-term debt, less current maturities:
Senior long-term debt..................................... 66,156 72,555
7.00% ALS Convertible Subordinated Debentures due 2004.... 50,000 50,000
6.75% Sterling Convertible Subordinated Debentures due
2006................................................... -- 35,000
-------- --------
Total long-term debt.............................. 116,156 157,555
-------- --------
Minority interest........................................... 8,615 8,790
Stockholders' equity:
Preferred stock, $0.01 par value per share; 5,000 shares
authorized, none issued................................ -- --
Common stock, $0.01 par value per share; 30,000 shares
authorized; 12,996 and 18,540 shares outstanding actual
and pro forma, respectively............................ 130 185
Additional paid-in capital.................................. 75,978 104,174
Accumulated deficit......................................... (10,978) (18,382)
-------- --------
Total stockholders' equity........................ 65,130 85,977
-------- --------
Total short-term debt and consolidated
capitalization.................................. $211,505 $274,137
======== ========
</TABLE>
16
<PAGE> 30
RISK FACTORS
In addition to other information in this Joint Proxy Statement/Prospectus,
the following factors should be considered carefully by ALS and Sterling
stockholders before voting on the matters described herein.
UNCERTAINTIES RELATED TO THE MERGER
The Merger involves the integration of two companies that have previously
operated independently. Among the factors considered by the Boards of Directors
of ALS and Sterling in connection with their approval of the Merger Agreement
were the opportunities for operating efficiencies that may result from the
Merger. While ALS and Sterling expect to achieve certain operating efficiencies
as a result of the Merger, no assurance can be given that difficulties will not
be encountered in integrating the operations of ALS and Sterling or that the
benefits expected from such integration will be realized. In addition,
management of ALS and Sterling expect to devote significant attention to efforts
to integrate the operations of the two companies, which effort may affect such
managements' ability to manage ongoing operations and expansion efforts. Any
delays or unexpected costs incurred in connection with such integration could
have a material adverse effect on the business, results of operations or
financial condition of the combined company.
SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENT OBLIGATIONS
ALS had lease expenses of $6.1 million and $7.0 million for the year ended
December 31, 1996 and the six months ended June 30, 1997, respectively. Sterling
had lease expenses of $3.0 million and $4.4 million for the year ended December
31, 1996 and the six months ended June 30, 1997, respectively. On a pro forma
basis giving effect to the Merger as if it had occurred as of January 1, 1994,
ALS's total indebtedness as of June 30, 1997 would have been $179 million, and
its net interest expense and lease expense would have been $2.9 million and
$14.0 million, respectively, for the year ended December 31, 1996 and $1.1
million and 11.4 million, respectively, for the six months ended June 30, 1997.
Debt and annual operating lease payment obligations will continue to increase
significantly as ALS and Sterling pursue their growth strategy. In addition, ALS
and Sterling anticipate 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 ALS or Sterling.
There can be no assurance that ALS or Sterling will generate sufficient
cash flow to meet their obligations. Any payment or other default with respect
to such obligations could cause the lender to foreclose upon the residences
securing the indebtedness or, in the case of an operating lease, to terminate
the lease, with a consequent loss of income and asset value to ALS. Moreover,
because of cross-default and cross-collateralization provisions in certain
mortgages and debt instruments of ALS and Sterling and in most of their
respective leases, a default by ALS or Sterling on one of their payment
obligations could result in acceleration of other obligations and adversely
affect a significant number of their other residences. See "-- Need for
Additional Financing; Risk of Rising Interest Rates."
HISTORY OF OPERATING LOSSES
ALS and Sterling each has experienced significant operating losses and net
losses in each year since inception, primarily as a result of their development,
construction and residence lease-up activities as well as the incurrence of
certain expenses to establish corporate infrastructure to support future planned
growth. For the years ended December 31, 1994, 1995 and 1996, ALS incurred
operating losses of $390,000, $1.0 million and $4.1 million, respectively, and
net losses of $643,000, $1.7 million and $7.8 million, respectively. For the six
months ended June 30, 1997, ALS incurred an operating loss and net loss of $1.9
million and $764,000, respectively. On a pro forma basis giving effect to the
Merger as if it had occurred as of January 1, 1994, ALS would have incurred
operating losses of $7.2 million and $3.2 million and net losses of $10.1
million and $1.6 million for the year ended December 31, 1996 and for the six
months ended June 30, 1997, respectively. For the years ended December 1994,
1995 and 1996, Sterling incurred operating losses of $398,000, $998,000 and
17
<PAGE> 31
$1.7 million, respectively. For the six months ended June 30, 1997, Sterling
incurred an operating loss and a net loss of $1.2 million and $262,000,
respectively.
Newly opened assisted living residences typically operate at a loss during
the first six to 12 months of operation, primarily due to the incurrence of
certain fixed and variable expenses in advance of the achievement of targeted
rent and service fee revenues from the lease-up of such residences. As of August
15, 1997, of ALS's 102 residences, 35 had been open for 12 months or less.
Similarly, as of August 15, 1997, of Sterling's 88 residences, 58 had been open
for 12 months or less. In addition, the development and construction of assisted
living residences requires the commitment of substantial capital over a typical
six- to 12-month construction period, the consequence of which may be an adverse
impact on ALS's or Sterling's liquidity. As of August 15, 1997, ALS and Sterling
together had 70 residences under construction and an additional 91 residences
under development. In the case of acquired residences, resident turnover and
increased marketing expenditures which may be required to reposition such
residences, together with the possible disruption of operations resulting from
the implementation of renovations, may adversely impact the financial
performance of such residences for a period of time after their acquisition. As
a result, ALS and Sterling may continue to incur additional operating losses in
the second half of 1997 as the operating expenses associated with developing,
renovating and operating residences and supporting the corporate infrastructure
necessary to manage their respective growth strategies will be only partially
offset by operating profits generated by stabilized residences. Accordingly,
there can be no assurance that ALS and Sterling will not experience unforeseen
expenses, difficulties, complications and delays which could result in greater
than anticipated operating losses or otherwise materially adversely affect ALS's
or Sterling's financial condition and results of operations. See "-- Development
and Construction Risks."
ABILITY TO CONTINUE GROWTH; ABILITY TO MANAGE RAPID EXPANSION AND BUSINESS
DIVERSIFICATION
ALS has and expects to continue to pursue an aggressive expansion strategy
focused on developing, constructing and acquiring assisted living residences.
Both ALS and Sterling are currently managing significant construction and
development activity. Accordingly, ALS's prospects are directly affected by its
ability to develop, construct and, to a lesser extent, acquire additional
residences. ALS's ability to continue to grow will depend in large part on its
ability to identify suitable and affordable development and acquisition
opportunities and successfully pursue such opportunities, identify and obtain
necessary financing commitments and effectively operate its assisted living
residences. There can be no assurance, however, that ALS will be successful in
developing, constructing or acquiring any additional residences or that it will
be able to continue to achieve or exceed its historical growth rate.
ALS's rapid expansion places significant demands on ALS's management and
operating personnel. Although ALS expects to retain and integrate within the
combined company substantially all management and other employees of Sterling,
ALS's ability to manage its recent and future growth effectively will require it
to continue to improve its operational, financial and management information
systems and to continue to attract, retain, train, motivate and manage key
employees. If ALS is unable to manage its growth effectively, its business,
operating results and financial condition will be adversely affected.
Following the Merger, management of ALS intends to review and, in
appropriate circumstances, pursue opportunities for development and expansion of
new products and services, such as home health care, rehabilitation and pharmacy
services. Efforts to achieve such business diversification, however, are subject
to certain risks, including management's relative unfamiliarity with such
businesses, additional uncertainties related to government regulation and
possible difficulties in integrating new products or businesses.
DEVELOPMENT AND CONSTRUCTION RISKS
ALS's growth strategy is dependent, in part, on its ability to develop and
construct a significant number of additional residences. As of August 15, 1997,
ALS and Sterling had 70 residences under construction and 91 residences under
development. Development projects generally are subject to various risks,
including zoning, permitting, health care licensing and construction delays,
that may result in construction cost overruns and longer development periods
and, accordingly, higher than anticipated start-up losses. Project management is
18
<PAGE> 32
subject to a number of contingencies over which ALS will have little or no
control and which might adversely affect project costs and completion time. Such
contingencies include shortages of, or the inability to obtain, labor or
materials, the inability of the general contractor or subcontractors to perform
under their contracts, strikes, adverse weather conditions and changes in
applicable laws or regulations or in the method of applying such laws and
regulations. In addition, Sterling's construction management subsidiary serves
as general contractor on many of Sterling's residences in construction and
development, and, accordingly, in these instances Sterling may not have the same
contractual recourse for construction delays and defects as would generally be
available were a third party general contractor engaged to construct these
residences. As a result of these various factors, there can be no assurance that
ALS will not experience construction delays, that it will be successful in
developing and constructing currently planned or additional residences or that
any developed residence will be economically successful. If ALS's planned
development is delayed, ALS's business, operating results and financial
condition could be adversely affected.
RISKS ASSOCIATED WITH ACQUISITIONS
ALS has acquired residences in the past and intends to continue to seek
acquisition opportunities in the future. However, no assurances can be given
that ALS will be successful in identifying any future acquisition opportunities
or completing any identified acquisitions. The acquisition of residences
involves a number of risks. Existing residences available for acquisition
frequently serve or target different market segments than those presently served
by ALS. It may be necessary in such cases to reposition and renovate acquired
residences or turn over the existing resident population to achieve a resident
acuity and income profile which is consistent with ALS's current operations. In
addition, ALS may also determine that staff and operating management personnel
changes are necessary to successfully integrate such residences into ALS's
existing operations. No assurances can be made that management will be
successful in repositioning any acquired residences or in effecting any
necessary operational or structural changes and improvements on a timely basis.
Any failure by ALS to make necessary operational or structural changes or to
successfully reposition acquired residences may adversely impact ALS's business,
operating results and financial condition. In undertaking acquisitions of
residences, ALS also may be adversely impacted by unforeseen liabilities
attributable to the prior operators of such residences, against whom ALS may
have little or no recourse.
NEED FOR ADDITIONAL FINANCING; RISK OF RISING INTEREST RATES
To achieve the combined company's growth strategy, ALS will need to obtain
sufficient financing to fund its development, construction and acquisition
activities. Accordingly, ALS's future growth will depend on its ability to
obtain additional financing on acceptable terms. ALS has executed non-binding
letters of intent with a health care REIT for additional financing commitments
aggregating approximately $250.0 million (of which $71 million has been utilized
in sale/leaseback and mortgage financing transactions through August 15, 1997).
Sterling has executed non-binding letters of intent with four health care REITs
for financing commitments aggregating approximately $323.8 million (of which
$145.6 million has been utilized in sale/leaseback and mortgages financing
transactions through August 15, 1997). ALS's management believes financing
available pursuant to these arrangements, and pursuant to other sources of
project financing, will be sufficient to fund the combined company's development
and acquisition programs for at least the next 18 months. ALS will from time to
time seek additional funding through public or private financing, including
equity or debt financing. If additional funds are raised by issuing equity
securities, ALS's stockholders may experience dilution. In addition, ALS will
require significant financial resources to meet its operating and working
capital needs. There can be no assurance that any newly constructed residences
will achieve a stabilized occupancy rate and attain a resident mix that meet
ALS's expectations or generate sufficient positive cash flow to cover operating
and financing costs associated with such residences. There can be no assurance
that ALS will be successful in securing additional financing or that adequate
funding will be available and, if available, will be on terms that are
acceptable to ALS. A lack of funds may require ALS to delay or eliminate all or
some of its development projects and acquisition plans. In addition, ALS may
require additional financing to enable it to acquire additional residences, to
respond to changing economic conditions, to expand ALS's development program or
to account for changes in assumptions related to its development program.
19
<PAGE> 33
On a pro forma basis giving effect to the Merger as if it had occurred on
June 30, 1997, approximately $38 million, or 21%, of ALS's total indebtedness as
of June 30, 1997 would have been subject to floating interest rates. Although a
majority of the debt and lease payment obligations of ALS and Sterling are not
subject to floating interest rates, indebtedness that ALS may incur in the
future may bear interest at a floating rate. In addition, future fixed rate
indebtedness and lease obligations will be based on interest rates prevailing at
the time such arrangements are obtained. Therefore, increases in prevailing
interest rates could increase ALS's interest or lease payment obligations and
could have an adverse effect on ALS's business, financial condition and results
of operations.
RESIDENCE MANAGEMENT, STAFFING AND LABOR COSTS
ALS and Sterling compete with other providers of long-term care with
respect to attracting and retaining qualified and skilled personnel. The
combined company will be dependent upon its ability to attract and retain
management personnel responsible for the day-to-day operations of each of ALS's
residences. Any inability of ALS to attract or retain qualified residence
management personnel could have a material adverse effect on ALS's financial
condition or results of operations. In addition, a possible shortage of nurses
or trained personnel may require ALS to enhance its wage and benefits package in
order to compete in the hiring and retention of such personnel. ALS will also be
dependent upon the available labor pool of semi-skilled and unskilled employees
in each of the markets in which it operates. No assurance can be given that
ALS's labor costs will not increase, or that, if they do increase, they can be
matched by corresponding increases in rates charged to residents. Any
significant failure by ALS to attract and retain qualified management and staff
personnel, to control its labor costs or to pass on any increased labor costs to
residents through rate increases would have a material adverse effect on ALS's
business, operating results and financial condition.
COMPETITION
The long-term care industry is highly competitive and, given the relatively
low barriers to entry and continuing health care cost containment pressures, ALS
expects that the assisted living segment of such industry will become
increasingly competitive in the future. ALS competes with other companies
providing assisted living services as well as numerous other companies providing
similar service and care alternatives, such as home health care agencies,
congregate care facilities, retirement communities and skilled nursing
facilities. While ALS believes there is a need for additional assisted living
residences in the markets where ALS and Sterling are constructing or developing
residences, ALS expects that as assisted living residences receive increased
market awareness and the number of states which include assisted living services
in their Medicaid programs increases, competition will increase from new market
entrants, many of whom may have substantially greater financial resources than
ALS. No assurance can be given that increased competition will not adversely
affect ALS's ability to attract or retain residents or maintain its existing
rate structures. Moreover, in implementing its growth strategy, ALS expects to
face competition for development and acquisition opportunities from local
developers and regional and national assisted living companies. Some of ALS's
present and potential competitors have, or may have access to, greater financial
resources than those of ALS. Consequently, there can be no assurance that ALS
will not encounter increased competition in the future which could limit its
ability to attract and retain residents, to maintain or increase resident
service fees or to expand its business and could have a material adverse effect
on ALS's financial condition, results of operations and prospects.
Management of ALS is not able to predict the effect that the healthcare
industry trend towards managed care will have on the assisted living
marketplace. Managed care, an arrangement whereby service and care providers
agree to sell specifically defined services to one or more public or private
payors (frequently not the end user or resident) subject to a predefined system
in an effort to achieve more efficiency with respect to utilization and cost, is
not currently a significant factor in the assisted living marketplace. However,
managed care plans sponsored by insurance companies or HMOs may in the future be
a factor in the assisted living marketplace. There can be no assurance that ALS
will not encounter increased competition or be subject to other competitive
pressures that could affect its business, results of operation or financial
condition as a result of managed care.
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<PAGE> 34
JOINT VENTURES AND RELATED MANDATORY PURCHASE OBLIGATIONS
ALS and Sterling have entered into several joint ventures with regional
real estate development partners for the construction, development and ownership
of assisted living residences in targeted geographic areas. As of June 30, 1997,
ten of ALS's operating residences and 21 of Sterling's operating residences were
jointly owned directly or indirectly with venture partners. Of the 87 ALS
residences and 74 Sterling residences which were either under construction or
development as of August 15, 1997, a significant portion of such residences are
being constructed or developed under joint venture agreements. There can be no
assurance that these joint venture development partners will be successful in
identifying sites for future residences, securing necessary permits and licenses
for the construction of new residences and supervising the construction of new
residences on time and within budget. In addition, ALS has agreed not to own or
operate competing assisted living residences during specified contractual
periods within specified geographic areas adjacent to residences developed
through most of its joint ventures. While ALS and Sterling typically receive a
fee for managing residences developed through joint ventures, they share with
their respective joint venture partners any profits or losses realized from the
operation or sale of such residences. Each of ALS and Sterling is obligated
under its joint venture arrangements to purchase the equity interests of its
joint venture partners upon the election of such joint venture partners at a
price based on either a formula price or the appraised value of the residence
owned by the applicable joint venture. These purchase rights generally become
exercisable during the first six months to two years following the opening of
the residence owned by such joint venture. As a result of these provisions, ALS
might become obligated to acquire additional interests in residences developed
through joint ventures on terms or at times that would otherwise not be
acceptable to ALS, including times during which ALS may not have adequate
liquidity to fund such acquisitions.
GOVERNMENT REGULATION
Health care is an area of extensive and frequent regulatory change. The
assisted living industry 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 impact on ALS's methods and costs of doing business. ALS and
Sterling are, and 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 they operate or intend to operate.
The sale of franchises is regulated by the Federal Trade Commission and by
certain state agencies located in jurisdictions other than those states where
Sterling 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 combined company to continue its franchising activities.
ALS and Sterling and their respective 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 ALS or Sterling to open additional residences at
desired locations or could result in costly delays. Several ALS and Sterling
residences have been financed by revenue bonds. In order to continue to qualify
for favorable tax treatment of the interest payable on certain of these bonds,
the financed 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.
ALS's success will depend in part upon its ability to satisfy applicable
regulations and requirements and to procure and maintain required licenses in
rapidly changing regulatory environments. Any failure to satisfy applicable
regulations or to procure or maintain a required license could have a material
adverse effect on ALS's financial condition, results of operations and
prospects. ALS's operations could also be adversely affected by, among other
things, regulatory developments such as revisions in building code requirements
for assisted living residences, mandatory increases in the scope and quality of
care to be offered to residents and
21
<PAGE> 35
revisions in licensing and certification standards. There can be no assurance
that Federal, state or local laws or regulations will not be imposed or expanded
which adversely impact ALS's business, financial condition, results of
operations or prospects. ALS's residence operations are also subject to health
and other state and local government regulations.
LIABILITY AND INSURANCE
The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the long-term care industry have
become subject to an increasing number of lawsuits alleging malpractice or
related legal theories, many of which involve large claims and result in the
incurrence of significant defense costs. In addition, compared to more
institutional long-term care facilities, assisted living residences (especially
dementia care residences) of the type operated by ALS and Sterling offer
residents a greater degree of independence in their daily lives. This increased
level of independence, however, may subject the resident and ALS or Sterling to
certain risks that would be reduced in more institutionalized settings. ALS and
Sterling currently maintain liability insurance intended to cover such claims
which they believe is adequate based on the nature of the risks, historical
experience and industry standards. There can be no assurance, however, that
claims in excess of such insurance or claims not covered by insurance, such as
claims for punitive damages, will not arise. A successful claim against ALS or
Sterling not covered by, or in excess of, their insurance could have a material
adverse effect upon ALS's or Sterling's financial condition and results of
operations. Claims against ALS or Sterling, regardless of their merit or
eventual outcome, may also have a material adverse effect upon ALS's ability to
attract or retain residents or expand its business and may require management to
devote substantial time to matters unrelated to day-to-day operations. In
addition, insurance policies must be renewed annually. There can be no assurance
that ALS or Sterling will be able to obtain liability insurance in the future or
that, if such insurance is available, it will be available on acceptable
economic terms.
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
ALS and Sterling currently rely, and for the foreseeable future, ALS
expects to rely, primarily on the ability of its residents to pay for services
from their own and their families' financial resources. Generally, only elderly
adults with income or assets meeting or exceeding the comparable median in the
region where assisted living residences of ALS or Sterling are located can
afford the fees for such residences. Inflation or other circumstances which
adversely affect the ability of residents and potential residents to pay for
assisted living services could have an adverse effect on ALS. In the event that
ALS encounters difficulty in attracting seniors with adequate resources to pay
for ALS's services, ALS would be adversely affected.
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 clean
up costs incurred by such parties in connection with the contamination. Such
laws typically impose clean up responsibility and liability without regard to
whether the owner knew of or caused the presence of contaminants, and 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 or 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.
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<PAGE> 36
With the exception of four Sterling residences operated by Sterling or its
predecessors since prior to 1995, each of ALS and Sterling has conducted
environmental assessments of all of its operating residences and has conducted,
or is in the process of conducting, environmental assessments of all of its
undeveloped sites and sites currently under construction. These assessments have
not revealed, and ALS is not otherwise aware of, any environmental liability
that it believes would have a material adverse effect on ALS's business, assets
or results of operations. There can be no assurance, however, that environmental
assessments would detect all environmental contamination which may give rise to
material environmental liabilities. ALS and Sterling believe that its respective
residences are in compliance in all material respects with all applicable
environmental laws. Neither ALS nor Sterling has been notified by any
governmental authority, or is 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 residences its currently operates.
ANTI-TAKEOVER PROVISIONS
The ALS Certificate of Incorporation authorizes the issuance of 5,000,000
shares of preferred stock and 30,000,000 shares of ALS Common Stock. After
giving effect to the Merger and the reservation of shares issuable upon
conversion of the Sterling Debentures and the ALS 7% Subordinated Convertible
Debentures due 2007 ("ALS Debentures") and exercise of the Sterling Options and
options granted or available to be granted under the ALS Amended and Restated
1995 Incentive Compensation Plan (the "ALS Option Plan"), ALS will have
5,363,422 shares of authorized but unissued ALS Common Stock. Subject to the
rules of the AMEX upon which the ALS Common Stock is listed, the ALS Board of
Directors has the power to issue any or all of these additional shares without
stockholder approval, and the preferred shares can be issued with such rights,
preferences and limitations as may be determined by the ALS Board. The rights of
the holders of ALS Common Stock will be subject to, and may be adversely
affected by, the rights of any holders of preferred stock that may be issued in
the future. ALS presently has no commitments or contracts to issue any
additional shares of ALS Common Stock (other than pursuant to the Merger,
outstanding ALS stock options or the ALS Debentures) or any shares of preferred
stock. Authorized and unissued ALS preferred stock and ALS Common Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could delay, discourage, hinder or preclude an
unsolicited acquisition of ALS, could make it less likely that stockholders
receive a premium for their shares as a result of any such attempt and could
adversely affect the market price of and the voting and other rights of the
holders of outstanding shares of ALS Common Stock. As a Delaware corporation,
ALS is subject to Section 203 of the DGCL which, in general, prevents an
"interested stockholder" (defined generally as a person owing 15% or more of the
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) for three years following the date such
person became an interested stockholder unless certain conditions are satisfied.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of ALS Common Stock in the public market
following the Merger could adversely affect prevailing market prices of the ALS
Common Stock. In connection with the Merger, ALS will issue 5,549,760 shares of
ALS Common Stock to holders of Sterling Common Stock, plus the Merger Options
exercisable for 406,465 shares of ALS Common Stock to holders of Sterling
Options, based on Sterling shares and Sterling Options outstanding on September
19, 1997. Up to 46% of such shares will be available for sale by the holders
thereof pursuant to Rule 145 adopted by the Commission under the Securities Act
upon the publication by ALS of financial results covering at least 30 days of
post-Merger combined operations, and the remainder of such shares will be
available for immediate resale by the holders thereof after the Effective Time.
See "THE MERGER -- Resales of ALS Common Stock; Affiliates."
Approximately 51.1% of the outstanding shares of ALS Common Stock were
offered and sold in reliance upon exemptions from registration under the
Securities Act and, accordingly, such shares are "restricted shares" for
purposes of Rule 144 adopted under the Securities Act ("Restricted Shares"). The
substantial majority of the ALS Restricted Shares are currently either freely
tradeable without restriction or limitation
23
<PAGE> 37
under the Securities Act or may be sold in the public market pursuant to Rule
144 promulgated under the Securities Act, subject to the volume and resale
restrictions of such rule.
Holders of the ALS Debentures have the right to convert such ALS Debentures
into ALS Common Stock at a conversion price of $20.25 per share at any time
after a registration statement filed by ALS with respect thereto is declared
effective by the Commission. ALS is obligated to file a registration statement
with respect to the ALS Debentures not later than November 14, 1997 and,
accordingly, ALS expects such registration statement to be effective in late
1997 or early 1998. If holders elect to convert all of the outstanding ALS
Debentures into shares of ALS Common Stock, ALS would issue an additional
2,469,136 shares of ALS Common Stock.
Pursuant to the Merger Agreement, holders of the Sterling Debentures will
have the right following the Merger to convert such debentures into shares of
ALS Common Stock at a conversion price of approximately $20.38 per share.
Pursuant to the Merger Agreement, ALS is obligated to file with the Commission a
registration statement with respect to the Sterling Debentures promptly
following the Effective Time. Upon effectiveness of such registration statement,
holders of the Sterling Debentures will have the right to convert such
debentures into shares of ALS Common Stock. If holders elect to convert all of
the outstanding Sterling Debentures into shares of ALS Common Stock, ALS would
issue an additional 1,717,217 shares of ALS Common Stock.
THE MEETINGS, VOTING AND PROXIES
SPECIAL MEETING OF STOCKHOLDERS OF ALS
Date, Time and Place of Special Meeting. The ALS Special Meeting of
Stockholders will be held at the O'Hare Hilton Hotel, O'Hare International
Airport, Chicago, Illinois 60666 at 2:00 p.m., local time, on Thursday, October
23, 1997.
Purpose of the ALS Special Meeting. The purpose of the ALS Special Meeting
is to consider and vote upon (i) the approval of the Merger pursuant to the ALS
Merger Proposal, pursuant to which, among other things: (a) Merger Sub will be
merged with and into Sterling, and Sterling will become a wholly owned
subsidiary of ALS; (b) each share of Sterling Common Stock will be converted
into the right to receive 1.1 shares of ALS Common Stock; (c) the Sterling
Options will be converted into the right to receive the Merger Options; and (d)
ALS will assume the Sterling Debentures which will thereupon become convertible
into ALS Common Stock; and (ii) approval of the ALS Bylaw Proposal.
ALS Record Date and Outstanding Shares. Stockholders of record at the
close of business on the ALS Record Date are entitled to notice of, and to vote
at, the ALS Special Meeting, or at any adjournment or postponement thereof. As
of the ALS Record Date, there were approximately 154 holders of ALS Common
Stock, and 13,001,546 shares of ALS Common Stock issued and outstanding.
Information with respect to the security ownership of certain beneficial owners
and management of ALS is incorporated herein by reference to ALS's December 31,
1996 Annual Report on Form 10-K, and, except as set forth therein, there were no
other persons known to the management of ALS to be the beneficial owners of more
than 5% of the outstanding ALS Common Stock.
Voting of Proxies. All properly executed proxies that are not revoked will
be voted at the ALS Special Meeting in accordance with the instructions
contained therein. Proxies returned and containing no instructions regarding the
ALS Proposals will be voted "FOR" the ALS Proposals in accordance with the
recommendation of the ALS Board of Directors. An ALS stockholder who has
executed and returned a proxy may revoke it at any time before it is voted at
the ALS Special Meeting by executing and returning a proxy bearing a later date,
by filing written notice of such revocation with the Secretary of ALS stating
that the proxy is revoked or by attending the ALS Special Meeting and voting in
person.
Vote Required. The ALS Board of Directors is soliciting the affirmative
vote of the holders of the ALS Common Stock on each of the ALS Proposals. The
presence, either in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of ALS Common Stock is necessary to
constitute a quorum at the ALS Special Meeting. Abstentions will be counted for
purposes of determining whether a
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quorum is present at the ALS Special Meeting. Approval of the ALS Merger
Proposal requires the affirmative vote of a majority of the votes cast in person
or by proxy on the ALS Merger Proposal, provided that a quorum is present.
Approval of the ALS Bylaw Proposal requires the affirmative vote of a majority
of the outstanding shares of ALS Common Stock present and entitled to vote on
the ALS Bylaw Proposal, provided that a quorum is present. With respect to the
ALS Merger Proposal, abstentions will have no effect, but with respect to the
ALS Bylaw Proposal, abstentions will have the effect of a negative vote.
Under the DGCL, holders of the ALS Common Stock are not entitled to
dissenters' or appraisal rights in connection with the Merger. See "THE
MERGER -- Dissenters' Rights."
As of the ALS Record Date, certain stockholders of ALS, including most of
the ALS directors, holding an aggregate of 3,349,297 shares of ALS Common Stock,
representing approximately 26% of the outstanding shares of ALS Common Stock,
have agreed to vote in favor of the ALS Proposals and have granted Sterling
irrevocable proxies to vote their shares in favor of the ALS Proposals and
against any "Third Party Transaction" (as defined herein). See "THE
MERGER -- Conduct of Sterling's and ALS's Business Prior to the Merger; No
Solicitation."
Expenses; Solicitation of Proxies. In addition to solicitation by use of
the mails, proxies may be solicited by directors, officers and employees of ALS
in person or by telephone or other means of communication. Such directors,
officers and employees will not be additionally compensated, but may be
reimbursed for out-of-pocket expenses incurred in connection with such
solicitation. Arrangements also will be made with custodians, nominees and
fiduciaries for the forwarding of proxy solicitation materials to beneficial
owners of shares held of record by such custodians, nominees and fiduciaries,
and ALS will reimburse such custodians, nominees and fiduciaries for reasonable
expenses incurred in connection therewith.
SPECIAL MEETING OF STOCKHOLDERS OF STERLING
Date, Time and Place of Sterling Special Meeting. The Sterling Special
Meeting will be held at the O'Hare Hilton Hotel, O'Hare International Airport,
Chicago, Illinois 60666 at 1:00 p.m., local time, on Thursday, October 23, 1997.
Purpose of the Sterling Special Meeting. The purpose of the Sterling
Special Meeting is to consider and vote upon the approval and adoption of the
Merger Agreement.
Sterling Record Date and Outstanding Shares. Stockholders of record at the
close of business on the Sterling Record Date are entitled to notice of, and to
vote at, the Sterling Special Meeting, or at any adjournment or postponement
thereof. On the Sterling Record Date, there were approximately 85 holders of
record of Sterling Common Stock, with 5,045,236 shares of Sterling Common Stock
issued and outstanding. Except as set forth in "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF STERLING" appearing elsewhere herein, there
were no other persons known to the management of Sterling to be the beneficial
owners of more than 5% of the outstanding Sterling Common Stock.
Voting of Proxies. All properly executed proxies that are not revoked will
be voted at the Sterling Special Meeting in accordance with the instructions
contained therein. Proxies returned and containing no instructions regarding the
Sterling Proposal will be voted "FOR" the Sterling Proposal in accordance with
the recommendation of the Sterling Board of Directors. A Sterling stockholder
who has executed and returned a proxy may revoke it at any time before it is
voted at the Sterling Special Meeting by executing and returning a proxy bearing
a later date, by filing written notice of such revocation with the Secretary of
Sterling stating that the proxy is revoked or by attending the Sterling Special
Meeting, revoking the proxy and voting in person.
Vote Required. Under the KGCC, approval and adoption of the Sterling
Proposal requires the affirmative vote of the holders of a majority of the
outstanding shares of Sterling Common Stock entitled to vote on the Sterling
Proposal. The presence, either in person or by properly executed proxy, of the
holders of a majority of the outstanding shares of Sterling Common Stock is
necessary to constitute a quorum at the Sterling Special Meeting. Because the
Sterling Proposal must be approved by a majority of the outstanding shares of
Sterling Common Stock, abstentions will have the effect of a negative vote.
Under the KGCC, holders of the Sterling Common Stock are not entitled to
dissenters' or appraisal rights in connection with the Merger.
As of the Sterling Record Date, certain stockholders of Sterling holding an
aggregate of 2,297,858 shares of Sterling Common Stock, representing
approximately 46% of the outstanding shares of Sterling Common
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Stock, have agreed to vote in favor of the Sterling Proposal and have granted
ALS proxies to vote their shares in favor of the Sterling Proposal and against
any Third Party Transaction.
Expenses; Solicitation of Proxies. In addition to solicitation by use of
the mails, proxies may be solicited by directors, officers and employees of
Sterling in person or by telephone or other means of communication. Such
directors, officers and employees will not be additionally compensated, but may
be reimbursed for out-of-pocket expenses incurred in connection with such
solicitation. Arrangements also will be made with custodians, nominees and
fiduciaries for the forwarding of proxy solicitation materials to beneficial
owners of shares held of record by such custodians, nominees and fiduciaries,
and Sterling will reimburse such custodians, nominees and fiduciaries for
reasonable expenses incurred in connection therewith.
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THE MERGER
Pursuant to the Merger Agreement, Sterling will become a wholly owned
subsidiary of ALS. At the Effective Time, as a result of the Merger, each
outstanding share of Sterling Common Stock will be automatically converted into
the right to receive 1.1 shares of ALS Common Stock for each share of Sterling
Common Stock outstanding immediately prior to the Merger (other than shares
owned by ALS or any of its subsidiaries, held in the treasury of Sterling or
owned by any subsidiary of Sterling). Fractional shares of ALS Common Stock will
not be issued in connection with the Merger, and Sterling stockholders otherwise
entitled to a fractional share will be paid the net proceeds of such fractional
share in cash, in the manner described under "TERMS OF THE MERGER AGREEMENT AND
RELATED TRANSACTIONS -- Manner and Basis for Converting Shares and Options."
BACKGROUND OF THE MERGER; MATERIAL CONTACTS
The respective business strategies of both ALS and Sterling are premised on
the belief that significant growth opportunities exist to provide personal and
health care services to the rapidly growing frail elderly population. In
implementing its growth strategy, ALS has emphasized growth through the
development and construction of new assisted living residences as well as
through strategic acquisitions of assisted living operations. In keeping with
its acquisition strategy, in January 1996, ALS acquired Heartland Retirement
Services, Inc., which operated 20 WovenHearts residences in the upper Midwest,
and, in May 1996, ALS acquired New Crossings International Corporation, which
operated 15 Crossings residences in the western United States.
William F. Lasky, ALS's Chief Executive Officer and President, and Timothy
J. Buchanan, Sterling's Chairman of the Board and Chief Executive Officer,
initially became acquainted in 1995 through their involvement in assisted living
trade association activities. As a result of their relationship, each of ALS and
Sterling acquired a general understanding of the business goals, operating
philosophy and culture of the other company. As the ALS Board of Directors and
management regularly consider opportunities for strategic acquisitions, in early
1997, ALS senior management commenced consideration of the advantages and
disadvantages of a strategic business combination with Sterling, believing that
the two companies could benefit from a combination of operations and management
talents given their similar and complementary operating philosophies and
culture. Mr. Lasky and other ALS representatives met with Mr. Buchanan and
Steven L. Vick, Sterling's President, to discuss ALS's interest in discussing a
strategic transaction or relationship between the two companies. These
discussions were preliminary and general in nature and took place on several
occasions from February 1997 to April 1997. During these preliminary
discussions, Mr. Lasky provided the ALS Board of Directors background
information regarding Sterling and its management team.
On May 28, 1997, Mr. Lasky advised Mr. Buchanan that, based on ALS's
preliminary analysis of Sterling and the benefits of a combination, ALS was
interested in a strategic business combination between the two companies. Mr.
Buchanan requested that Mr. Lasky prepare a written summary regarding these
matters to facilitate review and evaluation by Sterling's Board of Directors and
management.
On June 4, 1997, Mr. Lasky called an informational meeting of the ALS Board
of Directors to report on various preliminary discussions with Messrs. Buchanan
and Vick and to discuss the possibility of a strategic business combination
between ALS and Sterling. Mr. Lasky and Thomas E. Komula, ALS's Senior Vice
President and Chief Financial Officer, provided the ALS Board with background
information regarding Sterling as well as preliminary thoughts regarding the
terms of a proposal to Sterling with respect to a strategic business
combination. The ALS Board of Directors authorized Mr. Lasky to continue
discussions with Sterling regarding a possible business combination.
On June 7, 1997, Mr. Lasky sent a letter to Mr. Buchanan proposing that ALS
and Sterling enter into a strategic business combination in a manner
substantially similar to the terms reflected in the Merger Agreement, with
certain exceptions, principally that this proposal (the "June Proposal")
contemplated an exchange ratio of one share of ALS Common Stock in exchange for
each share of Sterling Common Stock and contemplated a nine person board of
directors of the combined company, with two representatives to be designated by
the Sterling Board of Directors.
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On June 17, 1997, the Sterling Board of Directors conducted a telephonic
meeting to discuss various matters. Messrs. Buchanan and Vick updated the
Sterling Board on their preliminary discussions with Mr. Lasky, William G.
Petty, Jr., ALS's Chairman of the Board, Thomas E. Komula, ALS's Senior Vice
President and Chief Financial Officer, and Ronald G. Kenny, a director of ALS,
and of Sterling's receipt of the June Proposal by Mr. Buchanan on June 10, 1997.
The Sterling Board discussed the June Proposal but took no action with respect
thereto.
On June 25, 1997, the Sterling Board of Directors conducted a telephonic
meeting during which Mr. Buchanan updated the Sterling Board on the progress of
the discussions with ALS and the Sterling Board discussed the merits of Mr.
Buchanan meeting with Mr. Lasky in Milwaukee to further discuss the June
Proposal.
On June 26 and 27, 1997, Messrs. Buchanan and Lasky met in Milwaukee to
discuss the June Proposal. Although no agreement was reached on the terms of a
business combination, on the basis of these discussions a decision was made to
prepare a confidentiality agreement, and, subject to Board approval thereof, to
execute such confidentiality agreement and then to commence legal, financial and
operational due diligence and to commence preparation and negotiation of a
definitive merger agreement.
On July 3, 1997, the Sterling Board of Directors conducted a telephonic
meeting to discuss the merits of moving forward with the June Proposal by
signing a confidentiality agreement. The Sterling Board discussed various
concerns regarding a business combination with ALS, including the desire for a
higher exchange ratio of ALS Common Stock for Sterling Common Stock, having
three directors on the Board of Directors of the combined company designated by
the Sterling Board of Directors instead of two, and having more influence with
regard to corporate governance issues. The Sterling Board approved entering into
a confidentiality agreement with ALS.
On July 3, 1997, ALS and Sterling executed a confidentiality agreement
pursuant to which the parties agreed to exchange certain confidential
information and to refrain from efforts to acquire ownership in or control of
the other without the permission of the other's Board of Directors. Thereafter,
ALS and Sterling, as well as their respective legal counsel, began to assemble
and exchange requested legal and financial information.
On July 3, 1997, concurrently with the execution of the confidentiality
agreement, Messrs. Buchanan and Vick called Mr. Lasky to advise him that the
Sterling Board of Directors had authorized the execution and delivery of the
confidentiality agreement but that the consensus of the Board was that a
definitive agreement would require a higher exchange ratio and greater
representation on the Board of the combined company.
On July 8, 1997, Messrs. Petty and Lasky met in Wichita with Messrs.
Buchanan and Vick and Mark W. Ohlendorf, Sterling's Chief Financial Officer, to
continue due diligence discussions and negotiations regarding the June Proposal.
Thereafter, Messrs. Petty and Lasky met with D. Ray Cook, M.D., a member of
Sterling's Board of Directors.
On July 9, 1997, Messrs. Lasky and Petty contacted representatives of
McDonald for the purposes of retaining McDonald's services as ALS's financial
advisor in connection with a possible business combination with Sterling.
McDonald requested and received detailed operating and financial information
regarding both Sterling and ALS, and was provided with background information
regarding the discussions between the parties as well as the terms of the June
Proposal.
On July 9, 1997, counsel to ALS provided counsel to Sterling a detailed
term sheet outlining ALS's proposal with respect to the business combination,
including key provisions of the merger agreement contemplated by ALS (the "July
Proposal"). The July Proposal was substantially similar to the terms reflected
in the Merger Agreement except that it contemplated an exchange ratio of one for
one and contemplated that the combined company would have a nine person board of
directors of which two members would be designated by the Sterling Board of
Directors. Following preliminary discussion of the July Proposal among counsel,
ALS counsel circulated a draft Merger Agreement on July 11, 1997. Thereafter and
until the Merger Agreement was executed by ALS and Sterling on July 30, 1997,
representatives of ALS and Sterling and their respective legal and financial
advisors were in regular contact negotiating the terms of the Merger Agreement.
At the regularly scheduled meeting of the ALS Board of Directors held on
July 16, 1997, Mr. Lasky and Mr. Komula provided an update of discussions with
Sterling and presented a summary of the key elements of
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the contemplated Merger Agreement, as well as the several issues that were the
subject of further negotiation. In addition, Messrs. Lasky and Komula reviewed
with the ALS Board detailed operating and financial information regarding
Sterling and the proposed Merger. Representatives of McDonald participated in
these discussions. After consideration of these presentations and discussion,
the ALS Board of Directors directed ALS management to continue discussions with
Sterling and ratified the engagement of McDonald as the financial advisor to the
ALS Board of Directors in connection with this transaction.
On July 17, 1997, Mr. Buchanan met in Chicago with Mr. Lasky and G. Faye
Godwin, ALS's Senior Vice President, to continue due diligence discussions and
discussion of certain corporate governance issues affecting the combined company
following the Merger. During these discussions, Mr. Lasky agreed, subject to ALS
Board approval, to increase the number of Sterling director designees on the
Board of Directors of the combined company from two to three members.
Thereafter, Mr. Buchanan met with Mr. Petty, Gene E. Burleson, Robert Haveman
and Jerry L. Tubergen, each of whom are members of the ALS Board of Directors.
On July 22 and 23, 1997, Messrs. Petty, Lasky, Komula and John Peterson,
ALS's Corporate Controller, met in Chicago with Messrs. Buchanan, Vick and
Ohlendorf of Sterling, along with representatives of each parties' respective
financial advisors and legal counsel, to continue due diligence discussions and
negotiations regarding a possible merger. The parties discussed various exchange
ratios and other business issues, including the composition of the board of
directors of the combined company, the respective duties of members of senior
management of the combined company, various conditions to the consummation of
the Merger and the consequences of termination of any resulting merger
agreement. Although ALS and Sterling did not reach agreement as to the exchange
ratio or on certain other material terms, the parties agreed to continue their
negotiations and to conduct further legal and operational due diligence.
On July 28, 1997, the ALS Board of Directors held a special meeting to
review the status of ongoing discussions with Sterling and to meet with ALS's
financial advisors and receive their report with respect to a possible business
combination with Sterling, including an analysis of various exchange ratios. ALS
management presented their reasons for recommending a business combination with
Sterling and discussed the principal advantages and disadvantages of such a
transaction. The ALS Board of Directors received reports on various matters
considered by ALS management in connection with the proposed transaction,
including operational, financial, legal and regulatory due diligence conducted
by ALS management and its advisors, the proposed structure of the proposed
merger, the level and advisability of various fixed exchange ratios (including
the Exchange Ratio), details of the break up fees, cross option agreement and
voting agreements, and the organizational and governance issues contemplated by
the Merger Agreement. ALS's financial advisors presented their financial
analysis and rendered their opinion as to the fairness of a range of exchange
ratios, including the Exchange Ratio, from a financial point of view, to ALS.
ALS management also outlined its position on the several remaining open items
and, following extensive discussions, the ALS Board of Directors authorized
Messrs. Petty and Lasky to resolve these matters through negotiations with
Sterling within prescribed limits. Subject to resolving these open matters with
Sterling within such prescribed limits, the ALS Board of Directors unanimously
approved the Merger, the Merger Agreement and the transactions contemplated
thereby.
Following the July 28, 1997 ALS Board meeting, representatives of ALS and
Sterling as well as their advisors continued to negotiate the terms of the
Merger Agreement. As a result of these negotiations, the parties agreed, among
other things, upon the Exchange Ratio of 1.1 shares of ALS Common Stock in
exchange for each share of Sterling Common Stock. On or before July 30, 1997,
Mr. Lasky contacted most of the ALS directors telephonically to report on the
resolution of the several open items.
On July 30, 1997, Schroders was retained by Sterling to render a fairness
opinion to Sterling in connection with the Merger Agreement. Sterling requested
that Schroders evaluate the fairness, from a financial point of view, to the
stockholders of Sterling of the consideration to be received from ALS pursuant
to the terms and conditions set forth in the Merger Agreement.
At a special meeting of the Sterling Board of Directors held on July 30,
1997, the Sterling Board of Directors received reports on the key elements of
the proposed transaction, including operational, financial,
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legal and regulatory due diligence conducted by Sterling management and its
advisors, various corporate governance provisions relating to the operation of
the combined company, the level and advisability of the fixed Exchange Ratio,
details of the break up fees, cross option agreement and voting agreements, and
the organizational and governance issues that would result from the Merger.
Representatives of Schroders presented their financial analyses and rendered
their opinion as to the fairness of the Exchange Ratio, from a financial point
of view, to holders of Sterling Common Stock. After extensive discussions, the
Sterling Board of Directors authorized Sterling's officers to continue
negotiations and, assuming that the remaining open items were resolved within
prescribed limits, to execute the Merger Agreement and to take all necessary
actions to consummate the Merger.
Following the Sterling Board meeting, representatives of ALS and Sterling
resolved the remaining open items on terms authorized by their respective Boards
of Directors and, on the evening of July 30, 1997, executed the Merger
Agreement.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Joint Reasons for the Merger. The Boards of Directors and management of
each of ALS and Sterling have independently concluded that the Merger would be
in the best interests of their respective stockholders and would further their
respective strategic objectives. Upon consummation of the Merger, the combined
company will be the nation's largest assisted living company in terms of total
revenue and residences in operation, as well as the nation's largest operator of
residences for individuals with Alzheimer's disease and other memory impairment.
As of August 15, 1997, ALS and Sterling together had 178 residences in operation
in 19 states with an aggregate capacity to accommodate approximately 8,000
residents. At such date, the combined company also would have had 70 residences
under construction and 91 under development (i.e., the site is under control and
development activities short of actual construction have commenced). Following
the Merger, the combined company will continue to implement business strategies
shared generally by ALS and Sterling, including: (i) a growth strategy
emphasizing growth through the development and construction of assisted living
residences and through strategic acquisitions of assisted living operations and
(ii) an operating strategy that seeks to achieve and sustain a strong
competitive position within selected geographic markets by offering multiple
product lines and an evolving continuum of care and services, including
specialty care services, across a range of pricing options, thereby serving both
the upper and moderate income segments of the elderly population.
In approving the Merger Agreement, each Board of Directors considered the
following factors:
- By creating the nation's largest provider of assisted living services
both in terms of total revenue and residences in operation, the combined
company should have improved access to lower cost capital to finance
future planned growth and expansion.
- ALS and Sterling share complementary operating philosophies and culture,
each having significant experience developing, constructing and operating
"purposefully built, health care model" assisted living residences.
- The combined company will have an expanded national focus, combining
ALS's concentration of residences in the West, East and Upper Midwest with
Sterling's concentration of residences in the Middle West and Southeast,
thereby providing stockholders of ALS and Sterling greater geographic and
demographic risk diversification.
- The combined corporate infrastructure of ALS and Sterling should improve
the combined company's ability to manage its significant anticipated
growth and expansion.
- With its nationwide scope of operations and strong market position in its
primary markets, the combined company should have improved opportunities
for strategic alliances with hospital groups and integrated delivery
networks.
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- With a very limited geographic overlap, the combined company should have
significant opportunities to achieve regional economies of scale by
clustering its five product lines within the geographic markets of both
constituent companies.
- The combined base of residences of the two companies should facilitate
the development and expansion of new products and services, such as home
health care, rehabilitation and pharmacy services in appropriate
circumstances.
- The market capitalization and public stock distribution of the combined
company will be larger than either company's current capitalization, which
is expected to provide stockholders of the combined company with increased
liquidity and to enhance the market visibility of the combined company.
- The Merger is intended to be treated as a "pooling of interests" business
combination for financial reporting purposes and as a tax-free
reorganization under the Code.
ALS's Reasons for the Merger. In addition to the anticipated joint
benefits described above, the Board of Directors of ALS believes that the Merger
is a significant strategic opportunity for ALS and believes that the following
are additional reasons for stockholders of ALS to vote FOR approval of the ALS
Proposals:
- The addition of Sterling's management team, with its strong operating and
management know-how and market awareness in its geographic markets, will
add significant depth and expertise to ALS's management team.
- Sterling's one-story, 33 to 50 unit residence prototype is a flexible,
middle-income model that will compliment ALS's existing product line of
four residence models.
- As Sterling operates a cottage for Alzheimer residents adjacent to
certain of its existing residences, the Merger should allow ALS to enhance
its position as a provider of Alzheimer care to the assisted living
marketplace.
- Sterling's strong presence in the several Middle West markets not
currently served by ALS (Kansas, Oklahoma, Texas and Ohio) will
substantially expand ALS's geographic markets.
- Sterling's construction subsidiary will enhance ALS's capacity for
construction and development.
In approving the Merger Agreement and the transactions contemplated
thereby, and in recommending that ALS's stockholders approve the Merger, the ALS
Board of Directors consulted with ALS management, as well as financial and legal
advisors, and also considered, among other things: (i) ALS's and Sterling's
business, managerial expertise, business strategy, prospects and competitive
position in the assisted living industry; (ii) historical, current and projected
financial condition and results of operations of ALS (without giving effect to
the Merger) and of the combined company (after giving effect to the Merger);
(iii) the proposed structure of the Merger and provisions relating to corporate
governance of the combined company; (iv) the Exchange Ratio and other terms of
the Merger Agreement; (v) the financial presentations and the opinion of
McDonald, as ALS's financial advisor, described below under "-- Opinion of ALS's
Financial Advisor;" and (vi) general economic and stock market conditions.
The ALS Board of Directors considered several potentially negative factors
in its deliberations concerning the Merger, including risks associated with
integrating the operations of two rapidly growing companies and the potential
for post-Merger dilution of earnings per share for the combined company.
Due to the wide variety of factors considered in connection with the
evaluation of the Merger, the ALS Board of Directors did not find it practicable
to and did not quantify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its determination. In addition,
individual members of the ALS Board of Directors may have given different
weights to different factors.
ALS Board Recommendation. The Board of Directors of ALS has unanimously
approved the Merger Agreement and the transactions contemplated thereby and has
determined that the Merger is in the best interests of ALS and its stockholders.
After careful consideration, the Board of Directors of ALS recommends
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that the stockholders of ALS vote FOR the Merger Agreement and the Bylaw
Amendments and the transactions contemplated thereby.
Sterling's Reasons for the Merger. In addition to the anticipated joint
benefits described above, the Board of Directors of Sterling believes that the
following are additional reasons for stockholders of Sterling to vote FOR the
Sterling Proposal:
- The relative strengths of each company, including an analysis of both the
diversity and concentration in geographic location of each company's
facilities, the types of services provided and the expansion strategies of
each company.
- The general impact of the Merger on the various constituencies served by
Sterling.
- The effect on stockholder value of Sterling continuing as an independent
company compared to the effect of its combining with ALS.
- The consideration of 1.1 shares of ALS Common Stock for each share of
Sterling Common Sock in relationship to the historical trading ranges for
Sterling Common Stock and ALS Common Stock, and that, upon consummation of
the Merger, the Sterling stockholders would own approximately 32% of
(calculated on a fully diluted basis) of ALS Common Stock.
- The business combination will result in the Sterling stockholders owning
a significant percentage of the outstanding ALS Common Stock upon the
Effective Time of the Merger, which should provide Sterling's stockholders
with a meaningful voice in the election of directors and other matters
brought to a vote of the stockholders of the combined company.
- As the Sterling Common Stock has recently traded at price/earnings
multiples below the industry averages, there is the possibility that
Sterling stockholders can benefit from a price/earnings multiple expansion
in the ALS Common Stock should the strategic direction and financial
results of the combined company result in the ALS Common Stock trading at
price/earnings multiples exceeding the mean of the industry peer group.
- In light of the representation on the ALS Board of Directors to be
afforded to three members of the Sterling Board of Directors, the
retention of key members of Sterling senior management in key management
roles for the combined company and the anticipated participation of most
other members of Sterling management in the management of the combined
company, Sterling stockholders will continue to benefit from the
management talents of its current management team.
In approving the Merger Agreement and the transactions contemplated
thereby, and in recommending that Sterling's stockholders approve the Merger,
the Sterling Board of Directors consulted with Sterling management, as well as
financial and legal advisors, and also considered, among other things: (i)
Sterling's and ALS's business, managerial expertise, business strategy,
prospects and competitive position in the healthcare industry; (ii) historical,
current and projected financial condition and results of operations of Sterling
(without giving effect to the Merger), of ALS (without giving effect to the
Merger) and of the combined company (after giving effect to the Merger); (iii)
the proposed structure of the Merger and provisions relating to corporate
governance of the combined company; (iv) the Exchange Ratio and other terms of
the Merger Agreement; (v) the financial presentations and review of Schroders,
as Sterling's financial advisor, described below under "-- Opinion of Sterling's
Financial Advisor;" and (vi) general economic and stock market conditions.
The Sterling Board of Directors considered several potentially negative
factors in its deliberations concerning the Merger, including: (i) the
irreversible nature of the decision and the consequent loss of independence;
(ii) the possible change in certain existing Sterling corporate policies and
strategies following the Merger; and (iii) the potential for post-Merger
dilution of earnings per share for the combined company. In the view of the
Board of Directors of Sterling, these considerations did not outweigh,
individually or collectively, the advantages of the Merger to Sterling.
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Due to the wide variety of factors considered in connection with the
evaluation of the Merger, the Sterling Board of Directors did not find it
practicable to and did not quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination. In
addition, individual members of the Sterling Board of Directors may have given
different weights to different factors.
Sterling Board Recommendation. The Board of Directors of Sterling has
unanimously approved the Merger Agreement and the transactions contemplated
thereby and determined that the Merger is in the best interest of Sterling and
its stockholders. After careful consideration, the Board of Directors of
Sterling recommends that the stockholders of Sterling vote FOR the Merger
Agreement and the transactions contemplated thereby.
OPINIONS OF FINANCIAL ADVISORS
Opinion of ALS's Financial Advisor
McDonald was retained by ALS to act as its financial advisor in connection
with the Merger. In connection with such engagement, ALS requested that McDonald
evaluate the fairness, from a financial point of view, to ALS of the
consideration to be paid by ALS in the Merger. On July 28, 1997, at a special
meeting of the ALS Board of Directors held to evaluate the proposed Merger,
McDonald rendered to the ALS Board of Directors an oral opinion (subsequently
confirmed by delivery of a written opinion dated as of the date of this Joint
Proxy Statement/Prospectus) to the effect that, as of such date and based upon
and subject to certain matters stated in such opinion, the Exchange Ratio was
fair, from a financial point of view, to ALS.
In arriving at its opinion and in preparing its report, McDonald reviewed
the Merger Agreement and held discussions with certain senior officers,
directors and other representatives and advisors to ALS and certain senior
officers and other representatives and advisors of Sterling concerning the
businesses, operations and prospects of ALS and Sterling. McDonald examined
certain publicly available business and financial information relating to ALS
and Sterling as well as certain financial forecasts and other information and
data for ALS and Sterling which were provided to or otherwise discussed with
McDonald by the respective management of ALS and Sterling, including information
relating to certain strategic implications and operational benefits anticipated
from the Merger. McDonald reviewed the financial terms of the Merger as set
forth in the Merger Agreement in relation to, among other things: current and
historical market prices and trading volumes of ALS Common Stock and Sterling
Common Stock; the historical and projected earnings and other operating data of
ALS and Sterling; and the capitalization and financial condition of ALS and
Sterling. McDonald considered, to the extent publicly available, the financial
terms of similar transactions recently effected that McDonald considered
relevant in evaluating the Merger and analyzed certain financial, stock market
and other publicly available information relating to the businesses of the other
companies whose operations McDonald considered relevant in evaluation of ALS and
Sterling. McDonald also evaluated the potential pro forma financial impact of
the Merger on ALS. In addition to the foregoing, McDonald conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as it deemed appropriate in arriving at its opinion. McDonald
noted that its opinion was necessarily based upon information available, and
financial, stock market and other conditions and circumstances existing and
disclosed, to it as of the date of its opinion.
In rendering its opinion, McDonald assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with McDonald. With respect to financial forecasts and other
information and data provided to or otherwise reviewed by or discussed with
McDonald, the managements of ALS and Sterling advised McDonald that such
forecasts and other data were prepared on bases reflecting reasonable estimates
and judgments as to the future financial performance of ALS and Sterling and the
strategic implications and operational benefits anticipated from the Merger.
McDonald assumed, with the consent of the ALS Board of Directors, that the
Merger will be treated as a "pooling of interests" in accordance with generally
accepted accounting principles and as a tax-free reorganization for federal
income tax purposes. See "-- Accounting Treatment" and "-- Certain Federal Tax
Considerations".
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McDonald's opinion related to the values of ALS and Sterling. McDonald did
not express any opinion as to what the value of the ALS Common Stock actually
will be when issued to Sterling stockholders pursuant to the Merger or the price
at which the ALS Common Stock will trade subsequent to the Merger. In addition,
McDonald did not make, and was not provided with, an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of ALS or
Sterling nor did McDonald make any physical inspection of the property or assets
of ALS or Sterling. With respect to any outstanding litigation and other
proceedings involving Sterling, McDonald assumed and relied, with the consent of
the ALS Board of Directors, upon the judgment of the management of ALS and its
advisors that the outcome of such litigation and proceedings is not expected,
individually or in the aggregate, to have a material adverse effect on the
financial condition or results of operations of Sterling. McDonald was not asked
to consider, and its opinion did not address, the relative merits of the Merger
as compared to any alternative business strategies that might exist for ALS or
the effect of any other transaction in which ALS might engage. Although McDonald
evaluated the Exchange Ratio from a financial point of view, it was not asked to
and did not recommend the specific consideration payable in the Merger. No other
limitations were imposed by ALS on McDonald with respect to the investigations
made or procedures followed by McDonald in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF MCDONALD DATED AS OF THE DATE OF
THIS JOINT PROXY STATEMENT/PROSPECTUS WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO
AS APPENDIX B AND IS INCORPORATED HEREIN BY REFERENCE. HOLDERS OF ALS COMMON
STOCK ARE URGED TO READ SUCH OPINION CAREFULLY IN ITS ENTIRETY. MCDONALD'S
OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL
POINT OF VIEW, AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED
TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE AT THE ALS SPECIAL MEETING. THE SUMMARY OF THE
OPINION OF MCDONALD SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRELY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion to the ALS Board of Directors, McDonald performed
a variety of financial and comparative analyses, including those described
below. The summary of such analyses does not purport to be a complete
description of the analyses underlying McDonald's opinion. The preparation of a
fairness opinion is a complex analytic process involving various determinations
as to the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. McDonald
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and its opinion. In its analyses, McDonald made
numerous assumptions with respect to ALS, Sterling, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of ALS and Sterling. The estimates
contained in such analyses and the valuation ranges resulting from any
particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. McDonald's opinion and financial analyses were only one of many
factors considered by the ALS Board of Directors in its evaluation of the Merger
and should not be viewed as determinative of the view of the ALS Board of
Directors or management with respect to the Exchange Ratio or the proposed
Merger.
Selected Comparable Company Analysis. Using publicly available
information, McDonald analyzed, among other things, the market values and
trading multiples of ALS, Sterling and eleven selected publicly traded companies
in the health care industry, consisting of American Retirement Corporation,
Assisted Living Concepts, Inc., ARV Assisted Living, Inc., Atria Communities,
Inc., Brookdale Living Communities, Inc., CareMatrix Corporation, Emeritus
Corporation, Greenbriar Corporation, Karrington Health, Inc., Kapson Senior
Quarters Corporation and Sunrise Assisted Living, Inc. (the "Selected
Companies"). McDonald compared market values as multiples of, among other
things, the latest 12 months net income and estimated calendar 1997 and 1998 net
income, and adjusted market values (equity market value, plus total debt and the
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<PAGE> 48
book value of preferred stock, and capitalized operating leases less cash and
cash equivalents) as multiples of, among other things, the latest 12 months
earnings before interest, taxes, depreciation and amortization, and rents
("EBITDAR"). McDonald also compared the debt to capitalization ratios, profit
margins, historical revenue growth and projected earnings per share ("EPS")
growth of ALS, Sterling and the Selected Companies. Net income projections for
ALS, Sterling and the Selected Companies were based on estimates of selected
investment banking firms. All multiples were based on closing stock prices as of
July 29, 1997. The ranges of multiples of enterprise value to EBITDAR for 1997
and 1998, the market capitalization to book value, enterprise value per unit and
1998 EPS of the Selected Companies were as follows: (i) enterprise value to 1997
EBITDAR: 11.4x to 35.5x (with an average of 17.8x and a median of 15.1x); (ii)
enterprise value to 1998 EBITDAR: 4.8x to 10.7x (with an average of 7.8x, a
median of 7.9x and implied Sterling value per share of $31.12); (iii) market
capitalization to book value of: 2.1x to 7.8x (with an average of 4.3x, a median
of 3.9x and implied Sterling value per share of $34.14); (iv) enterprise value
per unit: $57,000 to $340,000 (with a median of $90,000 and an implied Sterling
value per share of $31.81); and (v) 1998 EPS: 16.4x to 35.9x (with a median of
25.0x and implied Sterling value per share of $28.53). Applying multiples of the
Selected Companies to corresponding financial data for Sterling resulted in an
equity reference range for Sterling of approximately $28.53 to $34.14 per share,
as compared to the per share value implied by the Exchange Ratio of
approximately $23.79 based on a closing sales price per share of ALS Common
Stock on July 30, 1997.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, McDonald analyzed the purchase price and implied
transaction multiples paid or proposed to be paid in 14 selected transactions in
the health care industry (target/acquiror): The Gables at Farmington/Brookdale
Living Communities, Lake Howard Heights/Grand Court Lifestyles, Inc., Living
Centers of America, Inc./ GranCare, Inc., Covell Gardens/ARV Assisted Living,
Inc., Northport Health Services/GrandCare, Inc., Parklane West/American
Retirement Corporation, Park Place/Brookdale Living Communities, Retirement Care
Assoc., Inc./Sun Healthcare Group, Inc., Clipper Affiliates/Sun Healthcare
Group, Inc., American ElderServe Corporation/Atria Communities, Inc., Four
Bullock Facilities/Integrated Living Communities, eight assisted living
facilities/Integrated Living Communities, The Lodge of Montgomery/ARV Assisted
Living, Inc., and three assisted living facilities/Sunrise Assisted Living, Inc.
(the "Selected Transactions"). McDonald analyzed the purchase prices and
purchase price per bed in such transactions. The average purchase price was
$126.3 million and the average price per unit was $62,115 as compared to $73,422
per unit implied for Sterling.
No company, transaction or business used in the "Selected Comparable
Company Analysis" or "Selected Merger and Acquisition Transactions Analysis" as
a comparison is identical to ALS, Sterling or the Merger. Accordingly, an
analysis of the results of the foregoing is not entirely mathematical; rather,
it involves complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the Selected Companies, Selected
Transactions or the business segment, company or transaction to which they are
being compared.
Contribution Analysis. McDonald analyzed the respective contributions of
ALS and Sterling to the estimated revenue, EBITDAR, EBITDA, cash flow and net
income of the combined company for, among other things, fiscal year 1998, based
on estimates of selected investment banking firms and without taking into
account potential cost savings and other synergies anticipated by the management
of ALS to result from the Merger. This analysis indicated that, in fiscal year
1998, Sterling would contribute approximately 33.8% of revenue, 35.2% of
EBITDAR, 23.5% of EBITDA, 29.5% of cash flow and 37.5% of net income and ALS
would contribute approximately 66.2% of revenue, 64.8% of EBITDAR, 76.5% of
EBITDA, 70.5% of cash flow and 62.7% of net income, of the combined company. In
addition, this analysis indicated that ALS and Sterling would contribute 66.0%
and 34.0% of book value (including convertible debentures), 72.6% and 27.4% of
enterprise value, and 75.7% and 24.3% of market capitalization, respectively.
Immediately following consummation of the Merger, stockholders of ALS and
Sterling would own approximately 67.92% and 32.08%, respectively, of the
combined company (on a fully-diluted basis).
Exchange Ratio Analysis. McDonald reviewed the exchange ratio of shares of
ALS Common Stock per share of Sterling Common Stock implied by the daily closing
prices of Sterling and ALS Common Stock since August 6, 1996. It was noted that
the average implied exchange ratio within the period from July 24, 1997 to
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July 29, 1997 was 1.227 with a high of 1.259 on July 25, 1997 and a low of 1.185
on July 29, 1997. It was also noted that the average implied exchange ratio
within the period from June 18, 1997 to July 29, 1997, 1997 was 1.291, with a
high of 1.442 on June 25, 1997 and a low of 1.129 on July 15, 1997. It was
further noted that the average implied exchange ratio since August 6, 1996 was
1.249, with a high of 1.753 on March 5, 1997 and a low of 0.797 on August 9,
1996. In addition, McDonald analyzed the stock price premium of Sterling based
on a 1 to 1.1 exchange ratio. It was noted that the premium adjusted exchange
ratio for Sterling was 30.3% on July 30, 1997. The implied value of one share of
Sterling Common Stock was $23.79. It was also noted that for July 30, 1997 the
weighted average premium adjusted for exchange ratio for Sterling was 33.6%
during the latest five days, 38.0% during the latest ten days and 36.5% during
the latest 20 days.
Stock Price and Trading History. McDonald reviewed the daily trading
activity, including price and volume statistics, of Sterling and ALS since
August 6, 1996. With respect to Sterling, it was noted that, since August 8,
1996, the daily closing prices of the Sterling Common Stock ranged from a high
of $18.50 on July 28, 1997 to a low of $7.88 on November 26, 1996. With respect
to ALS, it was noted that, since August 8, 1996, the daily closing prices of the
ALS Common Stock ranged from a high of $24.25 on July 18, 1997, to a low of
$10.63 on December 6, 1996. Additionally, McDonald reviewed selected commentary
of research analysts at different points in the trading histories of Sterling
Common Stock and ALS Common Stock.
Pro Forma Merger Analysis. McDonald analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected EPS of ALS for the fiscal years ended 1997 and 1998,
based on estimates of selected investment banking firms. The results of the pro
forma merger analysis suggested that the Merger would be accretive to ALS EPS in
fiscal years 1998 and 1999, assuming that certain cost savings and synergies
anticipated by the managements of both companies are achieved. The actual
results achieved by the combined company may vary from projected results and the
variations may be material.
Other Factors and Comparative Analyses. In rendering its opinion, McDonald
considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) ALS's and Sterling's
historical and projected financial results; (ii) the history of trading prices
and volume for ALS Common Stock and Sterling Common Stock, including the
historical ratio of the daily closing prices of ALS Common Stock to Sterling
Common Stock for the period August 6, 1996 through July 30, 1997; (iii) selected
published analysts' reports on Sterling, including analysts' estimates as to the
earnings growth potential of Sterling; and (iv) the pro forma ownership of the
combined company.
Pursuant to the terms of McDonald's engagement, ALS has agreed to pay
McDonald for its services in connection with the Merger an aggregate financial
advisory fee of $400,000. ALS also has agreed to reimburse McDonald for travel
and other out-of-pocket expenses incurred in performing its services, including
the fees and expenses of its legal counsel, and to indemnify McDonald and
related persons against certain liabilities, including liabilities under the
federal securities laws, arising out of McDonald's engagement.
McDonald has advised ALS that, in the ordinary course of business, McDonald
and its affiliates may actively trade or hold the securities of ALS and Sterling
for their own account or for the account of customers and, accordingly, may at
any time hold a long or short position in such securities. McDonald has in the
past provided financial advisory and investment banking services to ALS
unrelated to the Merger, for which McDonald has received compensation. In
addition, McDonald and its affiliates may maintain relationships with ALS and
Sterling.
McDonald is a nationally recognized investment banking firm and was
selected by ALS based on McDonald's experience, expertise and familiarity with
both ALS and Sterling. In 1995, McDonald served as placement agent for the
private placement of $20 million of ALS Common Stock. In addition, McDonald
acted as a co-manager in ALS's public offering of six million shares of ALS
Common Stock in August 1996 and acted as co-placement agent in the private
placement of the ALS Debentures in June 1997. In 1995, McDonald acted as
co-manager in Sterling's initial public offering of 1.9 million shares of
Sterling Common Stock. McDonald regularly engages in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placement and valuations for estate, corporate and other
purposes.
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Opinion of Sterling's Financial Advisor
On July 30, 1997, Schroders delivered its oral opinion (the "Schroders
Opinion") to the Board of Directors of Sterling to the effect that, as of the
date of such opinion, the Exchange Ratio was fair, from a financial point of
view, to holders of Sterling Common Stock. Schroders subsequently confirmed its
July 30, 1997 oral opinion by delivery of its written opinion dated July 30,
1997. On the date of this Joint Proxy Statement/Prospectus, Schroders confirmed
the Schroders Opinion.
A COPY OF THE SCHRODERS OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY
SCHRODERS, TOGETHER WITH ITS WRITTEN CONFIRMATION DATED SEPTEMBER 22, 1997, IS
ATTACHED AS APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS. THE SCHRODERS
OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL
POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STERLING
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE STERLING SPECIAL
MEETING. THE SUMMARY OF THE SCHRODERS OPINION SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE SCHRODERS OPINION ATTACHED AS APPENDIX C HERETO. STOCKHOLDERS OF STERLING
SHOULD READ THE SCHRODERS OPINION CAREFULLY AND IN ITS ENTIRETY.
In arriving at the Schroders Opinion, Schroders (i) reviewed certain
publicly available financial statements and other information of Sterling and
ALS; (ii) reviewed certain internal financial statements and other financial and
operating data prepared by the management of Sterling and ALS, respectively;
(iii) analyzed certain financial projections prepared by the management of
Sterling and ALS, respectively; (iv) reviewed and discussed with senior
executives of Sterling and ALS the past and current operations and financial
condition and the prospects of Sterling and ALS, respectively; (v) reviewed and
discussed with senior executives of Sterling and ALS the strategic objectives of
the Merger and the long-term benefits expected to result from the Merger,
including without limitation, certain estimates of the timing of synergies and
certain cost savings for the combined company; (vi) reviewed the reported prices
and trading activity for the Sterling Common Stock and ALS Common Stock and
analyzed the implied historical exchange ratios for Sterling and ALS; (vii)
compared the financial performance of Sterling and the prices and trading
activity of Sterling Common Stock with that of certain other comparable publicly
traded companies and their securities; (viii) compared the financial performance
of ALS and the prices and trading activity of ALS Common Stock with that of
certain other comparable publicly traded companies and their securities; (ix)
reviewed the financial terms, to the extent publicly available, of certain
comparable transactions; (x) analyzed Sterling and ALS's relative contribution
to the combined company; (xi) analyzed the pro forma effects of the Merger;
(xii) reviewed the Merger Agreement and certain related documents; and (xiii)
performed other analyses and considered such other factors as Schroders deemed
appropriate.
In arriving at the Schroders Opinion, Schroders assumed and relied upon,
without independent verification, the accuracy and completeness of the
information reviewed by it for the purpose of the Schroders Opinion. With
respect to the financial projections, including estimates of the long-term
benefits expected to result from the Merger, Schroders assumed that they were
reasonably prepared by management of each respective company on bases reflecting
the best currently available estimates and judgments of the future financial
performance of Sterling and ALS. Furthermore, Schroders did not assume
responsibility for conducting a physical inspection of the properties or
facilities of Sterling or ALS, nor was Schroders furnished with any such
valuations or appraisals. Schroders assumed, with Sterling's consent, that the
Merger will be treated as a tax-free reorganization and will be accounted for as
a "pooling-of-interests" business combination in accordance with GAAP. Schroders
also assumed that the transactions described in the Merger Agreement will be
consummated on the terms set forth therein. The Schroders Opinion does not
address the relative merits of the Merger or the decision of the Sterling Board
of Directors to proceed with the Merger. Schroders expresses no opinion as to
the price or trading range at which the shares of ALS Common Stock will trade
after consummation of the Merger. The Schroders Opinion is necessarily based on
economic, market and other conditions as in effect on, and the information made
available to Schroders as of, its date.
The following is a summary of the material financial analyses presented by
Schroders in arriving at the Opinion and was provided by Schroders for inclusion
herein.
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Stock Trading History. Schroders reviewed the history of the trading
prices for ALS Common Stock from its initial public offering on August 6, 1996
to July 29, 1994 separately and in relation to the market prices of (i) the
Standard & Poor's 500 Index (the "S&P 500") and (ii) an index of assisted living
companies (the "Assisted Living Index") consisting of the following companies:
American Retirement Corporation, Assisted Living Concepts, Inc., Atria
Communities, Inc., Brookdale Living Communities, Inc., CareMatrix Corporation,
Emeritus Corporation, Kapson Senior Quarters Corporation, Karrington Health,
Inc., and Sunrise Assisted Living, Inc. Such review indicated that during such
period, the ALS Common Stock underperformed the S&P 500 through March 5, 1997
and subsequent to such date outperformed the S&P 500. Such review also indicated
that prior to December 9, 1996, the ALS Common Stock performed comparably to the
Assisted Living Index and subsequent to such date outperformed the Assisted
Living Index.
Selected Comparable Public Company Analysis. Schroders compared selected
projected financial and operating data of Sterling to the corresponding data of
a group of publicly traded companies that Schroders deemed to be similar to
Sterling. In determining the appropriate comparable company universe for
Sterling, Schroders considered a variety of factors, including market
capitalization, business focus, revenues, cash flow and resident capacity. These
companies included: Assisted Living Concepts, Inc., Brookdale Living
Communities, Inc., Kapson Senior Quarters Corporation and Karrington Health,
Inc. (collectively the "Sterling Comparable Companies"). Schroders calculated
multiples of Adjusted Enterprise Value (defined as market value plus total debt
plus capitalized rents (i.e., 8 times lease expense) less cash and cash
equivalents) to resident capacity (defined as total operating beds), to the
latest quarter annualized ("LQA") revenues and LQA EBITDAR. Schroders also
calculated multiples of the market value of equity to projected 1998 and
projected 1999 EPS based on information provided by a variety of sources,
including analyst research reports and information published by First Call (an
on-line data services which compiles estimates developed by research analysts).
Finally, Schroders calculated multiples of the market value of equity to book
value per share. The mean and median operating bed values were $77,900 (as
compared to $63,600 for Sterling). The mean and median multiples of LQA revenues
were 5.9x (as compared to 5.0x for Sterling). The mean and median multiples of
LQA EBITDAR were 21.5x and 17.7x, respectively (as compared to 19.5x for
Sterling). The mean and median multiples for projected 1998 EPS were 21.1x and
20.2x, respectively (as compared to 16.4x for Sterling), and the mean and median
multiples for projected 1999 EPS were 11.2x and 9.3x, respectively (as compared
to 8.7x for Sterling). The mean and median multiples of book value per share
were 4.0x and 3.0x, respectively (as compared to 3.8x for Sterling). The range
of implied equity values per Sterling share derived from this analysis ranged
from a high of $27.31 to a low of $14.41, with a mean of $23.62 and a median of
$20.98.
Using publicly available information, Schroders compared selected projected
financial and operating data of ALS to the corresponding data of a group of
publicly traded companies that Schroders deemed to be similar to ALS. In
determining the appropriate comparable company universe for ALS, Schroders
considered a variety of factors, including market capitalization, business
focus, revenues, cash flow and resident capacity. These companies included:
American Retirement Corporation, Atria Communities, Inc., CareMatrix
Corporation, Emeritus Corporation and Sunrise Assisted Living Inc. (collectively
the "ALS Comparable Companies"). Schroders calculated multiples of Adjusted
Enterprise Value to total operating beds, to LQA revenues and LQA EBITDAR.
Schroders also calculated multiples of the market value of equity to projected
1998 and projected 1999 EPS based on information provided by a variety of
sources, including research reports and information published by First Call.
Finally, Schroders calculated multiples of the market value of equity to book
value per share. The mean and median operating bed values were $174,900 and
$121,400, respectively (as compared to $122,000 for ALS). The mean and median
multiples for LQA revenues were 6.6x and 5.7x, respectively (as compared to 6.9x
for ALS). The mean and median multiples for LQA EBITDAR were 33.2x and 18.7x,
respectively (as compared to 30.2x for ALS). The mean and median multiples for
projected 1998 EPS were 32.7x and 33.1x, respectively (as compared to 24.4x for
ALS), and the mean and median multiples for projected 1999 EPS were 20.8x and
20.5x, respectively (as compared to 15.3x for ALS). The mean and median
multiples of book value per share were 4.4x and 4.5x, respectively (as compared
to 4.4x for ALS). The range of implied equity values per ALS share derived from
this analysis ranged from a high of $39.75 to a low of $6.38, with a mean of
$27.88 and a median of $22.06.
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Comparable Transaction Analysis. Schroders considered the terms, to the
extent publicly available, of selected transactions comparable to the Merger
(the "Comparable Transactions") and sought to compare the consideration to be
paid by ALS with the consideration involved in such transactions. The Comparable
Transactions and their pertinent dates were as follows: the acquisition by
Lazard Freres Real Estate LLC of a control stake in ARV Assisted Living, Inc.
(announced in July 1997); The Whitehall Group's acquisition of Integrated Living
Communities, Inc. (completed in July 1997); Sun Healthcare Group's acquisition
of Retirement Care Associates (announced in February 1997); Host Marriott's
acquisition of certain Forum Group retirement assets from Marriott
International, Inc. (completed in June 1997); Greenbriar Corporation's
acquisition of American Care Communities, Inc. (completed in December 1996);
Alternative Living Services, Inc.'s acquisition of New Crossings International,
Inc. (completed in May 1996); Greenbriar's acquisition of Wedgewood Retirement
Inns (completed in April 1996) and Marriott International Inc.'s acquisition of
The Forum Group (completed in March 1996). Schroders reviewed the multiples of
Adjusted Enterprise Value to total operating beds, to LQA revenues and LQA
EBITDAR as well as reviewed the multiple of equity value to book value per share
for each of the Comparable Transactions. Schroders noted that it was unable to
compare Sterling to the multiples of EBITDA, EBIT and net income for the
Comparable Transactions as comparable Sterling multiples were not meaningful.
The mean and median operating bed values were $60,000 and $59,900, respectively
(as compared to $74,400 implied for Sterling). The mean and median multiples of
LQA revenues were 3.5x and 3.4x, respectively (as compared to 5.9x implied for
Sterling). The mean and median multiples of LQA EBITDAR were 25.6x and 18.0x,
respectively (as compared to 22.8x implied for Sterling). The mean and median
multiples of book value per share were 3.9x and 4.4x, respectively (as compared
to 5.2x implied for Sterling). The range of implied equity values per Sterling
share derived from this analysis ranged from a high of $29.78 to a low of $5.23,
with a mean of $13.88 and a median of $16.71.
In addition, Schroders reviewed and analyzed the premiums paid per share
above market value in each of the Comparable Transactions and compared these
premiums paid to the premium to be paid for Sterling implied by an assumed
equity value of $24.20 per share of Sterling Common Stock as of June 30, 1997.
For purposes of the following calculations, market value equals the per share
closing stock price as of the relevant measuring date. Schroders analyzed the
premiums paid in the Comparable Transactions at three different times prior to
public announcement of the acquisitions. As of the date four (4) weeks prior to
announcement of the acquisitions, the premiums paid above market value ranged
from 3.1% to 50.8% with a mean of 30.7% and a median of 34.4% (as compared to
42.9% for Sterling). As of the date one week prior to public announcement of the
acquisitions, the premiums paid above market value ranged from 1.6% to 26.6%
with a mean of 14.4% and a median of 14.7% (as compared to 31.7% for Sterling).
As of the date one day prior to public announcement of the acquisitions, the
premiums paid above market value ranged from 3.1% to 26.9% with a mean of 14.3%
and a median of 13.5% (as compared to 32.6% for Sterling).
Contribution Analysis-Relative Contribution Analysis. Schroders reviewed
and compared the relative contribution of Sterling and ALS to the combined
company based on revenues, EBITDAR, earnings before interest, taxes,
depreciation and amortization ("EBITDA"), earnings before interest and taxes
("EBIT") and net income (fully diluted) for each of the LQA and the projected
calendar years 1997 and 1998, and reviewed and compared certain balance sheet
items (excluding debt) as of the latest reported period, and compared these
ratios to the pro forma ownership of the stockholders of Sterling and ALS of the
combined company. According to this analysis, Sterling would contribute to the
combined company the approximate combined percentages: (i) 34.5%, 33.1% and
33.8% of revenues for the LQA, 1997 and 1998, respectively; (ii) 37.2%, 36.2%
and 35.2% of EBITDAR for the LQA, 1997 and 1998, respectively; (iii) 5.6%, 24.4%
and 33.8% of EBITDA for the LQA, 1997 and 1998, respectively; (iv) 43.0% of 1998
EBIT (all prior periods are not meaningful due to losses incurred by both
companies); (v) 19.3% and 33.8% of fully diluted net income for 1997 and 1998,
respectively (data for LQA period is not meaningful). As of the latest reported
balance sheet, Sterling contributed 19.8% of property, plant and equipment,
26.8% of total assets and 27.2% of stockholders' equity. The mean and median
contribution by Sterling were 29.6% and 33.8%, respectively. These percentages
compare to a pro forma Sterling ownership of the combined company of 29.9% on a
primary basis and 32.3% on a fully diluted basis assuming the conversion of all
Sterling and ALS convertible debentures outstanding.
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Pro Forma Analysis of the Merger. Schroders analyzed certain pro forma
effects of the Merger on the earnings and capitalization of the combined company
as well as on ALS's earnings per share after taking into account the Exchange
Ratio. These analyses were based on ALS's and Sterling's respective estimates
for 1997, 1998 and 1999 net income. The result of the pro forma merger analysis
suggested that the Merger could be accretive to ALS' projected earnings for each
of the years 1997, 1998 and 1999, assuming certain after-tax cost savings and
synergies anticipated by the management of both companies to result from the
Merger were achieved. The actual results achieved by the combined company may
vary from projected results and the variations may be material.
Exchange Ratio Analysis. Schroders reviewed the historical stock prices of
Sterling Common Stock and ALS Common Stock and the implied historical exchange
ratios determined by dividing the price per share of Sterling Common Stock by
the price per share of ALS Common Stock (the "Historical Exchange Ratio") over
various periods of time, including, among others, the period from August 6, 1996
(ALS' IPO) through July 29, 1997. Schroders calculated that during this period
the Historical Exchange Ratio ranged from a high of 1.255 to a low of 0.570,
with a mean of 0.832 and a median of 0.764. In the Merger, the Exchange Ratio is
1.1.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Schroders
did not attribute any particular weight to any analysis or factor considered by
it described above. Subject to the matters set forth in the Schroders Opinion,
the judgments made by Schroders as to its analyses and the factors considered by
it caused Schroders to be of the opinion that the Exchange Ratio is fair, from a
financial point of view, to the holders of Sterling Common Stock. Schroders
believes that its analyses must be considered as a whole and that considering
any portion of such analyses and of the factors considered, without considering
all analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. Any estimates contained in these analyses are
not necessarily indicative of actual values or predictive of future results or
values or trading prices, which may be significantly more or less favorable than
as set forth herein. Estimated values do not purport to be appraisals or to
reflect the prices at which businesses or companies may be sold in the future
and such estimates are inherently subject to uncertainty.
Schroders is an internationally-recognized investment banking firm with
experience in the valuation of businesses and their securities in connection
with mergers, acquisitions, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Sterling selected Schroders to be its financial advisor for the transaction
because of the extensive experience of Schroders' health care investment banking
group in providing corporate finance and advisory services to companies in the
assisted living industry.
On December 2, 1996, Sterling entered into a letter agreement with National
Westminster Bank, Plc, New York Branch ("NatWest") pursuant to which NatWest was
engaged by Sterling to provide exclusive financial advisory services in
connection with its examination of alternatives for maximizing stockholder
value. In consideration of such services, Sterling agreed to pay NatWest a cash
success fee ("Success Fee") in the event of any "Transaction", as defined in the
letter agreement, occurring during the term of NatWest's engagement or, in
certain circumstances, within one year thereafter. The Success Fee is a formula
amount based upon the consideration to be received by Sterling or its
stockholders in connection with any such Transaction. Based on such value, the
Success Fee would have been in excess of $2 million based on the stock price of
ALS Common Stock on August 15, 1997.
In early July 1997, the representatives of NatWest's health care group who
had theretofore provided services to Sterling under the NatWest letter agreement
resigned from NatWest and became associated with Schroders. In order to continue
its working relationship with this group of investment bankers, shortly
thereafter Sterling advised NatWest of its decision to discontinue utilizing the
financial advisory services of NatWest pursuant to the terms of the letter
agreement.
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Pursuant to a letter agreement dated July 30, 1997, Sterling agreed to pay
Schroders a fee of $250,000 (the "Fairness Opinion Fee") upon delivery of the
Schroders Opinion. Sterling has also agreed to reimburse Schroders for its
out-of-pocket expenses incurred by it in connection with its engagement,
including all fees and expenses of its counsel. In addition, Sterling has agreed
to indemnify Schroders against certain expenses and liabilities in connection
with its engagement. The Fairness Opinion Fee was not conditioned upon the
conclusion reached by Schroders as to the fairness of the consideration to be
paid by ALS in the Merger, nor upon the ultimate consummation of the Merger.
As a result of negotiations among Sterling, ALS, NatWest and Schroders
concluded on August 29, 1997, the Success Fee has been reduced to an aggregate
fee of $1,550,000 payable, contingent upon consummation of the Merger,
$1,000,000 to NatWest and $550,000 to Schroders. The Success Fee is in addition
to the Fairness Opinion Fee.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Boards of Directors of ALS and
Sterling with respect to the Merger Agreement and the transactions contemplated
thereby, stockholders should be aware that certain members of management of ALS
and Sterling and the Boards of Directors of ALS and Sterling have interests in
the Merger that are in addition to the interests of stockholders of ALS and
Sterling generally.
Employment Agreements. All members of Sterling senior management have or
are expected to enter into employment agreements with ALS at or prior to the
Effective Time. In addition, members of Sterling management are entitled to
certain severance or "stay plan" benefits in connection with the Merger. See
"MANAGEMENT AND OPERATION OF THE COMBINED COMPANY FOLLOWING THE
MERGER -- Executive Officers Following the Merger; Employment and Other
Agreements."
Sterling Option Plans. As provided in the Merger Agreement, by virtue of
the Merger, all Sterling Options outstanding at the Effective Time will be
assumed by ALS and become exercisable for shares of ALS Common Stock. At the
Effective Time, the Options will vest and become immediately and fully
exercisable. Each Sterling Option assumed by ALS will be exercisable upon the
same terms and conditions as under the applicable Sterling Option Plan (with
appropriate adjustments to the number of shares and the exercise price to
reflect the Exchange Ratio) and applicable option agreements issued thereunder,
and ALS will assume the Sterling Option Plan for such purposes. Pursuant to the
Merger Agreement, at and after the Effective Time: (i) each Sterling Option
assumed by ALS may be exercised solely for ALS Common Stock; (ii) the number of
shares of ALS Common Stock subject to each Sterling Option will be equal to the
product of (A) the number of shares of Sterling Common Stock subject to the
original Sterling Option immediately prior to the Effective Time times (B) the
Exchange Ratio; and (iii) the per share exercise price for such Sterling Option
will be equal to (A) the per share exercise price under such Sterling Option
immediately prior to the Effective Time divided by (B) the Exchange Ratio.
As of September 19, 1997, employees (or former employees) and directors of
Sterling held Sterling Options to purchase an aggregate of 369,514 shares of
Sterling Common Stock at a weighted average price of $13.38 per share (at
exercise prices ranging from $0.10 to $23.75 per share). Approval of the Merger
Agreement by the stockholders of ALS will constitute stockholder approval of the
assumption by ALS of the rights and obligations of Sterling under the Sterling
Option Plan and of, if necessary, the amendment of the Sterling Option Plan to
provide for, among other things, the conversion at the Effective Time of each
outstanding Sterling Option into a Merger Option to purchase shares of ALS. See
"TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS -- Manner and Basis of
Converting Sterling Common Stock and Sterling Options."
Board of Directors of the Combined Company. Pursuant to the Merger
Agreement, ALS has agreed, as of the Effective Time, to cause three members of
the Sterling Board of Directors to be elected to the Board of Directors of ALS.
See "MANAGEMENT AND OPERATIONS OF THE COMBINED COMPANY FOLLOWING THE MERGER."
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Indemnification. Under the terms of the Merger Agreement, ALS will cause
Sterling, as the Surviving Corporation in the Merger, to keep in effect the
provisions in its Articles of Incorporation and Bylaws with respect to
indemnification and director and officer exculpation from liability identical to
such provisions in the Sterling Restated Articles of Incorporation as in effect
at the Effective Time, which provisions shall survive the Merger, shall not be
amended, repealed or modified for a period of six years after the Effective Time
in any manner as to adversely affect the rights thereunder of persons who at any
time prior to the Effective Time were directors or officers of Sterling. In
addition, pursuant to the Merger Agreement, from and after the Effective Time,
ALS shall indemnify, defend and hold harmless to the fullest extent permitted
under Delaware law each person who on or prior to July 30, 1997 was at any time
an officer or director of Sterling (individually, an "Indemnified Party" and
collectively, the "Indemnified Parties"), against all losses, claims, damages,
liabilities, costs or expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement of or otherwise in connection with any
claim, action, suit, proceeding or investigation (a "Claim") arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in their
capacities as such occurring at or prior to the Effective Time. Finally, ALS has
agreed to maintain, subject to certain conditions, for a period of six years
after the Effective Time, the current officers' and directors' liability
insurance maintained by Sterling insuring against claims relating to events
which occurred prior to the Effective Time.
Employee Benefit Plans. Under the terms of the Merger Agreement, the
Sterling employee benefit plans which are in effect at the date of the Merger
Agreement shall remain in effect immediately following the Effective Time for at
least one year. ALS and Sterling have agreed to cooperate in coordinating their
respective employee benefit plans and have agreed that any Sterling employee
benefit plan may be terminated after the Effective Time, to the extent
reasonably comparable benefits are made available to employees of Sterling under
one or more employee benefit plans of ALS or its subsidiaries and are not less
beneficial than the benefits provided to the employees of Sterling under the
employee benefit plans in effect as of the Effective Time. For all purposes of
determining eligibility and any and all entitlements under any ALS plan, service
performed by employees of Sterling prior to the Closing Date shall be credited.
Sterling's Financial Advisors. Sterling has agreed to pay Schroders and
NatWest certain financial advisory fees contingent upon the consummation of the
Merger. See "THE MERGER -- Opinions of Financial Advisors."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a "pooling of interests" business
combination for financial reporting purposes. Consummation of the Merger is
contingent upon ALS and Sterling receiving a letter from each of ALS's
independent auditors, KPMG Peat Marwick LLP, and Sterling's independent
auditors, Ernst & Young LLP, stating that the Merger, if consummated in
accordance with the terms of the Merger Agreement, will qualify as a "pooling of
interests" for financial reporting purposes in accordance with generally
accepted accounting principles. Under the "pooling of interests" accounting
method, (i) the recorded historical cost basis of the assets, liabilities and
stockholders' equity of both ALS and Sterling will be carried forward and
combined to become the reported values of the combined company and (ii)
financial statements of ALS issued subsequent to the consummation of the Merger
will be restated to include the combined financial position, results of
operations and cash flows for ALS and Sterling for all periods presented
therein, using historical balances. See "TERMS OF THE MERGER AGREEMENT AND
RELATED TRANSACTIONS -- Conditions to the Merger."
CERTAIN FEDERAL TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations relevant to the exchange of shares of Sterling Common Stock for
Merger Shares and the assumption by ALS of the Sterling Options and the
conversion thereof into Merger Options. In particular, this discussion addresses
the tax consequences of the Merger generally applicable to holders of Sterling
Common Stock and to the holders of Sterling Options. This discussion does not
deal with all federal income tax considerations that may be relevant to
particular holders of Sterling Common Stock and to holders of each outstanding
option to acquire Sterling
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Common Stock in light of their particular circumstances, such as holders who do
not hold their shares of Sterling Common Stock as capital assets, foreign
persons or persons who acquired their shares in compensatory transactions. Also,
the discussion does not address any tax consequences of the assumption of the
Sterling Debentures by ALS. In addition, the following discussion does not
address the tax consequences of transactions effectuated prior or subsequent to,
or concurrently with, the Merger (whether or not such transactions are
undertaken in connection with the Merger), including, without limitation, any
transaction in which shares of Sterling Common Stock are acquired or any shares
of ALS Common Stock are disposed of. Further, no foreign, state or local tax
considerations are addressed herein. ACCORDINGLY, HOLDERS OF STERLING COMMON
STOCK AND HOLDERS OF EACH OUTSTANDING OPTION TO ACQUIRE STERLING COMMON STOCK
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES
OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE MERGER.
This discussion is consistent with opinions of Rogers & Hardin LLP, counsel
to ALS, and Stroock & Stroock & Lavan LLP, counsel to Sterling, which are
expected to be delivered as conditions precedent to the consummation of the
Merger (collectively, the "Exhibit Opinions"). The Exhibit Opinions, the forms
of which are attached as Exhibit 8.1 and 8.2, respectively, to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part, will be
based on and will be subject to certain qualifications and assumptions as noted
therein. Sterling stockholders should be aware that this discussion and the
Exhibit Opinions will be based upon counsel's interpretation of the Code,
applicable Treasury regulations, judicial authority and administrative rulings
and practices, all as of the date hereof. There can be no assurance that future
legislative, judicial or administrative changes or interpretations will not
adversely affect the accuracy of the statements and conclusions set forth
herein. Any such changes or interpretations could be applied retroactively and
could affect the tax consequences of the Merger.
The Exhibit Opinions are expected to include opinions that the Merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, that each of ALS, Merger Sub, and
Sterling will be a party to the reorganization within the meaning of Section
368(b) of the Code and that no gain or loss will be recognized by a stockholder
of Sterling as a result of the Merger with respect to the Sterling Common Stock
converted solely into ALS Common Stock. Subject to the limitations and
qualifications referred to herein, the Merger's treatment for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code
will generally have the following consequences for federal income tax purposes:
(a) no gain or loss will be recognized by holders of Sterling Common
Stock upon their receipt in the Merger solely of ALS Common Stock in
exchange therefor;
(b) the aggregate basis for tax purposes of the ALS Common Stock
received in the Merger will be the same as the aggregate basis of the
Sterling Common Stock surrendered in exchange therefor; and
(c) the holding period of the ALS Common Stock received in the Merger
will include the period for which the Sterling Common Stock surrendered in
exchange therefor was held, provided that the Sterling Common Stock is held
as a capital asset as of the Effective Date.
Even if the Merger is treated for federal income tax purposes as a tax-free
reorganization, a recipient of ALS Common Stock could recognize gain to the
extent that such common stock was considered by the Internal Revenue Service
("IRS") to be received in exchange for property or services (other than solely
Sterling Common Stock). All or a portion of such gain may be taxable as ordinary
income. Gain could also have to be recognized to the extent that a Sterling
Common Stock holder was treated by the IRS as receiving (directly or indirectly)
consideration in addition to ALS Common Stock in exchange for his or her
Sterling Common Stock. Cash received by a holder of Sterling Common Stock in
lieu of a fractional interest in ALS Common Stock will result in the recognition
of gain or loss for federal income tax purposes, measured by the difference
between the amount of cash received and the portion of the holder's basis
allocable to such fractional share interest. Such gain or loss will be capital
gain or loss if Sterling Common Stock is held by the holder as a capital asset
as of the Effective Time.
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Sterling stockholders should be aware that the Exhibit Opinions will not
bind the IRS and that the IRS is therefore not precluded from successfully
asserting a contrary opinion. In addition, as noted earlier, all of the tax
opinions are subject to certain assumptions, including but not limited to the
accuracy of certain representations made by ALS and Sterling and their
affiliates.
Pursuant to Treasury Regulations promulgated under Section 368 of the Code,
a reorganization under Section 368 requires a continuing interest in the
enterprise on the part of the persons who, directly or indirectly, were the
owners of the enterprise prior to the reorganization. To satisfy the continuity
of interest requirement, Sterling stockholders must not, pursuant to a plan or
intent existing on or prior to the Effective Time, dispose of or transfer so
much of either (i) their Sterling Common Stock in anticipation of the Merger or
(ii) the ALS Common Stock to be received in the Merger (collectively "Planned
Dispositions"), such that Sterling stockholders, as a group, would no longer
have a significant equity interest in the Sterling business being conducted by
ALS after the Merger. Sterling stockholders will generally be regarded as having
a significant equity interest as long as the number of shares of ALS Common
Stock received in the Merger less the number of shares subject to Planned
Dispositions (if any) represents, in the aggregate, a substantial portion of the
entire consideration received by the Sterling stockholders in the Merger. Based
on the terms of the Affiliate Letters (as defined herein) and certain
representations made by members of management of each of ALS and Sterling in the
form of written certificates obtained by counsel in support of their respective
Exhibit Opinions, the continuity of interest requirement should be satisfied.
The conversion incident to the Merger of the Sterling Options granted in
connection with the performance of services into the Merger Options will not
result in the recognition of income, gain or loss for federal income tax
purposes by the holders of the Sterling Options.
A successful IRS challenge to the tax-free reorganization treatment of the
Merger (as a result of a failure of the continuity of interest or otherwise)
would result in the Sterling stockholders recognizing taxable gain or loss with
respect to each share of Sterling Common Stock surrendered equal to the
difference between the stockholder's basis in such share and the fair market
value, as of the Effective Time, of the ALS Common Stock received in exchange
therefor. In such event, a stockholder's basis in the ALS Common Stock so
received would equal its fair market value and the holding period for such stock
would begin the day after the Effective Time.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger cannot be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. Effective as of
September 9, 1997, ALS and Sterling each filed notification and report forms
under the HSR Act with the FTC and the Antitrust Division, and Messrs. Buchanan
and Vick and Dr. Cook and ALS expect to file their respective notification and
report forms under the HSR Act on September 22, 1997. The last of the applicable
waiting periods is expected to expire on October 22, 1997, unless extended by
the FTC or unless early termination of the waiting period is granted by the FTC.
Although the FTC has not taken any action to extend the waiting period, there
can be no assurance that the consummation of the Merger will not be delayed by
virtue of the HSR Act. At any time before or after consummation of the Merger,
the Antitrust Division or the FTC could take such action under the antitrust
laws that it deems necessary or desirable in the public interest, including
seeking to enjoin the consummation of the Merger or seeking divestiture of
substantial assets of ALS or Sterling. At any time before or after the Effective
Time, and notwithstanding the termination of the HSR Act waiting period, any
state could take such action it deems necessary or desirable under applicable
state antitrust laws. Such action could include (i) seeking to enjoin the
consummation of the Merger, (ii) seeking divestiture of Sterling by ALS or (iii)
seeking the divestiture of certain businesses of ALS or Sterling by ALS. Private
parties may also seek to take legal action under the antitrust laws under
certain circumstances.
Under applicable law, Sterling may be required to give notification to
various state and federal governmental entities of the Merger and apply for new
licenses and permits. Sterling believes that it will be
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able to obtain any such licenses upon application therefor in the ordinary
course of business; however, no assurance can be given that unforeseen delays
will not occur in the issuance of such new licenses and permits. ALS and
Sterling are aware of no other governmental or regulatory approvals required for
consummation of the Merger, other than compliance with applicable federal and
state securities laws.
RESALES OF ALS COMMON STOCK; AFFILIATES
The ALS Common Stock to be issued to the Sterling stockholders pursuant to
the Merger Agreement will be freely transferable under the Securities Act,
except for shares issued to any person who may be deemed to be an "affiliate" of
Sterling within the meaning of Rule 145 under the Securities Act. Shares of ALS
Common Stock received by persons who are deemed to be Sterling affiliates may be
resold by such persons only in transactions permitted by the resale provisions
of Rule 145 (permitting limited sales under certain circumstances) or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of Sterling generally include individuals or entities that, directly
or indirectly through one or more intermediaries, control, are controlled by or
are under common control with Sterling and may include certain officers,
directors and principal stockholders of Sterling. All Sterling stockholders who
may be deemed to be affiliates of Sterling will be so advised prior to the
Effective Date of the Merger.
It is a condition to ALS's obligation to consummate the Merger that ALS
receive a letter from each affiliate of Sterling and ALS prior to the Effective
Time (each, an "Affiliate Letter"), pursuant to which Affiliate Letter each such
Sterling affiliate shall undertake not to make any sale of ALS Common Stock
received upon consummation of the Merger in violation of the Securities Act or
the rules and regulations promulgated thereunder. Generally this will require
that such sales be made in accordance with Rule 145(d) under the Securities Act,
which in turn requires that, for specified periods, such sales be made in
compliance with the volume limitations, manner of sale provisions and current
information requirements of Rule 144 under the Securities Act. The volume
limitations should not pose any material limitations on any Sterling stockholder
who owns less than one percent of ALS's outstanding Common Stock after the
Merger unless, pursuant to Rule 144, such stockholder's shares are required to
be aggregated with those of another stockholder.
In addition, the Affiliate Letter will require each affiliate of Sterling
and ALS not to sell, exchange, transfer, pledge, dispose of or otherwise reduce
his risk relative to shares of ALS Common Stock (except under certain limited
circumstances) until such time as financial results covering at least 30 days of
combined operations of ALS and Sterling after the Effective Time of the Merger
have been filed or published by ALS. The certificates evidencing ALS Common
Stock issued to Sterling affiliates pursuant to the Merger Agreement will bear a
legend summarizing the foregoing restrictions unless (i) the sale, transfer or
other disposition has been registered under the Securities Act, (ii) such sale,
transfer or other disposition is made in compliance with Rule 145 promulgated
under the Securities Act, or (iii) in the opinion of counsel reasonably
acceptable to ALS, such sale, transfer or other disposition is otherwise exempt
from registration under the Securities Act.
Persons who are not affiliates of Sterling may sell their ALS Common Stock
without restrictions and without the necessity to deliver this Joint Proxy
Statement/Prospectus.
ABSENCE OF DISSENTERS' RIGHTS
ALS. Under the DGCL, the ALS stockholders are not entitled to dissenters'
or appraisal rights with respect to the Merger.
Sterling. Under the KGCC, the Sterling stockholders are not entitled to
dissenters' or appraisal rights with respect to the Merger.
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MANAGEMENT AND OPERATIONS OF THE COMBINED
COMPANY FOLLOWING THE MERGER
GENERAL
Immediately following consummation of the Merger, it is intended that (i)
Sterling will continue to operate as a separate business unit of ALS with its
principal executive offices located in Wichita, Kansas; and (ii) substantially
all of the employees of Sterling will continue as employees of either Sterling
or ALS. Coordination of the integration of the respective business operations of
Sterling and ALS will be delegated to and the responsibility of an executive
committee of the Board of Directors of the combined company created upon
consummation of the Merger. See "-- Executive Committee" below. The integration
of ALS and Sterling following the consummation of the Merger may result,
however, in the consolidation of certain activities or changes in the operations
of the respective companies following the Effective Time.
BOARD OF DIRECTORS AFTER THE MERGER
Effective at or immediately prior to the Effective Time, the Board of
Directors of ALS will take all action necessary to cause the full Board of
Directors of ALS to consist of the seven individuals currently serving as
members of the ALS Board plus three individuals designated by the Sterling
Board, namely: Timothy J. Buchanan, D. Ray Cook, M.D., and Steven L. Vick.
William G. Petty, Jr. and Richard W. Boehlke will continue to serve as Chairman
and Vice Chairman of the ALS Board of Directors, respectively.
Following the Effective Time and continuing through the 1999 Annual Meeting
of Stockholders of ALS, any vacancy on the ALS Board of Directors arising among
Messrs. Buchanan or Vick or Dr. Cook and any nominee selected to fill a director
position occupied by any of the foregoing individuals in accordance herewith
shall be nominated on behalf of the ALS Board of Directors, filled or selected
by a majority vote of the remaining Sterling Representatives and approved by the
Board of Directors of ALS. Provided that the ALS Bylaw Proposal is approved,
effective at the Effective Time, the ALS Bylaws will be amended to incorporate
the foregoing provision with respect to any vacancy arising with respect to a
board seat held by a Sterling Representative. See "PROPOSED AMENDMENTS TO THE
ALS BYLAWS."
Biographical information with respect to the current and proposed
additional directors of ALS is set forth below.
Richard W. Boehlke (age 49) has served as the Vice Chairman of the Board of
ALS since May 1996. Mr. Boehlke served as President and Chief Executive Officer
of New Crossings International Corporation ("Crossings"), an assisted living
company which he founded in 1984, until Crossings merged with ALS in May 1996.
Timothy J. Buchanan (age 43) has been the Chairman of the Board, Chief
Executive Officer, and a director of Sterling since he co-founded Sterling with
Mr. Vick in 1991. Mr. Buchanan founded BCI Construction, Inc. in 1984 and served
as its President until February 1997. BCI Construction, Inc. was wholly owned by
Mr. Buchanan prior to its acquisition by Sterling in 1994. Mr. Buchanan serves
on the Oklahoma Assisted Living Task Force -- Department of Human Resources,
Aging Division. He is also a member of the National Governing Board of The
Assisted Living Federation of America ("ALFA").
Gene E. Burleson (age 56) has served as a director of the Company since
July 1995. Mr. Burleson served as the Chief Executive Officer and a director of
Vitalink Pharmacy Services, Inc. from February 1997 to August 1997. He has
served as Chairman of the Board of GranCare, Inc. ("GranCare") since January
1994 and as Chief Executive Officer of GranCare from December 1990 to February
1997. Mr. Burleson also currently serves on the Board of Directors of Deckers
Outdoor Corporation, a shoe manufacturer, and Walnut Financial Services, a small
business investment company.
D. Ray Cook, M.D. (age 53) has been a director of Sterling since 1991. For
the past 22 years, Dr. Cook has been a family practice physician in private
practice in Wichita, Kansas. From 1986 to July 1994, he was a director of
Physician Corporation of America, a publicly-held health maintenance
organization. He is a member and elected fellow of the American Academy of
Family Physicians, and is a past President of the
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Kansas Academy. Dr. Cook is also an Assistant Professor in the Department of
Family Practice at the Kansas University College of Medicine. Dr. Cook is a
member of the General Board of the Church of the Nazarene.
Robert Haveman (age 49) has served as a director of ALS since May 1995. Mr.
Haveman has served as Treasurer of EDP Management Corp., a privately held
investment management firm, since April 1997 and as the Secretary/Treasurer of
the Prince Corporation, an automotive interior trim manufacturer, since 1987.
Ronald G. Kenny (age 41) has served as a director of ALS since May 1995. He
has served as Executive Vice President of Huizenga Capital Management, a
privately held investment management company, since 1990. Mr. Kenny also
currently serves on the Board of Directors of GranCare.
William F. Lasky (age 43) has served as Chief Executive Officer of ALS
since April 1996 and as President of ALS since December 1993. He served as the
Managing Partner of Alternative Living Services, a Wisconsin general partnership
(the "ALS Partnership"), from 1981 to December 1993 and as the President of Care
Living Centers, Inc. ("CLC") from 1989 to December 1993. The ALS Partnership and
CLC developed and operated assisted living residences, six of which are
currently managed by the Company. Mr. Lasky is a member of the National
Governing Board and the Chairman of ALFA and is a licensed nursing home
administrator.
William G. Petty, Jr. (age 52) has served as Chairman of the Board of ALS
since December 1993 and served as Chief Executive Officer of ALS from December
1993 to April 1996. He has served as a Managing Director of Beecken, Petty &
Company, the general partner of a private health care investment fund, since
September 1996. Mr. Petty has served as the Vice Chairman of GranCare since July
1995. Mr. Petty also served as Chairman of the Board, Chief Executive Officer
and President of Evergreen Healthcare, Inc. ("Evergreen") from June 1993 to July
1995, the date of its merger with GranCare, and as Chairman of the Board, Chief
Executive Officer and President of National Heritage, Inc., predecessor to
Evergreen, from October 1992 to June 1993.
Jerry L. Tubergen (age 44) has served as a director of ALS since May 1995.
He has served as President and Chief Executive Officer of RDV Corporation, a
private financial management firm, since its formation in 1991. Mr. Tubergen
served as Managing Partner of Deloitte & Touche in Grand Rapids, Michigan from
1987 to 1991. Mr. Tubergen also currently serves on the Board of Directors of
the Orlando Magic, Ltd., an NBA franchise, and Genmar Holdings, Inc., a
manufacturer and marketer of motorized pleasure boats.
Steven L. Vick (age 39) has been the President and a director of Sterling
since he co-founded Sterling with Mr. Buchanan in 1991. Mr. Vick previously
practiced as a certified public accountant specializing in health care
consulting.
EXECUTIVE COMMITTEE
At the Effective Time, the Board of Directors of ALS will take all action
necessary to establish an executive committee (the "Executive Committee") to be
comprised of the Chairman of the Board, Chief Executive Officer and President of
ALS (provided, however, that if none of such persons is a Sterling
Representative, the ALS Board shall replace one of such persons with a Sterling
Representative), and each such person shall serve as a member of the Executive
Committee for so long as he or she holds such office. The Chairman of the Board
shall serve as the Chairman of the Executive Committee, and such committee shall
act only by the affirmative vote of all of the members of the Executive
Committee.
The authority of the Executive Committee, which shall be set forth in an
amendment to the ALS Bylaws pursuant to the ALS Bylaw Amendments, shall include
the authority to: (i) approve development, acquisition and financing
transactions, without separate approval of the Board of Directors of ALS up to
$15 million; (ii) review and formulate recommendations on matters to be
submitted to the Board of Directors of ALS; (iii) approve and manage the
post-Merger consolidation of the operations of Sterling and its subsidiaries and
ALS and its subsidiaries; and (iv) to perform such other functions as shall be
assigned to the Executive Committee by the ALS Board from time to time. See
"PROPOSED AMENDMENTS TO ALS BYLAWS."
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EXECUTIVE OFFICERS AFTER THE MERGER; EMPLOYMENT AND OTHER AGREEMENTS
At the Effective Time, each of the current executive officers of ALS shall
continue as executive officers of ALS, although William F. Lasky shall resign as
President but shall continue to serve as the Chief Executive Officer of ALS. In
addition, (i) Timothy J. Buchanan, Sterling's Chairman of the Board and Chief
Executive Officer, shall be elected President of ALS; (ii) Steven L. Vick,
President of Sterling, will continue to serve as President of Sterling and will
become Chief Operating Officer of ALS upon his relocation to Brookfield,
Wisconsin no later than one year following the Effective Time; and (iii) Mark W.
Ohlendorf, Chief Financial Officer of Sterling, shall be elected a Senior Vice
President of ALS. Biographical information regarding Messrs. Buchanan and Vick
is provided above under the subcaption "-- Board of Directors After the Merger."
Mark W. Ohlendorf (age 37) has been the Chief Financial Officer of Sterling
since April 1997. Mr. Ohlendorf served as Vice President, Chief Financial
Officer and Treasurer of Vitas Healthcare Corporation from December 1990 to
April 1997. He served as Vice President -- Controller and Vice President of
Finance of Horizon Healthcare Corporation from 1987 to 1990. Mr. Ohlendorf is a
Certified Public Accountant and a former instructor on long-term care for the
American Institute of Certified Public Accountants.
Each of Messrs. Buchanan and Vick entered into employment agreements with
ALS simultaneously with the execution of the Merger Agreement, which employment
agreements will become effective upon the Effective Time of the Merger. In
addition, pursuant to the Merger Agreement, ALS has agreed to enter into an
employment agreement with Mr. Ohlendorf at the Effective Time. The employment
agreements with each of Messrs. Buchanan and Vick are included as exhibits to
the ALS Merger 8-K and the employment agreement with Mr. Ohlendorf is included
as an exhibit to the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part, and such exhibits are incorporated herein by
reference. The following summaries of such agreements do not comport to be
complete and are qualified in their entirety by reference to the complete
agreements.
Employment Agreement with Timothy J. Buchanan. ALS has entered into an
employment agreement with Mr. Buchanan which will become effective upon the
Effective Time and which has a term that expires on the third anniversary of the
Effective Time, unless earlier terminated pursuant to the terms thereof.
Pursuant to the employment agreement, Mr. Buchanan will serve ALS as its
President. The agreement is automatically renewed for additional consecutive
one-year terms unless timely notice of nonrenewal is given by either ALS or Mr.
Buchanan. The employment agreement provides that Mr. Buchanan shall receive a
base salary in an amount determined by ALS's Board of Directors; provided,
however, that in no event may such base salary be less than $265,000. In
addition, the employment agreement provides that Mr. Buchanan is entitled to
receive incentive bonuses of up to 35% of his base salary if ALS's earnings
before interest, taxes and depreciation are within ten percent of the earnings
targeted in ALS's annual business plan approved by the Board of Directors. The
employment agreement also provides for the granting of stock options at the same
time and on the same terms as grants to ALS's other senior executives and
certain other benefits typical in employment agreements with a senior executive
officer. Mr. Buchanan is also entitled to a payment equal to 300% of his base
salary upon a "change of control" of ALS if his employment is thereafter
terminated by ALS without "cause" or by him for "good reason." The employment
agreement also provides for the payment of reasonable moving and relocation
expenses typical in employment agreements with a senior executive officer.
Finally, the employment agreement provides that Mr. Buchanan will not disclose
certain proprietary information belonging to ALS or otherwise compete with ALS
for a period of eighteen months following his termination of employment except
where such termination is by ALS without "cause."
Employment Agreement with Steven L. Vick. ALS has entered into an
employment agreement with Mr. Vick with a term that expires on the third
anniversary of the Effective Time, unless earlier terminated pursuant to the
terms thereof. Pursuant to the employment agreement, Mr. Vick will serve the
Surviving Corporation as President and will become ALS's Chief Operating Officer
upon his relocation to Brookfield, Wisconsin no later than one year following
the Effective Time. The agreement is automatically renewed for additional
consecutive one-year terms unless timely notice of nonrenewal is given by either
ALS or Mr. Vick. The employment agreement provides that Mr. Vick shall receive a
base salary in an amount determined by ALS's Board of Directors; provided,
however, that in no event may such base salary be less than $225,000. In
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addition, the employment agreement provides that Mr. Vick is entitled to receive
incentive bonuses of up to 35% of his base salary if ALS's earnings before
interest, taxes and depreciation are within ten percent of the earnings targeted
in ALS's annual business plan approved by the Board of Directors. The employment
agreement also provides for the granting of stock options at the same time and
on the same terms as grants to ALS's other senior executives and certain other
benefits typical in employment agreements with a senior executive officer. Mr.
Vick is also entitled to a payment equal to 300% of his base salary upon a
"change of control" of ALS if his employment is thereafter terminated by ALS
without "cause" or by him for "good reason." The employment agreement also
provides for the payment of reasonable moving and relocation expenses typical in
employment agreements with a senior executive officer. Finally, the employment
agreement provides that Mr. Vick will not disclose certain proprietary
information belonging to ALS or otherwise compete with ALS for a period of
eighteen months following his termination of employment except where such
termination is by ALS without "cause."
Employment Agreement with Mark W. Ohlendorf. At the Effective Time, ALS
will enter an employment agreement with Mark W. Ohlendorf. Mr. Ohlendorf's
employment agreement has a one-year term that automatically renews for
consecutive one year terms unless timely notice of nonrenewal is given by either
ALS or Mr. Ohlendorf. The agreement provides that Mr. Ohlendorf shall receive a
base salary in an amount determined by ALS's Board of Directors; provided,
however, that in no event may such base salary be less than $190,000. Pursuant
to the agreement, Mr. Ohlendorf is entitled to receive incentive bonuses
payable, at the sole discretion of the Board of Directors, if certain target
earnings are achieved. The employment agreement also provides for the granting
of certain stock options and certain other benefits typical in employment
agreements with senior executive officers. The employment agreement also
provides for the payment of reasonable moving and relocation expenses typical in
employment agreements with a senior executive officer. Pursuant to the
employment agreement, Mr. Ohlendorf will agree not to disclose certain
proprietary information belonging to ALS or otherwise to compete with ALS for a
period of 12 months following his termination of employment, except where such
termination is by ALS without "cause."
In addition to the employment agreements with Messrs. Buchanan, Vick and
Ohlendorf, ALS has agreed to enter into one-year executive employment agreements
with nine additional members of Sterling management effective at the Effective
Time. Pursuant to these employment agreements, these employees shall be entitled
to a "stay bonus" equal to 20% to 30% of their base salary, which amount shall
be due and payable on the first to occur of twelve months following the
Effective Time or the earlier termination of such employee without cause.
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. This summary does
not purport to be complete and is qualified in its entirety by reference to the
Merger Agreement.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that the Merger will become effective upon
the filing of a Certificate of Merger with the Secretary of State of the State
of Kansas in accordance with the KGCC. It is anticipated that if the ALS
Proposals and the Sterling Proposal are approved and adopted at the ALS Special
Meeting and the Sterling Special Meeting, respectively, and all other conditions
of the Merger have been fulfilled or waived, the Effective Time will occur at
the time of filing the Certificate of Merger with the Secretary of State of the
State of Kansas or at such other time as ALS and Sterling shall have agreed upon
and designated in such filing as the Effective Time.
MANNER AND BASIS OF CONVERTING STERLING COMMON STOCK AND STERLING OPTIONS
Conversion of Sterling Common Stock into ALS Common Stock. At the
Effective Time, all outstanding shares of Sterling Common Stock will be
converted automatically into the right to receive an aggregate of approximately
5,549,760 shares of ALS Common Stock (or 1.1 shares of ALS Common Stock for each
share
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of Sterling Common Stock) based on the number of shares of Sterling Common Stock
outstanding as of September 19, 1997.
Based upon the number of shares of ALS Common Stock outstanding as of
September 19, 1997 and assuming that an aggregate of 5,549,760 Merger Shares are
issued to Sterling stockholders in the Merger, 18,551,306 shares of ALS Common
Stock (assuming none of the Sterling Options are exercised) will be outstanding
immediately after the Effective Time, of which approximately 30% will be held by
the former holders of Sterling Common Stock.
No fractional shares will be issued by ALS in the Merger. In lieu of any
such fractional shares, each holder of Sterling Common Stock who would otherwise
have been entitled to a fractional share of ALS Common Stock upon surrender of
certificates for exchange will be paid an amount in cash (without interest)
equal to such holder's proportionate interests in the net proceeds from the sale
or sales in the open market by American Stock Transfer and Trust Company, as
exchange agent (the "Exchange Agent"), on behalf of all such holders, of
aggregate fractional shares of the ALS Common Stock issued pursuant to the
Merger Agreement. As soon as practicable following the Effective Time, the
Exchange Agent shall determine the excess of (i) the number of full shares of
ALS Common Stock delivered to the Exchange Agent by ALS over (ii) the aggregate
number of full shares of ALS Common Stock to be distributed to holders of
Sterling Common Stock (such excess being herein called the "Excess Shares"), and
the Exchange Agent, as agent for the former holders of Sterling Common Stock,
shall sell the Excess Shares at the prevailing prices on the AMEX. The sale of
the Excess Shares by the Exchange Agent shall be executed on the AMEX through
one or more member firms of the AMEX and shall be executed in round lots to the
extent practicable. ALS shall pay all commissions, transfer taxes and other
out-of-pocket transaction costs, including the expenses and compensation of the
Exchange Agent, incurred in connection with such sale of Excess Shares. Until
the net proceeds of such sale have been distributed to the former stockholders
of Sterling, the Exchange Agent will hold such proceeds in trust for such former
stockholders (the "Fractional Securities Fund"). As soon as practicable after
the determination of the amount of cash to be paid to former stockholders of
Sterling in lieu of any fractional interests, the Exchange Agent shall make
available in accordance with the Merger Agreement such amounts to such former
stockholders.
In lieu of establishing the Fractional Securities Fund, the Exchange Agent
may, at the direction of ALS and Sterling prior to the Effective Time, pay any
cash amounts due the former stockholders of Sterling directly from cash made
available to the Exchange Agent by ALS for such purpose, in which event, each
holder of Sterling Common Stock who would otherwise have been entitled to
receive a fraction of a share of ALS Common Stock shall receive, in lieu of
thereof, cash (without interest) in an amount equal to such fractional part of a
share of ALS Common Stock multiplied by the closing price of a share of ALS
Common Stock on the business day immediately preceding the Effective Time as
reported on the AMEX as published by The Wall Street Journal.
Sterling Options. As of September 19, 1997, employees (or former
employees) and directors of Sterling held Sterling Options to purchase an
aggregate of 369,514 shares of Sterling Common Stock at various exercise prices
and subject to various vesting schedules. All of the Sterling Options become
vested and immediately exercisable as a result of the Merger and, pursuant the
terms of the Sterling Options, each holder of a Sterling Option will be entitled
to surrender for cancellation, within 60 days of the Effective Time, any such
option to the extent not yet exercised in consideration of a cash payment in an
amount calculated in accordance with the terms of such options. The Merger
Agreement provides that it is a condition to ALS's and Sterling's obligation to
consummate the Merger that the holders of the Sterling Options waive their
rights to receive such cash payments.
Pursuant to the Merger Agreement, each Sterling Option shall be assumed by
ALS and converted into Merger Options. Pursuant to the Merger Agreement, each
such Sterling Option will be exercisable for 1.1 shares of ALS Common Stock for
each share of Sterling Common Stock underlying such Sterling Option, at a price
per share equal to the aggregate exercise price for the shares of Sterling
Common Stock subject to such Sterling Option divided by the number of full
shares of ALS Common Stock deemed to be purchasable thereunder. After the
Effective Time, ALS does not intend to grant any options under the Sterling
Option
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Plan. The shares of ALS Common Stock that may be purchased upon exercise of such
Sterling Option shall not include any fractional shares and, upon the last such
exercise of such Sterling Option, a cash payment shall be made for any
fractional shares based upon the per share average of the highest and lowest
sale price of the ALS Common Stock as reported on the AMEX on the date of such
exercise. In the case of any Sterling Option to which Section 421 of the Code
applies by reason of its qualification under Section 422 or Section 423 of the
Code, the option price, the number of shares purchasable pursuant to the Merger
Option issued with respect to such Sterling Option and the terms and conditions
of exercise of such Merger Option shall be determined in a manner that complies
with Section 424 of the Code. ALS shall comply with the terms of the Sterling
Option Plan as they apply to the Sterling Options assumed as set forth above
including, but not limited to, provisions regarding changes of control that may
apply with respect to the Merger.
In the Merger, ALS will assume the outstanding Sterling Options, which
cover an aggregate of 369,514 shares of Sterling Common Stock with a weighted
average exercise price of $13.38 per share and which are held by employees,
former employees or non-employee directors of Sterling. Except with respect to
options to purchase 37,000 shares of Sterling Common Stock, all Sterling Options
have an exercise price equal to the fair market value per share of Sterling
Common Stock on the grant date and have a maximum term ranging from 5 to 10
years measured from such grant date, subject to earlier termination following
the optionee's cessation of service. The exercise price may be paid in cash, in
shares of common stock or through a cashless-exercise program involving a
same-day sale of the purchased shares. The options are non-assignable except
upon death and generally become exercisable in installments pursuant to
schedules determined at the time of grant.
The Sterling Option Plan is currently administered by the compensation
committee of the Sterling Board of Directors. After the Merger, the plan will be
administered by the compensation committee of the ALS Board of Directors, with
full power to interpret and administer the outstanding options assumed by ALS
thereunder; however, no additional option grants will be made under the Sterling
Option Plan.
Exchange of Certificates. At the Effective Time, by virtue of the Merger
and without any action on the part of any party, each share of Sterling Common
Stock outstanding immediately prior to the Effective Time (other than treasury
shares and shares of Sterling Common Stock owned by ALS and its subsidiaries)
shall be converted into the right to receive and become exchangeable for, 1.1
shares of ALS Common Stock.
Promptly after the Effective Time, the Exchange Agent shall cause to be
mailed to all holders of record of Sterling Common Stock at the closing
contemplated by the Merger Agreement (the "Closing") a letter of transmittal
with instructions to be used by the stockholders in surrendering certificates
which, prior to the Merger, represented shares of Sterling Common Stock in
exchange for certificates representing Merger Shares.
Upon the surrender of a certificate or instrument representing shares of
Sterling Common Stock to the Exchange Agent together with a duly executed letter
of transmittal, the holder of such certificate will be entitled to receive in
exchange therefor the whole number of Merger Shares and cash in lieu of any
fractional Merger Shares to which the holders of the Sterling Common Stock are
entitled pursuant to the provisions of the Merger Agreement. In the event of a
transfer of ownership of shares of Sterling Common Stock that are not registered
on the transfer records of Sterling, the appropriate number of Merger Shares may
be delivered to a transferee if the certificate is presented to the Exchange
Agent, together with the related letter of transmittal, and accompanied by all
documents required to evidence and effect such transfer and to evidence that any
applicable transfer taxes have been paid.
Until a certificate representing shares of Sterling Common Stock has been
surrendered to ALS, each such certificate will be deemed at any time after the
Effective Time to represent only the right to receive upon surrender the number
of Merger Shares to which the securityholder is entitled under the Merger
Agreement.
STERLING DEBENTURES
The Sterling Debentures are general unsecured obligations of Sterling and
are subordinated in right of payment to senior indebtedness of Sterling and pari
passu with existing subordinated indebtedness of Sterling.
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The Sterling Debentures pay interest semiannually at 6.75% per annum and mature
on June 30, 2006. Sterling may redeem the Sterling Debentures on or after July
15, 1999. The Sterling Debentures were sold in private transactions and the
holders thereof have certain registration rights with respect to such Sterling
Debentures.
The Sterling Debentures, which were issued pursuant to the Indenture dated
as of May 23, 1996 (the "Sterling Indenture"), will be assumed by ALS at the
Effective Time by ALS's execution and delivery of a supplemental indenture as
contemplated by the Sterling Indenture (the "Supplemental Indenture"). Such
Supplemental Indenture will provide that holders of the Sterling Debentures have
the right to convert, on the same terms and conditions as were applicable
immediately prior to the Merger, the principal amount of any Sterling Debentures
into the kind and amount of securities, cash and other property receivable upon
the Merger by a holder of a number of shares of Sterling Common Stock into which
such Sterling Debenture might have been converted immediately prior to the
Merger. Accordingly, each Sterling Debenture will become convertible into ALS
Common Stock at a conversion price (the "New Conversion Price") equal to the
quotient of the conversion price in effect for the Sterling Debentures
immediately prior to the Merger ($22.42) divided by the Exchange Ratio.
Accordingly, following the Merger the Sterling Debentures will be convertible
into shares of ALS Common Stock at a conversion price of approximately $20.38
per share. Promptly following the Closing, ALS is obligated under the Sterling
Indenture to prepare and file a registration statement on Form S-3 or another
appropriate form with the Commission to permit the sale under the Securities Act
of the Sterling Debentures and the shares of ALS Common Stock issuable upon
conversion thereof, and ALS will assume and satisfy the obligations of Sterling
arising out of those certain Registration Rights Agreements dated as of May 17,
1996 by and between Sterling and the purchasers of the Sterling Debentures.
EMPLOYEE BENEFIT PLANS
ALS and Sterling will cooperate in coordinating their respective benefit
plans. Any Sterling employee benefit plan may be terminated after the Effective
Time to the extent reasonably comparable benefits are made available to
employees of Sterling under one or more employee benefit plans of ALS or any of
its subsidiaries and are not less beneficial than the benefits provided to the
employees of Sterling under the employee benefit plans in effect as of the
Effective Time. Otherwise, the Sterling employee benefit plans that were in
effect as of the date of the Merger Agreement shall remain in effect for at
least one year following the Effective Time. For all purposes of determining
eligibility and any and all entitlements under any ALS plan, service performed
by employees of Sterling prior to the Closing Date shall be credited.
STOCKHOLDER VOTING AGREEMENTS
ALS Voting Agreements. Certain stockholders of ALS, including certain
directors of ALS and certain of ALS's affiliates have entered into an agreement
with Sterling (the "ALS Voting Agreements") to vote such person's shares in
favor of the ALS Proposals and against any proposal for a Third Party
Transaction. The 3,349,297 shares of ALS Common Stock subject to the ALS Voting
Agreements represent approximately 26% of the outstanding shares of ALS Common
Stock as of the ALS Record Date.
Sterling Voting Agreements. Certain stockholders of Sterling, including
three directors of Sterling, have entered into an agreement with ALS (the
"Sterling Voting Agreements") to vote such person's shares in favor of the
Sterling Proposal and against any proposal for a Third Party Transaction. The
2,297,858 shares of Sterling Common Stock subject to the Sterling Voting
Agreements represent approximately 46% of the outstanding shares of Sterling
Common Stock as of the Sterling Record Date.
CONDUCT OF STERLING'S AND ALS'S BUSINESS PRIOR TO THE MERGER; NO SOLICITATION
Sterling and ALS have agreed that until the Closing of the Merger, or the
earlier termination of the Merger Agreement pursuant to the terms thereof, they
will conduct their respective operations in the ordinary course of business and
consistent in all material respects with past practice and will use reasonable
efforts to preserve substantially intact their respective business
organizations, and to keep available the services of their
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present officers, employees and consultants and to preserve their present
relationships with customers, suppliers, payors and other persons with whom they
have a significant business relationship.
Among other limitations relating to the conduct of their business, Sterling
and ALS have each agreed that without the other's prior written consent, or
except as expressly contemplated by the Merger Agreement, neither Sterling nor
ALS will, or will commit to: (a) amend its respective charter or bylaws; (b)
declare, set aside or pay any dividend or other distribution or payment in cash,
securities or property in respect of shares of their common stock; (c) make any
direct or indirect redemption, retirement, purchase or other acquisition of any
of their capital stock (except if required by written agreement existing as of
the date of the Merger Agreement); (d) reclassify, combine, split, subdivide or
redeem, purchase or otherwise acquire, directly or indirectly, any of their
outstanding shares of capital stock; (e) issue, grant, sell or pledge or agree
or propose to issue, grant, sell or pledge any shares of, or rights or
securities of any kind to acquire any shares of, their capital stock or the
capital stock of their subsidiaries, except that either may grant stock options
to employees and consultants under its existing option plans and may issue
shares of common stock upon the exercise of stock options outstanding on the
date of the Merger Agreement pursuant to the terms thereof existing as of the
date of the Merger Agreement or issued thereafter in accordance therewith; (f)
other than in the ordinary course of business and consistent with past practices
incur any material indebtedness for borrowed money, except under credit
facilities existing as of the date of the Merger Agreement and as they may be
amended from time to time or pursuant to a substitute credit facility on terms
comparable to such existing credit facilities; (g) waive, release, grant or
transfer any rights of material value, except in the ordinary course of
business; (h) except as otherwise provided in the Merger Agreement, merge or
consolidate with any person or adopt a plan of liquidation or dissolution; (i)
acquire (or enter into an agreement to acquire) any assets, stock or other
interests of a third-party except for cash transactions involving total cash
consideration in any individual transaction not in excess of $10 million or
taking all such acquisitions in the aggregate, involving consideration not in
excess of $10 million, and which are of a nature so as not to require a merger
or consolidation with Sterling or ALS, respectively, or to cause the
Registration Statement or the Joint Proxy Statement/Prospectus to need to be
amended by ALS; (j) transfer, lease, license, sell or dispose of a material
portion of assets or any material assets, other than in the ordinary course of
business and consistent with past practices; (k) change any accounting
principles or methods except insofar as may be required by changes in generally
accepted accounting principles; (l) mortgage or pledge any of their assets or
properties or subject any of their assets or properties to any material liens,
charges, encumbrances, imperfections of title, security interests, options or
rights or claims of others with respect thereto; and (m) except as otherwise
would be permitted by subsection (i) above, enter into any joint venture,
affiliation, partnership or similar agreement, or amend, modify or alter any
such transaction to which either ALS (or any subsidiary of ALS) or Sterling (or
any subsidiary of Sterling) is presently a party.
Sterling and ALS have each covenanted to use all reasonable efforts (a) to
give notice to third parties of the Merger, obtain required third-party
consents, file notices of the Merger and obtain any authorizations, consents and
approvals of governments and governmental agencies required for the consummation
of the Merger, (b) to permit representatives of ALS and Sterling, respectively,
access to their respective premises, properties, personnel, books, records,
contracts and documents, and (c) to give prompt written notice to the other of
any adverse development causing a breach of any of their respective
representations and warranties in the Merger Agreement.
ALS and Sterling have agreed not to solicit, initiate or knowingly
encourage the submission of any proposal or offer from any person or entity
relating to: (i) the sale of or tender offer for 20% or more of the outstanding
shares of any capital stock of such entity; (ii) any sale, exchange, transfer or
other disposition of 20% or more of the assets of such entity; (iii) any merger,
consolidation, share exchange, business combination or similar transaction
involving such entity (these transactions described in (i), (ii) and (iii) above
referred to as a "Third Party Transaction"); (iv) any person, or any group
formed for the purpose of affecting a Third Party Transaction, acquiring
beneficial ownership or the right to acquire beneficial ownership of 20% or more
of the then outstanding capital stock of such entity; or (v) any public
announcement by such entity of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing with respect to
such entity. Each party has agreed to notify the other party
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immediately of any proposal, offer, inquiry or contact relating to either of the
foregoing, and to keep confidential any information it obtains relating to the
other party and such other parties affiliates' businesses, or the negotiations
surrounding the Merger, which information is not available to the public.
ALS, Merger Sub and Sterling have agreed not to take any actions or omit to
take any actions which would prevent the Merger from qualifying as a tax-free
reorganization pursuant to Section 368(a) of the Code or a business combination
that may be accounted for as a "pooling of interests" for financial reporting
purposes.
Pursuant to the Merger Agreement, ALS, Merger Sub and Sterling have also
agreed to use all reasonable efforts to satisfy the conditions to closing
described in the Merger Agreement, and to take all action and to do all things
necessary or desirable to consummate and make effective the Merger.
CONDITIONS TO THE MERGER
The respective obligations of ALS, Merger Sub and Sterling to consummate
the Merger are subject to the satisfaction or mutual waiver of a number of
conditions, including, but not limited to the following: (a) the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part shall have
been declared effective by the Commission; (b) all state securities laws or
"blue sky" permits and authorizations necessary to issue the Merger Shares
consideration and other securities of ALS pursuant to the Merger and the
transactions contemplated thereby shall have been obtained; (c) the stockholders
of each of ALS and Sterling shall have approved the Merger; (d) no governmental
authority or other agency, commission or court of competent jurisdiction shall
have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, injunction or other order which is in effect and has the effect of
making the Merger illegal or otherwise prohibiting consummation of the
transactions contemplated by the Merger Agreement; (e) the statutory waiting
period with respect to the consummation of Merger under the HSR Act shall have
expired or been earlier terminated; (f) the shares of ALS Common Stock issuable
to Sterling's stockholders in the Merger shall have been authorized for listing
on the AMEX; (g) all material federal, state, local and foreign governmental
consents, approvals and filings required to permit the Merger shall have been
received and any applicable waiting period shall have expired or been terminated
without the imposition of conditions that are or would become applicable to
Sterling or its subsidiaries or ALS or its subsidiaries and which would
reasonably be anticipated to have a material adverse effect on the financial
condition, results of operations, properties, business or immediate prospects of
either Sterling or ALS; (h) the absence of any action or proceeding by or before
any court or governmental authority, or determination by any government or
governmental authority, which would require either ALS or Sterling to dispose of
all or a material portion of the business or assets of ALS and its subsidiaries,
or Sterling and its subsidiaries; (i) ALS and Sterling shall have received
written confirmation from each of Ernst & Young LLP and KPMG Peat Marwick LLP
that "pooling of interests" accounting is available to ALS with respect to the
Merger; and (j) Sterling's receipt of waivers from the holders of Sterling
Options of their rights to receive any cash payments upon cancellation or
surrender of such options as a consequence or result of the Merger.
In addition, the obligation of Sterling to consummate the Merger is further
subject to the satisfaction or waiver of a number of conditions, including: (a)
ALS's performance of all of its obligations under the Merger Agreement,
including approval of the ALS Bylaw Amendments; (b) the continued truth and
accuracy in all material respects of the representations or warranties of ALS
set forth in the Merger Agreement; (c) the absence of any material adverse
change (or development involving a prospective change) in the financial
condition, results of operations, properties, business, or prospects of ALS; (d)
Sterling's receipt of an officer's certificate certifying the fulfillment (or
the waiver thereof by Sterling) of the certain conditions set forth in the
Merger Agreement; (e) ALS's procurement of all material third party consents;
(f) Sterling's receipt of opinions of counsel to ALS relating to certain
corporate matters; and (g) Sterling's receipt of opinions of its counsel
relating to certain tax matters.
The obligation of ALS and Merger Sub to consummate the Merger is also
subject to the satisfaction or waiver of a number of conditions, including: (a)
Sterling's performance of all of its obligations under the Merger Agreement; (b)
the continued truth and accuracy in all material respects of the representations
or
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warranties of Sterling set forth in the Merger Agreement; (c) Sterling's
procurement of all material third party consents; (d) the absence of any
material adverse change (or development involving a prospective change) in the
financial condition, results of operations, properties, business, or prospects
of Sterling; (e) ALS's receipt of an officer's certificate certifying the
fulfillment of the certain conditions set forth in the Merger Agreement (or the
waiver thereof by ALS); (f) Sterling's receipt of resignations, effective as of
the Effective Time, of each director of Sterling's Board of Directors; (g) ALS's
receipt of opinions of counsel to Sterling relating to certain corporate
matters; (h) ALS's receipt of opinions of its counsel relating to certain tax
matters; and (i) ALS's receipt of Affiliate Letters from each of the pooling
affiliates of Sterling.
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT
Termination. The Merger Agreement provides that it may be terminated at
any time prior to the Effective Time, whether before or after approval of the
Merger by the stockholders of Sterling and ALS, by either ALS or Sterling (a) by
mutual consent, (b) if the Merger is not consummated by March 31, 1998
(provided, however, that this date may be extended to a date not later than June
30, 1998 by written notice of either ALS or Sterling if the Merger shall not
have been consummated as a result of ALS or Sterling having failed by March 31,
1998 to receive all Third Party Consents with respect to the Merger or as a
result of an order, writ, judgment, injunction, consent decree, stipulation,
determination or award entered by or with any Governmental Entity), (c) if
approval by ALS's stockholders shall not have been obtained at the ALS Special
Meeting or any adjournment thereof, (d) if approval by Sterling's stockholders
shall not have been obtained at the Sterling Special Meeting or any adjournment
thereof, or (e) a United States federal or state court or governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken action permanently restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action shall have
become final and non-appealable.
The Merger Agreement provides that it may be terminated at any time prior
to the Effective Time, whether before or after approval of the Merger by the
stockholders of ALS, by ALS, if (a) a proposal for a Third Party Transaction
involving ALS has been made or received and ALS's Board of Directors determines,
in the exercise of its good faith judgment, that such termination is required
for such Board of Directors to comply with its fiduciary duties to the ALS
stockholders, (b) there has been a breach by Sterling of any representation or
warranty contained in the Merger Agreement which would have or would be
reasonably likely to have a material adverse effect on Sterling, (c) there has
been a material breach of any of the covenants or agreements set forth in the
Merger Agreement on the part of Sterling, which breach is not curable or, if
curable, is not cured within 15 days after written notice of such breach is
given by ALS to Sterling, (d) following the receipt of a proposal of a Third
Party Transaction by Sterling, the Board of Directors of Sterling shall have
altered its determination to recommend that the stockholders of Sterling approve
the Merger Agreement, (e) following the receipt of a proposal for a Third Party
Transaction by Sterling, Sterling shall have failed to proceed to hold the
Sterling Special Meeting, provided ALS gives Sterling twenty-four hours' prior
written notice of its election to terminate the Merger Agreement or (f) the
conditions to ALS's obligations to effect the Merger shall not have been
satisfied by Sterling or waived by ALS on or before March 31, 1998.
The Merger Agreement provides that it may be terminated at any time prior
to the Effective Time, whether before or after approval of the Merger by the
stockholders of Sterling, by Sterling, if (a) a proposal for a Third Party
Transaction involving Sterling has been made or received and Sterling's Board of
Directors determines, in the exercise of its good faith judgment that such
termination is required for such Board of Directors to comply with its fiduciary
duties to the Sterling stockholders, (b) there has been a breach by ALS of any
representation or warranty contained in the Merger Agreement which would have or
would be reasonably likely to have a material adverse effect on ALS, (c) there
has been a material breach of any of the covenants or agreements set forth in
the Merger Agreement on the part of ALS, which breach is not curable or, if
curable, is not cured within 15 days after written notice of such breach is
given by Sterling to ALS, (d) following the receipt of a proposal of a Third
Party Transaction by ALS, the Board of Directors of ALS shall have altered its
determination to recommend that the stockholders of ALS approve the Merger
Agreement, (e) following the receipt of a proposal for a Third Party Transaction
by ALS, ALS shall have
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failed to proceed to hold the ALS Special Meeting, provided Sterling gives ALS
24 hours' prior written notice of its election to terminate the Merger Agreement
or (f) the conditions to Sterling's obligations to effect the Merger shall not
have been satisfied by ALS or waived by Sterling on or before March 31, 1998.
Effects of Termination. The Merger Agreement provides that if either ALS
or Sterling terminates the Merger Agreement, under certain circumstances
involving the receipt by ALS or Sterling of a proposal for a Third Party
Transaction, then such other party may be entitled to receive from the other
party a termination fee of $8.0 million.
Except as otherwise provided in the Merger Agreement, in the event of the
termination of the Merger Agreement, the Merger Agreement will be void, there
will be no liability on the part of the parties or any of their respective
officers or directors to the other and all rights and obligations of any party
to the Merger Agreement will cease.
Cross Option Agreement. Concurrently with the execution of the Merger
Agreement, ALS and Sterling entered into a Cross Option Agreement, pursuant to
which, among other things, Sterling granted to ALS an irrevocable option (the
"Sterling Cross Stock Option") to purchase 1,003,344 fully paid and
non-assessable shares of Sterling Common Stock at a purchase price of $18.25 per
share, representing an amount equal to 19.9% of the outstanding shares of
Sterling Common Stock on July 30, 1997 (the "Sterling Option Shares"). ALS may
exercise the Sterling Cross Stock Option in whole or in part at any time or from
time to time after the Merger Agreement becomes terminable or is terminated by
ALS or Sterling under circumstances which could entitle ALS to the $8 million
termination fee in accordance with the Merger Agreement (regardless of whether
the Merger Agreement is actually terminated or whether there occurs a closing of
any Third Party Transaction).
Pursuant to the Cross Option Agreement, ALS granted to Sterling an
irrevocable option (the "ALS Cross Stock Option") to purchase 2,586,303 fully
paid and non-assessable shares of ALS Common Stock at a purchase price of
$21.625 per share, representing an amount equal to 19.9% of the outstanding
shares of ALS Common Stock on July 30, 1997 (the "ALS Option Shares"). Sterling
may exercise the ALS Cross Stock Option in whole or in part at any time or from
time to time after the Merger Agreement becomes terminable or is terminated by
ALS or Sterling under circumstances which could entitle Sterling to the $8
million fee in accordance with the Merger Agreement (regardless of whether the
Merger Agreement is actually terminated or whether there occurs a closing of any
Third Party Transaction).
Under the terms of the Cross Option Agreement, Sterling and ALS have agreed
to register the Sterling Option Shares or the ALS Option Shares, as the case may
be, under the Securities Act, upon the occurrence of certain circumstances. None
of such shares are being registered pursuant to the Merger.
The foregoing is a brief summary of the Cross Option Agreement, which is
included as an exhibit to the ALS Merger 8-K and is incorporated herein by
reference. This summary does not purport to be complete and is qualified in its
entirety by reference to the Cross Option Agreement.
Amendments. The Merger Agreement may be further amended by the parties
thereto, provided such amendment is in writing, at any time before or after the
approval and adoption of the Merger Agreement by the stockholders of Sterling
and ALS. After such stockholder approval and adoption has been obtained, no
amendment of any of the agreements executed in connection with the Merger may be
made which by law requires the further approval of the stockholders, without
obtaining such further approval.
PROPOSED AMENDMENTS TO THE ALS BYLAWS
Pursuant to the Merger Agreement, the obligation of Sterling to consummate
the Merger is subject to, among other things, the adoption by the holders of ALS
Common Stock of certain amendments to the ALS Bylaws relating to the management
and operation of the combined company following the Merger. Specifically, the
Board of Directors of ALS has approved, and recommends that the ALS stockholders
adopt, amendments to the ALS Bylaws to (i) amend Section 3.5 of the ALS Bylaws
regarding the filling of vacancies occurring on the Board of Directors of ALS;
(ii) adding a new Section 3.15 to the ALS Bylaws establishing an
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executive committee of the ALS Board of Directors (the "ALS Executive
Committee") and (iii) amending Section 8.4 of the ALS Bylaws in its entirety
with respect to amendments to the ALS Bylaws. The ALS Bylaw Amendments are
conditioned upon consummation of the Merger and, accordingly, shall be effective
on the Effective Time provided that such amendments receive the requisite ALS
stockholder approval.
AMENDMENT TO PROVISION REGARDING VACANCIES ON THE ALS BOARD OF DIRECTORS
Section 3.5 of the ALS Bylaws currently provides as follows:
Section 3.5 Vacancies. Any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of
directors or any other cause, may be filled by the remaining directors or
by the stockholders by a plurality of the votes cast at a meeting of the
stockholders. Each director so chosen to fill a vacancy shall hold office
until his successor shall have been elected and shall qualify or until he
shall resign or shall have been removed in the manner provided herein.
This provision allows vacancies occurring in the Board of Directors of ALS,
whether by reason of death, resignation, disqualification, an increase in the
number of directors or any other cause, to be filled either by the remaining
directors or by the ALS stockholders by plurality of the votes cast at a meeting
of ALS stockholders. Pursuant to the Merger Agreement, ALS and Sterling agreed
that, following the Effective Time and through the 1999 annual meeting of ALS
stockholders, the Board of Directors of ALS would include three individuals
designated by the Sterling Board of Directors. See "MANAGEMENT AND OPERATIONS OF
THE COMBINED COMPANY FOLLOWING THE MERGER -- Board of Directors After the
Merger." In order to give effect to the parties' agreement in this regard, the
Board of Directors of ALS proposes amending Section 3.5 of the ALS Bylaws by the
addition of the following text at the end of Section 3.5 of the ALS Bylaws:
Notwithstanding the foregoing, until the Corporation's 1999 annual
meeting of stockholders, any vacancy (whether arising because of death,
resignation, disqualification, removal or any other cause) on the Board
arising among any individual newly elected to serve on the Board pursuant
to Section 5.17(a) of that certain Agreement and Plan of Merger by and
between the Corporation, Tango Merger Corporation and Sterling House
Corporation ("Sterling") dated as of July 30, 1997 or any individual
elected to fill a director position occupied by any such person
(collectively, the "Sterling Directors") shall be nominated on behalf of
the Board, filled or selected by a majority vote of the remaining Sterling
Directors and approved by the Board, which approval shall not be
unreasonably withheld.
ADOPTION OF PROVISION ESTABLISHING ALS EXECUTIVE COMMITTEE
Pursuant to Section 3.13 of the ALS Bylaws, the ALS Board may establish by
resolution one or more committees consisting of one or more directors of the
corporation. Such committees, to the extent set forth in the ALS Board's
resolution and except as otherwise limited by law, shall have and may exercise
all of the powers and authority of the ALS Board in the management of the
business and affairs of the corporation. Pursuant to this provision, the ALS
Board of Directors has established an Audit Committee as well as a Compensation
Committee.
Pursuant to the Merger Agreement, ALS and Sterling have agreed to establish
at the Effective Time an ALS Executive Committee to be comprised of three
members, specifically the Chairman of the Board, the Chief Executive Officer and
the President of ALS and, provided that if none of such persons is a Sterling
Representative, the ALS Board will replace one of such persons with a Sterling
Representative.
In order to give effect to the parties' agreement in this regard, the Board
of Directors of ALS proposes the addition of a new Section 3.15 to the ALS
Bylaws and the renumbering of existing Sections 3.15 and 3.16. The text of the
proposed new Section 3.15 of the ALS Bylaws is as follows:
Section 3.15 Executive Committee. The Corporation shall have an
executive committee (the "Executive Committee") comprised of three (3)
members. The members of the Executive Committee shall be the Corporation's
Chairman, Chief Executive Officer and President (provided, however, that if
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none of such persons is a Sterling Director, the Board shall replace one of
such persons with a Sterling Director), and each such person shall serve as
a member of such committee for so long as he holds such office. The
Chairman shall serve as the Chairman of the Executive Committee.
Notwithstanding Sections 3.13 and 3.14 of Article 3, the presence of all
the members of the Executive Committee shall be required to constitute a
quorum for the transaction of any business at any meeting of the Executive
Committee, and all matters shall be decided at any such meeting by the
affirmative vote of all the members of the Executive Committee present.
The Executive Committee shall have authority (i) to (a) make an equity
investment or otherwise provide equity funding, (b) borrow funds, incur
indebtedness or guarantee indebtedness or (c) enter into sale/leaseback
transactions as a form of financing in connection with the development,
construction, acquisition, financing, refinancing or operation of any
assisted living, dementia care or related specialty care facility primarily
for the elderly (each a "Facility" and collectively "Facilities") provided
that as to any such transaction the aggregate equity investment to be made
by the Corporation and its subsidiaries together with the aggregate
indebtedness to be incurred by the Corporation and its subsidiaries shall
not exceed $15,000,000 in the aggregate (or, in the case of a
sale/leaseback transaction, the value of the Facility or Facilities sold
and leased back shall not exceed $15,000,000 in the aggregate) (all such
transactions referred to as "Authorized Transactions"); (ii) in connection
with and pursuant to any Authorized Transaction, to create, convey and
establish liens and collateral interests in the real and personal property
of and relating to such Facility or Facilities to collateralize
indebtedness incurred, including, without limitation, security deeds,
mortgages, deeds of trust, pledges, collateral assignments, security
interests and title retention arrangements and, with respect to
sale/leaseback transactions, convey title to and enter into lease
agreements with respect to such Facility or Facilities; (iii) to review and
formulate recommendations on matters to be submitted to the Board; (iv) to
approve and manage the consolidation of the operations of Sterling and its
subsidiaries and the Corporation and its subsidiaries as a result of
consummation of the transactions contemplated by that certain Agreement and
Plan of Merger by and between the Corporation, Tango Merger Corporation and
Sterling dated as of July 30, 1997, including, but not limited to, the
implementation of Section 5.6 thereof; (v) to consider and develop
strategic business initiatives and long-term planning proposals for the
Corporation, including proposals to acquire other assisted living companies
or to engage in other strategic business transactions, and to present and
review such initiatives and proposals with the Board; and (vi) to perform
such other functions as shall be appropriate to the effective discharge of
the duties and responsibilities assigned to the Executive Committee by
these Bylaws or from the Board from time to time.
The Executive Committee shall meet from time to time on call of the
Chairman of the Executive Committee or by two or more members of the
Executive Committee. Meetings of the Executive Committee may be held at
such place or places, within or without the State of Delaware, as the
Executive Committee shall determine or as may be specified or fixed in the
notices or waivers of notice of such meetings. The Executive Committee may
fix its own rules of procedure, including provision for notice of its
meetings and shall keep a record of its proceedings.
The members of the Executive Committee may participate in Executive
Committee proceedings by means of conference telephone or similar
communications equipment by means of which all persons participating in the
proceeding can hear each other, and such participation shall constitute
presence in person at such proceedings.
Any action of the Executive Committee may be taken by a written
instrument signed by all the members of the Executive Committee, and such
action shall be fully effective as if taken at a meeting of the Executive
Committee.
AMENDMENT TO PROVISION REGARDING AMENDMENT TO ALS BYLAWS
Section 8.4 of the ALS Bylaws currently provides as follows:
Section 8.4. Amendments. These Bylaws, or any of them, may be
amended, modified, repealed or adopted and new Bylaws may be made (i) by
the Board, acting at any meeting of the Board, or (ii) by
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the stockholders, at any annual meeting of stockholders, without previous
notice, or at any special meeting of stockholders, provided that notice of
such proposed amendment, modification, repeal or adoption is given in the
notice of special meeting. Any Bylaws made or altered by the stockholders
may be altered or repealed by either the Board or the stockholders.
Pursuant to the Merger Agreement, ALS and Sterling agreed that, in
connection with securing ALS stockholder approval of the Merger, Section 8.4 of
the ALS Bylaws would be amended in its entirety as follows:
Section 8.4 Amendments. Except as expressly provided herein, these
Bylaws, or any of them, may be amended, modified, repealed or adopted and
new Bylaws may be made (i) by the Board, acting at any meeting of the
Board, or (ii) by the stockholders, at any annual meeting of stockholders,
without previous notice, or at any special meeting of stockholders,
provided that notice of such proposed amendment, modification, repeal or
adoption is given in the notice of special meeting. Except as expressly
provided herein, any Bylaws made or altered by the stockholders may be
altered or repealed by either the Board or the stockholders.
Notwithstanding anything in these Bylaws to the contrary, (i) Section 3.5
hereof may only be amended, modified, repealed or replaced prior to the
Corporation's 1999 annual meeting of stockholders by (a) the Corporation's
stockholders, at any annual meeting of stockholders, without previous
notice, or at any special meeting of stockholders, provided that notice of
such proposed action is given in the notice of special meeting or (b) the
Board, provided that the proposed action is also approved by a majority of
the Sterling Directors, and (ii) Section 3.15 hereof and this Section 8.4
may only be amended, modified, repealed or replaced prior to December 31,
2000 by (a) the Corporation's stockholders, at any annual meeting of
stockholders, without previous notice, or any at any special meeting of
stockholders, provided that notice of such proposed action is given in the
notice of special meeting or (b) the Board, provided that the proposed
action is also approved by a majority of the Sterling Directors.
The effect of the proposed amendment to Section 8.4 is to limit the ability
of the ALS Board of Directors to amend, modify, repeal or replace Section 3.5 of
the ALS Bylaws prior to the 1999 annual meeting of stockholders of ALS, or to
amend, modify, repeal or replace Sections 3.15 or 8.4 of the ALS Bylaws prior to
December 31, 2000, unless, in any such case, such amendment is approved by
either (a) the ALS stockholders or (b) the ALS Board of Directors, provided that
such action is also approved by a majority of the Sterling Representatives then
serving on the ALS Board.
The affirmative vote of a majority of the shares of ALS Common Stock
present in person or represented by proxy at the ALS Special Meeting, assuming a
quorum is present, shall be required to approve the ALS Bylaw Amendments. The
Board of Directors of ALS recommend that the ALS stockholders vote FOR the ALS
Bylaw Amendments.
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BUSINESS OF STERLING
GENERAL
Sterling constructs, owns, operates, manages and franchises Sterling House
assisted living residences, providing a wide range of 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 ("ADLs"), such as
dressing, bathing and eating, or routine skilled nursing services. In addition,
Sterling owns and operates Sterling Cottage, a concept specifically designed for
the care of those affected by Alzheimers and other cognitive impairments.
Sterling'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 home like setting.
Sterling was co-founded in 1991 by Timothy J. Buchanan, Sterling's Chief
Executive Officer, and Steven L. Vick, Sterling's President, and has actively
expanded its assisted living operations through the development, operation and
selective franchising of Sterling House residences. In connection with
Sterling's initial public offering (the "Sterling IPO"), on October 26, 1995,
Sterling entered into a reorganization transaction with various individuals,
limited liability companies and limited partnerships of which Sterling owned
majority or minority interests, whereby Sterling acquired all of the stock of
Sterling House of Augusta, Inc. and all of the assets of such limited liability
companies and limited partnerships (Sterling House of Abilene, L.P., Sterling
House of Wichita, L.P., Sterling House of Bethany, L.L.C., Sterling Group,
L.L.C., Scotia, L.L.C. and Corridor Properties, L.L.C.) (the "Reorganization
Transaction"). Following the completion of the Sterling IPO, Sterling owned or
leased 14 residences containing 417 units and managed/franchised an additional
nine residences with 315 units, for a total of 23 residences, with 732 units in
Kansas and Oklahoma.
In May 1996, Sterling privately placed $35 million aggregate principal
amount of the Sterling Debentures. The Sterling Debentures and underlying
securities were registered with the Commission on November 19, 1996. The net
proceeds of $33.4 million have been used primarily to fund construction of
Sterling House residences.
At August 15, 1997, Sterling had in operation 88 assisted living residences
with 3,296 units located in Kansas, Oklahoma, Texas, Florida, Ohio and Colorado.
In addition, as of August 15, 1997, Sterling managed and/or its franchisees
operated 13 residences containing 488 units. At that date, Sterling also had 74
residences with 3,146 units under development or construction in Kansas,
Oklahoma, Arizona, Florida, Ohio, Colorado, Indiana, North Carolina, South
Carolina and Tennessee. Sterling House residences are located primarily in
select affluent suburban areas, as well as small to medium sized communities
with populations in excess of 10,000.
Sterling is following its plan to construct, develop, manage, and, to a
lesser extent, acquire additional assisted living residences in states which
Sterling believes possess attractive demographic and favorable regulatory
environments. In support of continued expansion, Sterling has opened regional
operations offices in Stuart, Florida, and Dayton, Ohio, Castle Rock, Colorado
and Edmond, Oklahoma. In addition, Sterling maintains development and
construction offices in Denton, Texas and Charlotte, North Carolina.
Sterling is a Kansas corporation, with its principal executive office
located at 453 S. 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,
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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 residents in congregate or retirement settings, but require
lower levels of care than skilled nursing home patients. For seniors in need of
continuous unschedulable 24 hours a day attendance by a skilled nurse or
practitioner, a skilled nursing facility may be required. The typical age of an
assisted living resident is 83-85 years old.
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. 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.
Sterling 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 favorable alternative.
STERLING HOUSE SERVICES
Each Sterling House residence provides a broad range of health care 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 Sterling include, but are not limited to, personal
care, support services, supplemental services, 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
"Personalized Service Plans" targeted specifically at each resident's individual
needs and preferences.
In designing each resident's Personalized Service Plan, Sterling
periodically assesses the needs and desires of a resident by conducting
interviews with the resident and, if appropriate, family members and other
medical personnel. A service assessment matrix is utilized to establish a point
score which represents the resident's position within Sterling's range of care
and services, and thereby determining the resulting charge for services within
Sterling's three levels of pricing. A fourth pricing level may be utilized for
services to residents with Alzheimer's disease or other memory impairment.
Additionally, Sterling 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 OPERATIONS
Each Sterling House 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 Sterling. On
occasion, certain nursing services may be delegated by the nurse to trained
members of the staff. Sterling consults with outside providers, such as
pharmacists and dieticians, to assist residents through services such as
medication review and menu planning to meet special dietary needs. Personal
care, dietary services,
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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.
Sterling's residences are divided into regional operating districts, each
of which is supervised by a District Manager who supervises up to eight
residences. The District Manager is responsible for the overall operations of
the Sterling House 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 Sterling's Regional
Marketing Representatives 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 to stabilization and provide training, direction and
assistance to Residence Directors and staff for community relations marketing,
and census retention. The Marketing Representative makes presentations to groups
and organizations on the Sterling House 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 Managers are provided by the
executive and support staffs who work out of Sterling's headquarters. Accounting
services, data processing, accounts payable, payroll services and human
resources are all provided at Sterling's headquarters.
COMPETITION
Sterling competes with numerous other companies and long-term care
providers offering similar services such as other assisted living providers,
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 Sterling expects that assisted living in
particular will become increasingly competitive. While Sterling believes that
presently there is generally an inadequate number of assisted living facilities
in the markets where Sterling intends to operate, as assisted living receives
increased attention, more states include assisted living in their Medicaid
Waiver Program, and 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.
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, some of Sterling's competitors are larger
than Sterling and have or may obtain greater resources than those of Sterling.
Sterling's competitors primarily are long-term care providers operating in
similar geographic areas.
FUNDING FOR ASSISTED LIVING CARE
Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an individual's
health insurance program or long-term care insurance policy, the individual may
receive reimbursement for costs for care under an "alternative care benefit."
Government payments for assisted living have been limited. Some state and local
governments offer subsidies for rent or services for low income elders. Others
may provide subsidies in the form of additional payments for those who receive
Supplemental Security Income ("SSI"). Medicaid provides coverage for certain
financially or medically needy persons, regardless of age, and is funded jointly
by federal, state and local governments. Medicaid reimbursement varies from
state to state. Although a majority of Sterling's revenue in the six months
ended June 30, 1997 came from private payors (99%), the cost structure of the
residences has historically been, and is expected to continue to be,
sufficiently low so that the residences are able to operate and compete in the
Medicaid reimbursement market. Sterling expects that state Medicaid
reimbursement programs will constitute a larger percentage of total revenue in
the future.
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<PAGE> 76
GOVERNMENT REGULATION
Currently, assisted living residences are not specifically regulated as
such by the federal government. However, Sterling'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
Personal Care Facilities, all residences in Florida are licensed as Adult
Congregate Living Facilities and certain residences in Florida are additionally
licensed as Extended Congregate Care Facilities, and residences in Ohio are
licensed as Rest Homes. 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 less encompassing in
comparison with regulations imposed upon skilled nursing home 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 Sterling. The success of Sterling will be dependent, in
part, upon its ability to satisfy applicable regulations and requirements and to
maintain any required licenses. Sterling'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, changes in
staffing requirements, and revisions in licensing and certification standards.
Sterling 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, Sterling
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. Sterling has elected to admit, on a very
limited basis, residents eligible for reimbursement under the Texas and Kansas
Medicaid Waiver Programs and is subject to the related laws and regulations. For
the six months ended June 30, 1997, Sterling's revenues from private payors was
99% of its total revenues. In order to comply with the terms of the revenue
bonds used to finance eight of Sterling's residences, Sterling 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 Code.
Sterling is subject to the Fair Labor Standards Act, which governs such
matters as minimum wage, overtime and other working conditions. A portion of
Sterling'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
Sterling'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
Sterling 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 Sterling's and its
franchisee's post-termination rights and obligations.
EXPANSION
Consistent with its strategy of rapidly developing new locations, Sterling
is currently developing new residences in Kansas, Oklahoma, Arizona, Florida,
Ohio, Colorado, Indiana, Tennessee, North Carolina and South Carolina. As of
August 15, 1997, Sterling had under construction 27 residences containing 1,120
units. Additionally, Sterling has under development and land purchase
commitments a total of 47 residences.
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<PAGE> 77
The Sterling House residences generally range in size from 33 to 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 health care delivery setting.
Sterling locates residences in a variety of markets ranging from select suburban
communities, as well as small to medium size towns with populations of 10,000
and more.
Sterling develops and constructs residences utilizing a combination of its
in-house construction subsidiary (BCI Construction, Inc.), joint ventures and
outside developers and contractors. Currently Sterling has retained outside
developers and contractors and has also retained outside general contractors for
construction of properties in Florida, Ohio and Texas. Sterling also entered
into joint ventures with regional real estate development partners for the
construction, development and ownership of Sterling House assisted living
residences in targeted geographic areas. Sterling anticipates that the total
number of residences constructed and developed using joint ventures in 1997 will
increase. Sterling will continue to use this combination of joint ventures,
in-house construction and outside developers and 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 Sterling and are typically managed from its
headquarters. Sterling estimates construction time for a new residence to be
approximately six to nine months, and, once opened, estimates that it will take
approximately nine to twelve months to achieve a stabilized occupancy level of
95% or higher.
There can be no assurance that Sterling or its joint venture partners will
be successful in identifying sites for future residences, securing necessary
permits and licenses for the construction of new residences and supervising the
construction of new residences on time and within budget.
TRADEMARKS, PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION
Sterling is the registered owner of the service mark "Sterling House" (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. Sterling expects that it will renew its service mark at that time.
Sterling is in the process of registering its service mark "Sterling Cottage."
Sterling 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 residence system and in the
trade dress protection of the physical residences.
EMPLOYEES
As of June 30, 1997, Sterling had approximately 1,500 employees,
approximately 700 of whom were employed in full-time positions. Sterling has no
collective bargaining agreements with any of its employees. Sterling believes
that its labor relations are good.
PROPERTIES
The following chart sets forth, as of August 15, 1997, the location, number
of units, ownership and the date on which operations commenced for the Company's
residences and the number of units and residences under construction or
development:
<TABLE>
<CAPTION>
COMMENCED
LOCATION UNITS OWNERSHIP OPERATIONS
- -------- ----- --------- ----------
<S> <C> <C> <C>
OWNED OR LEASED
Augusta, KS............................... 21 Owned October 1991
Wichita, KS............................... 26 Leased September 1993
Abilene, KS............................... 26 Owned November 1993
Bethany, OK............................... 26 Leased January 1994
Junction City, KS......................... 26 Owned March 1994
Derby, KS................................. 26 Leased April 1994
</TABLE>
64
<PAGE> 78
<TABLE>
<CAPTION>
COMMENCED
LOCATION UNITS OWNERSHIP OPERATIONS
- -------- ----- --------- ----------
<S> <C> <C> <C>
OWNED OR LEASED
McPherson, KS............................. 33 Leased June 1994
Emporia, KS............................... 26 Owned July 1994
Salina, KS................................ 33 Leased August 1994
Wellington, KS............................ 26 Leased September 1994
Arkansas City, KS......................... 33 Owned October 1994
Great Bend, KS............................ 33 Leased January 1995
Ponca City, OK............................ 33 Leased March 1995
Hays, KS.................................. 33 Leased June 1995
Dodge City, KS............................ 35 Leased July 1995
Bartlesville, OK.......................... 33 Leased July 1995
Midwest City, OK.......................... 33 Leased October 1995
Enid, OK.................................. 33 Leased October 1995
Shawnee, OK............................... 33 Leased December 1995
Stillwater, OK............................ 33 Leased December 1995
SW Oklahoma City, OK...................... 33 Leased January 1996
Chickasha, OK............................. 33 Leased February 1996
Edmond, OK................................ 37 Leased April 1996
Norman, OK................................ 33 Leased April 1996
Duncan, OK................................ 33 Leased May 1996
Lawton, OK................................ 37 Leased June 1996
Broken Arrow, OK.......................... 37 Leased June 1996
Denton, TX................................ 37 Leased July 1996
Ennis, TX................................. 33 Leased July 1996
Corsicana, TX............................. 33 Leased July 1996
Waxahachie, TX............................ 37 Leased August 1996
Palestine, TX............................. 37 Leased August 1996
Muskogee, OK.............................. 37 Leased August 1996
Claremore, OK............................. 37 Leased August 1996
Liberal, KS............................... 44 Owned August 1996
Paris, TX................................. 37 Leased September 1996
NW Oklahoma City, OK...................... 37 Leased September 1996
Stuart, FL................................ 42 Leased September 1996
Vero Beach, FL............................ 42 Leased September 1996
Ada, OK................................... 37 Leased October 1996
Owasso, OK................................ 37 Leased October 1996
W. Melbourne, FL.......................... 42 Leased November 1996
Texarkana, TX............................. 37 Leased November 1996
Oklahoma City Hefner, OK.................. 37 Leased December 1996
Tequesta, FL.............................. 42 Leased December 1996
Leesburg, FL.............................. 42 Leased December 1996
Coffeyville, KS........................... 37 Leased December 1996
Wichita Falls, TX......................... 42 Leased December 1996
Tyler, TX................................. 42 Leased December 1996
DeSoto, TX................................ 37 Leased December 1996
Salina II, KS............................. 42 Leased December 1996
Mansfield, TX............................. 37 Leased December 1996
Jacksonville, St. Augustine, FL........... 42 Leased December 1996
Richland Hills, TX........................ 37 Leased December 1996
Weatherford, TX........................... 37 Leased December 1996
Kerrville, TX............................. 42 Leased December 1996
Cedar Hill, TX............................ 37 Leased December 1996
Lancaster, TX............................. 37 Owned December 1996
Tulsa Mingo, OK........................... 37 Leased January 1997
Temple, TX................................ 42 Leased January 1997
</TABLE>
65
<PAGE> 79
<TABLE>
<CAPTION>
COMMENCED
LOCATION UNITS OWNERSHIP OPERATIONS
- -------- ----- --------- ----------
<S> <C> <C> <C>
OWNED OR LEASED
Carrolton, TX............................. 37 Leased January 1997
Lewisville, TX............................ 42 Leased January 1997
Durant, OK(1)............................. 37 Leased February 1997
San Antonio, Nacogdoches, TX.............. 37 Leased March 1997
Findlay, OH(1)............................ 37 Leased March 1997
Tavares, FL............................... 42 Leased March 1997
Georgetown, TX(1)......................... 42 Leased March 1997
Port Orange, FL(1)........................ 42 Leased March 1997
Ocala, FL(1).............................. 42 Leased March 1977
Troy, OH(1)............................... 37 Leased March 1997
San Antonio, Maltsberger, TX(2)........... 37 Leased March 1997
Waco, TX(2)............................... 42 Leased March 1997
San Antonio, Whitby, TX(2)................ 50 Leased March 1997
Brighton, CO(2)........................... 42 Leased May 1997
Tulsa, 71st, OK(2)........................ 46 Leased May 1997
Newark, OH(1)............................. 42 Leased May 1997
New Braunfels, TX(2)...................... 37 Leased May 1997
Greenville, OH(2)......................... 42 Leased June 1997
Fairfield, OH(2).......................... 42 Leased June 1997
Punta Gorda, FL(2)........................ 42 Leased June 1997
Gainesville, FL(2)........................ 50 Leased June 1997
Springfield, OH........................... 42 Owned June 1997
Port Charlotte, FL(2)(4).................. 42 Owned June 1997
DeLand, FL(1)(4).......................... 42 Owned June 1997
Jacksonville, Merrimac, FL(2)............. 42 Owned July 1997
Loveland, CO(4)........................... 50 Owned July 1997
Arvada, CO(4)............................. 50 Owned July 1997
Springdale, OH(2)(4)...................... 42 Owned August 1997
-----
Total Units..................... 3,296
=====
MANAGED OR FRANCHISED
Olathe, KS................................ 37 Franchised November 1992
Topeka, KS................................ 37 Franchised April 1994
Pratt, KS................................. 43 Managed September 1994
Lenexa, KS................................ 38 Franchised November 1994
Lawrence, KS.............................. 37 Franchised April 1995
Leawood, KS............................... 37 Franchised September 1995
Olathe II, KS............................. 42 Franchised December 1995
Colorado Springs, CO(5)................... 37 Managed/Franchised September 1995
Colorado Springs II, CO(5)................ 37 Managed/Franchised April 1997
Lenexa, KS II............................. 37 Franchised April 1997
Greeley, CO(3)............................ 42 Managed June 1997
Edmond, OK................................ 29 Managed August 1997
Weatherford, OK........................... 35 Managed August 1997
-----
Total Units..................... 488
=====
</TABLE>
66
<PAGE> 80
<TABLE>
<CAPTION>
UNDER CONSTRUCTION UNITS RESIDENCES
- ------------------ ----- ----------
<S> <C> <C>
Colorado.................................. 92 2
Florida................................... 386 9
Ohio...................................... 322 8
Oklahoma.................................. 33 1
Kansas.................................... 33 1
North Carolina............................ 126 3
South Carolina............................ 128 3
----- --
Total Units..................... 1,120 27
===== ==
</TABLE>
<TABLE>
<CAPTION>
UNDER DEVELOPMENT UNITS RESIDENCES
- ----------------- ----- ----------
<S> <C> <C>
Colorado.................................. 50 1
Florida................................... 462 11
Ohio...................................... 214 5
Arizona................................... 298 6
North Carolina............................ 210 5
South Carolina............................ 210 5
Indiana................................... 452 11
Tennessee................................. 130 3
----- --
Total Units..................... 2,026 47
===== ==
</TABLE>
- ---------------
(1) Minority interest owned by joint venture partner.
(2) Majority interest owned by joint venture partner.
(3) Facility owned by a development partner. Sterling has an operating lease
commitment letter with LTC Properties, Inc. to lease the facility in 30 to
180 days after August 15, 1997.
(4) Certificate of Occupancy received but not yet fully licensed.
(5) Sterling closed on the purchase of these residences on August 29, 1997.
As of August 15, 1997, Sterling had a total of 74 residences under
construction, development or purchase commitment. Sterling's executive offices
are located in leased office space in Wichita, Kansas. Sterling also leases
office space in Florida, Ohio, Colorado and Oklahoma for its District Managers
and in Texas and North Carolina for its construction Project Managers.
LEGAL PROCEEDINGS
As of June 30, 1997, there were no material pending legal proceedings to
which Sterling or its property is subject.
STERLING DIVIDEND POLICY
Sterling has never paid any cash dividends and, for the foreseeable future,
Sterling 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 Sterling, other relevant factors, and, more importantly,
upon compliance with various financial covenants contained in future financing
agreements to which Sterling may become a party, the effect of which is to make
the payment of dividends unlikely during the foreseeable future.
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<PAGE> 81
STERLING MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Sterling was formed in 1991 and, prior to the Sterling IPO in October 1995,
used a series of limited partnerships and limited liability companies to finance
the development and construction of residences in which it retained certain
minority and majority interests. In January 1994, Sterling acquired BCI
Construction, Inc. (formerly Buchanan Homes, Inc.), a construction management
company, which previously constructed all of the residences developed by
Sterling. During 1994, Sterling secured a significant financing commitment from
Health Care REIT, Inc. ("HCRI") and, as a result, initiated the development of a
series of residences through Corridor Properties, L.L.C., which at that time was
a 60% owned affiliate.
On October 26, 1995, Sterling issued 2,185,000 shares in the Sterling IPO
realizing net proceeds of $21.8 million. Sterling utilized approximately $1.5
million of the net proceeds to repay certain long-term debt and to pay a $0.5
million termination fee to HCRI in connection with the termination of Sterling's
loan agreement by Sterling. Sterling used the remaining net proceeds to finance
development. Also, in connection with the Sterling IPO, Sterling entered into
the Reorganization Transaction. See Note 1 to the Audited Consolidated Financial
Statements of Sterling included herein.
During 1996, Sterling continued its efforts to expand its market share in
the assisted living residence segment of the long-term care industry through
development, construction and acquisition of assisted living residences. On
March 26, 1996, Assisted Living Properties Inc. ("ALP"), a wholly owned
subsidiary of Sterling, entered into an operating lease agreement with Meditrust
to lease three assisted living residences previously owned by franchisees of
Sterling. Concurrently with this transaction the franchisees, Masters
Associates, L.L.C. ("Masters"), the owner of the Derby, Kansas residence, Hays
Assisted Living, L.L.C. ("HAL"), the owner of the Hays, Kansas residence, and
Wellington Partners, L.L.C. ("WPL"), the owner of the Wellington, Kansas
residence, contemporaneously sold all of their assets (principally consisting of
their real property, building, improvements, furniture and equipment) to
Meditrust. Sterling had previously managed the Derby, Hays and Wellington
residences for the franchisees. On March 26, 1996, the Management and Franchise
Agreements with Masters, HAL and WPL were terminated and ALP assumed all the
operations and residents' lease agreements. The sale price of each facility was
the result of negotiations among Sterling, Meditrust and the three franchisees.
Mr. Bushee, a director of Sterling, is the Chief Operating Officer of Meditrust.
D. Ray Cook, M.D., a director and principal stockholder of Sterling, was a
passive investor in Masters and WPL.
On May 23, 1996, Sterling increased its funds available for development,
construction and acquisitions of assisted living residences by issuing, in a
private placement, $35 million aggregate principal amount of the Sterling
Debentures. The Sterling Debentures, which are noncallable until July 15, 1999,
are convertible into shares of Sterling Common Stock at a conversion price of
$22.42 per share, or an aggregate of 1,561,106 shares. Sterling used the net
proceeds of $33.4 million to finance development activities. The Sterling
Debentures and underlying securities were registered on Form S-3 with the
Commission on November 19, 1996.
On August 1, 1996, Sterling acquired the land, building, and other fixed
assets of Woodland Terrace, a 45 unit retirement and assisted living residence
located in Liberal, Kansas. Sterling also acquired an operating lease on a 37
unit retirement and assisted living residence located in Coffeyville, Kansas on
December 31, 1996. Sterling had managed the property since September 1, 1996.
In February 1997, Sterling formed a wholly owned subsidiary, Coventry
Corporation ("Coventry"), to enter into joint venture agreements with Sterling's
development partners. Pursuant to the joint venture agreements, Coventry holds
interests in various limited liability companies and limited partnerships formed
to develop Sterling House residences (the "Joint Ventures"). Sterling's
development strategy includes forming strategic alliances with regional real
estate development partners which are anticipated to enable Sterling to develop
and construct additional residences while reducing the investment of, and
associated risk to, Sterling. Sterling's development partners generally provide
construction management experience, access to existing
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<PAGE> 82
relationships with local contractors, suppliers and municipal authorities,
knowledge of local and state building codes and zoning laws and assistance with
site location for new residences while investing capital and sharing in the
development risk of new properties. Sterling, through Coventry, assists in
financing residences, contributes operational and industry expertise and has
management responsibility for the residences. Sterling has both the option, at
its election and an obligation, at the election of its Joint Venture partners,
to acquire the equity interests of the other partners at predetermined prices
and times. Sterling plans to continue to utilize this development strategy in
the future.
At March 25, 1997, Coventry held an interest in Austin Development,
Limited. On February 21, 1997, Sterling transferred ownership of a site under
construction in Findlay, Ohio to Austin Development, Limited for $2,500,000,
evidenced by a promissory note for the same amount. Concurrently with this
transaction, Austin Development, Limited entered into a management agreement and
a license agreement with Sterling. In January 1997, Sterling formed North
Central Assisted Living, L.L.C., ("NCAL") with Eby Development, a franchisee
since 1992. NCAL will develop, construct and manage Sterling House residences.
Sterling holds a minority interest in NCAL.
From time to time, Sterling has continuing discussions with its franchisees
and Joint Venture partners relative to the structure of their relationships with
Sterling. Sterling opened 41 residences containing 1,519 units during the year
ended December 31, 1996 and 27 residences containing 1,114 units during the
first six months of 1997.
The following table presents the number of owned/leased, managed or
franchised residences and the number of residences under construction and under
development, by state, as of June 30, 1997, December 31, 1996 and 1995.
<TABLE>
<CAPTION>
OWNED/LEASED MANAGED/FRANCHISED UNDER CONSTRUCTION UNDER DEVELOPMENT
-------------------- -------------------- -------------------- --------------------
6/97 12/96 12/95 6/97 12/96 12/95 6/97 12/96 12/95 6/97 12/96 12/95
---- ----- ----- ---- ----- ----- ---- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residences by State:
Kansas........................... 16 16 11 8 7 10 1 0 0 0 0 0
Oklahoma......................... 23 19 6 0 0 0 1 3 7 0 0 7
Texas............................ 25 18 0 0 0 0 0 9 4 0 0 13
Florida.......................... 13 5 0 0 0 0 8 7 0 9 12 6
Colorado......................... 2 0 0 2 1 0 3 3 0 3 4 0
Ohio............................. 6 0 0 0 0 0 8 10 0 4 8 0
Iowa............................. 0 0 0 0 0 0 2 0 0 3 5 0
North Carolina................... 0 0 0 0 0 0 2 0 0 4 0 0
South Carolina................... 0 0 0 0 0 0 1 0 0 5 0 0
Other States..................... 0 0 0 0 0 0 0 0 0 12 7 0
-- -- -- -- -- -- -- -- -- -- -- --
85 58 17 10 8 10 26 32 11 40 36 26
== == == == == == == == == == == ==
</TABLE>
Sterling plans to finance its development and construction of new
residences primarily through the use of financing agreements involving the sale
and immediate lease back of the land, building and equipment used at the
residences.
Sterling has experienced recurring net losses since its inception resulting
from the expenses incurred to establish the infrastructure necessary to support
its aggressive residence development program, as well as operating losses
incurred on newly opened residences during the lease-up period.
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<PAGE> 83
The following table sets forth the number of operational residences and
units owned/leased or managed/franchised and the stabilized occupancy and
private pay percentages at June 30, 1997 and December 31, 1996, 1995, 1994 and
1993.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ---------------------------------
1997(1) 1996 1995 1994 1993
----------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Residences:
Owned/Leased(2)................................... 76 58 17 9 3
Managed/Franchised................................ 10 8 10 6 1
------ ------ ------ ------ ------
Total..................................... 86 66 27 15 4
====== ====== ====== ====== ======
Units:
Owned/Leased...................................... 2,979 2,035 516 250 73
Managed/Franchised................................ 557 309 358 207 37
------ ------ ------ ------ ------
Total............................................... 3,536 2,344 874 457 110
====== ====== ====== ====== ======
Stabilized occupancy percentage(3).................. 95% 97% 96% 95% 100%
Units private pay................................... 98 99 100 100 100
Average monthly rent/unit........................... $1,754 $1,688 $1,618 $1,505 $1,355
Average monthly rent/unit including community
fees.............................................. $1,804 $1,753 $1,705 -- --
</TABLE>
- ---------------
(1) Nine residences have a Certificate of Occupancy but were not yet fully
licensed until July 1997. Includes four residences owned/leased by Sterling,
through Joint Ventures in which Sterling holds a 9.8% ownership interest.
(2) Prior to October 26, 1995, residences were owned by limited partnerships,
limited liability companies, or a corporation.
(3) Stabilized occupancy percentage represents the occupancy at the dates
presented and only includes those residences that have been operating in
excess of nine months or that have reached an occupancy rate of 95% (does
not include Managed/Franchised units).
Except for the historical information contained herein, the matters
discussed in this Sterling Management's Discussion and Analysis of Financial
Condition and Results of Operations are forward looking statements that involve
risks and uncertainties that could cause actual results to differ materially,
including, without limitation, risks associated with Sterling's ability to
develop, construct, acquire or franchise additional assisted living residences
in accordance with Sterling's development schedule, management of quarter to
quarter results, and other risks detailed herein under "RISK FACTORS." The risk
factors and information set forth under "RISK FACTORS" should be carefully
considered in the evaluation of Sterling, its business and its investment value.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 as Compared to Six Months Ended June 30, 1996.
Revenues. Total revenue for the six months ended June 30, 1997, increased
to $17,798,000 compared to $5,951,000 for the six months ended June 30, 1996, an
increase of $11,847,000 or 199%. This increase was primarily attributable to an
increase of $11,706,000 in residence rentals as a result of the 1,958 new rental
units at 40 residences that have been developed or acquired by Sterling since
June 30, 1996. The average monthly rental per resident for the six months ended
June 30, 1997, increased to $1,754 compared to $1,642 for the same period in
1996. Payments from Medicaid programs comprised approximately 1% of Sterling's
revenue for the six months ended June 30, 1997. Sterling anticipates that the
percentage of revenue derived from Medicaid programs will increase, although
revenues from private pay residents will continue to be Sterling's predominant
source of revenue.
Residence Operating Expenses. Residence operating expenses increased to
$11,030,000 for the six months ended June 30, 1997, compared to $3,797,000 for
the six months ended June 30, 1996, an increase of
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<PAGE> 84
$7,233,000 or 190%. The increase is attributable to the increase in residences
as described above. In addition, beginning September 1996, Sterling opened
residences with an increased number of units, resulting in higher operating
expenses, primarily property expenses, during the stabilization period of these
residences.
At June 30, 1997, Sterling had received certificates of occupancy on 85
residences, including four residences owned/leased through Joint Ventures in
which Sterling holds a 9.8% ownership interest, 76 of which were fully
operational, compared to the 32 residences opened at June 30, 1996, all of which
were fully operational.
General and Administrative Expenses. General and administrative expenses
increased to $2,259,000 for the six months ended June 30, 1997, from $1,191,000
for the six months ended June 30, 1996, an increase of $1,068,000 or 90%. The
increase is primarily attributable to the increase in payroll and associated
costs relating to additions in management and other personnel to support the
additional residences operated by Sterling and its growing development program,
as well as travel costs associated with new residences located in additional
states.
Building Rentals. Building rental increased to $4,410,000 for the six
months ended June 30, 1997, up from $1,116,000 for the six months ended June 30,
1996, an increase of $3,294,000 or 295%. The increase is attributable to
Sterling having 57 residences under operating leases at June 30, 1997, compared
to 17 residences under operating leases at June 30, 1996, an increase of 40
residences.
Depreciation and Amortization. Depreciation and amortization increased to
$1,321,000 for the six months ended June 30, 1997, compared to $471,000 for the
six months ended June 30, 1996, an increase of $850,000 or 180%. This increase
is primarily attributable to the increase in prerental cost amortization during
the current period. Prerental cost amortization was $902,000 for the six months
ended June 30, 1997, compared to $189,000 for the six months ended June 30,
1996, an increase of $686,000. Prerental costs represent preopening marketing,
employee recruitment and training, and other start-up expenditures necessary to
prepare the residences for occupancy. These prerental costs are amortized over a
12 month period commencing the month the residence opens. Prerental costs (net
of amortization) were $1,016,000 at June 30, 1997, compared to $555,000 at June
30, 1996, an increase of approximately $461,000 or 83%. The increase in
prerental costs is primarily attributable to 44 residences opened for twelve
months or less at June 30, 1997, compared to 11 such residences at June 30,
1996.
Excluding prerental cost amortization, depreciation and other amortization
expense was $419,000 for the six months ended June 30, 1997, compared to
$282,000 for the six months ended June 30, 1996, an increase of $164,000 or 64%.
The increase is attributable to the additional property and equipment acquired
since June 30, 1996.
Interest Income. Interest income decreased to $528,000 for the six months
ended June 30, 1997, down from $534,000 for the six months ended June 30, 1996,
a decrease of $6,000.
Interest Expense. Interest expense for the six months ended June 30, 1997,
was $153,000 (net of interest capitalization of $1,119,000) compared to $333,000
(net of interest capitalization of $509,000) for the six months ended June 30,
1996, a decrease of $180,000 or 54%. The decrease in interest expense is
primarily attributable to the increase in interest capitalization resulting from
an increase in Sterling's level of construction in progress during the same
periods. Construction in progress totaled $33,546,000 and $12,205,000 at June
30, 1997, and June 30, 1996, respectively.
Minority Interest Share of Loss of Subsidiaries. Minority interest in loss
of subsidiaries was $525,000 for the six months ended June 30, 1997, compared to
$0 for the six months ended June 30, 1996. The losses represent the share of
losses allocated to the minority joint venture partners in the Joint Ventures
formed in the first six months of 1997.
Incomes Taxes. Sterling recorded an income tax benefit of $97,000 for the
six months ended June 30, 1997, compared to $139,000 for the six months ended
June 30, 1996, a decrease of $42,000 or 30%. This decrease is related to the
decrease in Sterling's net loss before income taxes for the six month period
ended June 30, 1997, compared to the same period in 1996.
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<PAGE> 85
Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995.
Revenues. Total revenues increased to $16,038,000 in 1996 compared to
$4,598,000 in 1995, an increase of $11,440,000 or 249%. This increase is
primarily attributable to an increase of $13,279,000 in residence rentals as a
result of the 1,519 new rental units that have been developed and acquired by
Sterling since December 31, 1995, and the 330 rental units acquired in the
Reorganization Transaction. The overall decrease in other revenues is primarily
due to Sterling's efforts to rapidly develop Sterling-owned residences,
primarily through new construction and acquisitions, and Sterling's decreasing
emphasis on revenue from developing, managing and constructing franchise
residences. Sterling expects that franchise and royalty fee revenues, which have
historically produced higher margins than rental revenue, will continue to
decline as a percentage of Sterling's total revenue.
Residence Operating Expenses. Residence operating expenses increased to
$10,267,000 compared to $1,510,000 for the same period in 1995, an increase of
$8,757,000 or 580%. The increase is attributable to the increase in the number
of new residences as described above. Additionally in 1996, Sterling opened
residences with a greater number of rental units per building, resulting in
higher fixed property expenses, during the lease-up period than experienced in
1995. Sterling does not allocate general and administrative overhead charges to
the residences.
General and Administrative Expenses. General and administrative expenses
increased to $3,147,000 in 1996 from $1,810,000 during the same period in 1995,
an increase of $1,337,00 or 74%. The increase is primarily attributable to the
increase in payroll costs and associated costs relating to the expansion in the
number of management and support personnel to facilitate Sterling's increase in
residences and growing development program. Other increases came in the areas of
marketing, advertising, professional fees, and other expenses related to being a
publicly traded company.
Cost of Construction Services. Cost of construction services decreased to
$63,000 in 1996 from $1,069,000 during the same period in 1995. The decrease is
attributable to a decrease in such services to franchisees.
Building Rentals. Building rental increased to $2,982,000 in 1996, up from
$55,000 during the same period in 1995. Such costs reflect the operating leases
entered into during 1996. Sterling had five residences under operating leases at
the end of 1995, and entered into an additional 41 operating leases during 1996,
resulting in a total of 46 residences operating under an operating lease
agreements at December 31, 1996.
Depreciation and Amortization. Depreciation and amortization increased to
$1,229,000 in 1996, compared to $460,000 in 1995, an increase of $769,000 or
167%. This increase is primarily attributable to the increase in prerental cost
amortization during the current period. Prerental cost amortization was $631,000
in 1996, compared to $169,000 in 1995, an increase of $462,000. Prerental costs
represent preopening marketing, employee recruitment and training, and other
start-up expenditures necessary to prepare the residence for rent. These
prerental costs are amortized over a 12-month period commencing in the month the
residence opens. Prerental costs (net of amortization) was approximately
$1,339,000 at December 31, 1996, compared to approximately $242,000 at December
31, 1995, an increase of approximately $1,097,000. The increase in prerental
costs is primarily attributable to two factors. First, Sterling opened 36
residences during 1996 compared to eight residences opened in 1995, an increase
of 28 residences. Second, Sterling has experienced higher prerental costs on a
per residence basis as it has begun operations in the markets of Florida and
Texas. Sterling incurred prerental costs averaging approximately $51,000 per
residence in 1996 ($42,000 for the first ten residences in 1997), which
represents a significant increase over expenditures incurred per residence
during the same period in 1995. Management anticipates that prerental costs per
residence will continue to be higher than the amounts incurred in 1995, as a
result of the higher costs in the new markets Sterling is entering, and that the
amortization of these prerental costs will continue to impact Sterling's results
of operations.
Depreciation was $598,000 in 1996, compared to $291,000 in 1995, an
increase of $307,000 or 105%. The increase is attributable to the residences
acquired in the Reorganization Transaction and the depreciation related to the
property and equipment acquired since December 31, 1995.
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<PAGE> 86
Equity In Net Loss From Investments in Unconsolidated Affiliates. Equity
in net loss from investments in unconsolidated affiliates decreased to $0 in
1996 from $279,000 in 1995. Sterling's investments in its unconsolidated
affiliates were terminated on October 26, 1995, as the minority interests were
acquired in the Reorganization Transaction.
Interest Income. Interest income increased to $1,042,000 in 1996 up from
$204,000 in 1995. The increase is attributable to the investment of excess cash
balances in U.S. Treasury securities.
Interest Expense. Interest expense increased to $534,000 in 1996, up from
$375,000 in 1995. The increase is attributable to the assumption of debt
associated with the residences acquired in the Reorganization Transaction and
the interest incurred relating to the Debentures.
Income Taxes. In 1996, Sterling recorded a tax benefit of $409,000
compared to $75,000 in 1995. This benefit recognized the effect of the
residences acquired in the Reorganization Transaction, whereby Sterling
accounted for the acquisition under the purchase method of accounting, and, as
required by FAS 109, the basis differences between the allocated fair value for
book purposes and the assumed historical tax basis required Sterling to
establish the necessary deferred tax liabilities for these temporary
differences. As such, Sterling's deferred tax liability position allowed
Sterling to recognize a tax benefit for the pre-tax operating losses generated
in the subsequent periods.
Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994.
Revenues. Total revenues increased to $4,598,000 in 1995 from $2,272,000
in 1994, an increase of $2,326,000 or 102%. This increase was primarily
attributable to an increase of $1,936,000 in residence rentals as a result of
the residences acquired in the Reorganization Transaction, rentals from six new
Sterling-owned residences and rentals from the Abilene residence which has been
included in Sterling's operations since May 31, 1995. Additionally, other
revenues increased to $2,301,000 from $1,911,000 in 1994, an increase of
$390,000 or 20%. Such increase was attributable to an increase in initial
franchise and royalty fees of $55,000, a 23% increase from $236,000 in 1994, an
increase in management and service fees of $184,000, a 60% increase from
$306,000 in 1994, and an increase in construction services of $161,000, a 15%
increase from $1,056,000 in 1994. Such increases were primarily a result of the
development and operation of additional franchise residences which opened during
1995 and 1994. The overall increase in other revenues was partially offset by a
reduction in development fees of $10,000, a 3% reduction from $313,000 in 1994,
attributable to Sterling's increased focus on development and construction of
its own residences and the reduction of fees from the residences that were
acquired as part of the Reorganization Transaction.
Residence Operating Expenses. Residence operating expenses increased to
$1,510,000 in 1995 from $251,000 in 1994, a 502% increase, reflecting the
expenses associated with the operation of the residences previously described.
General and Administrative Expenses. General and administrative expenses
increased to $1,810,000 in 1995 from $1,162,000 in 1994, an increase of $648,000
or 56%. The increase was primarily the result of additional payroll and
associated costs of approximately $557,000 relating to the expansion in the
number of management and support personnel to facilitate Sterling's growing
development program. The remaining increase of $91,000 was attributable to an
increase in marketing, advertising costs and overall increases in other general
corporate expenses incurred to support the growth in personnel.
Stock Compensation Expenses. Stock compensation expense increased to
$413,000 in 1995 from $0 in 1994. Such costs represent a one-time grant of
non-qualified stock options on October 26, 1995 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). The options vested immediately and will
be exercisable in three 20% increments at the end of each six-month period
subsequent to October 26, 1995, with the remaining 40% balance becoming
exercisable on October 26, 1997.
Cost of Construction Services. Cost of construction services increased to
$1,069,000 in 1995 from $869,000 in 1994, a 23% increase. Such an increase was
attributable to an increase in such services provided to franchisees.
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<PAGE> 87
Building Rental. Building rental increased to $55,000 in 1995 from $0 in
1994. Such costs reflect the operating leases entered into for the Ponca City
residence in September 1995, and the Dodge City, Great Bend, McPherson and
Salina residences in December 1995.
Depreciation and Amortization. Depreciation and amortization increased to
$460,000 in 1995 from $88,000 in 1994, an increase of $372,000. The increase was
attributable to the residences acquired in the Reorganization Transaction and
the depreciation related to property and equipment acquired during 1995.
Equity in Net Loss from Investments in Unconsolidated Affiliates. Equity
in net loss from investments in unconsolidated affiliates decreased to $278,000
in 1995, from $298,000 in 1994, a decrease of $20,000 or 7%. The decrease was
attributable to the residences opened in 1994 reaching stabilized occupancy
during 1995. Sterling's investments in its unconsolidated affiliates were
terminated on October 26, 1995, as the minority interests were acquired in the
Reorganization Transaction.
Interest Income. Interest income increased to $204,000 in 1995, from
$7,000 in 1994, an increase of $197,000. The increase was attributable to the
investment of excess public offering proceeds from the Sterling IPO in U.S.
Treasury securities.
Interest Expense. Interest expense increased to $375,000 in 1995, from
$103,000 in 1994, an increase of $272,000 or 264%. The increase was attributable
to the assumption of debt associated with the residences acquired in the
Reorganization Transaction and the cost of financing the Ponca City,
Bartlesville, Midwest City and Enid residences.
Income Taxes. For 1995, Sterling recorded a tax benefit of $75,000
compared to $0 in 1994. This benefit recognizes the effect of the residences
acquired in the Reorganization Transaction, whereby Sterling accounted for the
acquisition under the purchase method of accounting, and as required by FAS 109,
the basis differences between the allocated fair value for book purposes and the
assumed historical tax bases required Sterling to established necessary deferred
tax liabilities for these temporary differences. As such, Sterling's deferred
net tax liability position allowed Sterling to recognize a tax benefit for the
pre-tax operating losses generated in the period subsequent to the date of the
Reorganization Transaction. During 1995 and 1994, the pre-tax losses incurred by
Sterling prior to the date of the Reorganization Transaction were not tax
benefitted because Sterling was in a net deferred tax asset position which
required such benefits to be reduced by valuation allowances.
Loss before Extraordinary Item. Loss before extraordinary item increased
to $1,007,000 in 1995 from $494,000 in 1994, an increase of $513,000 or 104%.
The increase was primarily attributable to increases in operating expenses
resulting from the addition of overhead and the recognition of start-up losses
from the opening of additional residences.
Extraordinary Item. In 1995, Sterling incurred an extraordinary pre-tax
loss of $1,923,000 attributable to (i) the issuance of 87,823 shares of Sterling
Common Stock and $500,000 paid in cash to HCRI as a termination fee in
connection with the termination of Sterling's loan commitment, and (ii) to the
write-off of all unamortized financing costs incurred by Sterling pursuant to
the terminated loan commitment.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1997, was $13,920,000 up from $7,116,000 at
December 31, 1996. Net cash provided from operating activities totaled $86,000,
for the six months ended June 30, 1997, compared to net cash used in operating
activities of $776,000 in the 1996 period. This improvement in operating cash
flow was primarily due to the increase in the number of stabilized residences at
June 30, 1997. Net cash used in investing activities was $3,601,000 for the six
months ended June 30, 1997, compared to $5,036,000 for the 1996 period. This
improvement in investment cash flows resulted primarily from the addition of
$46,264,000 in property and equipment, $20,536,000 advanced to unconsolidated
affiliates and offsetting proceeds of $54,225,000 from sale/leaseback
transactions and $6,296,000 received from unconsolidated affiliates during the
first six months of 1997. Net cash provided by financing activities totaled
$2,397,000 for the first six months ended June 30, 1997, compared to $24,469,000
for the 1996 period. Financing activities in the 1997 period consisted of cash
received from mortgage financing of one residence of $1,868,000 and capital
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<PAGE> 88
contributions by minority interest members of $700,000. The 1996 period included
the issuance of $35,000,000 of Sterling Debentures.
Sterling has entered into sale/leaseback agreements with certain REITs
providing for $323,800,000 as a source of financing the development,
construction and, to a lesser extent, acquisitions of assisted living
residences. Under such agreements, Sterling enters into a series of
sale/leaseback transactions, whereby Sterling sells residences at negotiated
values and concurrently enters into a lease agreement for each residence. The
initial terms of the leases vary from 10 to 15 years and include aggregate
renewal options ranging from 15 to 40 years. Sterling is responsible for all
operating costs, including repairs, property taxes, and insurance. Typically the
lease arrangements provide Sterling with a right of first refusal if the REIT
were to seek to sell the property. The annual minimum lease payments are based
upon a percentage of the negotiated sales value of each residence. These
percentages are typically equal to the yield of the most actively traded U.S.
Treasury Note with a maturity comparable to the initial term of the lease in
effect at the time of the transaction plus rates ranging from 3.20% to 3.75%.
The minimum lease payments are adjusted annually by a percentage multiplier that
is contingent upon changes in the Consumer Price Index. Through August 15, 1997,
Sterling had used approximately $145,600,000 of the committed REIT financing.
Sterling accounts for these leases as operating leases.
Capital expenditures for 1997 are estimated to total approximately
$110,000,000 to $130,000,000, related primarily to the development of additional
residences, which will be financed primarily with sale/leaseback transactions.
During the first six months of 1997, Sterling's capital expenditures totaled
$66,801,000. Sterling intends to satisfy future capital requirements for its
development activities by various means, including financing obtained from
sale/leaseback transactions, construction and other debt financing and, to the
extent available, cash generated from operations. Sterling does not anticipate
any significant capital expenditures within the foreseeable future with respect
to its existing residences. It is expected that cash generated from operations
will be sufficient to fund any expenditures Sterling may be required to make
with respect to existing residences.
IMPACT OF INFLATION
Since the Reorganization Transaction, Sterling's principal source of
revenues is from resident rentals. The operations of the residences are affected
by rental rates which are dependent upon market conditions and the competitive
environment in the areas where the residences are located. Compensation to
employees is the principal cost element relative to the operations of the
residences. Although Sterling has not historically experienced any adverse
effects of inflation on salaries or other operating expenses, there can be no
assurance that such trends will continue or that should inflationary issues
arise that Sterling will be able to offset such costs by increasing rental
rates.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF STERLING
The following table presents certain information as of August 15, 1997
regarding the beneficial ownership of Sterling Common Stock by (i) each of the
directors and certain executive officers of Sterling individually, (ii) all
persons known by Sterling to be beneficial owners of 5% or more of the
outstanding Sterling Common Stock, and (iii) all directors and executive
officers of Sterling as a group. Unless otherwise noted, the persons listed
below have sole voting and investment power and record and beneficial ownership
with respect to such shares. The following table also presents certain
information giving effect to the Merger and the transactions contemplated
thereby and the resulting beneficial ownership of ALS Common Stock, as if the
Merger had occurred on August 15, 1997.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF ALS
STERLING COMMON STOCK AS OF COMMON STOCK FOLLOWING THE
AUGUST 15, 1997 MERGER
---------------------------- ----------------------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
SHARES OWNED(1) SHARES OWNED(2)
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Timothy J. Buchanan(3)....................... 949,436(4) 18.8% 1,059,047 5.7%
Steven L. Vick(3)............................ 740,753(5) 14.7% 829,495 4.5%
</TABLE>
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<PAGE> 89
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF ALS
STERLING COMMON STOCK AS OF COMMON STOCK FOLLOWING THE
AUGUST 15, 1997 MERGER
---------------------------- ----------------------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
SHARES OWNED(1) SHARES OWNED(2)
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
D. Ray Cook, M.D.(3)......................... 627,001(6) 12.4% 702,901 3.8%
Palisade Capital Management, L.L.C........... 447,900(7) 8.4% 492,744 2.6%
One Bridge Plaza, Suite 695
Fort Lee, New Jersey 07024
The Kaufman Fund, Inc........................ 390,000(8) 7.7% 429,000 2.3%
43rd Floor
140 East 45th Street
New York, New York 10017
J.P. Morgan & Co............................. 285,500(9) 5.7% 314,050 1.7%
60 Wall Street
New York, New York 10260
Ronald L. Mercer(3).......................... 28,000(10) * 44,000 *
Michael F. Frey(3)........................... 9,331(11) * 22,978 *
Michael F. Bushee(3)......................... 6,000(11) * 19,800 *
Diana M. Laing(3)............................ 6,000(11) * 19,800 *
Mark W. Ohlendorf(3)(12)..................... -- -- 110,000 *
All directors and executive officers......... 2,387,031(13) 46.7% 2,872,341 15.2%(14)
as a group(12 persons)
</TABLE>
- ---------------
* Less than one percent.
(1) Based upon 5,042,428 shares of Sterling Common Stock outstanding on August
15, 1997.
(2) Based upon 18,548,217 shares of ALS Common Stock outstanding after the
Merger, assuming that the Merger had occurred on August 15, 1997. Reflects
percentage ownership in ALS resulting from the exchange of Sterling Common
Stock, the Sterling Debentures and Sterling Options in the Merger.
(3) The business address of Sterling's directors and executive officers is 453
Webb Road, Suite 500, Wichita, Kansas 67207.
(4) Includes (i) 460,000 shares owned beneficially by Mr. Buchanan's spouse,
Meredith Gail Buchanan; (ii) 20,000 shares held in trust for Mr. Buchanan's
children for which trusts Mr. Buchanan is sole trustee; (iii) 10,000 shares
beneficially owned by The Buchanan Family Foundation of which Mr. Buchanan
is the sole trustee; and (iv) 6,666 shares issuable upon the exercise of
Sterling Options that are or will become exercisable on or within 60 days
of August 15, 1997. All of the shares of Sterling Common Stock beneficially
owned by Mr. Buchanan are subject to the terms of the Sterling Voting
Agreements. See "TERMS OF THE MERGER AGREEMENT -- Stockholder Voting
Agreement."
(5) Includes (i) 634,087 shares owned jointly with Mr. Vick's spouse, Susan C.
Vick; (ii) 20,000 shares held in trust for Mr. Vick's children for which
trusts Mr. Vick is the sole trustee; (iii) 10,000 shares beneficially owned
by The Vick Foundation of which Mr. Vick is the sole trustee and (iv) 6,666
shares issuable upon the exercise of Sterling Options that are or will
become exercisable on or within 60 days of August 15, 1997. All of the
shares of Sterling Common Stock beneficially owned by Mr. Vick are subject
to the terms of the Sterling Voting Agreements. See "TERMS OF THE MERGER
AGREEMENT -- Stockholder Voting Agreement."
(6) Includes 6,000 shares issuable upon the exercise of Sterling Options that
are or will become exercisable on or within 60 days of August 15, 1997. All
of the shares of Sterling Common Stock beneficially owned by Dr. Cook are
subject to the terms of the Sterling Voting Agreements. See "TERMS OF THE
MERGER AGREEMENT -- Stockholder Voting Agreement."
(7) According to information set forth on a Schedule 13G reflecting beneficial
ownership as of August 31, 1997 provided to Sterling by the beneficial
owner. Includes 312,200 shares of Sterling Common Stock which the
beneficial owner has the right to acquire upon conversion of Sterling
Debentures.
(8) According to information set forth on a Schedule 13G provided by Sterling
by the beneficial owner.
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<PAGE> 90
(9) According to information set forth on a Schedule 13G provided to Sterling
by the beneficial owner, the beneficial owner has sole investment power for
all shares, but sole voting power as to 178,700 shares.
(10) Includes 6,000 shares issuable upon the exercise of Sterling Options that
are or will become exercisable on or within 60 days of August 15, 1997.
(11) Represents shares issuable upon the exercise of Sterling Options that are
or will become exercisable on or within 60 days of August 15, 1997.
(12) Mr. Ohlendorf commenced employment with Sterling in April 1997.
(13) In addition to those identified on the notes to the table, includes, as of
August 15, 1997, an aggregate of 20,045 shares of Sterling Common Stock
issuable upon the exercise of Merger Options.
(14) In addition to those identified on the notes to the table, includes,
assuming consummation of the Merger on August 15, 1997, an aggregate of
64,319 shares of ALS Common Stock issuable upon the exercise of Merger
Options.
COMPARISON OF RIGHTS OF STERLING
AND ALS STOCKHOLDERS
ALS is incorporated in the State of Delaware and Sterling is incorporated
in the State of Kansas. Stockholders of Sterling, whose rights are currently
governed by the KGCC and the Sterling Restated Articles of Incorporation and
Sterling Bylaws, will, upon consummation of the Merger, become stockholders of
ALS and their rights will be governed by the DGCL and the ALS Certificate of
Incorporation and the ALS Bylaws.
Certain significant differences between the rights of stockholders of ALS
and Sterling are set forth below. This summary is not intended to be relied upon
as an exhaustive list or a detailed description of the provisions discussed and
is qualified in its entirety by the respective corporate codes of the States of
Delaware and Kansas and by the Sterling Restated Articles of Incorporation and
Sterling Bylaws and the ALS Certificate of Incorporation and ALS Bylaws, to
which the Sterling stockholders are referred. See "AVAILABLE INFORMATION."
DESCRIPTION OF THE COMMON STOCK
The authorized capital stock of ALS consists of 30,000,000 shares of ALS
Common Stock, $.01 par value per share, and 5,000,000 shares of $0.01 par value
preferred stock (the "ALS Preferred Stock"). The authorized capital stock of
Sterling consists of 75,000,000 shares of Sterling Common Stock, no par value
per share, and 20,000,000 shares of no par value preferred stock (the "Sterling
Preferred Stock").
Voting Rights. Each share of Sterling Common Stock or ALS Common Stock
entitles the holder thereof to one vote in all matters submitted to a vote of
stockholders, voting together as one class. This means that holders of a
majority of the outstanding shares of Sterling Common Stock or ALS Common Stock
voting for the election of directors of Sterling or ALS, respectively, can elect
all directors then being elected.
Liquidation. In the event of the dissolution, liquidation or winding up of
ALS, the holders of ALS Common Stock are entitled to share equally and ratably
in the assets available for distribution after payments are made to the ALS's
creditors, but subject to the preferred liquidation rights of any holders of any
series of ALS Preferred Stock. Holders of Sterling Common Stock are subject to
the same type of limitations and restrictions.
Other. The holders of shares of ALS Common Stock or Sterling Common Stock
have no preemptive, subscription, redemption or conversion rights and are not
liable for further call or assessment. All of the outstanding shares of ALS
Common Stock are, and the Merger Shares offered hereby by ALS will be, fully
paid and non-assessable upon issuance.
DESCRIPTION OF THE PREFERRED STOCK
The ALS Certificate of Incorporation and the Sterling Restated Articles of
Incorporation authorize the issuance of 5,000,000 shares and 20,000,000 shares,
respectively, of preferred stock. Each of the ALS and Sterling Boards are
authorized to issue the preferred stock, without stockholder approval, in one or
more
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<PAGE> 91
series, and with respect to each series, to determine, subject to limitations
prescribed by law, the dividend rights, dividend rates, any conversion rights or
right of exchange, rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, the liquidation preferences, the
voting rights, if any, and generally any other rights, preferences, and
privileges not in conflict with the respective ALS Certificate of Incorporation
and Sterling Restated Articles of Incorporation, and qualifications, limitations
and restrictions for each series. To date neither company has issued a series of
preferred stock, and neither has any present plans to issue any shares of
preferred stock.
The issuance of shares of preferred stock by action of the ALS Board of
Directors or the Sterling Board of Directors could adversely affect the voting
power, dividend rights and other rights of holders of the ALS Common Stock or
Sterling Common Stock, respectively. Issuance of shares of a series of preferred
stock also could, depending on the terms of such series, either impede or
facilitate the completion of a merger, tender offer or other takeover attempt.
Although the Board of Directors is required to make a determination as to the
best interests of the stockholders when issuing shares of preferred stock, the
ALS Board of Directors or the Sterling Board of Directors could act in a manner
that would discourage an acquisition attempt or other transaction that some or a
majority of the stockholders might believe to be in the best interests of ALS or
Sterling, respectively, or in which stockholders might receive a premium for
their common stock over the then-prevailing market price. Although there are
currently no plans to issue shares of ALS Preferred Stock or rights to purchase
such shares, ALS believes that the availability of the ALS Preferred Stock will
provide ALS with increased flexibility in structuring future financing and
acquisitions and in meeting other corporate needs that might arise. The
authorized shares of ALS Preferred Stock are available for issuance without
further action by ALS stockholders, unless such action is required by applicable
law or the rules of any stock exchange on which the ALS Common Stock may then be
listed.
RIGHTS PLAN
On June 25, 1997, the Board of Directors of Sterling declared a dividend
distribution of one Right for each outstanding share of the Sterling's Common
Stock, to the holders of record on July 3, 1997 (the "Record Date"). Each Right
entitles the registered holder to purchase from the Sterling one one-hundredth
(1/100th) of a share of Series A Junior Participating Preferred Stock, no par
value per share (the "Series A Preferred Stock"), or, in some circumstances,
Sterling Common Stock, other securities, cash or other assets as summarized
below, at a price of $80.00 per one one-hundredth of a share (the "Purchase
Price"), with both shares and price being subject to adjustment in certain
events. The complete terms and conditions of the Rights are set forth in a
Rights Agreement (the "Rights Agreement") between Sterling and ChaseMellon
Stockholder Services, L.L.C., as Rights Agent, dated as of June 25, 1997, as it
may be amended from time to time.
Initially, the Rights attach to all certificates representing outstanding
shares of Sterling Common Stock and no separate certificates for the Rights
("Rights Certificates") will be distributed. The Rights will separate from the
Sterling Common Stock upon the "Distribution Date," which will occur upon the
earlier of (i) subject to certain exemptions, 10 days following a public
announcement that a person or group (an "Acquiring Person") has acquired
beneficial ownership of 20% or more of the outstanding shares of Sterling Common
Stock (the date of such announcement, the "Stock Acquisition Date") or (ii) 10
business days following the commencement of a tender offer or exchange offer,
the consummation of which would result in a person becoming an Acquiring Person
or (iii) 10 business days following a determination by Sterling's Board of
Directors that a person has become the beneficial owner of more than 10% of the
outstanding shares of Sterling Common Stock and (a) has acquired such beneficial
ownership to cause Sterling to repurchase the shares owned by such person or to
pressure Sterling to take some action that would provide such person with
short-term financial gain under circumstances where the Sterling Board
determines that the best long-term interests of Sterling would not be served by
taking such action or (b) such beneficial ownership is causing or is reasonably
likely to cause a material adverse impact on the business or prospects of
Sterling (any such person, an "Adverse Person"). Until the Distribution Date,
(a) the Rights will be evidenced by Sterling certificates and may be transferred
only with such certificates, (b) Sterling Common Stock certificates will contain
a legend incorporating the Rights Plan by reference and (c) the surrender for
transfer of any certificate for
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Sterling Common Stock will also constitute the transfer of the Rights associated
with the stock represented by such certificate. The Rights are not exercisable
until the Distribution Date and will expire at the close of business on June 25,
2007 (the "Final Expiration Date"), unless earlier redeemed by Sterling as
described below.
In the event (a "Flip-In Event") that (i) a person or group becomes an
Acquiring Person (except pursuant to a tender or exchange offer for all
outstanding shares of Sterling Common Stock which at least a majority of
disinterested Sterling Directors, after receiving advice from one or more
investment banking firms, determines to be at a price which is fair to
stockholders and otherwise in the best interests of Sterling and its
stockholders (a "Qualifying Offer")) or (ii) the Sterling Board determines that
a person is an Adverse Person, each holder of a Right will have the right to
receive, upon exercise of such Right, a number of shares of Sterling Common
Stock (or, in certain circumstances, cash, property or other securities of the
Company) having a then current market value of twice the Purchase Price (i.e.,
at a 50% discount to the then current market value). Notwithstanding, following
the occurrence of any Flip-In Event, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person or an Adverse Person (or by certain related parties) will be
null and void in the circumstances set forth in the Rights Agreement. However,
Rights will not be exercisable following the occurrence of any Flip-In Event
until such time as the Rights are no longer redeemable by Sterling as set forth
below.
In the event (a "Flip-Over Event") that, at any time on or after the Stock
Acquisition Date, (i) Sterling is acquired in a merger or other business
combination in which the Sterling is not the surviving corporation, (ii)
Sterling is the continuing or surviving corporation in a merger but all or part
of the outstanding shares of Sterling Common Stock is changed into or exchanged
for stock or securities of any other person or cash or other property, or (iii)
50% or more of the Sterling's assets, earning power or cash flow is sold or
transferred, then each holder of a Right (except Rights that have been voided as
set forth above) thereafter shall have the right to receive, upon exercise at
the then current Purchase Price (as set forth in the Rights Agreement), a number
of shares of common stock of the acquiring company having a then current market
value of twice such Purchase Price (i.e., at a 50% discount). Sterling may not
engage in a transaction with an Acquiring Person constituting a Flip-Over Event
unless the Acquiring Person meets certain conditions. If the Acquiring Person's
(or its affiliated entity's) common stock has not been registered under the
Securities Exchange Act of 1934, as amended, for the preceding twelve months,
but it is a direct or indirect subsidiary of another company which has
registered common stock, the Rights shall be exercisable as described above to
purchase the common stock of such parent company. Moreover, Sterling may not
engage in a Flip-Over transaction unless the Acquiring Person (or its affiliated
entity or parent, as applicable) (i) has sufficient shares of common stock
authorized to permit the full exercise of the Rights and (ii) enters into an
agreement containing the terms set forth above and providing that, as soon as
practicable after the date of the Flip-Over Event, the Acquiring Person will
register the Rights and the securities issuable upon exercise of the Rights
under the Securities Act and maintain the effectiveness of such registration
statement until the Expiration Date of the Rights Plan. Notwithstanding the
foregoing, the Flip-Over provision would not be applicable to a "clean-up"
merger which would take place after the consummation of a Qualifying Offer if,
pursuant to the terms of such merger, (i) the price per share of Sterling Common
Stock offered in such transaction is not less than the price paid to holders of
Sterling Common Stock whose shares were purchased in the Qualifying Offer and
(ii) the form of consideration offered in the transaction is the same as the
form of consideration paid pursuant to the Qualifying Offer.
The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on (payable in shares of the Series A Preferred Stock), or a
subdivision, combination or reclassification of, the Series A Preferred Stock,
(ii) if holders of the Series A Preferred Stock are granted certain rights,
options or warrants to subscribe for or purchase Series A Preferred Stock at
less than the current market price of the Series A Preferred Stock or (iii) upon
the distribution to holders of the Series A Preferred Stock of evidences of
indebtedness or cash (other than a regular quarterly cash dividend out of the
earnings or retained earnings of the Company) or assets (excluding regular
quarterly cash dividends and dividends payable in shares of Series A Preferred
Stock) or of subscription rights, options or warrants
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(other than those referred to above). With certain exceptions, no adjustment in
the Purchase Price will be required until cumulative adjustments amount to at
least 1% of the Purchase Price. Fractional shares of Series A Preferred Stock in
integral multiples of one one-hundredth of a share of Series A Preferred Stock
will be issuable. In lieu of fractional shares other than fractions that are
multiples of one one-hundredth of a share, an adjustment in cash may be made
based on the market price of the Series A Preferred Stock on the last trading
date prior to the date of exercise.
At any time prior to the expiration of 10 days following the Stock
Acquisition Date, Sterling may redeem the Rights in whole, but not in part, at a
price of $.01 (subject to certain adjustments as set forth in the Rights Plan)
per Right. The Sterling Board may not, however, redeem any Rights following a
determination by the Sterling Board that a person is an Adverse Person.
Additionally, the 10 day period following the Stock Acquisition Date during
which the Rights may be redeemed may be extended by the Sterling Directors
during such 10 day period. However, if the Rights are not so redeemed during
such 10 day period (or any extension thereof), the Rights shall become
non-redeemable for the duration of the Rights Plan. Immediately upon the
effectiveness of the action of the Sterling Board ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 redemption price.
In the event that a majority of the Board of Directors of Sterling
following a meeting of stockholders or stockholder action by written consent are
not nominated by the Sterling Board serving immediately prior to such meeting or
action, then for 180 days following such meeting or action the Rights may not be
redeemed if such redemption is reasonably likely to have the purpose or effect
of allowing any person to become an Acquiring Person, otherwise facilitating the
occurrence of a Flip-In Event or a Flip-Over Event or a transaction with an
Acquiring Person.
The Series A Preferred Stock purchasable upon exercise of the Rights will
be junior to any other series of preferred stock Sterling may issue (unless
otherwise provided in the terms of such series). Each whole share of Series A
Preferred Stock will entitle the holder thereof to receive a quarterly
cumulative dividend in an amount equal to the greater of $2.00 or 100 (as
adjusted pursuant to the terms of the Certificate of Designations of the Series
A Preferred Stock, the "Formula Number") times the dividends and other
distributions declared on each share of Sterling Common Stock. In the event of
liquidation, the holders of the Series A Preferred Stock will receive a
preferred liquidation payment equal to $80.00 per share, plus an amount equal to
accrued and unpaid dividends thereon to the date of such payment (the "Series A
Liquidation Preference"). Following such payment, the holders of Sterling Common
Stock will receive an amount per share equal to the quotient obtained by
dividing (i) the Series A Liquidation Preference by (ii) the Formula Number (the
"Adjustment Amount"). Following the full payment of the Series A Liquidation
Preference and the Adjustment Amount, holders of Series A Preferred Stock and
Sterling Common Stock shall receive their ratable and proportionate share of the
remaining assets to be distributed in the ratio of the Formula Number to one
with respect to such Preferred Stock and Sterling Common Stock, on a per share
basis, respectively.
Each share of Series A Preferred Stock will have the number of votes equal
to the Formula Number, voting together with the shares of Sterling Common Stock.
In the event six quarterly cumulative dividends, whether consecutive or not, on
the Series A Preferred Stock are in arrears, the holders of Series A Preferred
Stock will have the right, voting as a class, to elect two members of the
Sterling Board (in addition to the normal voting rights) until all unpaid
dividends on the Series A Preferred Stock have been paid in full.
In the event of any consolidation, merger or other transaction in which
shares of Sterling Common Stock are exchanged, each share of Series A Preferred
Stock will be entitled to receive 100 times the amount and type of consideration
received per share of Sterling Common Stock. The rights of the Series A
Preferred Stock as to dividends, liquidation payments and voting, and in the
event of mergers or consolidations, are protected by customary anti-dilution
provisions.
Except as provided above, any provision of the Rights Agreement may be
amended by the Sterling Board prior to the Distribution Date. Thereafter, the
provisions of the Rights Agreement may be amended by the Sterling Board in order
to cure any ambiguity, defect or inconsistency, to make changes that do not
adversely affect the interests of holders of Rights (excluding the interest of
any Acquiring Person or Adverse Person), or
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to shorten or lengthen any time period under the Rights Plan; provided, however,
that an amendment to lengthen the time period governing redemption may be made
only if the Rights are redeemable and an amendment to lengthen any other time
period may be made only for the purpose of protecting, enhancing or clarifying
the rights of, and/or benefits to, the holders of Rights (other than any
Acquiring Person or Adverse Person). Until a Right is exercised, the holder
thereof, as such, will have no rights as a stockholder of Sterling, including,
without limitation, the right to vote or to receive dividends.
The Rights may have the effect of impeding a change of control of Sterling
without the prior approval of Sterling's Board. The Rights will have certain
anti-takeover effects. The Rights will cause substantial dilution to any person
or group that attempts to acquire Sterling without the approval of the
Sterling's Board. As a result, the overall effect of the Rights may be to render
more difficult or discourage any attempt to acquire Sterling even if such
acquisition may be favorable to the interests of Sterling's stockholders.
Because Sterling's Board can redeem the Rights or approve a Qualifying Offer,
the Rights should not interfere with a tender offer, merger or other business
combination approved by Sterling's Board such as the transaction contemplated by
the Merger Agreement.
The Rights will be extinguished as of the Effective Time upon conversion of
the Sterling Common Stock and the Rights into the right to receive the Merger
Shares.
ALS does not have a rights plan in effect and has no present intention to
adopt one.
AMENDMENT OF ORGANIZATIONAL DOCUMENTS
Articles/Certificates. The Sterling Restated Articles of Incorporation may
be amended at any annual or special meeting of the stockholders of Sterling by
at least a two-thirds vote of the stockholders entitled to vote; provided,
however, that if the Sterling Board, by an affirmative vote of at least
two-thirds of all members of the Sterling Board recommends the advisability of
the amendment, such amendment may be effected by a majority vote of the Sterling
stockholders.
The ALS Certificate of Incorporation provides that it may be amended in the
manner prescribed by statute. Under the DGCL, amendments to certificates of
incorporation generally require the authorization of the board of directors and
approval of stockholders holding a majority of the outstanding shares entitled
to vote on such amendment, unless a greater proportion is specified in the
certificate of incorporation. In addition, amendments which make changes
relating to the capital stock by increasing its par value or aggregate number of
authorized shares, or otherwise adversely affecting the rights of a class, must
be approved by the majority vote of each class or series of stock affected, even
if such stock would not otherwise having voting rights.
Bylaws. The Sterling Bylaws may be amended or repealed by a two-thirds
vote of (i) the stockholders, or (ii) the full Board of Directors.
The DGCL reserves the power to amend, repeal, or adopt bylaws exclusively
to the stockholders, unless the certificate of incorporation also confers such
power upon the board of directors. However, the ALS Certificate of Incorporation
provides the ALS Board may amend and repeal the ALS Bylaws including, to the
extent permitted by law, any bylaw adopted by the stockholders of the
corporation unless such bylaw specifically provides that it may not be amended
or repealed by the ALS Board of Directors. However, see "PROPOSED AMENDMENTS TO
THE ALS BYLAWS."
BOARD OF DIRECTORS
Size of the Board and Classification. The Sterling Restated Articles of
Incorporation and Sterling Bylaws currently provide for a classified Board of
Directors consisting of not less than three and not more than fifteen directors.
The directors are divided into three classes as nearly equal in number as may
be. The current Sterling Board is comprised of six members, divided into three
classes of two members each. In addition, the Sterling Bylaws provide for the
directors to be divided into three classes each with staggered, three year terms
of office. These staggered term provisions may have an anti-takeover effect
against certain tender offers and other attempts to control the Sterling Board.
The ALS Bylaws allow the number of directors to be established by resolution of
the Board of Directors. At the present time, the number of directors is seven.
The number of
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directors may be increased or decreased from time to time by a resolution of the
Board of Directors, but no decrease can have the effect of shortening the term
of any incumbent director. Each director serves for an annual term of office
until the next annual meeting of the stockholders, and each director holds
office for the term for which he is elected and until his successor has been
elected and qualified. However, see "PROPOSED AMENDMENTS TO THE ALS BYLAWS."
Removal. The Sterling Restated Articles of Incorporation provide that
directors may be removed from office, but only for cause and that any action
taken by stockholders to remove one or more directors for cause may only be
taken by the affirmative vote of the holders of at least two-thirds of the
stockholders at a meeting called for such purpose. However, if Sterling's Board
of Directors, by an affirmative vote of at least two-thirds of all members of
the Board of Directors then in office, recommends removal of a director or
directors to the stockholders, such removal may be effected by the affirmative
vote of a majority of the stockholders at a meeting of the stockholders called
for that purpose. The ALS Bylaws provide that a director may be removed at any
time, with or without cause, by the holders of a majority of shares of stock of
the corporation then entitled to vote at an election of directors, except as
other provided by statute. However, see "PROPOSED AMENDMENTS TO THE ALS BYLAWS."
Vacancies. Any vacancy occurring in the Sterling Board of Directors and
any newly created directorship resulting from an increase in the authorized
number of directors, must be filled by the affirmative vote of a majority of the
directors then in office. A director elected to fill a vacancy must be elected
for the unexpired term of his or her predecessor in office until his or her
earlier death, resignation, retirement, disqualification or removal. A director
elected to fill a directorship by reason of an increase in the authorized number
of directors holds office until the next succeeding annual meeting of
stockholders or until such subsequent annual meeting of stockholders as may be
determined by the Sterling Board to be necessary in order to provide for
staggered terms of office as set out in the Sterling Restated Articles of
Incorporation.
Any vacancy in the ALS Board, whether because of death, resignation,
disqualification, an increase in the number of directors or any other cause, may
be filled by the remaining directors or by the stockholders by a plurality of
the votes cast at a meeting of stockholders. Each director so chosen to fill a
vacancy holds office until his or her successor has been elected and qualified
or until he or she resigns or has been removed. However, see "PROPOSED
AMENDMENTS TO THE ALS BYLAWS."
Special Meetings. Pursuant to the Sterling Bylaws, special meetings may be
called by stockholders holding in the aggregate of not less than two-thirds of
the voting stock, the Board of Directors, or the Chairman of the Board. Under
Delaware law, a special meeting of stockholders may be called by the board of
directors or by any other person authorized to do so in the certificate of
incorporation or the bylaws. Pursuant to the ALS Bylaws, special meetings may
only be called by the Board of Directors or the President.
INDEMNIFICATION
Sterling. As authorized by the KGCC, the Sterling Restated Articles of
Incorporation provide that, to the fullest extent permitted by Kansas law, as
the same exists or may hereafter be amended, directors and former directors of
Sterling will not be liable to Sterling or its stockholders for monetary damages
for an act or omission occurring in their capacity as a director. Kansas law
does not currently authorize the elimination or limitation of the liability of a
director to the extent the director is found liable (i) for any breach of the
director's duty of loyalty to Sterling or its stockholders, (ii) for acts or
omissions not in good faith that constitute a breach of duty of the director of
Sterling or that involve intentional misconduct or a knowing violation of law,
(iii) for transactions from which the director received an improper benefit,
whether or not the benefit resulted from action taken within the scope of the
director's office, or (iv) for acts or omissions for which the liability of a
director is expressly provided by law.
ALS. The ALS Restated Certificate of Incorporation provides that no
director of ALS shall be personally liable to ALS or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability (i) for any breach of the directors' duty of loyalty to ALS or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock purchase or redemptions, or (iv) for
any
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transaction from which the director derived an improver personal benefit. The
effect of these provisions is to eliminate the rights of ALS and its
stockholders (through stockholders' derivative suits on behalf of ALS) to
recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from grossly negligent behavior), except
in the situations described above. These provisions do not limit the liability
of directors under federal securities laws and do not affect the availability of
equitable remedies such as an injunction or rescission based upon a director's
breach of his duty of care.
EXTRAORDINARY TRANSACTIONS
Sterling. The Sterling Restated Articles of Incorporation require, in
addition to any vote required by law or agreement, either the affirmative vote
by (i) at least two-thirds of the outstanding shares of the "voting stock" (as
defined therein) of Sterling, or (ii) more than two-thirds of the Board of
Directors, in order to approve, authorize, adopt or consummate by Sterling and
any of its subsidiaries any "business combination" (as defined therein) with a
"related person" (as defined therein). A "business combination" includes (i) any
merger or consolidation of Sterling with or into a "related person," (ii) any
merger or consolidation of a "related person" with or into Sterling, (iii) any
transfer of a substantial part (20%) of the assets of Sterling to or with a
"related person," (iv) any transfer of a substantial part (20%) of the assets of
a "related person" to or with Sterling; (v) the issuance of any securities of
Sterling to a "related person," (vi) certain reclassifications and
recapitalizations, (vii) any partial or complete liquidation, spin-off, split
off, or split-up or similar transaction of Sterling involving a "related
person," and (viii) any transaction, event, agreement contract, commitment or
other arrangement that provides for, is intended to or is likely to have an
effect similar to the above. A "related person" includes, but is not limited to,
any person that owns or is the beneficial owner of 5% or more of the outstanding
shares of Sterling's voting stock. The two-thirds vote requirement is calculated
by excluding from the voted shares those shares of which the "related person" is
the beneficial owner.
Similarly, as a Kansas corporation, Sterling would have the benefit of the
provisions of the Kansas Business Combinations with Interested Shareholders Act
(the "Business Combinations Act"). The Business Combinations Act may provide a
substantial deterrent effect in respect of certain unsolicited acquisition
transactions. In general, the Business Combinations Act prevents an "interested
stockholder" (i.e., a beneficial owner of 15% or more of a corporation's
outstanding voting stock) from engaging in certain "business combinations" with
a Kansas corporation for three years following the date when such person became
an interested stockholder, unless (i) before such date, the board of directors
of the corporation approved either the transaction in which such person became
an interested stockholder or the business combination; (ii) upon consummation of
the transaction which resulted in such person becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
stock held by directors who are also officers of the corporation and by certain
employee stock ownership plans); or (iii) following the transaction in which
such person became an interested stockholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
interested stockholder. Under the Business Combinations Act, an interested
stockholder will be freed from the restrictions described above if the board of
directors, during the three-year period, approves a business combination
involving the corporation and a person who is not an interested stockholder.
Sterling is also subject to the Kansas Control Share Acquisitions 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. In essence, the Control Act prevents an
"acquiring person" from voting any "control shares" without first obtaining
approval from a vote of the stockholders not characterized as "interested." In
addition to affecting voting rights, the Control Act contains provisions
intended to reduce the likelihood of the payment of "greenmail" by granting
target corporations the right to force redemptions of control shares at market
prices. The Control Act also affects friendly acquisitions of less than all of
the outstanding shares of a corporation by giving minority stockholders
dissenters' rights to receive "fair value" for
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their shares in a manner comparable to the dissenters' rights typically
available in connection with mergers and sales of significant assets.
ALS. Section 203 of the DGCL prohibits certain transactions between a
publicly held Delaware corporation and an "interested stockholder," which is
defined as a person who, together with any affiliates and/or associates of such
person, beneficially owns, directly or indirectly, 15 percent or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
10 percent or more of the consolidated assets of the corporation, and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation) between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder acquired its stock, unless (i) the business combination or the
transaction whereby the person became an interested stockholder is approved by
the corporation's board of directors prior to the date of such transaction; (ii)
the interested stockholder acquired at least 85 percent of the voting stock of
the corporation in the transaction in which it became an interested stockholder;
or (iii) the business combination is approved by a majority of the board of
directors and by the affirmative vote of two-thirds of the outstanding voting
stock owned by disinterested stockholders at an annual or special meeting.
Neither the KGCC nor the DGCL provide for appraisal rights for dissenting
stockholders due to the fact that both the ALS Common Stock and the Sterling
Common Stock are listed on the American Stock Exchange.
DIVIDENDS
Each share of Sterling Common Stock or ALS Common Stock has an equal and
ratable right to receive dividends to be paid from the respective company's
assets legally available therefor when, as and if declared by the respective
Boards of Directors but subject to rights of holders of any series of preferred
stock. Delaware law generally requires that dividends are payable only out of
the company's surplus or current net profits in accordance with the DGCL. See
"STERLING DIVIDEND POLICY."
LEGAL MATTERS
Certain legal matters with respect to the legality of the shares offered
hereby will be passed on for ALS by Rogers & Hardin LLP, Atlanta, Georgia.
EXPERTS
The consolidated financial statements of Alternative Living Services, Inc.
and subsidiaries as of December 31, 1995 and 1996 and for the years ended
December 31, 1994, 1995 and 1996 have been included in the 1996 ALS Form 10-K
and incorporated by reference in this Joint Proxy Statement/Prospectus in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing therein upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Sterling House Corporation as of
December 31, 1995 and 1996 and for the three years in the period ended December
31, 1996 included herein and in the Registration Statement of which this Joint
Proxy Statement/Prospectus is a part, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report, appearing elsewhere herein
and in the Registration Statement, and are included in reliance upon such report
given upon the authority of said firm as experts in accounting and auditing.
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ADDITIONAL INFORMATION
STOCKHOLDER PROPOSALS
Stockholders of ALS and Sterling may be entitled to submit proposals which
they believe should be voted upon by the stockholders of such companies. The
Commission has adopted regulations which govern the inclusion of such proposals
in annual proxy materials.
As described in ALS's proxy statement relating to its 1997 Annual Meeting
of Stockholders, for stockholder proposals to be considered for inclusion in the
proxy statement for the 1998 Annual Meeting of Stockholders of ALS, such
proposals must be received by the Secretary of ALS on or before February 17,
1998.
As described in Sterling's proxy statement relating to its 1997 Annual
Meeting of Stockholders, for stockholder proposals to be considered for
inclusion in the proxy statement for the 1998 Annual Meeting of Stockholders of
Sterling (if the Merger is not consummated), such proposals must be received by
the Secretary of Sterling on or before January 24, 1998.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
are presented assuming the Merger has been consummated and accounted for as a
pooling of interests. The pro forma condensed combined statements of income for
the six months ended June 30, 1997 and for the three years ended December 31,
1996, 1995 and 1994 have been prepared as if the Merger had occurred on January
1, 1994. The pro forma condensed combined balance sheets as of June 30, 1997 and
December 31, 1996 have been prepared as if the Merger and the other transactions
requiring pro forma adjustments had occurred on such respective dates. The pro
forma statements of income for the six months ended June 30, 1997 and for the
year ended December 31, 1996 have been adjusted to give effect to significant
transactions which were completed by ALS and Sterling during 1996 and 1997 as if
those significant transactions had occurred at the beginning of the applicable
fiscal years.
The pro forma combined data is based on the separate historical
consolidated financial statements of ALS and Sterling giving effect to the
Merger and transactions described in the notes hereto under the assumptions and
adjustments outlined in the accompanying Notes to Unaudited Pro Forma Condensed
Combined Financial Statements. The pro forma results of operations of the
operations acquired by ALS in 1996 were derived from unaudited financial
statements. The unaudited pro forma condensed combined financial data are
provided for comparative purposes only and are not necessarily indicative of the
results that would have been obtained had the Merger occurred on the dates
indicated or that may be achieved in the future.
For all applicable periods presented in the unaudited pro forma condensed
combined statements of income, shares used in the computation of earnings per
common and common equivalent share give effect to the Exchange Ratio of 1.1 to
1.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the separate audited consolidated financial statements
of ALS and Sterling incorporated by reference or included in this Joint Proxy
Statement/Prospectus.
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ALTERNATIVE LIVING SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
ALS STERLING MERGER ALS & STERLING
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 15,440 $12,542 $ -- $ 27,982
Resident receivables, net....................... 1,365 1,131 -- 2,496
Other current assets............................ 7,225 16,328 -- 23,553
-------- ------- ------- --------
Total current assets.................... 24,030 30,001 -- 54,031
-------- ------- ------- --------
Property, plant and equipment, net................ 188,557 46,347 -- 234,904
Long-term investments............................. 1,165 2,772 -- 3,937
Investments in and advances to unconsolidated
affiliates...................................... 4,100 -- -- 4,100
Other assets...................................... 12,471 3,705 -- 16,176
-------- ------- ------- --------
Total assets............................ $230,323 $82,825 $ -- $313,148
======== ======= ======= ========
LIABILITIES AND EQUITY
Current liabilities:
Current installments of long-term debt.......... $ 548 $ 211 $ -- $ 759
Short-term notes payable........................ 21,056 -- -- 21,056
Accounts payable................................ 3,476 11,017 4,000(5) 18,493
Accrued expenses................................ 8,561 4,853 (230)(6) 13,184
-------- ------- ------- --------
Total current liabilities............... 33,641 16,081 3,770 53,492
-------- ------- ------- --------
Long-term debt, less current installments......... 116,156 41,399 -- 157,555
Other long-term liabilities....................... -- 886 (333)(6) 553
Deferred gain on sale............................. 6,781 -- -- 6,781
Minority interest................................. 8,615 175 -- 8,790
Stockholders' equity:
Common stock and paid in capital................ 76,108 28,251 -- 104,359
Accumulated deficit............................. (10,978) (3,967) (3,437) (18,382)
-------- ------- ------- --------
Total stockholders' equity.............. 65,130 24,284 (3,437) 85,977
-------- ------- ------- --------
Total liabilities and stockholders'
equity................................ $230,323 $82,825 $ -- $313,148
======== ======= ======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
87
<PAGE> 101
ALTERNATIVE LIVING SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
ALS
CONVERTIBLE PRO FORMA
ALS DEBT ALS STERLING MERGER ALS & STERLING
HISTORICAL ADJUSTMENTS(8A) PRO FORMA HISTORICAL ADUSTMENTS PRO FORMA
---------- --------------- --------- ---------- ----------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 25,796 $48,065 $ 73,861 $13,659 $ -- $ 87,520
Resident receivables,
net................... 1,614 -- 1,614 418 -- 2,032
Other current assets.... 4,989 -- 4,989 5,890 -- 10,879
-------- ------- -------- ------- ------- --------
Total current
assets......... 32,399 48,065 80,464 19,967 -- 100,431
-------- ------- -------- ------- ------- --------
Property, plant and
equipment, net.......... 79,816 -- 79,816 53,106 -- 132,922
Long-term investments..... 1,171 -- 1,171 1,664 -- 2,835
Investments in and
advances to
unconsolidated
affiliates.............. 1,649 -- 1,649 -- -- 1,649
Other assets.............. 11,501 1,935 13,436 3,082 -- 16,518
-------- ------- -------- ------- ------- --------
Total assets..... $126,536 $50,000 $176,536 $77,819 $ -- $254,355
======== ======= ======== ======= ======= ========
LIABILITIES AND EQUITY
Current liabilities:
Current installments of
long-term debt........ $ 769 $ -- $ 769 $ 216 $ -- $ 985
Short-term notes
payable............... 8,335 -- 8,335 -- -- 8,335
Accounts payable........ 1,985 -- 1,985 9,786 4,000(5) 15,771
Accrued expenses........ 8,130 -- 8,130 2,848 (237)(6) 10,741
-------- ------- -------- ------- ------- --------
Total current
liabilities.... 19,219 -- 19,219 12,850 3,763 35,832
-------- ------- -------- ------- ------- --------
Long-term debt, less
current installments.... 28,772 50,000 78,772 39,590 -- 118,362
Other long-term
liabilities............. -- -- -- 869 (423)(6) 446
Deferred gain on sale..... 6,763 -- 6,763 -- -- 6,763
Minority interest......... 5,888 -- 5,888 -- -- 5,888
Stockholders' equity:
Common stock and paid in
capital............... 76,108 -- 76,108 28,216 -- 104,324
Accumulated deficit..... (10,214) -- (10,214) (3,706) (3,340) (17,260)
-------- ------- -------- ------- ------- --------
Total
stockholders'
equity......... 65,894 -- 65,894 24,510 (3,340) 87,064
-------- ------- -------- ------- ------- --------
Total liabilities
and
stockholders'
equity......... $126,536 $50,000 $176,536 $77,819 $ -- $254,355
======== ======= ======== ======= ======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
88
<PAGE> 102
ALTERNATIVE LIVING SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
ALS
CONVERTIBLE PRO FORMA
ALS DEBT ALS PRO STERLING MERGER ALS & STERLING
HISTORICAL ADJUSTMENTS(8A) FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- --------------- --------- ---------- ----------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues.... $35,164 $ -- $35,164 $17,798 $ -- $52,962
Operating expenses:
Residence
operations....... 22,540 -- 22,540 11,030 -- 33,570
Lease expense....... 7,006 -- 7,006 4,410 -- 11,416
General and
administrative... 5,066 -- 5,066 2,280 -- 7,346
Depreciation and
amortization..... 2,484 -- 2,484 1,320 -- 3,804
------- ----- ------- ------- ---- -------
Total
operating
expenses... 37,096 -- 37,096 19,040 -- 56,136
------- ----- ------- ------- ---- -------
Operating
loss...... (1,932) -- (1,932) (1,242) -- (3,174)
------- ----- ------- ------- ---- -------
Other income
(expense):
Interest expense,
net.............. (994) (488) (1,482) 374 -- (1,108)
Equity in losses of
unconsolidated
affiliates....... (137) -- (137) -- -- (137)
Minority interest in
losses of
consolidated
subsidiaries..... 2,307 -- 2,307 525 -- 2,832
Other, net.......... (8) -- (8) (16) -- (24)
------- ----- ------- ------- ---- -------
Total other
expenses,
net....... 1,168 (488) 680 883 -- 1,563
------- ----- ------- ------- ---- -------
Loss before income
taxes............... (764) (488) (1,252) (359) -- (1,611)
------- ----- ------- ------- ---- -------
Provision for income
taxes............... -- -- -- 97 (97)(6) --
------- ----- ------- ------- ---- -------
Net loss from
continuing
operations.......... $ (764) $(488) $(1,252) $ (262) $(97) $(1,611)
======= ===== ======= ======= ==== =======
Net loss per share.... $ (0.06) $ (0.10) $ (0.05) $ (0.09)
======= ======= ======= =======
Weighted average
number of common
shares
outstanding......... 12,996 12,996 5,040 504(7) 18,540
======= ======= ======= ==== =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
89
<PAGE> 103
ALTERNATIVE LIVING SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ALS STERLING
ALS PRO FORMA ALS STERLING CONVERTIBLE DEBT
HISTORICAL ADJUSTMENTS(1) PRO FORMA HISTORICAL ADJUSTMENTS(8B)
---------- -------------- --------- ---------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating revenues...... $39,599 $11,730 $51,329 $16,038 $ --
Operating expenses:
Residence
operations.......... 25,710 7,070 32,780 10,267 --
Lease expense......... 6,053 4,939 10,992 2,982 --
General and
administrative...... 7,933 1,782 9,715 3,210 --
Depreciation and
amortization........ 2,994 (584) 2,410 1,229 --
Non-recurring
charge.............. 976 -- 976 -- --
------- ------- ------- ------- ------
Total operating
expenses...... 43,666 13,207 56,873 17,688 --
------- ------- ------- ------- ------
Operating
loss.......... (4,067) (1,477) (5,544) (1,650) --
------- ------- ------- ------- ------
Other income (expense):
Interest expense,
net................. (3,740) 1,215 (2,525) 509 (932)
Equity in losses of
unconsolidated
affiliates.......... (52) (5) (57) -- --
Minority interest in
losses of
consolidated
subsidiaries........ 76 (22) 54 -- --
Other, net............ (28) 43 15 5 --
------- ------- ------- ------- ------
Total other
expenses,
net........... (3,744) 1,231 (2,513) 514 (932)
------- ------- ------- ------- ------
Loss before income
taxes................. (7,811) (246) (8,057) (1,136) (932)
------- ------- ------- ------- ------
Provision for income
taxes................. -- -- -- 410 --
------- ------- ------- ------- ------
Net loss from continuing
operations............ $(7,811) $ (246) $(8,057) $ (726) $(932)
======= ======= ======= ======= ======
Net loss per share...... $ (0.79) $ (0.63) $ (0.14)
======= ======= =======
Weighted average number
of common shares
outstanding........... 9,889 12,798 5,037
======= ======= =======
<CAPTION>
PRO FORMA ALS &
STERLING MERGER STERLING
PRO FORMA ADJUSTMENTS PRO FORMA
--------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Operating revenues...... $16,038 $ -- $ 67,367
Operating expenses:
Residence
operations.......... 10,267 -- 43,047
Lease expense......... 2,982 -- 13,974
General and
administrative...... 3,210 -- 12,925
Depreciation and
amortization........ 1,229 -- 3,639
Non-recurring
charge.............. -- -- 976
------- ----- --------
Total operating
expenses...... 17,688 -- 74,561
------- ----- --------
Operating
loss.......... (1,650) -- (7,194)
------- ----- --------
Other income (expense):
Interest expense,
net................. (425) -- (2,950)
Equity in losses of
unconsolidated
affiliates.......... -- -- (57)
Minority interest in
losses of
consolidated
subsidiaries........ -- -- 54
Other, net............ 5 -- 20
------- ----- --------
Total other
expenses,
net........... (420) -- (2,933)
------- ----- --------
Loss before income
taxes................. (2,068) -- (10,125)
------- ----- --------
Provision for income
taxes................. 410 (410)(6) --
------- ----- --------
Net loss from continuing
operations............ $(1,658) $(410) $(10,125)
======= ===== ========
Net loss per share...... (0.33) $ (0.55)
======= ========
Weighted average number
of common shares
outstanding........... 5,037 504(7) 18,339
======= ===== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
90
<PAGE> 104
ALTERNATIVE LIVING SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
ALS STERLING MERGER ALS & STERLING
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues................................. $10,464 $ 4,598 $ -- $15,062
Operating expenses:
Residence operations............................. 7,207 1,510 -- 8,717
Lease expense.................................... 890 55 -- 945
General and administrative....................... 2,599 3,292 -- 5,891
Depreciation and amortization.................... 814 460 -- 1,274
------- ------- ---- -------
Total operating expenses................. 11,510 5,317 -- 16,827
------- ------- ---- -------
Operating loss........................... (1,046) (719) -- (1,765)
------- ------- ---- -------
Other income (expense):
Interest expense, net............................ (813) (171) -- (984)
Equity in losses of unconsolidated affiliates.... (438) (279) -- (717)
Minority interest in losses of consolidated
subsidiaries.................................. 112 48 -- 160
Other, net....................................... 439 39 -- 478
------- ------- ---- -------
Total other expenses, net................ (700) (363) -- (1,063)
------- ------- ---- -------
Loss before income taxes........................... (1,746) (1,082) -- (2,828)
------- ------- ---- -------
Provision for income taxes......................... -- 75 (75)(6) --
------- ------- ---- -------
Net loss from continuing operations................ $(1,746) $(1,007) $(75) $(2,828)
======= ======= ==== =======
Net loss per share................................. $ (0.30) $ (0.36) $ (0.32)
======= ======= =======
Weighted average number of common shares
outstanding...................................... 5,863 2,787 279(7) 8,929
======= ======= ==== =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
91
<PAGE> 105
ALTERNATIVE LIVING SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
PRO FORMA
ALS STERLING MERGER ALS & STERLING
HISTORICAL HISTORICAL ADJUSTMENTS(7) PRO FORMA
---------- ---------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues.............................. $ 4,957 $ 2,272 $ -- $ 7,229
Operating expenses:
Residence operations.......................... 2,934 251 -- 3,185
Lease expense................................. 697 -- -- 697
General and administrative.................... 1,458 2,032 -- 3,490
Depreciation and amortization................. 258 88 -- 346
------- ------- ---- -------
Total operating expenses.............. 5,347 2,371 -- 7,718
------- ------- ---- -------
Operating loss........................ (390) (99) -- (489)
------- ------- ---- -------
Other income (expense):
Interest expense, net......................... (301) (96) -- (397)
Equity in losses of unconsol. affiliates...... (1) (298) -- (299)
Minority interest in losses of consolidated
subsidiaries............................... 49 (1) -- 48
Other, net.................................... -- -- -- --
------- ------- ---- -------
Total other expenses, net............. (253) (395) -- (648)
------- ------- ---- -------
Loss before income taxes........................ (643) (494) -- (1,137)
------- ------- ---- -------
Provision for income taxes...................... -- -- -- --
------- ------- ---- -------
Net loss from continuing operations............. $ (643) $ (494) $ -- $(1,137)
======= ======= ==== =======
Net loss per share.............................. $ (0.22) $ (0.22) $ (0.21)
======= ======= =======
Weighted average number of common shares
outstanding................................... 2,959 2,281 228 5,468
======= ======= ==== =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
92
<PAGE> 106
ALTERNATIVE LIVING SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. ALS 1996 PRO FORMA ADJUSTMENTS
The ALS Pro Forma Adjustments to the Unaudited Pro Forma Condensed Combined
Statement of Operations for the year ended December 31, 1996 are comprised of
adjustments related to (i) the ALS-Midwest Restructuring (as defined in Note 2),
(ii) the Crossings Merger (as defined in Note 2), (iii) the ALS initial public
offering, (iv) the December 31, 1996 ALS sale/leaseback transaction, and (v) the
issuance of the ALS Debentures. The principal components of these adjustments
are set forth below:
<TABLE>
<CAPTION>
ALS- ALS
MIDWEST ALS- CROSSINGS PUBLIC
ALS OPERATING MIDWEST OPERATING CROSSINGS OFFERING
HISTORICAL RESULTS(2A) ADJUSTMENTS RESULTS(2A) ADJUSTMENTS ADJUSTMENTS(3)
---------- ----------- ----------- ----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Operating revenue........... $39,599 $2,141 $ -- $9,589 $ -- $ --
Operating expenses:
Resident operations....... 25,710 1,604 -- 5,466 -- --
Lease expense............. 6,053 94 -- 2,196 -- --
General and
administrative.......... 7,933 -- -- 1,782 -- --
Depreciation and
amortization............ 2,994 204 38(2b) 157 91(2e) --
Non-recurring charge...... 976 -- -- -- -- --
------- ------ ----- ------ ---- ----
Total operating
expenses.......... 43,666 1,902 38 9,601 91 --
------- ------ ----- ------ ---- ----
Operating income (loss)..... (4,067) 239 (38) (12) (91) --
------- ------ ----- ------ ---- ----
Other income (expense), net
Interest expense, net..... (3,740) (307) (143)(2c) (350) -- 833
Other, net................ (28) -- -- 43 -- --
Equity in losses of
unconsolidated
affiliates.............. (52) -- -- -- -- --
Minority interest in
losses of consolidated
subsidiaries............ 76 32 (32)(2d) -- -- --
------- ------ ----- ------ ---- ----
Total other
income............ (3,744) (275) (175) (307) -- 833
------- ------ ----- ------ ---- ----
Net loss from continuing
operations................ $(7,811) $ (36) $(213) $ (319) $(91) $833
======= ====== ===== ====== ==== ====
Net loss per share.......... $ (0.79)
=======
Weighted average shares
outstanding............... 9,889
=======
<CAPTION>
ALS CUMULATIVE
SALE/LEASEBACK CONVERTIBLE 1996
TRANSACTION DEBT PRO FORMA ALS
ADJUSTMENTS(9) ADJUSTMENTS(8A) ADJUSTMENTS PRO FORMA
-------------- --------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenue........... $ -- $ -- $11,730 $51,329
Operating expenses:
Resident operations....... -- -- 7,070 32,780
Lease expense............. 2,649 -- 4,939 10,992
General and
administrative.......... -- -- 1,782 9,715
Depreciation and
amortization............ (1,074) -- (584) 2,410
Non-recurring charge...... -- -- -- 976
------- ------- ------- -------
Total operating
expenses.......... 1,575 -- 13,207 56,873
------- ------- ------- -------
Operating income (loss)..... (1,575) -- (1,477) (5,544)
------- ------- ------- -------
Other income (expense), net
Interest expense, net..... 2,447 (1,265) 1,215 (2,525)
Other, net................ -- -- 43 15
Equity in losses of
unconsolidated
affiliates.............. (5) -- (5) (57)
Minority interest in
losses of consolidated
subsidiaries............ (22) -- (22) 54
------- ------- ------- -------
Total other
income............ 2,420 (1,265) 1,231 (2,513)
------- ------- ------- -------
Net loss from continuing
operations................ $ 845 $(1,265) (246) $(8,057)
======= ======= ======= =======
Net loss per share.......... $ (0.63)
=======
Weighted average shares
outstanding............... 12,798
=======
</TABLE>
93
<PAGE> 107
ALTERNATIVE LIVING SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. PURCHASE BUSINESS COMBINATIONS
ALS completed two significant acquisitions in 1996 which were accounted for
under the purchase method of accounting for business combinations. Specifically,
on May 24, 1996, ALS acquired (i) the remaining general and limited partner
interests not owned by ALS in certain partnerships that owned ALS's Michigan
residences ("ALS-Midwest") for a total purchase price $6.2 million (the
"ALS-Midwest Restructuring"), and (ii) acquired by merger all of the outstanding
capital stock of New Crossings International Corporation ("Crossings") in
exchange for shares of ALS Common Stock valued at $9.3 million (the "Crossings
Merger").
ALS' unaudited pro forma condensed combined statement of income for the
year ended December 31, 1996 gives effect to pro forma adjustments to reflect
the following:
a. Operating results of ALS-Midwest and Crossings from January 1, 1996
to the date of acquisition.
b. Additional depreciation and amortization of $38,000 attributable to
the increase in the carrying value of property, plant and equipment as a
result of the ALS-Midwest Restructuring (depreciated over the estimated
average useful life of 30 years).
c. Interest expense for ALS-Midwest of $93,000 (interest rate of 8%)
and $29,000 (interest rate of 9%), respectively, relating to notes issued
in the ALS-Midwest Restructuring and elimination of interest income of
$21,000 (assumed interest rate of 5%) resulting from reduced cash balances.
d. Elimination of minority interest of $32,000 related to ALS-Midwest.
e. The effects of the Crossings Merger, including: (i) the additional
depreciation and amortization of $59,000 attributable to the increase in
carrying value of property, plant and equipment (depreciated over the
estimated average remaining useful life of 30 years); and (ii) the
recognition of goodwill amortization of $32,000 (amortized over 40 years).
3. ALS PUBLIC OFFERING ADJUSTMENTS
The ALS Public Offering Adjustments reflect the reduction in interest
expense resulting from the application by ALS of the net proceeds from its
August 1996 initial public offering to repay indebtedness. The related reduction
in interest includes: (i) $521,000 (interest rate of 10%) relating to bridge
financing incurred in January 1996; (ii) $130,000 (average interest rate of 10%)
relating to the ALS-Midwest construction loans; and (iii) $138,000 (interest
rate of 8%) and $44,000 (interest rate of 9%) relating to the notes issued in
connection with the ALS-Midwest Restructuring.
4. INTEGRATION AND ANTICIPATED COST SAVINGS
Significant expenses are expected to be incurred in connection with the
consolidation and integration of ALS and Sterling. Such activities may include
restructuring regional and corporate functions, consolidating information,
integrating operations, and relocating personnel. The expenses associated with
these activities are not currently estimable with a reasonable degree of
accuracy. Accordingly, they have not been reflected in the unaudited pro forma
condensed combined financial statements. The estimated costs associated with the
integration activities will be expensed in the period in which ALS completes its
integration plan.
Certain efficiencies and cost savings are expected to result from the
consolidation and integration of ALS and Sterling operations. Due to imprecision
in estimates of potential future cost savings, the unaudited pro forma condensed
combined financial statements do not reflect such savings.
94
<PAGE> 108
ALTERNATIVE LIVING SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. TRANSACTION FEES
Under the pooling of interests accounting method, direct transaction costs
are expensed in the period in which the transaction is consummated. Such costs
are estimated to be $4.0 million and include investment banking, legal,
accounting, printing, solicitation and filing fees, and similar expenses. The
accrual of these expenses has been reflected in the unaudited pro forma
condensed combined balance sheet at December 31, 1996 and June 30, 1997 but not
in the unaudited pro forma condensed combined income statement for the periods
then ended.
6. INCOME TAXES
The income tax benefit and deferred tax liabilities which had previously
been recognized by Sterling were eliminated to give effect to the impact of the
ALS valuation allowance on the combined deferred tax provision of the two
companies.
7. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Common stock, additional paid-in-capital and earnings per share have been
adjusted to reflect the issuance of 1.1 shares of ALS Common Stock for each
issued and outstanding share of Sterling Common Stock for each of the respective
periods presented.
The weighted average common share amount represents the aggregate weighted
average shares of ALS and Sterling adjusted to reflect the Exchange Ratio.
8. CONVERTIBLE DEBT ADJUSTMENTS
a. ALS. The ALS Convertible Debt Adjustments reflect the $50 million of
proceeds and associated impact on interest expense, net of estimated interest
income on proceeds received from, the ALS Debentures issued May 21, 1997 as if
the ALS Debentures were issued on January 1, 1996. The ALS Debentures are
convertible into shares of ALS Common Stock at the conversion price of $20.25
per share, which if fully converted would result in the issuance of 2,469,136
shares of ALS Common Stock. Approximately $1.9 million in financing costs were
capitalized related to the placement of the ALS Debentures.
b. Sterling. The Sterling Convertible Debt Adjustments reflect the $35
million of proceeds and associated impact on interest expense, net of estimated
interest income on proceeds received from, the Sterling Debentures issued May
23, 1996 as if the debentures were issued on January 1, 1996. The Sterling
Debentures will be assumed by ALS and will thereupon become convertible into a
number of shares of ALS Common Stock equal to the product of the Exchange Ratio
and the number of shares of Sterling Common Stock issuable upon conversion of
the Sterling Debentures. Approximately $1.4 million in financing costs were
capitalized related to the placement of the Sterling Debentures.
9. SALE/LEASEBACK TRANSACTION ADJUSTMENTS
The Sale/Leaseback Transaction Adjustments reflect a sale/leaseback
transaction completed by ALS in December 31, 1996 as if it occurred on January
1, 1996. Pursuant to the transaction, ALS sold twelve assisted living residences
for approximately $45.0 million and leased them back under a twelve-year
operating lease. The transaction produced a gain of approximately $5.7 million
which has been deferred and will be amortized over the lease period.
95
<PAGE> 109
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
STERLING HOUSE CORPORATION
Audited Financial Statements as of December 31, 1996 and 1995 and
for The Three Years Ended December 31, 1996
1. Report of Independent Auditors.............................. F-2
2. Consolidated Balance Sheets as of December 31, 1996 and
1995........................................................ F-3
3. Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994............................ F-4
4. Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994................ F-5
5. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994............................ F-6
6. Notes to Consolidated Financial Statements.................. F-7
Unaudited Consolidated Financial Statements as of June 30, 1997
and December 31, 1996 and for The Six Months Ended June 30, 1997
and 1996
1. Consolidated Balance Sheets as of June 30, 1997 and December
31, 1996.................................................... F-21
2. Consolidated Statements of Operations for the Six Months
Ended June 30, 1997 and 1996................................ F-22
3. Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1996................................ F-23
4. Notes to Condensed Consolidated Financial Statements........ F-24
</TABLE>
F-1
<PAGE> 110
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sterling House Corporation
We have audited the accompanying consolidated balance sheets of Sterling
House Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sterling House
Corporation at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
February 10, 1997
Wichita, Kansas
F-2
<PAGE> 111
STERLING HOUSE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 11)....................... $13,658,827 $17,396,355
Accounts receivable
Construction due from REIT.............................. 3,847,647 --
Trade................................................... 417,820 157,616
Other................................................... 143,138 400,437
Prerental costs (net of amortization)..................... 1,339,309 242,285
Deferred income taxes (Note 9)............................ -- 138,238
Other..................................................... 560,151 582,945
----------- -----------
Total current assets............................... 19,966,892 18,917,876
Property and equipment (Notes 5, 6, and 8)
Land and improvements..................................... 1,384,013 3,714,642
Buildings................................................. 10,189,690 14,977,356
Leasehold improvements.................................... 40,997 26,636
Vehicles and equipment.................................... 626,715 393,599
Furniture, fixtures and office equipment.................. 1,311,823 1,273,480
Construction in progress.................................. 40,382,765 3,102,364
----------- -----------
53,936,003 23,488,077
Less accumulated depreciation............................. (829,966) (406,353)
----------- -----------
Net property and equipment......................... 53,106,037 23,081,724
Other assets:
Bond financing cost....................................... 1,495,200 142,707
Restricted investments.................................... 1,663,784 --
Other..................................................... 1,586,505 950,757
----------- -----------
Total other assets................................. 4,745,489 1,093,464
----------- -----------
Total assets....................................... $77,818,418 $43,093,064
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (Notes 5 and 11).................... $ -- $ 6,726,428
Accounts payable.......................................... 9,786,224 1,832,100
Accrued expenses:
Salaries and benefits................................... 924,279 255,316
Interest................................................ 107,912 284,620
Other................................................... 1,171,161 133,584
Deferred income taxes (Note 9)............................ 236,894 --
Deferred rent and refundable deposits..................... 408,307 189,509
Current maturities of long-term debt...................... 215,623 277,966
----------- -----------
Total current liabilities.......................... 12,850,400 9,699,523
Long-term debt (Notes 8 and 11)............................. 39,589,497 6,561,808
Deferred income taxes (Note 9).............................. 423,177 1,214,570
Accrued stock option compensation (Note 12)................. 387,419 412,550
Deferred revenue and other.................................. 57,977 --
Commitments (Note 14)....................................... -- --
Stockholders' equity (Notes 8, 10 and 12)
Preferred stock; no par value; 20,000,000 shares
authorized, none issued and outstanding................. -- --
Common stock; no par value; 75,000,000 shares authorized,
5,038,836 shares issued and outstanding (5,035,000 in
1995)................................................... 28,216,042 28,184,228
Accumulated deficit....................................... (3,706,094) (2,979,615)
----------- -----------
Total stockholders' equity......................... 24,509,948 25,204,613
----------- -----------
Total liabilities and stockholders' equity......... $77,818,418 $43,093,064
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 112
STERLING HOUSE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Revenue:
Residence rental..................................... $15,575,866 $ 2,296,994 $ 360,943
Development fees:
Affiliates (Note 13).............................. -- 302,871 188,370
Other............................................. -- -- 125,000
Initial franchise and royalty fees:
Affiliates (Note 13).............................. 54,606 168,880 152,019
Other............................................. 126,523 122,083 83,643
Management and service fees:
Affiliates (Note 13).............................. -- 345,320 232,460
Other............................................. 114,527 144,363 73,416
Construction services:
Affiliates (Note 13).............................. -- 803,302 602,052
Other............................................. 166,720 413,822 454,180
----------- ----------- ----------
16,038,242 4,597,635 2,272,083
Operating expenses:
Residence operating expenses...................... 10,267,289 1,509,599 251,484
General and administrative........................ 3,147,191 1,810,186 1,162,149
Stock compensation expense (Note 12).............. -- 412,550 --
Cost of construction services..................... 62,976 1,069,270 869,482
Building rental................................... 2,981,529 55,147 --
Depreciation...................................... 597,715 290,761 88,190
Amortization...................................... 630,916 169,313 --
Equity in net loss from investments in
unconsolidated affiliates....................... -- 278,636 298,327
----------- ----------- ----------
Total operating expenses..................... 17,687,616 5,595,462 2,669,632
Loss from operations................................. (1,649,374) (997,827) (397,549)
Other income (expenses):
Interest income................................... 1,042,628 204,476 7,072
Interest expense (net of interest capitalized in
1996, 1995 and 1994 of $1,435,376, $344,982 and
$33,017)........................................ (534,016) (375,165) (102,794)
Minority interest share of (income) loss of
subsidiaries.................................... -- 47,757 (1,074)
Other............................................. 4,920 38,833 --
----------- ----------- ----------
513,532 (84,099) (96,796)
----------- ----------- ----------
Loss before income taxes and extraordinary item...... (1,135,842) (1,081,926) (494,345)
Benefit for income taxes (Note 9).................... 409,363 74,512 --
----------- ----------- ----------
Loss before extraordinary item....................... (726,479) (1,007,414) (494,345)
Extraordinary item:
Loss from early retirement of financing
agreements, net of tax benefit of $747,098 (Note
7).............................................. -- (1,175,933) --
----------- ----------- ----------
Net loss.......................................... $ (726,479) $(2,183,347) $ (494,345)
=========== =========== ==========
Net loss per common share:
Loss before extraordinary item.................... $ (.14) $ (.36) $ (.22)
Extraordinary item................................ -- (.42) --
----------- ----------- ----------
Net loss..................................... $ (.14) $ (.78) $ (.22)
=========== =========== ==========
Weighted average number of common shares
outstanding................................ 5,036,779 2,786,868 2,281,416
=========== =========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 113
STERLING HOUSE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED ------------------------ ACCUMULATED
STOCK NUMBER AMOUNT DEFICIT TOTAL
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993....................... $ -- 2,281,416 $ 2,000 $ (301,923) $ (299,923)
Net loss..................... -- -- -- (494,345) (494,345)
--- --------- ----------- ----------- -----------
Balance at December 31,
1994....................... -- 2,281,416 2,000 (796,268) (794,268)
Shares issued-initial public
offering(Note 1)........... -- 2,185,000 21,785,649 -- 21,785,649
Shares issued-acquisition of
assisted living facilities
(Note 3)................... -- 480,761 5,408,570 -- 5,408,570
Shares issued-termination fee
(Note 7)................... -- 87,823 988,009 -- 988,009
Net loss..................... -- -- -- (2,183,347) (2,183,347)
--- --------- ----------- ----------- -----------
Balance at December 31,
1995....................... -- 5,035,000 28,184,228 (2,979,615) 25,204,613
Shares issued -- 1995 options
exercised (Note 12)........ -- 3,836 43,155 -- 43,155
Tax effect of options
exercised.................. -- -- (11,341) -- (11,341)
Net loss..................... -- -- -- (726,479) (726,479)
--- --------- ----------- ----------- -----------
Balance at December 31,
1996....................... $ -- 5,038,836 $28,216,042 $(3,706,094) $24,509,948
=== ========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 114
STERLING HOUSE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (726,479) $ (2,183,347) $ (494,345)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 1,228,631 460,074 88,190
Amortized rent and interest expense....................... 156,891 -- --
Deferred income taxes..................................... (409,363) (74,512) 7,292
Equity in net loss from investments in unconsolidated
affiliates.............................................. -- 278,636 298,327
Minority interest in loss of subsidiaries................. -- (47,757) 1,074
Loss on early retirement of financing agreement, excluding
cash paid............................................... -- 675,933 --
Stock option compensation................................. -- 412,550 --
Net change in operating assets and liabilities:
Accounts receivable..................................... (2,905) 154,835 264,336
Earnings in excess of billings on uncompleted
contracts............................................. -- 143,605 (102,759)
Deferred rent and refundable deposits................... 190,798 42,381 (6,303)
Prerental costs......................................... (1,727,741) (266,456) (3,377)
Accrued expenses........................................ 745,843 (138,841) 75,651
Accounts payable........................................ 342,863 710,757 (157,810)
Other................................................... 934 (100,835) 230,299
------------ ------------ -----------
Net cash (used)/provided by operating activities.... (200,528) 67,023 200,575
INVESTING ACTIVITIES
Purchases of property and equipment......................... (59,362,598) (11,998,796) (880,204)
Construction receivable due from REIT....................... (3,847,647) -- --
Proceeds from sale/leaseback transactions................... 39,037,567 8,117,576 --
Proceeds from sale of property and equipment................ -- 130,103 --
Advances to affiliates...................................... -- 127,230 (127,230)
Acquisitions of assisted living facilities, net of cash
acquired (Note 3)......................................... (2,200,000) (253,053) --
Net cash acquired in acquisition of assisted living
facilities................................................ -- 92,455 --
Purchases of restricted investments......................... (1,663,784) -- --
Other assets................................................ -- 9,909 (3,893)
------------ ------------ -----------
Net cash used in investing activities....................... (28,036,462) (3,774,576) (1,011,327)
FINANCING ACTIVITIES
Net change in notes payable................................. -- (88,200) 48,200
Proceeds from short-term borrowings......................... 5,749,008 7,700,130 552,906
Payments on short-term borrowings........................... (12,475,436) (1,574,051) --
Payments on long-term debt.................................. (2,007,500) (7,445,294) (177,384)
Proceeds from issuance of convertible bonds payable......... 35,000,000 -- --
Expenditures for financing costs............................ (1,602,000) -- --
Payments on notes payable to stockholders................... -- (85,975) (5,476)
Proceeds from initial public offering....................... -- 21,785,649 --
Proceeds from issuance of long-term debt.................... -- 283,583 276,483
Contributed capital from minority members................... -- -- 670,000
Other....................................................... (164,610) (57,023) (96,771)
------------ ------------ -----------
Net cash provided by financing activities........... 24,499,462 20,518,819 1,267,958
------------ ------------ -----------
Net (decrease)/increase in cash..................... (3,737,528) 16,811,266 457,206
Cash at beginning of period................................. 17,396,355 585,089 127,883
------------ ------------ -----------
Cash at end of period....................................... $ 13,658,827 $ 17,396,355 $ 585,089
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 2,039,297 $ 449,493 $ 135,335
Cash paid (received) during the year for income taxes..... -- $ (13,147) $ 14,852
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During 1994, the Company purchased the outstanding stock of BCI Construction,
Inc. from a stockholder in exchange for the Company's note payable of
$300,000. In conjunction with the acquisition, liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value allocated to assets.............................. $1,249,709
Issuance of note payable.................................... 300,000
----------
Liabilities assumed......................................... $ 949,709
==========
</TABLE>
During 1994, the Company purchased $91,006 of furniture, fixtures and office
equipment through capital leases.
During 1995, the Company acquired all the assets of Sterling House of Wichita,
L.P., Sterling House of Bethany, L.L.C., Sterling Group, L.L.C., and Scotia,
L.L.C. and acquired the minority interest remaining in Corridor Properties,
Inc. and Sterling House of Abilene, L.P. in exchange for 480,761 shares of the
Company's common stock and the assumption by the Company of all the
liabilities of each entity (see Note 1 -- Background). In conjunction with
such acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value allocated to assets.............................. $18,543,059
Elimination of intercompany accounts........................ 1,513,840
Issuance of common stock.................................... (5,408,570)
-----------
Liabilities assumed......................................... $14,648,329
===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 115
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. BACKGROUND
Sterling House Corporation (the "Company"), was organized as a Kansas
corporation in April 1991 for the purpose of developing, operating,
constructing, managing, franchising and owning Sterling House(R) assisted living
facilities. On October 26, 1995, the Company completed an initial public
offering ("IPO") in which it sold 2,185,000 shares of its common stock and
realized net proceeds of $21,785,649. Prior to the effective date of the IPO,
the Company's consolidated financial statements included the accounts of the
Company and its then wholly owned subsidiaries, Sterling Management Company,
Inc. ("SMC"), BCI Construction, Inc. ("BCI"), formerly Buchanan Homes, Inc., SH
Franchise, Inc. ("SHFI"), and Sterling Partners, L.L.C. ("Partners"), and its
majority owned indirect subsidiary, Corridor Properties, L.L.C. ("Corridor").
Corridor was a 60% majority owned subsidiary of the Company. In addition, prior
to the IPO, the Company had investment interests in certain affiliated limited
partnerships and limited liability companies that developed and operated
Sterling House(R) assisted living facilities. Ownership of such investments
ranged from 1% to 40% and the Company accounted for such investments using the
equity method of accounting.
Concurrently with the IPO, the Company merged SHFI, SMC and Partners into
the Company and completed a reorganization transaction which included a series
of transactions involving the Company's common stock (the "Reorganization
Transaction") and enabled the Company to acquire all the remaining interests in
certain affiliates that operated Sterling House(R) assisted living facilities as
follows:
<TABLE>
<CAPTION>
COMPANY'S
COMPANY'S OWNERSHIP COMPANY'S
OWNERSHIP INTEREST AFTER SHARES
INTEREST AT THE ISSUED IN
ENTITY OCTOBER 26, 1995 EXCHANGE THE EXCHANGE
------ ---------------- -------------- ------------
<S> <C> <C> <C>
Sterling House of Wichita, L.P.............. 25.0% 100.0% 53,333
Sterling House of Bethany, L.L.C............ 20.0% 100.0% 53,333
Sterling Group, L.L.C....................... 40.0% 100.0% 192,000
Scotia, L.L.C............................... 28.3% 100.0% 32,889
Sterling House of Abilene, L.P.............. 62.3% 100.0% 30,095
Sterling House of Augusta, Inc.............. 0.0% 100.0% 42,845
Corridor Properties, L.L.P.................. 60.0% 100.0% 119,111
-------
523,606
=======
</TABLE>
LINE OF BUSINESS
The Company is involved in developing, operating, constructing, managing,
franchising and owning Sterling House(R) assisted living facilities (the
Residences). The Company also enters into general contractor arrangements for
the construction of residential properties. The Company's principal sources of
revenues in 1996 are resident rentals (Note 4). For years prior to 1996, the
Company's principal sources of revenues were development, management, royalty
and franchise fees, and construction revenues from both affiliates and
nonaffiliates which developed and operated Residences.
At December 31, 1996, 1995 and 1994, the Company had seven, nine and
fourteen operating franchised Residences, respectively, one of which opened in
1996 and 6 of which opened in 1995. During 1995 and in connection with the
Exchange, the Company acquired 11 franchised Residences. In addition, the
Company acquired an additional three franchised residences in 1996 (Note 3).
F-7
<PAGE> 116
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary and/or former subsidiaries prior to the IPO after elimination
of all material intercompany accruals and transactions. The minority interests,
which were acquired in the Exchange, represents the minority members' and
partners' proportionate interest in Corridor and Abilene prior to the
Reorganization Transaction.
CASH
For purposes of the consolidated statements of cash flows, the Company
considers cash to include currency on hand, demand deposits and short-term
investments with maturities of three months or less.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that were exposed to concentrations of
credit risk consist primarily of cash. The Company places its funds into high
credit quality financial institutions and, at times, such funds may be in excess
of the Federal Depository insurance limit.
PRERENTAL COSTS
Costs incurred in connection with preopening marketing, employee
recruitment and training, and other start-up expenditures necessary to prepare
the Residences for rent are capitalized. These prerental costs are amortized
over 12 months beginning when the Residences are available for occupancy.
Accumulated amortization on such prerental costs at December 31, 1996 and 1995
was $763,536 and $132,819, respectively.
PROPERTY AND EQUIPMENT
Property assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Useful lives are as follows:
<TABLE>
<S> <C>
Land improvements........................................... 15 years
Buildings................................................... 40 years
Leasehold improvements...................................... 5-13 years
Vehicles and equipment...................................... 5 years
Furniture, fixtures and office equipment.................... 3-10 years
</TABLE>
Property and equipment include interest costs and property taxes incurred
during the construction period, as well as development fees and other costs
directly related to the development and construction of the Residences.
Maintenance and repairs are charged to income as incurred and significant
renewals and betterments are capitalized. Deductions are made for retirements
resulting from the renewals or betterments.
INTANGIBLE ASSETS
Intangible assets include costs incurred in connection with obtaining
long-term financing. Such costs have been capitalized and are being amortized
over the term of the related financing using the effective interest method.
Accumulated amortization at December 31, 1996 and 1995 was $106,800 and
$160,916, respectively.
INITIAL FRANCHISE AND ROYALTY FEE REVENUE
The Company is the franchisor of the Sterling House(R) concept. Under the
franchise agreement (the "Agreement"), the Company provides a Franchisee with
the right to use the formats, trade name and methods developed by the Company.
Each Agreement has an initial term ranging from 10 to 15 years and can
F-8
<PAGE> 117
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
be extended for up to three additional five-year periods provided that the
Franchisee satisfies certain conditions. The Agreement provides for the Company
to receive an initial franchise fee ranging from $25,000 to $35,000 and a
continuing monthly royalty fee in the amount of 3% of each Residence's gross
receipts. The Company may also require the Franchisee to contribute a monthly
amount equal to no more than 1% of each Residences' gross receipts for
advertising. Initial franchise fee revenue consists of amounts earned by the
Company under franchise agreements. The Company records initial franchise fee
revenue when all material services or conditions relating to the franchise
agreement have been substantially performed or satisfied by the Company.
Franchise royalty fees from the Residences are recognized as earned on a monthly
basis.
CONSTRUCTION SERVICES
The Company acts in the capacity of general contractor for the construction
of assisted living facilities. In its capacity, the Company's primary function
is the supervision of subcontractors who actually perform the construction
activities. The Company has no investments in construction equipment and has no
employees who perform construction activities other than construction
supervision. The Company typically receives a fee for its time incurred in the
direct supervision of the project plus a specified mark-up based upon total
construction cost. The Company accounts for its construction activities by
recognizing, as revenue only, the construction fee amounts; thus, the revenues
and costs associated with the subcontractor activities are excluded from the
accompanying consolidated statement of operations. The Company believes that
such presentation most accurately depicts the nature of its operating
activities.
Earned fees on construction contracts are recognized for financial
reporting purposes on the percentage of completion method. Revenue is recorded
and profit is recognized on each contract principally based upon the total
construction costs incurred. Each contract normally contains a maximum contract
price to be paid by the customer. Provisions for anticipated losses on all such
contracts, if any, are made currently as the amount of loss is determinable.
INCOME TAXES
Income taxes are provided using the liability method in accordance with
Statement of Financial Accounting Standards Board No. 109, Accounting for Income
Taxes.
NET LOSS PER COMMON SHARE
Net loss per common share has been computed by dividing net loss by the
weighted average number of common shares outstanding during each period. The
weighted average number of common shares does not include any common stock
equivalents because, (1) stock options outstanding are not materially dilutive
and (2) common stock equivalents associated with the convertible debenture bonds
would be anti-dilutive.
ACCOUNTING FOR STOCK BASED COMPENSATION
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which prescribed accounting and reporting standards
for all stock-based compensation plans, including employee stock options,
restricted stock, and stock appreciation rights. Statement No. 123 did not
require companies to change their existing accounting for employee stock options
under APB Opinion No. 25, Accounting for Stock Issued to Employees, but instead
encouraged companies to recognize expense for stock-based awards on their
estimated fair value on the date of grant. Companies electing to continue to
follow present accounting rules under APB 25 are required to provide pro forma
disclosures of what net income and earnings per share would have been had the
new fair value method been used. The Company has elected to
F-9
<PAGE> 118
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
continue to apply the existing accounting rules contained in APB 25 and the
required pro forma disclosures under the new method have been presented (see
Note 12).
MARKETING AND PROMOTIONAL EXPENSE
Marketing and promotion costs incurred prior to the opening of the
Residences are capitalized as prerental costs. All marketing and promotion costs
incurred subsequent to opening the Residences are expensed as incurred. The
total amount of marketing and promotion expense capitalized as prerental costs
during 1996 was $376,887 and the total amount of marketing and promotion expense
incurred during the years ended December 31, 1996, 1995, and 1994, was $156,827,
$48,923, and $90,148, respectively.
RESTRICTED INVESTMENTS
Restricted investments represent United States Treasury obligations and
certificates of deposit which mature at various times during 1998. Such
investments are required by certain real estate investment trusts (the "REITs")
as collateral for leased residences. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity as the Company has the positive intent and ability to hold the
securities to maturity. Interest received on debt securities is included in
interest income at the time it is earned. Held-to-maturity debt securities are
stated at amortized cost, which approximates fair value.
ACCOUNTS RECEIVABLE
Construction due from REIT's represents receivables from REITs for
construction draws on residences that are being constructed by the Company
pursuant to certain operating lease agreements between the Company and certain
REITs. These costs are reimbursed to the Company by the REITs throughout the
construction phase of the residence, which is generally five to eight months.
Trade receivables include residence billings, franchise fees, franchisee
construction receivables, and other fee receivables.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued FAS 121,
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. FAS 121 also addresses the accounting for long-lived assets
expected to be disposed of. The Company adopted FAS 121 in the first quarter of
1996. The effect of the adoption of FAS 121 was not material to the Company's
financial position.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1995 and 1994 financial
statements to conform with the 1996 financial statement format.
F-10
<PAGE> 119
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS OF ASSISTED LIVING FACILITIES
On March 26, 1996, the company entered into an agreement with Meditrust to
lease three assisted living residences previously owned by franchisees of the
Company, as well as entering into sale/leaseback transactions for two
Company-owned residences located in Wichita, Kansas and Bethany, Oklahoma. The
total aggregate amount financed with Meditrust for the five residences was
approximately $7,500,000. Concurrently with this transaction, the franchisees,
Masters Associates, L.L.C., the owner of the Derby, Kansas residence, Hays
Assisted Living, L.L.C., the owner of the Hays, Kansas residence, and Wellington
Partners, L.L.C., the owner of the Wellington, Kansas residence,
contemporaneously sold all of their assets (principally consisting of their real
property, building, improvements, furniture and equipment) to Meditrust. The
lease terms for these agreements are similar to those described in Note 6. The
annual lease expense to be incurred by the Company under the terms of the
agreements will total approximately $952,000.
In August 1996, the Company purchased, from High Plains Senior Living, Inc.
("HPSLI"), the land, building, and other fixed assets of Woodland Terrace, a 45
unit retirement and assisted living residence located in Liberal, Kansas. The
total purchase price was approximately $2,200,000 and was paid in cash. The
acquisition was accounted for under the purchase method of accounting in
accordance with APB No. 16 and, accordingly, the results of operations for
Woodlawn Terrace have been included in the Company's consolidated financial
statements subsequent to the acquisition date. The acquired assets and
liabilities assumed have been recorded at their estimated fair values at the
date of acquisition and are summarized as follows:
<TABLE>
<S> <C>
Property and equipment...................................... $2,233,000
Other current liabilities................................... (33,000)
----------
$2,200,000
==========
</TABLE>
During 1995, the Company entered into Exchange Agreements (the
"Agreements") with certain affiliates described in Note 1. Pursuant to the
Agreements, each of the affiliates agreed to exchange all of their assets for a
total of 523,606 shares of the Company's common stock and the assumption by the
Company of all the liabilities and obligations of each affiliate. The Company
accounted for the purchase of the affiliates (excluding Sterling House of
Augusta, Inc.) using the purchase method of accounting in accordance with APB
No. 16 and the results of the affiliates' operations have been included in the
Company's consolidated financial statements subsequent to the Exchange date. The
acquired assets and liabilities assumed have been recorded at their estimated
fair values at the Exchange date and are summarized as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 92,455
Accounts receivable......................................... 17,873
Other current assets........................................ 702,317
Property and equipment, net................................. 17,239,368
Other assets................................................ 491,046
-----------
18,543,059
Less assumed liabilities:
Accounts payable.......................................... 107,109
Other current liabilities................................. 665,138
Deferred tax liabilities.................................. 1,897,942
Long-term debt............................................ 11,978,140
-----------
14,648,329
-----------
Net assets acquired(a)...................................... $ 3,894,730
===========
</TABLE>
- ---------------
(a) Net assets acquired include all the assets acquired and the liabilities
assumed of Sterling House of Wichita, L.P., Sterling House of Bethany,
L.L.C., Sterling Group, L.L.C., and Scotia, L.L.C. and the
F-11
<PAGE> 120
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS OF ASSISTED LIVING FACILITIES -- (CONTINUED)
step-up in accounting basis attributable to the purchase of minority
interest in Sterling House of Abilene, L.P. (Abilene, L.P.) (see Note 4) and
Corridor Properties, L.L.C. of $419,500 and $925,762, respectively. Both
Abilene, L.P. and Corridor Properties, L.L.C. were majority owned
subsidiaries previously consolidated in the Company's consolidated financial
statements. Accordingly, the results of their operations have been included
in the Company's consolidated statement of operations for the whole year or
with respect to Abilene since May 31, 1995.
Sterling House of Augusta, Inc. ("Augusta") was under the common control of
certain controlling shareholders of the Company and, accordingly, its assets and
liabilities were recorded at historical cost in a manner similar to that of a
pooling of interest and the accompanying financial statements were restated in
the year of acquisition.
The following pro forma information presents the combined results of
operations of the Company and the franchised residences acquired through the
Exchange, the Meditrust transactions and the residence acquired from HPSLI as
though the acquisitions occurred at the beginning of the period prior to each of
the individual the acquisition dates. These pro forma amounts represent the
historical operating results of the acquired residences combined with those of
the Company with appropriate adjustments which give effect to interest expense,
depreciation and amortization, lease expense, income tax benefits, and
elimination of intercompany transactions.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Revenues............................................. $16,642,956 $ 8,320,602 $3,482,000
Net loss before extraordinary item................... (844,243) (1,597,247) (748,000)
Net loss............................................. (844,243) (2,773,180) (748,000)
Net loss before extraordinary item per common
share.............................................. $ (0.17) $ (0.50) $ (0.27)
Net loss per common share............................ $ (0.17) $ (0.87) $ (0.27)
Weighted average number of shares of common stock
outstanding........................................ 5,036,779 3,173,153 2,761,606
</TABLE>
The pro forma adjustments are based upon available information and
assumptions that management believes are reasonable under the circumstances. The
pro forma consolidated results do not purport to be indicative of the actual
financial position or operating results which would have occurred had such
transactions been consummated on the dates indicated. In addition, the pro forma
information is not intended to be indicative of future results of operations.
F-12
<PAGE> 121
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Prior to the Reorganization Transaction, the Company's investments in
unconsolidated entities reflected the Company's investment in affiliated
entities which own and operate assisted living facilities franchised under the
Sterling House(R) concept. The investee entities generally operated as limited
liability companies or limited partnerships. The Company's investments in such
entities prior to the Exchange are summarized as follows:
<TABLE>
<CAPTION>
OWNERSHIP
AFFILIATED ENTITY PERCENTAGE
----------------- ----------
<S> <C>
Sterling House of Wichita, L.P.............................. 25.00%
Sterling House of Bethany, L.L.C............................ 20.00%
Sterling Group, L.L.C....................................... 40.00%
Scotia, L.L.C............................................... 28.31%
Sterling House of Abilene, L.P.............................. 62.00%(a)
</TABLE>
In connection with the Reorganization Transaction, the Company acquired the
remaining interest in the affiliated entities and, accordingly, the assets,
liabilities and operations of such entities for the period subsequent to the
Exchange date, have been included in the Company's consolidated financial
statements for the year ended December 31, 1995. Prior to such date, the Company
accounted for these investments using the equity method of accounting. Such
method was used by the Company because it either owned greater than a 20%
interest in the invested entity or it had the approved responsibility from the
voting members of the entity to exercise significant influence over the
operating and financial policies of such entity. Under this method, the net
income or loss of the investee was recognized as income or loss in the Company's
statement of operations and added to or deducted from the investment account,
and distributions received from the affiliate were treated as a reduction of the
investment account.
Combined condensed statements of operations for the unconsolidated
affiliated entities accounted for under the equity method of accounting
described above are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1995
THROUGH YEAR ENDED
OCTOBER 26, DECEMBER 31,
1995 1994
----------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS
Revenues.................................................... $3,439,413 $1,940,774
Operating expenses.......................................... 3,309,212 2,287,470
---------- ----------
Operating income (loss)..................................... 130,201 (346,696)
Other expense (principally interest)........................ 740,485 461,366
---------- ----------
Net loss.................................................... $ (610,284) $ (808,062)
========== ==========
</TABLE>
- ---------------
(a) Effective May 31, 1995, the Company increased its ownership in Sterling
House of Abilene, L.P. from 1% to approximately 62% by purchasing
partnership interests from existing partners. The aggregate purchase price
was approximately $311,600 and the Company financed the purchase through
bank borrowings. The transaction was accounted for as a purchase and the
results of operations of Abilene, L.P. are consolidated in the Company's
operating results from the date of acquisition. Abilene, L.P.'s assets and
liabilities are included in the Company's consolidated balance sheet at
December 31, 1995. The pro forma impact on the results of operations of the
Company as if this transaction occurred on January 1, 1994, are included in
the pro forma income amounts at Note 3.
F-13
<PAGE> 122
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SHORT-TERM BORROWINGS
At December 31, 1995, short-term borrowings consisted of construction loans
pursuant to the sale/ leaseback agreements described in Note 6. The loans permit
borrowings up to $1,539,000 per Residence and interest is payable monthly during
the construction period, as defined, at a rate equal to the National City Bank's
prime rate plus 3.5%, and are secured by all tangible assets of the Residence.
As each Residence was completed, the amounts borrowed during the construction
period were retired with proceeds received from the sale/leaseback transactions.
6. LEASING ARRANGEMENTS
The Company has entered into sale/leaseback agreements with certain REITs
as a primary source of financing the development, construction and, to a lesser
extent, acquisitions of assisted living residences. Under such agreements, the
Company may enter into a series of sale/leaseback transactions whereby each new
Residence is sold at its negotiated value and the Company will enter into a
lease agreement for such Residence. The initial terms of the leases vary from 10
to 15 years and include aggregate renewal options ranging from 15 to 40 years.
The Company is responsible for all operating costs, including repairs, property
taxes, and insurance. All of these lease arrangements provide the Company with a
right of first refusal if the REIT were to seek to sell the property. The annual
minimum lease payments are based upon a percentage of the negotiated sales value
of each Residence. Such percentages are generally equal to the yield for the
ten-year United States Treasury Note plus rates ranging from 3.25% to 3.75%. The
minimum lease payments are adjusted annually by a percentage multiplier that is
contingent upon changes in the Consumer Price Index. The Residences sold in the
sale/leaseback transactions are sold for an amount equal to or less than their
fair market value. The leases are accounted for as operating leases with any
applicable gain or loss realized in the initial sales transaction being deferred
and amortized into income in proportion to rental expense over the initial term
of the lease.
In addition to leased Residences, the Company leases certain office space
and equipment under noncancelable operating leases from nonaffiliates that
expire at various times through 2009. Rental expense on all such operating
leases, including Residences, for the years ended December 31, 1996, 1995 and
1994, was $3,056,752, $92,727 and $13,215, respectively.
Future minimum lease payments for the next five years and thereafter under
noncancellable operating leases with initial terms of one year or more in effect
at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------------
RESIDENCE OTHER
FISCAL YEAR LEASES LEASES
----------- ----------- --------
<S> <C> <C>
1997........................................................ $ 5,523,071 $ 75,504
1998........................................................ 5,523,071 75,504
1999........................................................ 5,523,071 73,188
2000........................................................ 5,523,071 42,630
2001........................................................ 5,523,071 --
Thereafter.................................................. 29,509,559 --
----------- --------
Total minimum lease payments................................ $57,124,914 $266,826
=========== ========
</TABLE>
7. EXTRAORDINARY LOSS
During 1995, upon the completion of the IPO, the Company terminated a
certain loan commitment agreement with a REIT and paid an aggregate termination
fee of $1,488,000, of which $500,000 was paid in cash and $988,000 by delivery
of 87,823 shares of the Company's common stock. The Company incurred an
extraordinary pretax loss of $1,923,031 ($1,175,933 net of income taxes), which
represents the termination
F-14
<PAGE> 123
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EXTRAORDINARY LOSS -- (CONTINUED)
cost incurred by the Company related to the early extinguishment of the loan
commitment and the write-off of all unamortized financing costs as of the IPO
date which were incurred by the Company pursuant to the terminated loan
commitment.
8. LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Serial and term revenue bonds maturing serially from 1995
through 2013, interest accrues at rates ranging from 4.0%
to 9.5% with overall effective rates ranging from 7.2% to
9.2%, secured by substantially all assets of the
applicable Residences(a)................................. $ 4,710,000 $6,717,500
Convertible subordinated debenture bonds due June 30, 2006,
callable by the Company anytime on or after July 15,
1999, convertible into the Company's common stock at
$22.42 per share (equal to approximately 1,561,106
shares)(b)............................................... 35,000,000 --
Other...................................................... 95,120 122,274
----------- ----------
39,805,120 6,839,774
Less current maturities.................................... 215,623 277,966
----------- ----------
$39,589,497 $6,561,808
=========== ==========
</TABLE>
- ---------------
(a) Certain of these bonds have been issued in compliance with certain federal
regulations to provide tax-exempt interest to the bond holders. These
regulations require that the Company comply with renting a defined
percentage of the rental units of each Residence to certain qualified
tenants. Qualified tenants are determined based upon their income and the
median family income adjusted for the family size for the area in which the
Residences are located.
(b) The convertible subordinated debenture bonds are callable at a premium after
July 15, 1999, at the following redemption prices (expressed as a percentage
of principal amount):
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICES
---- -----------------
<S> <C>
1999........................................................ 102%
2000........................................................ 101%
2001 and thereafter......................................... 100%
</TABLE>
Aggregate annual maturities of long-term debt are $215,600, $190,000,
$205,000, $220,000 and $235,000 for the years through 2001, respectively.
F-15
<PAGE> 124
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards........................ $ 468,873 $ 447,901
Accrued compensation..................................... 150,512 161,713
Other.................................................... 88,343 --
---------- -----------
Total deferred tax assets........................ 707,728 609,614
Deferred tax liabilities:
Property and equipment................................... 896,183 1,662,471
Start-up costs........................................... 471,616 23,475
---------- -----------
Total gross deferred tax liabilities............. 1,367,799 1,685,946
---------- -----------
Net deferred tax liabilities..................... $ (660,071) $(1,076,332)
========== ===========
</TABLE>
Significant components of the (benefit) provision for income taxes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- -------- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $ -- $ -- $(6,571)
State............................................ -- -- (721)
--------- -------- -------
Total current............................ -- -- (7,292)
Deferred:
Federal.......................................... (360,785) (65,881) 6,358
State............................................ (48,578) (8,631) 934
--------- -------- -------
Total deferred........................... (409,363) (74,512) 7,292
--------- -------- -------
$(409,363) $(74,512) $ --
========= ======== =======
</TABLE>
The effective tax rate on income before income taxes varies from the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory rate.......................................... (34.0)% (34.0)% (34.0)%
State taxes, net........................................ (4.9) (4.8) (5.0)
Valuation allowance..................................... -- 30.3 36.4
Other................................................... 2.8 1.6 2.6
----- ----- -----
(36.1)% (6.9)% 0.0%
===== ===== =====
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $1,200,000 which expires through 2011.
During 1994, the valuation allowance was increased by approximately $175,746,
because the Company was uncertain that such deferred tax assets in excess of the
F-16
<PAGE> 125
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES -- (CONTINUED)
applicable reversing deferred tax liabilities would be realized in future years.
During 1995, the valuation allowance was increased by approximately $328,000 to
reserve for the tax benefit of losses accumulated prior to the Exchange. In
connection with the Exchange, the valuation allowance was subsequently reduced
to zero and the related benefit was recorded as a reduction to the purchase
price in accordance with SFAS No. 109.
10. PREFERRED STOCK
The Company has authorized 20,000,000 shares of preferred stock with no par
value. All preference rights, powers, limitations or restrictions attributable
to such preferred stock will be specified by the Board of Directors.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents -- The carrying amount reported in the
balance sheet for cash and cash equivalents approximates its fair value.
Restricted Investments -- Restricted investments represent Treasury
bills and certificates of deposit held by the Company as collateral for
letters of credit. The carrying amount reported in the balance sheet for
restricted investments approximates their fair value.
Short-Term Borrowings, Bonds Payable and Convertible Bond
Payable -- The carrying amounts of the Company's borrowings under its
short-term debt agreements approximate their fair value. The fair values of
the Company's long-term debt are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------- -----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents....... $13,658,827 $13,658,827 $17,396,355 $17,396,355
Short-term borrowings........... -- -- 6,726,428 6,726,428
Restricted investments.......... 1,663,784 1,663,784 -- --
Bonds payable & convertible
bonds payable................. 39,805,120 34,667,746 6,839,774 7,167,665
</TABLE>
12. STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options usually equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
The Company's 1995 Incentive Stock Option Plan (the Plan) has authorized
the grant of options to management and other key employees for up to 237,000
shares of the Company's common stock, and the grant of options for up to 72,000
shares of it common stock to certain Directors outside of the Plan.
F-17
<PAGE> 126
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCK OPTIONS -- (CONTINUED)
Concurrently with the IPO, the Company granted options to certain officers and
key employees to purchase 37,000 shares of the Company's common stock at
exercise prices of $0.10 per share. These options vested immediately and are
exercisable in three 20% increments at the end of each six-month period
subsequent to the grant date and expire ten years from the grant date. Options
granted to the Directors vest and become exercisable over three years and expire
ten years from the date of grant. All other options granted under the Plan vest
and become exercisable over three years of continued employment and expire ten
years from the date of grant. In accordance with the provisions of APB 25, the
Company has recognized $412,550 of compensation expense related to options
granted in 1995.
Pro forma information regarding net loss and loss per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of the Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995, risk-free interest rates of 5.1%; a dividend yield of 0%; volatility
factors of the expected market price of the Company's common stock of .541 and a
weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferrable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Pro forma net loss before extraordinary item............... $(938,315) $(1,019,031)
Pro forma net loss......................................... $(938,315) $(2,194,964)
Pro forma loss per share before extraordinary item......... $ (0.19) $ (0.37)
Pro forma loss per share................................... $ (0.19) $ (0.79)
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding-beginning of year...................... 109,000 $ 7.47 -- --
Granted............................................ 149,450 16.31 109,000 $7.47
Exercised.......................................... (3,836) 0.10 -- --
Forfeited.......................................... (6,700) 18.27 -- --
Outstanding-end of year............................ 247,914 $12.62 109,000 $7.47
Exercisable at end of year......................... 34,954 $ 7.76 -- $0.00
Weighted average fair value of options granted
during the year.................................. $ 9.11 $ 8.00
</TABLE>
F-18
<PAGE> 127
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCK OPTIONS -- (CONTINUED)
At December 31, 1996, the Company had 33,164 options outstanding with an
exercise price of $0.10 per share and a remaining contractual life of 8.8 years.
In addition, the Company had 214,750 options outstanding with prices ranging
from $8.25 to $19.25 per share and a weighted average remaining contractual life
of 9.3 years.
13. RELATED PARTY TRANSACTIONS
Prior to the Exchange date, the Company had material transactions with
related parties that were unconsolidated affiliates of the Company. Such
transactions included the payment of management, accounting, marketing and
development fees, construction costs, and certain cash management transactions.
Following the Exchange, such transactions no longer occur.
MANAGEMENT AND SERVICE FEES
In return for certain management and administrative services, the Company
received a monthly fee for management services rendered on behalf of its
affiliates for each of their Residences. Pursuant to the related management
agreement, the Company received monthly fees for each Residence equal to the
greater of $1,500 or 5% of each Residence's monthly gross revenues. In addition
to these fees, the Company provided its affiliates with bookkeeping and payroll
services for a monthly fee ranging from $250 to $500 per Residence. Aggregate
management and accounting fees received from affiliates for the years ended
December 31, 1996, 1995 and 1994 totaled $-0-, $232,853 and $128,426,
respectively. Such fees are reflected as management and service fees in the
accompanying consolidated statements of operations.
In return for certain preopening marketing services, the Company received
$20,000 per Residence. These services included initial marketing activities,
resident recruitment and qualification, selection of initial Residence staff,
selection and recruitment of third-party service providers and referral sources,
and primary responsibility for state and local licensing. Amounts recognized by
the Company for these preopening services for the years ended December 31, 1996,
1995 and 1994 were $-0-, $112,467 and $104,034, respectively. Such fees are
reflected as management and service fees in the accompanying consolidated
statements of operations.
INITIAL FRANCHISE AND ROYALTY FEES
The Company receives initial franchise fees of $25,000 from certain
affiliated franchisees. Such fees are deferred and recognized when the Residence
commences operations. The Company also received a monthly royalty fee of 3% of
each Residences' gross receipts in consideration for the continuing rights,
licenses and ongoing services provided under each applicable franchise
agreement. Initial franchise and royalty fees earned by the Company from
affiliates during 1996, 1995 and 1994 are $54,606, $168,880, and $152,019,
respectively. Such fees are reflected as initial franchise and royalty fees in
the accompanying consolidated statements of operations.
DEVELOPMENT FEES
The Company received compensation from affiliates for planning and
executing the construction and development of their Residence. These services
included primary responsibility for land acquisition, zoning and licensing,
obtaining supplemental financing, site planning and development activities,
general contractor and bid selection, construction oversight, and initial
accounting system and organization setup. Amounts recognized by the Company for
development fees from its affiliates for the years ended December 31, 1996, 1995
and 1994 were $-0-, $302,871 and $188,370, respectively.
During 1994, the Company also received $125,000 in development fees from
Covenant Housing Corporation (CHC), a not-for-profit corporation that is managed
by the Company. This was a one-time
F-19
<PAGE> 128
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RELATED PARTY TRANSACTIONS -- (CONTINUED)
payment in consideration for the Company's services in helping to acquire and
reorganize an existing Residence on behalf of the corporation. Neither the
Company nor its affiliates have any direct ownership in CHC.
EARNED REVENUES FROM CONSTRUCTION SERVICES
The Company was retained by certain of its affiliates as the general
contractor for the construction of their Residences for which the Company
received a fee for construction services. Revenues earned by the Company from
such affiliates for the years ended December 31, 1996, 1995 and 1994, were $-0-,
$803,302 and $602,002, respectively.
NOTES PAYABLE TO STOCKHOLDERS
The notes payable to stockholders at December 31, 1995, represent working
capital loans made to the Company from certain stockholders. These loans were
payable on demand and accrued interest at the short-term Applicable Federal Rate
as published monthly by the Internal Revenue Service. For the years ended
December 31, 1996, 1995 and 1994, interest expense incurred by the Company on
such loans was approximately $-0-, $4,279 and $6,083, respectively. During 1995,
the Company repaid the balance of such loans with proceeds received from the
IPO.
OTHER
During 1994, the Company sold a portion of its interest in an affiliated
Franchisee to a stockholder of the Company for $12,644, an amount equal to its
book value.
During 1994, the Company paid $30,000 in consulting fees to a stockholder
of the Company.
14. COMMITMENTS
The Company entered into three additional sale/leaseback financing
commitments with REITs during 1996 which provide approximately $113,110,000 in
sale/leaseback financing. The terms of the financing commitments are similar to
those described in Note 7. The aggregate amount of unused sale/leaseback
financing at December 31, 1996 was approximately $135,630,000.
The Company is required by certain REITs to obtain a letter of credit as
collateral for leased residences. Outstanding letters of credit at December 31,
1996 and 1995, were $1,270,056 and $470,175, respectively.
In connection with the acquisition of BCI, the Company entered into a
consulting agreement with the seller, who is also an officer and stockholder of
the Company, whereby the seller received $10,000 per month through December 1996
for providing consulting services to BCI.
15. SAVINGS PLAN
In 1995, the Company initiated an employee savings plan under Section
401(k) of the Internal Revenue Code. The plan covers full-time employees and
allows employees to contribute up to 15% of their salary to the plan. The
Company matches employee contributions up to a maximum of 3% of the employee's
salary. Amounts charged to expense for matching contributions during 1996 and
1995 were $40,474 and $43,386 respectively.
F-20
<PAGE> 129
STERLING HOUSE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $12,541,587 $13,658,827
Accounts receivable:
Construction due from REIT.............................. 60,241 3,847,647
Trade................................................... 1,131,093 417,820
Other................................................... 41,245 143,138
Advances to unconsolidated affiliates..................... 14,240,038 --
Prerental costs (net of amortization)..................... 1,015,666 1,339,309
Other..................................................... 970,765 560,151
----------- -----------
Total current assets............................... 30,000,635 19,966,892
Property and equipment:
Land and improvements..................................... 1,533,921 1,384,013
Buildings................................................. 9,590,929 10,230,687
Vehicles and equipment.................................... 1,135,342 626,715
Furniture, fixtures and office equipment.................. 1,677,131 1,311,823
Construction in progress.................................. 33,545,898 40,382,765
----------- -----------
47,483,221 53,936,003
Less accumulated depreciation............................. (1,136,224) (829,966)
----------- -----------
Net property and equipment......................... 46,346,997 53,106,037
Other assets:
Deferred financing costs.................................. 1,444,925 1,495,200
Restricted investments.................................... 2,772,428 1,663,784
Other..................................................... 2,259,650 1,586,505
----------- -----------
Total other assets................................. 6,477,003 4,745,489
----------- -----------
Total assets....................................... $82,824,635 $77,818,418
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $11,017,186 $ 9,786,224
Accrued expenses:
Salaries and benefits................................... 1,325,831 924,279
Interest................................................ 197,489 107,912
Real estate and property taxes.......................... 1,163,840 210,196
Construction costs...................................... 1,275,029 778,989
Other................................................... 347,659 181,976
Deferred income taxes..................................... 229,785 236,894
Unearned rent and refundable deposits..................... 312,019 408,307
Current maturities of long-term debt and bonds payable.... 211,406 215,623
----------- -----------
Total current liabilities.......................... 16,080,244 12,850,400
Long-term debt.............................................. 41,399,492 39,589,497
Deferred income taxes....................................... 333,479 423,177
Deferred compensation....................................... 366,173 387,419
Other....................................................... 186,618 57,977
Minority interest in subsidiaries........................... 174,777 --
Stockholders' equity:
Preferred stock; no par value 20,000,000 shares
authorized, none issued and outstanding................. -- --
Common stock; no par value; 75,000,000 shares authorized,
5,041,928 shares issued and outstanding (5,038,836 in
1996)................................................... 28,250,827 28,216,042
Accumulated deficit....................................... (3,966,975) (3,706,094)
----------- -----------
Total stockholders' equity......................... 24,283,852 24,509,948
----------- -----------
Total liabilities and stockholders' equity......... $82,824,635 $77,818,418
=========== ===========
</TABLE>
See accompanying notes.
F-21
<PAGE> 130
STERLING HOUSE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Revenues:
Residence rental.......................................... $17,460,364 $5,754,476
Initial franchise and royalty fees:
Affiliates............................................. 26,563 28,826
Other.................................................. 140,350 51,697
Management and service fees:
Affiliates............................................. 89,440 --
Other.................................................. 41,795 52,966
Construction services..................................... 39,763 63,123
----------- ----------
Total revenue..................................... 17,798,275 5,951,088
Operating expenses:
Residence operating expenses........................... 11,029,645 3,796,559
General and administrative............................. 2,258,726 1,191,283
Building rental........................................ 4,410,064 1,115,523
Depreciation and amortization.......................... 1,320,666 470,879
Construction costs..................................... 21,081 28,245
----------- ----------
Total operating expenses.......................... 19,040,182 6,602,489
Loss from operations...................................... (1,241,907) (651,401)
Other income (expenses):
Interest income........................................ 527,852 534,262
Interest expense....................................... (153,392) (332,800)
Minority interest in loss of subsidiaries.............. 525,223 --
Other.................................................. (16,319) (20,257)
----------- ----------
Total other income................................ 883,364 181,205
----------- ----------
Loss before income taxes.................................. (358,543) (470,196)
----------- ----------
(Provision) benefit for income taxes...................... 96,807 139,285
----------- ----------
Net loss.......................................... $ (261,736) $ (330,911)
=========== ==========
Net loss per common share......................... $ (.05) $ (.07)
=========== ==========
Weighted average number of shares outstanding during the
period................................................. 5,039,585 5,035,421
=========== ==========
</TABLE>
See accompanying notes.
F-22
<PAGE> 131
STERLING HOUSE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (261,736) $ (330,911)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 1,320,666 470,879
Amortized rent and interest expense....................... 29,009 32,405
Deferred income taxes..................................... (96,807) (139,285)
Minority interest in loss of subsidiaries................. (525,223) --
Net change in operating assets and liabilities:
Accounts receivable....................................... (611,380) 11,615
Prerental costs........................................... (590,377) (504,919)
Accrued expenses.......................................... 1,610,456 512,232
Unearned rent and refundable deposits..................... (96,288) 3,317
Accounts payable.......................................... 180,135 (790,125)
Deferred compensation..................................... (21,246) (21,335)
Other..................................................... (850,878) (20,241)
------------ ------------
Net cash provided by (used in) operating
activities...................................... 86,331 (776,368)
INVESTING ACTIVITIES
Purchase of property and equipment.......................... (46,264,365) (16,804,275)
Proceeds from sale/leaseback transactions................... 54,224,854 12,292,497
Construction receivable due from REIT....................... 3,787,406 --
Advances to unconsolidated affiliates....................... (20,536,489) --
Proceeds received from unconsolidated affiliates on
advances.................................................. 6,296,451 --
Other....................................................... (1,108,644) (524,453)
------------ ------------
Net cash used in investing activities............. (3,600,787) (5,036,231)
FINANCING ACTIVITIES
Proceeds from short-term borrowings......................... -- 1,473,650
Principal payments on short-term borrowings................. -- (8,200,078)
Principal payments on long-term debt........................ (67,315) (1,996,856)
Convertible debt issued..................................... -- 35,000,000
Proceeds from issuance of long-term debt.................... 1,868,500 61,173
Expenditures for financing costs............................ (34,514) (1,602,000)
Capital contributions by minority members................... 700,000 --
Net change in bond reserve funds in trust................... (104,240) (275,066)
Other....................................................... 34,785 7,737
------------ ------------
Net cash provided by financing activities......... 2,397,216 24,468,560
------------ ------------
Net increase (decrease) in cash................... (1,117,240) 18,655,961
Cash at beginning of period................................. 13,658,827 17,396,355
------------ ------------
Cash at end of period....................................... $ 12,541,587 $ 36,052,316
============ ============
</TABLE>
See accompanying notes.
F-23
<PAGE> 132
STERLING HOUSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
1. GENERAL
The accompanying unaudited interim financial statements of Sterling House
Corporation (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and note disclosures normally included in annual financial
statements have been condensed or omitted pursuant to those rules and
regulations. In the opinion of management, all adjustments, consisting of
normal, recurring adjustments considered necessary for a fair presentation, have
been included. Although management believes that the disclosures made are
adequate to ensure that the information presented is not misleading, it is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included herein for the fiscal year ended
December 31, 1996. The results of the six-month periods ended June 30, 1997 and
1996 are not necessarily indicative of the results of operations for the entire
year.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, BCI Construction, Inc., BCINC,
Inc., Assisted Living Properties, Inc. and Coventry Corporation ("Coventry").
The Company's consolidated financial statements also include Austin Development,
Limited, Waterford Development Company, L.L.C., Newport Development, L.L.C.,
Claremont Development, Limited Partnership, and Bridgeport Development, Limited
(collectively known as the Company's Development Partnerships), all of which are
majority-owned subsidiaries of Coventry. The "Minority interest in subsidiaries"
represents the minority members' proportionate interest in the Company's
Development Partnerships.
In addition, the Company has investment interests in certain limited
partnerships and limited liability companies that develop and operate Sterling
House(R) assisted living facilities. Ownership of such investments at June 30,
1997, is 9.8% and the Company accounts for all such investments using the equity
method of accounting.
All significant intercompany balances and transactions have been
eliminated.
3. NET LOSS PER COMMON SHARE AND RECENTLY ISSUED ACCOUNTING STANDARDS
Net loss per common share has been computed by dividing net loss by the
weighted average number of common shares outstanding during each period. The
weighted average number of common shares does not include any common stock
equivalents because, (1) stock options outstanding are not materially dilutive
and (2) common stock equivalents associated with the convertible debentures
would be anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"),
which specifies the computation, presentation, and disclosure requirements for
earnings per share with the objective to simplify the computation of earnings
per share. FAS 128 is effective for financial statements for periods ending
after December 15, 1997, and earlier application is not permitted. After the
effective date, all prior period earnings per share data will be restated to
conform with the provisions of FAS 128. The adoption of FAS 128 is not expected
to have a material impact on the Company's earnings per share data.
4. UNCONSOLIDATED AFFILIATES
Advances to unconsolidated affiliates represents construction receivables
from certain affiliated limited partnerships and limited liability companies in
which the Company owns a 9.8% ownership interest. Such affiliates develop and
operate Sterling House(R) assisted living facilities. Advances to such
affiliates are
F-24
<PAGE> 133
STERLING HOUSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reimbursed to the Company as the affiliates obtain permanent financing. The
affiliates will typically obtain financing through sale/leaseback financing in
accordance to the sale/leaseback commitments previously obtained by the Company.
At June 30, 1997, the Company had guaranteed $6,985,000 of mortgage
indebtedness for three of the Company's joint venture partnerships and had
guaranteed payments under operating leases for two of the Company's joint
venture partnerships with aggregate annual lease payments of $478,584.
5. SHAREHOLDERS RIGHTS PLAN
On June 25, 1997, the Board of Directors of the Company declared a dividend
distribution of one Right for each outstanding share of the Company's Common
Stock, to the holders of record on July 3, 1997. Each Right entitles the
registered holder to purchase from the Company one one-hundredth (1/100th) of a
share of Series A Junior Participating Stock no par value per share (the "Series
A Preferred Stock"), or, in some circumstances, Common Stock, other securities,
cash or other assets at a price of $80.00 per one one-hundredth of a share with
both shares and price being subject to adjustment in certain events. The
complete terms and conditions of the Rights are set forth in a Rights Agreement
between the Company and ChaseMellon Shareholder Services, Inc., as Rights Agent,
dated as of June 25, 1997, as it may be amended from time to time.
Initially, the Rights will attach to all certificates representing
outstanding shares of Common Stock and no separate certificates for the Rights
("Rights Certificates") will be distributed. The Rights will separate from the
Common Stock upon the "Distribution Date," which will occur upon the earlier of
(i) 10 days following a public announcement that a person or group (an
"Acquiring Person") has acquired beneficial ownership of 20% or more of the
outstanding shares of Common Stock or (ii) 10 business days following the
commencement of a tender offer or exchange offer, the consummation of which
would result in a person becoming an Acquiring Person or (iii) 10 business days
following a determination by the Company's Board of Directors that a person has
become the beneficial owner of more than 10% of the outstanding shares of Common
Stock and (a) has acquired such beneficial ownership to cause the Company to
repurchase the shares owned by such person or to pressure the Company to take
some action that would provide such person with short-term financial gain under
circumstances where the Board determines that the best long-term interests of
the Company would not be served by taking such action or (b) such beneficial
ownership is causing or is reasonably likely to cause a material adverse impact
on the business or prospects of the Company (any such person, an "Adverse
Person"). Until the Distribution Date, (a) the Rights will be evidenced by
Common Stock certificates and may be transferred only with such certificates,
(b) Common Stock certificates will contain a legend incorporating the Rights
Plan by reference and (c) the surrender for transfer of any certificate for
Common Stock will also constitute the transfer of the Rights associated with the
stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on June 25, 2007 unless earlier redeemed by the
Company. (Reference is hereby made to the Company's Form 8-K filed the with SEC
on July 3, 1997.)
6. SUBSEQUENT EVENTS
Subsequent to June 30, 1997, the Company entered into a definitive purchase
agreement to purchase two assisted living residences from a franchisee of the
Company. The Company has also entered into a definitive lease agreement to lease
two assisted living residences in Oklahoma and one in Texas from LTC Properties,
Inc. Both transactions are anticipated to close on or before September 1, 1997.
On July 31, 1997, the Company announced that it had entered into a
definitive merger agreement under which a wholly owned subsidiary of Alternative
Living Services, Inc. (AMEX:ALI) would merge with and
F-25
<PAGE> 134
STERLING HOUSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
into the Company and Alternative Living Services, Inc. would issue 1.1 shares of
its common stock in exchange for each outstanding share of the Company's common
stock. (Reference is hereby made to the Company's Form 8-K filed with the SEC on
August 13, 1997.)
7 RECLASSIFICATIONS
Certain reclassifications have been made in the 1996 financial statements
to conform with the 1997 financial statement presentation.
F-26
<PAGE> 135
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
ALTERNATIVE LIVING SERVICES, INC.,
TANGO MERGER CORPORATION
AND
STERLING HOUSE CORPORATION
DATED AS OF JULY 30, 1997,
AS AMENDED
AS OF SEPTEMBER 2, 1997
A-1
<PAGE> 136
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I THE MERGER.................................................. A-5
1.1 The Merger.................................................. A-5
1.2 Closing..................................................... A-5
1.3 Effective Time.............................................. A-5
1.4 Effect of Merger............................................ A-6
1.5 Articles of Incorporation and Bylaws........................ A-6
1.6 Directors and Officers...................................... A-6
ARTICLE II.. CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES.......... A-6
2.1 Share Consideration; Conversion or Cancellation of Shares in
the Merger.................................................. A-6
2.2 Payment for Shares in the Merger............................ A-7
2.3 Exchange Agent.............................................. A-8
2.4 Fractional Shares........................................... A-8
2.5 Transfer of Shares After the Effective Time................. A-9
2.6 Further Assurances.......................................... A-9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF TANGO AND MERGER SUB...... A-9
3.1 Corporate Organization...................................... A-9
3.2 Capitalization.............................................. A-10
3.3 Options or Other Rights..................................... A-11
3.4 Authority Relative to this Agreement........................ A-11
3.5 Tango Common Stock.......................................... A-11
3.6 No Violation................................................ A-12
3.7 Compliance with Laws........................................ A-12
3.8 Litigation.................................................. A-13
3.9 Financial Statements and Reports............................ A-13
3.10 Absence of Certain Changes or Events........................ A-14
3.11 Employee Benefit Plans and Employment Matters............... A-14
3.12 Labor Matters............................................... A-15
3.13 Insurance................................................... A-15
3.14 Environmental Matters....................................... A-15
3.15 Tax Matters................................................. A-16
3.16 Intellectual Property....................................... A-16
3.17 Related Party Transactions.................................. A-16
3.18 No Undisclosed Material Liabilities......................... A-17
3.19 No Default.................................................. A-17
3.20 Title to Properties; Encumbrances........................... A-17
3.21 Pooling of Interests........................................ A-17
3.22 Brokers..................................................... A-17
3.23 Opinion of Financial Advisor................................ A-18
3.24 Twister Stock Ownership..................................... A-18
ARTICLE IV.. REPRESENTATIONS AND WARRANTIES OF TWISTER................... A-18
4.1 Corporate Organization...................................... A-18
4.2 Capitalization.............................................. A-18
4.3 Options or Other Rights..................................... A-19
4.4 Authority Relative to this Agreement........................ A-19
4.5 No Violation................................................ A-20
4.6 Compliance with Laws........................................ A-20
4.7 Litigation.................................................. A-21
</TABLE>
A-2
<PAGE> 137
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
4.8 Financial Statements and Reports............................ A-21
4.9 Absence of Certain Changes or Events........................ A-22
4.10 Employee Benefit Plans and Employment Matters............... A-22
4.11 Labor Matters............................................... A-23
4.12 Insurance................................................... A-23
4.13 Environmental Matters....................................... A-23
4.14 Tax Matters................................................. A-23
4.15 Intellectual Property....................................... A-24
4.16 Related Party Transactions.................................. A-24
4.17 No Undisclosed Material Liabilities......................... A-24
4.18 No Default.................................................. A-25
4.19 Title to Properties; Encumbrances........................... A-25
4.20 Pooling of Interests........................................ A-25
4.21 Brokers..................................................... A-25
4.22 Opinion of Financial Advisor................................ A-25
4.23 Contracts................................................... A-25
ARTICLE V COVENANTS AND AGREEMENTS.................................... A-26
5.1 Joint Proxy Statement/Prospectus; Registration Statement;
Stockholders' Meeting....................................... A-26
5.2 Conduct of the Business of Twister Prior to the Effective
Time........................................................ A-27
5.3 Conduct of the Business of Tango Prior to the Effective
Time........................................................ A-29
5.4 Access to Properties and Records............................ A-30
5.5 No Solicitation of Transactions............................. A-30
5.6 Employee Benefit Plans...................................... A-32
5.7 Treatment of Options and Debentures......................... A-32
5.8 Indemnification............................................. A-33
5.9 Confidentiality............................................. A-34
5.10 Reasonable Best Efforts..................................... A-34
5.11 Certification of Stockholder Vote........................... A-35
5.12 Affiliate Agreements........................................ A-35
5.13 Listing Application......................................... A-35
5.14 Supplemental Disclosure Schedules........................... A-35
5.15 No Action................................................... A-35
5.16 Conduct of Business of Merger Sub........................... A-35
5.17 Corporate Governance........................................ A-35
5.18 Cross Option Agreement...................................... A-37
5.19 Plan of Reorganization...................................... A-37
5.20 Compliance by Merger Sub.................................... A-37
5.21 Change Corporate Name....................................... A-37
ARTICLE VI CONDITIONS PRECEDENT........................................ A-37
6.1 Conditions to Each Party's Obligation to Effect the
Merger...................................................... A-37
6.2 Additional Conditions to the Obligations of Twister......... A-38
6.3 Conditions to the Obligations of Tango and Merger Sub to
Effect the Merger........................................... A-39
ARTICLE VII TERMINATION................................................. A-40
7.1 Termination................................................. A-40
7.2 Effects of Termination...................................... A-42
</TABLE>
A-3
<PAGE> 138
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE VIII MISCELLANEOUS............................................... A-42
8.1 Amendment................................................... A-42
8.2 Waiver...................................................... A-43
8.3 Survival.................................................... A-43
8.4 Expenses and Fees........................................... A-43
8.5 Notices..................................................... A-43
8.6 Headings.................................................... A-44
8.7 Public Announcements........................................ A-44
8.8 Certain Definitions......................................... A-44
8.9 Entire Agreement............................................ A-44
8.10 Assignment; Parties in Interest............................. A-45
8.11 Counterparts................................................ A-45
8.12 Invalidity; Severability.................................... A-45
8.13 Governing Law............................................... A-45
EXHIBITS
Exhibit A Articles of Incorporation and Bylaws of Surviving
Corporation
Exhibit B Confidentiality Agreement
Exhibit C-1 Form of Twister Affiliate Agreement
Exhibit C-2 Form of Tango Affiliate Agreement
Exhibit C-3 Executive Employment Agreement
Exhibit C-4 Other Executive Employment Agreements
Exhibit C-5 Tango Bylaws Amendments
Exhibit D Form of Cross Option Agreement
SCHEDULES
Schedule 1.6(a) Directors of Surviving Corporation
Schedule 1.6(b) Officers of Surviving Corporation
Schedule 5.17(d) Other Executives
Schedule 5.17(g) Stay Plan
</TABLE>
A-4
<PAGE> 139
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of July 30, 1997, as
amended as of September 2, 1997 among ALTERNATIVE LIVING SERVICES, INC., a
Delaware corporation (referred to herein as "Tango"), TANGO MERGER CORPORATION,
a Kansas corporation and a wholly owned subsidiary of Tango (referred to herein
as "Merger Sub"), and STERLING HOUSE CORPORATION, a Kansas corporation (referred
to herein as "Twister").
WHEREAS, the Boards of Directors of Tango, Merger Sub and Twister have
approved, and deem advisable, consistent with their respective long-term
business strategies and in the best interests of their respective stockholders,
to consummate the merger of Merger Sub with and into Twister (the "Merger") upon
the terms and conditions set forth herein and in accordance with the Kansas
General Corporation Code (the "KGCC") (Twister, following the effectiveness of
the Merger, being hereinafter sometimes referred to as the "Surviving
Corporation");
WHEREAS, concurrently with the execution and delivery of this Agreement, as
a condition of Tango's and Twister's willingness to enter into this Agreement,
Tango and Twister are entering into a Stock Option Agreement dated the date
hereof and attached as Exhibit D hereto (the "Cross Option Agreement") pursuant
to which (A) Tango is granting to Twister an option to purchase shares of the
common stock, par value $0.01 per share, of Tango (the "Tango Common Stock") and
(B) Twister is granting to Tango an option to purchase shares of the common
stock, no par value per share, of Twister (the "Twister Common Stock");
WHEREAS, Tango and Twister desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes it is intended that the Merger shall be
accounted for as a "pooling of interests" pursuant to Opinion No. 16 of the
Accounting Principles Board.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions contained herein, and in order to set forth
the terms and conditions of the Merger and the method of carrying the same into
effect, the parties hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions hereinafter
set forth, and in accordance with KGCC, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into Twister. As a result of
the Merger, the separate corporate existence of Merger Sub shall cease and
Twister, as the Surviving Corporation, shall continue to exist under and be
governed by the KGCC. The name of the Surviving Corporation shall be Sterling
House Corporation.
1.2 Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of Tango
at 450 N. Sunnyslope Road, Suite 300, Brookfield, Wisconsin 53005 as promptly as
practicable after satisfaction or waiver, if permissible, of the conditions set
forth in Article VI, or at such other location, time or date as may be agreed to
in writing by the parties hereto. The date on which the Closing occurs is
hereinafter referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth in
Article VI shall have been satisfied or if permissible, waived in accordance
herewith and this Agreement shall not have been terminated as provided in
Article VII, the parties hereto shall cause the Merger to be consummated by
filing a certificate of merger meeting the requirements of the KGCC
("Certificate of Merger") with the Secretary of State of Kansas in such form as
required by, and executed in accordance with such requirements of, the KGCC on
the Closing Date. The Merger shall become effective at the time of filing of the
Certificate of Merger with the Secretary of
A-5
<PAGE> 140
State of the State of Kansas in accordance with the KGCC or at such other time
which the parties hereto shall have agreed upon and designated in such filing as
the effective time of the Merger (the "Effective Time").
1.4 Effect of Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of the KGCC. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time,
except as otherwise provided herein, the separate existence of Merger Sub will
cease and the Surviving Corporation shall succeed, without other transfer, to
all the rights, privileges, powers, franchises and property of Merger Sub and
shall be subject to all the debts, duties and liabilities of Merger Sub in the
same manner as if the Surviving Corporation had itself incurred them.
1.5 Articles of Incorporation and Bylaws. At the Effective Time, the
Articles of Incorporation and the Bylaws attached as Exhibit A shall be the
Articles of Incorporation and Bylaws of the Surviving Corporation.
1.6 Directors and Officers. The persons set forth on Schedule 1.6(a)
hereto shall, after the Effective Time, serve as the directors of the Surviving
Corporation, to serve until their successors have been duly elected and
qualified in accordance with the Articles of Incorporation and Bylaws of the
Surviving Corporation. The persons set forth on Schedule 1.6(b) hereto shall,
after the Effective Time, serve as the officers of the Surviving Corporation at
the pleasure of the Board of Directors of the Surviving Corporation in the
office(s) set forth on said Schedule 1.6(b). The directors of Tango as of the
Effective Time shall be as specified in Section 5.17.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
2.1 Share Consideration; Conversion or Cancellation of Shares in the
Merger. Subject to the provisions of this Article II, at the Effective Time, by
virtue of the Merger and without any action on the part of Merger Sub, Twister
or the holders of any of the following securities:
(a) Each share of Twister Common Stock (together with the right to
purchase one one-hundredth (1/100th) of a share of the Twister Series A
Junior Participating Preferred Stock (the "Rights")) issued and outstanding
immediately prior to the Effective Time (other than shares of Twister
Common Stock that are owned by Twister as treasury stock (the "Treasury
Shares") and shares of Twister Common Stock owned by Tango) shall be
automatically converted into the right to receive 1.1 share (the "Exchange
Ratio") of Tango Common Stock. If, prior to the Effective Time, Tango or
Twister should split or combine their respective Common Stock, or pay a
stock dividend or other stock distribution in their respective Common
Stock, or otherwise change their respective Common Stock into any other
securities, or make any other dividend or distribution on their respective
Common Stock, then the Exchange Ratio will be appropriately adjusted to
reflect such split, combination, dividend or other distribution or change.
The Exchange Ratio shall be rounded, in each case, to the nearest
ten-thousandth of a share.
(b) All of the shares of the Twister Common Stock (together with
Rights) to be converted into Tango Common Stock pursuant to Section 2.1(a)
(the "Twister Shares") shall cease to be outstanding, shall be canceled and
retired and shall cease to exist, and each holder of a certificate
representing any such shares shall thereafter represent the right to
receive for each of the shares, upon the surrender of such certificate in
accordance with Section 2.2(b), the amount of the Tango Common Stock
specified above (the "Share Consideration") and cash in lieu of fractional
Tango Common Stock as contemplated by Section 2.4. The holders of such
certificates previously evidencing such shares of Twister Common Stock
immediately prior to the Effective Time shall cease to have any rights with
respect to such shares of Twister Common Stock except as otherwise provided
herein or by law.
(c) The issued and outstanding shares of the common stock, $.01 par
value, of Merger Sub (the "Merger Sub Common Stock") shall be converted
into one hundred (100) shares of fully paid and nonassessable shares of
common stock, $.01 par value, of the Surviving Corporation ("Surviving
Corporation Common Stock").
A-6
<PAGE> 141
(d) All shares of Twister Common Stock which are owned as Treasury
Shares and each share of Twister Common Stock owned by Tango or any direct
or indirect wholly owned subsidiary of Tango or of Twister immediately
prior to the Effective Time shall be canceled and retired and cease to
exist, without any conversion thereof or payment with respect thereto.
(e) Each outstanding option to purchase Twister Common Stock (each a,
"Twister Stock Option") and each outstanding 6.75% Convertible Subordinated
Debenture due 2006 of Twister (the "Twister Debentures") shall be assumed
by Tango in the manner provided in Section 5.7.
2.2 Payment for Shares in the Merger. (a) At the Effective Time, Tango
shall deposit, or shall cause to be deposited, with a bank or trust company
selected by Tango and reasonably acceptable to Twister as exchange agent for the
Twister Shares in accordance with this Article II (the "Exchange Agent"), for
the benefit of those persons who immediately prior to the Effective Time were
the holders of Twister Shares, a sufficient number of certificates representing
shares of Tango Common Stock required to effect the delivery of the aggregate
Share Consideration required to be issued pursuant to Section 2.1 (the
certificates representing Tango Common Stock comprising such aggregate Share
Consideration, together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "Exchange Fund"). The Exchange
Agent shall, pursuant to irrevocable instructions from Tango, deliver the shares
of Tango Common Stock contemplated to be issued pursuant to Section 2.1 and
effect the sales provided for in Section 2.4 out of the Exchange Fund. The
Exchange Fund shall not be used for any other purpose.
(b) As soon as reasonably practicable after the Effective Time, Tango shall
cause the Exchange Agent to send to each holder of record of a certificate or
certificates which immediately prior to the Effective Time evidenced outstanding
shares of Twister Common Stock (the "Certificates"), (A) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent and shall be in such form and have such other provisions as
Tango may reasonably specify) and (B) instructions for use in effecting the
surrender of the Certificates in exchange for certificates evidencing the Share
Consideration and cash in lieu of fractional shares, if any. Upon the surrender
for exchange of a Certificate, together with such letter of transmittal duly
completed and properly executed in accordance with instructions thereto and such
other customary documents as may be reasonably required pursuant to such
instructions, the holder of such Certificate shall be entitled to receive in
exchange therefor (X) certificates evidencing the Share Consideration to which
such holder is entitled hereunder, (Y) cash in lieu of fractional shares of
Tango Common Stock to which such holder is entitled pursuant to Section 2.4
herein and (Z) any dividends or other distribution to which such holder is
entitled pursuant to Section 2.2(c) herein (the Share Consideration, the
dividends, distributions and cash described in clauses (X), (Y) and (Z) being
collectively referred to as the "Merger Consideration"), and the surrendered
Certificate shall forthwith be canceled. Until so surrendered and exchanged, the
Certificates shall represent solely the right to receive the Merger
Consideration, subject to any required withholding of taxes. If Share
Consideration for any Twister Shares is to be issued to a person other than the
person in whose name the Certificates for such shares surrendered are
registered, it shall be a condition of the exchange that the person requesting
such exchange shall pay to the Exchange Agent any transfer or other taxes
required by reason of the delivery of such Share Consideration to a person other
than the registered owner of the Certificates surrendered or shall establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
applicable. Unless prohibited by law, former stockholders of record of Twister
shall be entitled to vote, after the Effective Time, at any meeting of Tango
stockholders, the number of whole shares of Tango Common Stock into which their
respective Twister Shares are converted, regardless of whether such holders have
exchanged their Certificates in accordance with this Section 2.2.
(c) No dividends or other distributions with respect to Tango Common Stock
with a record date after the Effective Time shall be paid to the holders of any
unsurrendered Certificate with respect to the shares of Tango Common Stock
represented thereby, and no other part of the Merger Consideration shall be paid
to any such holder, until the surrender of such Certificate in accordance with
this Section 2.2. Subject to the effect of applicable laws, following surrender
of any such Certificate, there shall be paid by Tango or the Exchange Agent to
the holder of the certificates evidencing whole shares of Tango Common Stock
issued in exchange therefor, in addition to the Share Consideration to be issued
in exchange therefor, without interest, (i) at the
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time of such surrender, the amount of any cash payable in lieu of a fractional
share of Tango Common Stock to which such holder is entitled pursuant to Section
2.4 and the amount of dividends or other distributions, with a record date after
the Effective Time theretofore paid with respect to such Share Consideration,
and (ii) at the appropriate payment date, the amount of dividends or other
distributions, with a record date after the Effective Time but prior to such
surrender and with a payment date subsequent to such surrender, payable with
respect to such Share Consideration.
(d) In the event any Certificates shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Tango, the
posting by such person of a bond in such amount, form and with such surety as
Tango may reasonably direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the number of shares of
the Tango Common Stock and cash in lieu of fractional shares deliverable (and
unpaid dividends and distributions) in respect thereof pursuant to this
Agreement.
(e) Tango, as the sole stockholder of Merger Sub, shall, upon surrender to
the Surviving Corporation of certificates representing the Merger Sub Common
Stock, receive a certificate representing the number of shares of the Surviving
Corporation Common Stock into which such Merger Sub Common Stock shall have been
converted pursuant to Section 2.1.
(f) Certificates surrendered for exchange by any person constituting a
Pooling Affiliate of Twister (as defined in Section 5.13) shall not be exchanged
for certificates representing Tango Common Stock until Tango has received a
written agreement from such person as provided in Section 5.13.
2.3 Exchange Agent. Tango shall cause the Exchange Agent to agree, among
other things, that (i) the Exchange Agent shall maintain the Exchange Fund as a
separate fund to be held for the benefit of the holders of the Twister Shares,
which shall be promptly applied by the Exchange Agent to making the payments
provided for in Section 2.2, (ii) any portion of the Exchange Fund that has not
been paid to holders of the Twister Shares pursuant to Section 2.2 prior to that
date which is one year from the Effective Time shall be delivered to Tango, and
any holders of Twister Shares who shall not have theretofore complied with
Section 2.2 shall thereafter look only to Tango for the Merger Consideration;
(iii) the Exchange Fund shall not be used for any purpose that is not provided
for herein, and (iv) all expenses of the Exchange Agent shall be paid directly
by Tango. Promptly following the date which is one year from the Effective Time,
the Exchange Agent shall return to Tango all cash, securities and any other
instruments in its possession relating to the transactions described in this
Agreement, and the Exchange Agent's duties shall terminate. Thereafter, each
holder of Certificates may surrender such Certificates to Tango and (subject to
applicable abandoned property, escheat and similar laws) receive in exchange
therefor the Merger Consideration payable with respect thereto, without
interest, but shall have no greater rights against Tango than may be accorded to
general creditors of Tango under the Delaware General Corporation Law (the
"DGCL"). The Exchange Agent shall not be entitled to vote or exercise any rights
of ownership with respect to the Tango Common Stock held by it from time to time
hereunder. Neither Tango nor the Surviving Corporation shall be liable to any
holder of shares of Twister Common Stock for any Merger Consideration from the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
2.4 Fractional Shares. (a) No certificates or scrip evidencing fractional
shares of Tango Common Stock shall be issued in the Merger. In lieu of any such
fractional shares, each holder of Twister Shares who would otherwise have been
entitled to a fractional share of Tango Common Stock upon surrender of
Certificates for exchange pursuant to this Article II will be paid an amount in
cash (without interest), rounded to the nearest cent, equal to such holder's
proportionate interest in the Fractional Securities Fund (as defined below). As
promptly as practicable following the Effective Time, the Exchange Agent shall
determine the excess of (i) the number of full shares of the Tango Common Stock
delivered to the Exchange Agent by Tango pursuant to Section 2.2(b) over (ii)
the aggregate number of full shares of the Tango Common Stock to be distributed
to holders of Twister Shares pursuant to Section 2.2(b) (such excess being
herein called the "Excess Shares"), and the Exchange Agent, as agent for the
holders of Twister Shares, shall sell the Excess Shares at then prevailing
prices on the American Stock Exchange ("AMEX"), all in the manner provided in
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this Section 2.4(a). The sale of the Excess Shares by the Exchange Agent shall
be executed on the AMEX through one or more member firms of the AMEX and shall
be executed in round lots to the extent practicable. Tango shall pay all
commissions, transfer taxes and other out-of-pocket transaction costs, including
the expenses and compensation of the Exchange Agent, incurred in connection with
such sale of Excess Shares. Until the net proceeds of such sale or sales have
been distributed to the holders of Twister Shares, the Exchange Agent will hold
such proceeds in trust for such holders of Twister Shares (the "Fractional
Securities Fund").
(b) In lieu of establishing the Fractional Securities Fund pursuant to
Section 2.4(a), the Exchange Agent may, at the direction of Tango and Twister
prior to the Effective Time, pay any cash amounts due the former stockholders of
Twister directly from cash made available to the Exchange Agent by Tango for
such purpose, in which event, each holder of Twister Shares who would otherwise
have been entitled to receive a fraction of a share of Tango Common Stock (after
taking into account all Certificates delivered by such holder) shall receive, in
lieu of thereof, cash (without interest) in an amount equal to such fractional
part of a share of Tango Common Stock multiplied by the closing price of a share
of Tango Common Stock on the business day immediately preceding the Closing Date
as reported on the AMEX as reported by The Wall Street Journal.
(c) As soon as practicable after the determination of the amount of cash to
be paid to holders of Twister Shares in lieu of any fractional interests, the
Exchange Agent shall make available in accordance with this Agreement such
amounts to such holders.
2.5 Transfer of Shares After the Effective Time. No transfers of Twister
Shares shall be made on the stock transfer books of Twister after the Effective
Time.
2.6 Further Assurances. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary, desirable or
proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation, the title to any property or right of Twister or Merger Sub
acquired or to be acquired by reason of, or as a result of, the Merger, or (b)
otherwise to carry out the purposes of this Agreement, Twister and Merger Sub
agree that the Surviving Corporation and its proper officers and directors shall
and will execute and deliver all such deeds, assignments and assurances in law
and do all acts necessary, desirable or proper to vest, perfect or confirm title
to such property or right in the Surviving Corporation and otherwise to carry
out the purposes of this Agreement, and that the proper officers and directors
of the Surviving Corporation are fully authorized in the name of Twister and
Merger Sub or otherwise to take any and all such action.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TANGO AND MERGER SUB
Tango and Merger Sub, jointly and severally, represent and warrant to
Twister that, except as set forth in the Disclosure Schedule delivered prior
hereto (the "Tango Disclosure Schedule"), which shall identify exceptions by
specific Section references:
3.1 Corporate Organization. Each of Tango, Merger Sub and Tango's
Subsidiaries (the "Tango Subsidiaries") has been duly organized and is validly
existing and in good standing under the laws of the jurisdiction of its
organization, has all requisite power and authority to own, operate and lease
its properties and to carry on its business as it is now being conducted, and is
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of the business conducted by it or the
ownership or leasing of its properties makes such qualification necessary, other
than where the failure to be so qualified or licensed, individually or in the
aggregate, would not have a Material Adverse Effect on Tango. The term "Material
Adverse Effect on Tango" as used in this Agreement shall mean any change or
effect that, individually or when taken together with all such other changes or
effects, would be materially adverse to the financial condition, results of
operations, properties or business of Tango and the Tango Subsidiaries taken as
a whole at the time of such change or effect. True and complete copies of the
Amended and Restated Certificate of Incorporation ("Tango Restated Certificate
of Incorporation") and the Bylaws of Tango (the
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"Tango Bylaws") have heretofore been delivered to Twister, and such Amended and
Restated Certificate of Incorporation and Bylaws are in full force and effect.
True and complete copies of the Articles of Incorporation and Bylaws of Merger
Sub have heretofore been delivered to Twister, and such Articles of
Incorporation and Bylaws are in full force and effect. Section 3.1 of the Tango
Disclosure Schedule contains a complete and accurate list of all of the Tango
Subsidiaries and Section 3.1 of the Tango Disclosure Schedule sets forth Tango's
percentage ownership in each such Subsidiary. Neither Tango nor any Tango
Subsidiary is in violation of any provision of its articles or certificate of
incorporation or bylaws (each as may have been amended or restated) or other
organizational documents, as the case may be. Merger Sub was formed solely for
the purpose of engaging in the transactions contemplated by this Agreement. As
of the date hereof and the Effective Time, except for obligations or liabilities
incurred in connection with its incorporation or organization and the
transactions contemplated by this Agreement and except for this Agreement and
any other agreements or arrangements contemplated by this Agreement, Merger Sub
has not and will not have incurred, directly or indirectly, through any
Subsidiary or affiliate, any liabilities or obligations or engaged in any
business activities of any type or kind whatsoever or entered into any
agreements or arrangements with any person.
3.2 Capitalization. As of the date of this Agreement, the authorized
capital stock of Tango consists of (i) 30,000,000 shares of Tango Common Stock
and (ii) 5,000,000 shares of preferred stock, $.01 par value ("Tango Preferred
Stock"). As of the date of this Agreement, (i) 12,996,498 shares of Tango Common
Stock are issued and outstanding, all of which were duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, the Tango Restated Certificate of Incorporation or the Tango
Bylaws or any agreement to which Tango is a party or by which Tango is bound and
(ii) 11,639 shares of Tango Common Stock were held in the treasury of Tango. As
of the date hereof, no shares of Tango Preferred Stock are issued and
outstanding. As of the date of this Agreement, 799,695 shares of Tango Common
Stock are reserved for future issuance pursuant to employee stock options
granted pursuant to Tango's Amended and Restated 1995 Incentive Plan (the "1995
Plan") and certain other option arrangements (any stock option so issued being a
"stock option"). In addition to the foregoing, 2,469,136 shares of Tango Common
Stock are reserved for issuance upon conversion of Tango's $50,000,000 principal
amount of aggregate outstanding 7.0% Convertible Subordinated Debentures Due
2004. As of the date of this Agreement, the authorized capital of Merger Sub
consists of 1,000 shares of common stock, $.01 par value per share, of which 100
shares are issued and outstanding and were duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights created by
statute, Merger Sub's Articles of Incorporation or Bylaws or any agreement to
which Merger Sub is a party or by which Merger Sub is bound. Tango has
heretofore delivered to Twister a correct and complete copy of the 1995 Plan and
a schedule identifying all outstanding stock options issued, including those
issued under the 1995 Plan. The schedule of outstanding options sets forth for
each stock option holder (i) such holder's name, (ii) the date of grant of stock
options to such holder, (iii) the number of shares of Tango Common Stock into
which each such grant is exercisable, (iv) the exercise price per share of Tango
Common Stock with respect to each such grant, and (v) the periods during which
such stock options or portions thereof are exercisable by such holder. Except as
set forth in this Section 3.2 or in Section 3.2 of the Tango Disclosure
Schedule, there are no options, warrants or other rights (including registration
rights), agreements, arrangements or commitments of any character to which Tango
or any Tango Subsidiary is a party relating to the issued or unissued capital
stock of, or other equity interests in, Tango or any Tango Subsidiary or
obligating Tango or any Tango Subsidiary to grant, issue or sell any shares of
capital stock of, or other equity interests in, Tango or any Tango Subsidiary,
by sale, lease, license or otherwise. All shares of Tango Common Stock subject
to issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable and will not have been issued in
violation of or subject to any preemptive rights created by statute, the Tango
Restated Certificate of Incorporation or Tango Bylaws or any agreement to which
Tango is a party or by which Tango is bound. Except as set forth in this Section
3.2 or in the Tango Current Reports (hereinafter defined), there are no
outstanding contractual obligations, contingent or otherwise, of Tango or any
Tango Subsidiary to (x) repurchase, redeem or otherwise acquire any shares of
Tango Common Stock or any capital stock of, or other equity interests in, any
Tango Subsidiary, or (y) except for guarantees of obligations of, or loans or
capital contribution commitments to, Tango Subsidiaries entered
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into in the ordinary course of business, provide funds to, or make any
investment in (in the form of a loan, capital contribution or otherwise), or
provide any guarantee with respect to the obligations of, any Tango Subsidiary
or any other person. Each outstanding share of capital stock of, or other equity
interests in, each Tango Subsidiary is duly authorized, validly issued, fully
paid and nonassessable and, except as set forth in Section 3.2 of the Tango
Disclosure Schedule, each such share or other equity interest owned by Tango or
another Tango Subsidiary is owned free and clear of all security interests,
liens, claims, pledges, options, rights of first refusal, agreements,
limitations on Tango's or such other Tango Subsidiary's voting rights, charges
and other encumbrances of any nature whatsoever.
3.3 Options or Other Rights. Except as disclosed in Section 3.2 or in the
Tango SEC Filings (hereinafter defined), there is no outstanding right,
subscription, warrant, call, unsatisfied preemptive right, option or other
agreement or arrangement of any kind to purchase or otherwise to receive from
Tango or any Tango Subsidiary any of the outstanding authorized but unissued,
unauthorized or treasury shares of the capital stock or any other security of
Tango or any Tango Subsidiary, and there is no outstanding security of any kind
convertible into or exchangeable for such capital stock. Except as set forth in
Section 3.3 of the Tango Disclosure Schedule, there are no agreements or
understandings among Tango or any Tango Subsidiary on the one hand and any other
person on the other hand concerning the registration of any security of Tango or
a Tango Subsidiary under the Securities Act. Except as set forth on Section 3.3
of the Tango Disclosure Schedule, no options granted under the 1995 Plan have
provisions which accelerate the vesting or right to exercise such options upon
the occurrence of certain events, including, but not limited to, the
consummation of the Merger.
3.4 Authority Relative to this Agreement. (a) Tango has all requisite
corporate power and authority to execute and deliver this Agreement and the
Cross Option Agreement, to perform its obligations hereunder and thereunder and
to consummate the transactions contemplated hereby and thereby to be consummated
by Tango. The execution and delivery of this Agreement and the Cross Option
Agreement by Tango and the consummation of the transactions contemplated on its
part hereby and thereby have been duly authorized by all necessary corporate
action, and, other than the approval of Tango's stockholders as provided in
Section 5.1 hereof, no other corporate proceedings on the part of Tango are
necessary to authorize the execution and delivery of this Agreement and the
Cross Option Agreement by Tango or the consummation of the transactions
contemplated on its part hereby and thereby. This Agreement and the Cross Option
Agreement have been duly executed and delivered by Tango and, assuming the due
authorization, execution and delivery hereof and thereof by Twister, constitute
the legal, valid and binding obligations of Tango, enforceable against Tango in
accordance with their respective terms, except to the extent that such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other laws affecting the enforcement of creditors' rights
generally or by general equity principles.
(b) Merger Sub has the requisite corporate power and authority to execute
and deliver this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby to be consummated by it. The
execution and delivery of this Agreement by Merger Sub and the consummation by
Merger Sub of the transactions contemplated hereby have been duly authorized by
all necessary corporate action and no other corporate proceedings on the part of
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Merger Sub and, assuming the due authorization, execution and
delivery thereof by Twister, constitutes a legal, valid and binding obligation
of Merger Sub, enforceable against Merger Sub in accordance with its terms,
except to the extent that such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or other laws affecting the enforcement
of creditors' rights generally or by general equity principles.
3.5 Tango Common Stock. The shares of Tango Common Stock to be issued in
connection with the Merger have been duly authorized and, when issued as
contemplated hereby at the Effective Time, will be validly issued, fully paid
and non-assessable, and not subject to any preemptive rights created by statute,
Tango's Amended and Restated Certificate of Incorporation or Bylaws or any
agreement to which Tango is a party or by which Tango is bound and will be
registered under the Securities Act of 1933, as amended (the
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"Securities Act") and registered or exempt from registration under applicable
Blue Sky Laws and listed on the AMEX.
3.6 No Violation. The execution and delivery of this Agreement by each of
Tango and Merger Sub and of the Cross Option Agreement by Tango do not, the
performance by Tango and Merger Sub of their respective obligations hereunder
and by Tango of its obligations under the Cross Option Agreement will not, and
the consummation by Tango and Merger Sub of the transactions contemplated hereby
to be performed by each of them and by Tango of the transactions contemplated by
the Cross Option Agreement to by performed by Tango will not (i) violate or
conflict with any provision of any Federal, state, foreign or local law,
statute, ordinance, rule, regulation, order, judgment or decree (collectively,
"Laws") in effect on the date of this Agreement and applicable to Tango or any
Tango Subsidiary or by which any of their respective properties or assets is
bound or subject, (ii) require Tango or any Tango Subsidiary to obtain any
consent, waiver, approval, license or authorization or permit of, or make any
filing with, or notification to, any governmental or regulatory authority,
domestic or foreign ("Governmental Entities"), based on laws, rules, regulations
and other requirements of Governmental Entities in effect as of the date of this
Agreement (other than (a) the filing of a pre-merger notification report under
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder (the "HSR Act") and the expiration
of the applicable waiting period, (b) filings or authorizations required in
connection with or in compliance with the provisions of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the Securities Act, the KGCC, the
Bylaws of the AMEX or the "takeover" or "blue sky" laws of various states and
(c) any other filings and approvals expressly contemplated by this Agreement),
(iii) require the consent, waiver, approval, license or authorization of any
person (other than Governmental Entities) other than as listed on Section 3.6 of
the Tango Disclosure Schedule, (iv) violate, conflict with, or result in a
breach of or the acceleration of any obligation under, or constitute a default
(or an event which with notice or the lapse of time or both would become a
default) under, or give to others any right of, or result in any, termination,
amendment, acceleration or cancellation of, or loss of any benefit or creation
of a right of first refusal, or require any payment under, or result in the
creation of a lien or other encumbrance on any of the properties or assets of
Tango or any Tango Subsidiary pursuant to or under any provision of any
indenture, mortgage, note, bond, lien, lease, license, agreement, franchise,
contract, order, judgment, ordinance, Tango Permit (as defined below) or other
instrument or obligation to which Tango or any Tango Subsidiary is a party or by
which Tango or any Tango Subsidiary or any of their respective properties is
bound or subject to, or (v) conflict with or violate the Certificate of
Incorporation or Bylaws, or the equivalent organizational documents, in each
case as amended or restated, of Tango or any of the Tango Subsidiaries, except
for any such conflicts or violations described in clause (i) or breaches,
defaults, events, rights of termination, amendment, acceleration or
cancellation, payment obligations or liens or encumbrances described in clause
(iv) that would not have a Material Adverse Effect on Tango and except where the
failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications would not, either individually or in the
aggregate, prevent Tango or Merger Sub from performing any of their respective
obligations under this Agreement or prevent Tango from performing any of its
obligations under the Cross Option Agreement and would not have a Material
Adverse Effect on Tango. Neither Tango nor any of its affiliates or associates
(as each such term is defined in Section 17-1297 of the KGCC) is, prior to the
date hereof, an "interested shareholder" (as such term is defined in Section
17-12,100 of the KGCC) of Twister.
3.7 Compliance with Laws. (a) As of the date of this Agreement, each of
Tango and the Tango Subsidiaries holds all licenses, franchises, grants,
permits, easements, variances, exemptions, consents, certificates,
identification numbers, approvals, orders and other authorizations
(collectively, "Tango Permits") necessary to own, lease and operate its
properties and to carry on its business as it is now being conducted, are
certified as providers under all applicable Medicare and Medicaid programs to
the extent required to be so certified, and are in compliance with all Tango
Permits and all Laws governing their respective businesses, including, without
limitation, the requirements, guidelines, rules and regulations of Medicare,
Medicaid, state approved Medicaid waiver programs and other third-party
reimbursement programs, except where the failure to hold such Tango Permits or
to so comply, individually or in the aggregate, would not have a Material
Adverse Effect on Tango.
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(b) To Tango's knowledge, all health care personnel employed by Tango or
any Tango Subsidiary are properly licensed to the extent required to perform the
duties of their employment in each jurisdiction where such duties are performed,
except where the failure to be so licensed, individually or in the aggregate,
would not have a Material Adverse Effect on Tango.
(c) Except as set forth in Section 3.7 of the Tango Disclosure Schedule, no
action or proceeding is pending or, to Tango's knowledge, threatened that may
result in the suspension, revocation or termination of any Tango Permit, the
issuance of any cease-and-desist order, or the imposition of any administrative
or judicial sanction, and neither Tango nor any Tango Subsidiary has received
any notice from any governmental authority in respect of the suspension,
revocation or termination of any Tango Permit, or any notice of any intention to
conduct any investigation or institute any proceeding, in any such case where
such suspension, revocation, termination, order, sanction, investigation or
proceeding would result, individually or in the aggregate, in a Material Adverse
Effect on Tango.
(d) Neither Tango nor any Tango Subsidiary has received notice that
Medicare, Medicaid, state approved Medicaid waiver programs or any other
third-party reimbursement program has any claims for disallowance of costs
against any of them which could result in offsets against future reimbursement
or recovery of prior payments, which offsets or recoveries, individually or in
the aggregate, would have a Material Adverse Effect on Tango.
3.8 Litigation. As of the date of this Agreement, except as may be
disclosed in the Tango 10-K (as defined below), reports filed on Forms 10-Q or
8-K or proxy statements filed on Schedule 14A for periods subsequent to the
period covered by such Tango 10-K, in each case filed prior to the date hereof
(such reports and filings, collectively, the "Tango Current Reports"), there is
no claim, litigation, suit, arbitration, mediation, action, proceeding, unfair
labor practice complaint or grievance pending or, to Tango's knowledge,
investigation of any kind, at law or in equity (including actions or proceedings
seeking injunctive relief), pending or, to Tango's knowledge, threatened in
writing against Tango or any Tango Subsidiary or with respect to any property or
asset of any of them, except for claims, litigations, suits, arbitrations,
mediations, actions, proceedings, complaints, grievances or investigations
which, individually or in the aggregate, would not have a Material Adverse
Effect on Tango. Neither Tango nor any Tango Subsidiary nor any property or
asset of any of them is subject to any continuing order, judgment, settlement
agreement, injunction, consent decree or other similar written agreement with
or, to Tango's knowledge, continuing investigation by, any Governmental Entity,
or any judgment, order, writ, injunction, consent decree or award of any
Governmental Entity or arbitrator, including, without limitation,
cease-and-desist or other orders, except for such matters which would not
reasonably be expected to have a Material Adverse Effect on Tango.
3.9 Financial Statements and Reports. Tango has made available to Twister
true and complete copies of (a) its Annual Report on Form 10-K for the year
ended December 31, 1996 (the "Tango 10-K") as filed with the Securities and
Exchange Commission (the "Commission"), (b) all registration statements filed by
Tango and declared effective under the Securities Act (other than registration
statements on Form S-8), and (c) all other reports, statements and registration
statements (including Quarterly Reports on Form 10-Q and Current Reports on Form
8-K but excluding preliminary material and reports pursuant to Sections 13(d) or
13(g) of the Exchange Act) filed by it with the Commission. The reports,
statements and registration statements referred to in the immediately preceding
sentence (including, without limitation, any financial statements or schedules
or other information, included or incorporated by reference therein) are
referred to in this Agreement as the "Tango SEC Filings." As of the respective
times such documents were filed or, as applicable, were effective, the Tango SEC
Filings complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations promulgated thereunder, except for such noncompliance which,
individually or in the aggregate, would not have a Material Adverse Effect on
Tango, and did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of Tango included in the Tango SEC
Filings comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the Commission with
respect thereto, were prepared in accordance with generally accepted accounting
principles (as in effect from time to time) applied on a consistent basis
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during the periods involved (except as may be indicated therein or in the notes
thereto or, in the case of the unaudited interim financial statements, as
permitted by Form 10-Q of the Commission) and present fairly the consolidated
financial position, consolidated results of operations and consolidated cash
flows of Tango and the Tango Subsidiaries as of the dates and for the periods
indicated, except (i) in the case of unaudited interim consolidated financial
statements, to normal recurring year-end adjustments and any other adjustments
described therein and (ii) any pro forma financial information contained therein
is not necessarily indicative of the consolidated financial position of Tango
and the Tango Subsidiaries as of the respective dates thereof and the
consolidated results of operations and cash flows for the periods indicated. No
Tango Subsidiary is required to file any form, report or other document with the
Commission.
3.10 Absence of Certain Changes or Events. Other than as disclosed in the
Tango Current Reports or otherwise disclosed in this Agreement, since December
31, 1996 and through the date hereof, the business of Tango and of each of the
Tango Subsidiaries has been conducted in the ordinary course, and there has not
been (i) any Material Adverse Effect on Tango; (ii) any material indebtedness
incurred by Tango or any Tango Subsidiary for money borrowed, except under
credit facilities disclosed in the Tango Current Reports, if any; (iii) any
material transaction or commitment, except in the ordinary course of business or
as contemplated by this Agreement, entered into by Tango or any of the Tango
Subsidiaries; (iv) any damage, destruction or loss, whether covered by insurance
or not, which, individually or in the aggregate, would have a Material Adverse
Effect on Tango; (v) any material change by Tango in accounting principles or
methods except insofar as may be required by a change in generally accepted
accounting principles; (vi) any declaration, setting aside or payment of any
dividend (whether in cash, securities or property) with respect to the Tango
Common Stock; or (vii) any material agreement to acquire any assets or stock or
other interests of any third-party; (viii) any increase in the compensation
payable or to become payable by Tango or any Tango Subsidiary to any employees,
officers, directors, or consultants or in any bonus, insurance, welfare, pension
or other employee benefit plan, payment or arrangement made to, for or with any
such employee, officer, director or consultant (other than as provided in
employment agreements, consulting agreements and welfare and benefit plans set
forth on the Tango Disclosure Schedule, and except for increases consistent with
past practice); (ix) any material revaluation by Tango or any Tango Subsidiary
of any asset (including, without limitation, any writing down of the value of
inventory or writing off of notes or accounts receivable); (x) any mortgage or
pledge of any of the assets or properties of Tango or any Tango Subsidiary or
the subjection of any of the assets or properties of Tango or any Tango
Subsidiary to any material liens, charges, encumbrances, imperfections of title,
security interest, options or rights or claims of others with respect thereto
other than in the ordinary course consistent with past practice; or (xi) any
assumption or guarantee by Tango or a Tango Subsidiary of the indebtedness of
any person or entity other than in the ordinary course consistent with past
practice.
3.11 Employee Benefit Plans and Employment Matters. (a) Section 3.11(a) of
the Tango Disclosure Schedule lists all employee benefit plans, collective
bargaining agreements, labor contracts, and employment agreements not otherwise
disclosed in the Tango Current Reports in which Tango or any Tango Subsidiary
participates, or by which any of them are bound, including, without limitation,
(i) any profit sharing, deferred compensation, bonus, stock option, stock
purchase, pension, welfare, and incentive plan or agreement; (ii) any plan
providing for "fringe benefits" to their employees, including, but not limited
to, vacation, sick leave, medical, hospitalization and life insurance; (iii) any
written employment agreement and any other employment agreement not terminable
at will; and (iv) any other "employee benefit plan" (within the meaning of
Section 3(3) of the Employment Retirement Income Security Act of 1974
("ERISA")). Tango and the Tango Subsidiaries are in compliance in all material
respects with the requirements prescribed by all laws currently in effect
applicable to employee benefit plans and to any employment agreements,
including, but not limited to, ERISA and the Code. Tango and the Tango
Subsidiaries have each performed all of its obligations under all such employee
benefit plans and employment agreements in all material respects. There is no
pending or, to the knowledge of Tango, threatened legal action, proceeding or
investigation against or involving any Tango or Tango Subsidiary employee
benefit plan which could result in a material amount of liability to such
employee benefit plan or to Tango.
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(b) Neither Tango nor the Tango Subsidiaries sponsors or participates in,
and has not sponsored or participated in, any employee benefit pension plan to
which Section 4021 of ERISA applies that would create a material amount of
liability to Tango under Title IV of ERISA.
(c) Neither Tango nor the Tango Subsidiaries sponsors or participates in,
and have not sponsored or participated in, any employee benefit pension plan
that is a "multiemployer plan" (within the meaning of Section 3(37) of ERISA).
(d) All group health plans of Tango and the Tango Subsidiaries have been
operated in compliance with the group health plan continuation coverage
requirements of Section 4980B of the Code in all material respects, to the
extent such requirements are applicable.
(e) There have been no acts or omissions by Tango or the Tango Subsidiaries
or by any fiduciary, disqualified person or party in interest with respect to an
employee benefit plan of Tango or any Tango Subsidiaries that have given rise to
or may give rise to a material amount of fines, penalties, taxes, or related
charges under Sections 502(c), 502(i) or 4071 of ERISA or under Chapter 43 of
the Code.
(f) No "reportable event," as defined in ERISA Section 4043, other than
those events with respect to which the Pension Benefit Guaranty Corporation has
waived the notice requirement, has occurred with respect to any of the employee
benefit plans of Tango.
(g) Section 3.11(g) of the Tango Disclosure Schedule sets forth the name of
each director, officer or employee of Tango or any Tango Subsidiary entitled to
receive any benefit or payment under any existing employment agreement,
severance plan or other benefit plan solely as a result of the consummation of
any transaction contemplated by this Agreement, and with respect to each such
person, the nature of such benefit or the amount of such payment, the event
triggering the benefit or payment, and the date of, and parties to, such
employment agreement, severance plan or other benefit plan.
(h) Tango has furnished Twister with true and correct copies of all plan
documents and employment agreements referred to on the Tango Disclosure
Schedule, including all amendments thereto, and all related summary plan
descriptions to the extent that one is required by law.
(i) For purposes of this Section 3.11, any reference to "Tango" shall be
deemed to include a reference to any entity that is aggregated with Tango under
the provisions of Section 414 of the Code, to the extent that those aggregation
rules apply.
3.12 Labor Matters. Except as disclosed on Schedule 3.12 of the Tango
Disclosure Schedule, neither Tango nor any Tango Subsidiary is a party to any
collective bargaining agreement with respect to any of their employees. None of
the employees of Tango or any Tango Subsidiary is represented by any labor
union. To the knowledge of Tango, there is no activity involving any employees
of Tango or the Tango Subsidiaries seeking to certify a collective bargaining
unit or engaging in any similar organizational activity.
3.13 Insurance. Tango and the Tango Subsidiaries maintain insurance
against such risks and in such amounts as Tango reasonably believes are
necessary to conduct its business. Tango and the Tango Subsidiaries are not in
default with respect to any provisions or requirements of any such policy, nor
have any of them failed to give notice or present any claim thereunder in a due
and timely fashion, except for defaults or failures which, individually or in
the aggregate, would not have a Material Adverse Effect on Tango. Neither Tango
nor any Tango Subsidiary has received any notice of cancellation or termination
in respect of any of its insurance policies.
3.14 Environmental Matters. Except as disclosed on Section 3.14 of the
Tango Disclosure Schedule, Tango and the Tango Subsidiaries are in compliance
with all environmental laws, and have obtained all necessary licenses and
permits required to be issued pursuant to any environmental law, except where
the failure to so comply or to obtain such licenses or permits, individually or
in the aggregate, would not have a Material Adverse Effect on Tango. Neither
Tango nor any Tango Subsidiary has received notice or communication from any
governmental agency with, respect to (i) any hazardous substance relative to its
operations, property or assets or (ii) any investigation, demand or request
pursuant to enforcing any
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environmental law relating to it or its operations, and no such investigation is
pending or, to the knowledge of Tango, threatened, in any case, which would lead
to a Material Adverse Effect on Tango.
3.15 Tax Matters. Neither Tango nor, to the knowledge of Tango, any of its
affiliates has taken or agreed to take any action that would, nor does Tango
have any knowledge of any fact or circumstance that is reasonably likely to,
prevent the Merger from qualifying as a reorganization under the provisions of
Section 368(a) of the Code. Tango has paid, or made adequate provision for on
its balance sheet at December 31, 1996 included in the Tango 10-K, all federal,
state, local, foreign or other governmental income, franchise, payroll,
F.I.C.A., unemployment, withholding, real property, personal property, sales,
payroll, disability and all other taxes imposed on Tango or any Tango Subsidiary
or with respect to any of their respective properties, or otherwise payable by
them, including interest and penalties, if any, in respect thereof
(collectively, "Tango Taxes"), for the Tango taxable period ended December 31,
1996 and all fiscal periods of Tango prior thereto, except such nonpayment, or
failure to make adequate provision, which, individually or in the aggregate,
would not have a Material Adverse Effect on Tango. Tango Taxes paid and/or
incurred from December 31, 1996 until the Closing Date shall include only Tango
Taxes incurred in the ordinary course of business determined in the same manner
as in the taxable period ended December 31, 1996. Tango and each of the Tango
Subsidiaries has timely filed all income tax, excise tax, sales tax, use tax,
gross receipts tax, franchise tax, employment and payroll related tax, property
tax, and all other tax returns which Tango and/or such Tango Subsidiary (as the
case may be) are required to file ("Tango Tax Returns"), and have paid or
provided for all the amounts shown to be due thereon, except where such failure
to make such timely filings, individually or in the aggregate, would not have a
Material Adverse Effect on Tango, and except for the nonpayment of such amounts
which, individually or in the aggregate, would not have a Material Adverse
Effect on Tango. Neither Tango nor any Tango Subsidiary (i) has filed or entered
into, or is otherwise bound by, any election, consent or extension agreement
that extends any applicable statute of limitations with respect to taxable
periods of Tango, (ii) is a party to any contractual obligation requiring the
indemnification or reimbursement of any person with respect to the payment of
any Tango Taxes, other than among Tango and the Tango Subsidiaries, or (iii) has
received any claim by an authority in a jurisdiction where neither Tango nor any
Tango Subsidiary files Tango Tax Returns that they are or may be subject to
Tango Taxes by that jurisdiction, except for any such claims as, individually or
in the aggregate, would not have a Material Adverse Effect on Tango. No action
or proceeding is pending or, to Tango's knowledge, threatened by any
governmental authority for any audit, examination, deficiency, assessment or
collection from Tango or any Tango Subsidiary of any Tango Taxes, no unresolved
claim for any deficiency, assessment or collection of any Tango Taxes has been
asserted against Tango or any Tango Subsidiary, and all resolved assessments of
Tango Taxes have been paid or are reflected on the Tango balance sheet at
December 31, 1996 included in the Tango 10-K, except for any of the foregoing
which, individually or in the aggregate, would not have a Material Adverse
Effect on Tango.
3.16 Intellectual Property. Except as disclosed in Section 3.16 of the
Tango Disclosure Schedule, Tango and the Tango Subsidiaries own, possess or have
the right to use all franchises, patents, trademarks, service marks, tradenames,
licenses and authorizations (collectively, "Tango Intellectual Property Rights")
which are necessary to the conduct of their respective businesses. To the
knowledge of Tango, neither Tango nor any Tango Subsidiary is infringing or
otherwise violating the intellectual property rights of any person which
infringement or violation would subject Tango or any Tango Subsidiary to
liabilities which, individually or in the aggregate, would have a Material
Adverse Effect on Tango or which would prevent Tango or any Tango Subsidiary
from conducting their respective businesses substantially in the manner in which
they are now being conducted. No claim has been made or, to Tango's knowledge,
threatened against Tango or any Tango Subsidiary alleging any such violation.
3.17 Related Party Transactions. Except as disclosed in the Tango SEC
Filings or in Section 3.17 of the Tango Disclosure Schedule, there have been no
material transactions between Tango or any Tango Subsidiary on the one hand, and
any (i) officer or director of Tango or any Tango Subsidiary, (ii) record or
beneficial owner of five percent or more of the voting securities of Tango, or
(iii) affiliate (as such term is defined in Regulation 12b-2 promulgated under
the Exchange Act) of any such officer, director or beneficial
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owner, on the other hand, other than payment of compensation for services
rendered to Tango or the Tango Subsidiaries or the grant of stock options to
purchase shares of Tango Common Stock.
3.18 No Undisclosed Material Liabilities. Except as disclosed in the Tango
Current Reports, neither Tango nor any of the Tango Subsidiaries has incurred
any liabilities of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, that, individually or in the aggregate,
would have a Material Adverse Effect on Tango other than (i) liabilities
incurred in the ordinary course of business consistent with past practice since
December 31, 1996, (ii) liabilities that have been repaid, discharged or
otherwise extinguished, and (iii) liabilities under or contemplated by this
Agreement.
3.19 No Default. Except as set forth in Section 3.19 of the Tango
Disclosure Schedule, neither Tango nor any of the Tango Subsidiaries is in
default or violation (and no event has occurred which with notice or the lapse
of time or both would constitute a default or violation) of any term, condition
or provision of (a) its certificate of incorporation or bylaws or other
organizational documents, (b) indenture, mortgage, note, bond, lien, lease,
license, agreement, franchise, contract, order, judgment, ordinance, Tango
Permit or other instrument or obligation to which Tango or any Tango Subsidiary
is a party or by which Tango or any Tango Subsidiary or any of their respective
properties is bound or subject to, or (c) any order, writ, injunction, decree or
Law applicable to Tango or any of the Tango Subsidiaries, except in the case of
clauses (b) and (c) above for defaults or violations which would not have a
Material Adverse Effect on Tango.
3.20 Title to Properties; Encumbrances. Section 3.20 of the Tango
Disclosure Schedule sets forth all real property owned or leased by Tango and
the Tango Subsidiaries (the "Tango Real Property"), indicating which facilities
are owned and which are leased. Except as disclosed in the Tango Current Reports
and as described in clause (ii) below: (i) each of Tango and the Tango
Subsidiaries has good, valid and marketable title to, or a valid leasehold
interest in, as applicable, all of its properties and assets (real, personal and
mixed, tangible and intangible), including, without limitation, all Tango Real
Property and all other properties and assets reflected in the consolidated
balance sheet of Tango and the Tango Subsidiaries at December 31, 1996 included
in the Tango 10-K (except for properties and assets disposed of in the ordinary
course of business and consistent with past practices since December 31, 1996)
and (ii) none of such properties or assets are subject to any liability,
obligation, claim, lien, mortgage, pledge, security interest, conditional sale
agreement, charge or encumbrance of any kind (whether absolute, accrued,
contingent or otherwise), except for liens securing repayment of indebtedness
incurred in the ordinary course consistent with past practices subsequent to
March 31, 1997 and liens for taxes not yet due and payable, easements and
restrictions of record, unrecorded and undelivered mortgages between a Tango
Subsidiary and a joint venture entity in which Tango is a limited partner or a
managing member and minor imperfections of title and encumbrance, if any, which
are not substantial in amount, do not materially detract from the value of the
property or assets subject thereto and do not impair the operations of Tango and
the Tango Subsidiaries. Each of the leases is in full force and effect and there
is no default by landlord or tenant existing thereunder (and no event has
occurred which, with notice and the passage of time or both, would constitute a
default under such lease) which would have a Material Adverse Effect on Tango.
Except as would not cause a Material Adverse Effect on Tango, all of the
properties and assets of Tango and the Tango Subsidiaries are, in all material
respects, in good operating condition and repair, and maintenance thereon has
not been deferred beyond industry standards, and are suitable for the purposes
for which they are presently being used.
3.21 Pooling of Interests. Neither Tango nor any of the Tango Subsidiaries
nor, to the knowledge of Tango, any of their respective directors, officers or
stockholders has taken any action which would interfere with the parties'
ability to account for the Merger as a "pooling of interests" in accordance with
Accounting Principles Board Opinion No. 16, the interpretive releases issued
pursuant thereto, and the pronouncements of the Commission.
3.22 Brokers. Neither Tango nor any Tango Subsidiary has paid or is
obligated to pay any brokerage, finder's or other fee or commission to any
broker, finder, investment banker or other intermediary in connection with this
Agreement or the Cross Option Agreement, except that Tango has retained McDonald
& Company Securities, Inc. as its financial advisor for the transactions
contemplated hereby.
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3.23 Opinion of Financial Advisor. Tango has received the opinion of
McDonald & Company Securities, Inc. to the effect that, as of the date hereof,
the consideration to be paid to the holders of shares of Twister Common Stock
pursuant to this Agreement is fair to Tango, from a financial point of view.
3.24 Twister Stock Ownership. Except as contemplated pursuant to the terms
of this Agreement and the transactions to be consummated hereby or by the Cross
Option Agreement, neither Tango nor any of the Tango Subsidiaries owns any
shares of Twister Common Stock or rights to acquire or dispose of Twister Common
Stock.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TWISTER
Twister represents and warrants to Tango and Merger Sub that, except as set
forth in the Disclosure Schedule delivered prior hereto (the "Twister Disclosure
Schedule"), which shall identify exceptions by specific Section references:
4.1 Corporate Organization. Twister and each of its Subsidiaries (the
"Twister Subsidiaries") has been duly organized and is validly existing and in
good standing under the laws of the jurisdiction of its organization, has all
requisite power and authority to own, operate and lease its properties and to
carry on its business as it is now being conducted, and is qualified or licensed
to do business and is in good standing in each jurisdiction in which the nature
of the business conducted by it or the ownership or leasing of its properties
makes such qualification necessary, other than where failure to be so qualified
or licensed, individually or in the aggregate, would not have a Material Adverse
Effect on Twister. The term "Material Adverse Effect on Twister" as used in this
Agreement shall mean any change or effect that, individually or when taken
together with all such other changes or effects, would be materially adverse to
the financial condition, results of operations, properties or business of
Twister and the Twister Subsidiaries taken as a whole at the time of such change
or effect. True and complete copies of the Articles of Incorporation and the
Bylaws together with all amendments thereto of Twister and the Articles of
Incorporation of the Twister Subsidiaries, together with all amendments thereto
have been heretofore delivered to Tango. Such charter, Bylaws or other
organizational documents are in full force and effect. Section 4.1 of the
Twister Disclosure Schedule contains a complete and accurate list of all of the
Twister Subsidiaries. Neither Twister nor any Twister Subsidiary is in violation
of any provision of its charter or bylaws or other organizational documents of
limited partnership, as the case may be.
4.2 Capitalization. As of the date of this Agreement, the authorized
capital stock of Twister consists in its entirety of (i) 75,000,000 shares of
common stock, no par value, and (ii) 20,000,000 shares of preferred stock, none
of which are issued and outstanding. As of the date of the Agreement, (i)
5,041,931 shares of Twister Common Stock were issued and outstanding, (ii)
options and warrants to acquire 376,969 shares of Twister Common Stock were
outstanding under the Twister Option Plans (as hereinafter defined) and (iii)
1,561,106 shares of Twister Common Stock were reserved for issuance upon
conversion of Twister's $35,000,000 principal amount of aggregate outstanding
6.75% Convertible Subordinated Debentures Due 2006. Except as set forth on
Section 4.2 of the Twister Disclosure Schedule, all of the outstanding shares of
capital stock of each of the Twister Subsidiaries is owned beneficially and of
record by Twister or a Twister Subsidiary free and clear of all liens, charges,
encumbrances, options, rights of first refusal or limitations or agreements
regarding voting rights of any nature. All of the outstanding shares of capital
stock of Twister and each of the Twister Subsidiaries have been duly authorized,
validly issued and are fully paid and nonassessable and are not subject to
preemptive rights created by statute, their respective charter or bylaws or any
agreement to which any such entity is a party or by which any such entity is
bound. Twister has heretofore delivered to Tango, correct and complete copies of
the Stock Option Plans and warrants to purchase Twister Common Stock, in each
case as currently in effect. Each option agreement, together with any related
award letter, sets forth for each stock option holder (i) such holder's name,
(ii) the date of grant of stock options to such holder, (iii) the number of
shares of Twister Common Stock into which each such grant is exercisable, (iv)
the exercise price per share of Twister Common Stock with respect to each such
grant, and (v) the periods during which such stock options or portions thereof
are exercisable by such holder. Except as set forth in this Section 4.2 or in
Section 4.2 of the Twister Disclosure Schedule, there are no options, warrants
or other rights
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(including registration rights), agreements, arrangements or commitments of any
character to which Twister or any Twister Subsidiary is a party relating to the
issued or unissued capital stock, or other interest in, of Twister or any
Twister Subsidiary or obligating Twister or any Twister Subsidiary to grant,
issue or sell any shares of capital stock of, or other equity interests in,
Twister or any Twister Subsidiary, by sale, lease, license or otherwise. All
shares of Twister Common Stock subject to issuance as aforesaid, upon issuance
on the terms and conditions specified in the instruments pursuant to which they
are issuable, will be duly authorized, validly issued, fully paid and
nonassessable and will not have been issued in violation of or subject to any
preemptive rights created by statute, the articles of incorporation or bylaws of
Twister or any agreement to which Twister is a party or to which Twister is
bound. Except as set forth in this Section 4.2 or in the Twister Current Reports
(hereinafter defined), there are no outstanding contractual obligations of
Twister or any Twister Subsidiary to (x) repurchase, redeem or otherwise acquire
any shares of Twister Common Stock or any capital stock, or other interests in,
of any Twister Subsidiary, (y) except for guarantees of obligations of, or loans
to, or capital contribution commitments, Twister Subsidiaries entered into in
the ordinary course of business, provide funds to, make any investment in (in
the form of a loan, capital contribution or otherwise) or provide any guarantee
with respect to the obligations of, any Twister Subsidiary or any other person.
Each outstanding share of capital stock, or other interest in, of each Twister
Subsidiary is duly authorized, validly issued, fully paid and nonassessable and,
except as set forth in Section 4.2 of the Twister Disclosure Schedule, each such
share owned by Twister or another Twister Subsidiary is owned free and clear of
all security interests, liens, claims, pledges, options, rights of first
refusal, agreements, limitations on Twister's or such other Twister Subsidiary's
voting rights, charges and other encumbrances of any nature whatsoever.
4.3 Options or Other Rights. (a) Except as disclosed in Section 4.2 or in
the Twister SEC Filings (hereinafter defined), there is no outstanding right,
subscription, warrant, call, unsatisfied preemptive right, option or other
agreement or arrangement of any kind to purchase or otherwise to receive from
Twister or any Twister Subsidiary any of the outstanding, authorized but
unissued, unauthorized or treasury shares of the capital stock or any other
security of Twister or any Twister Subsidiary and there is no outstanding
security of any kind convertible into or exchangeable for such capital stock.
Except as set forth in Section 4.3 of the Twister Disclosure Schedule, there are
no agreements or understandings among Twister or any Twister Subsidiary on the
one hand and any other person on the other hand concerning the registration of
any security of Twister or a Twister Subsidiary under the Securities Act. Except
as set forth on Section 4.3 of the Twister Disclosure Schedule, all options
granted under the Twister Option Plans have provisions which accelerate the
vesting or right to exercise such options upon the occurrence of certain events,
including, but not limited to, the consummation of the Merger.
(b) Prior to the execution and delivery of this Agreement, Twister has
entered into Amendment No. 1 to that certain Rights Agreement dated as of June
25, 1997 (the "Rights Agreement"), between Twister and ChaseMellon Shareholder
Services, L.L.C., as rights agent, pursuant to which amendment the definition of
"Acquiring Person" in Section 1(a) of the Rights Agreement will be amended as
set forth on Section 4.3(b) of the Twister Disclosure Schedule.
4.4 Authority Relative to this Agreement. Twister has all requisite
corporate power and authority to execute and deliver this Agreement and the
Cross Option Agreement, to perform its obligations hereunder and thereunder and
to consummate the transactions contemplated on its part hereby and thereby to be
consummated by Twister. The execution and delivery of this Agreement and the
Cross Option Agreement by Twister and the consummation of the transactions
contemplated on its part hereby and thereby have been duly authorized by all
necessary corporate action, and, other than the approval of Twister's
stockholders as provided in Section 5.1 hereof, no other corporate proceedings
on the part of Twister are necessary to authorize the execution and delivery of
this Agreement and the Cross Option Agreement by Twister or the consummation of
the transactions contemplated on its part hereby and thereby. This Agreement and
the Cross Option Agreement have been duly executed and delivered by Twister and,
assuming the due authorization, execution and delivery hereof and thereof by
Tango and Merger Sub, constitutes the legal, valid and binding obligations of
Twister, enforceable against Twister in accordance with their respective terms,
except to the extent that such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or other laws affecting the enforcement
of creditors' rights generally or by general equity principles.
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4.5 No Violation. The execution and delivery of this Agreement and of the
Cross Option Agreement by Twister do not, the performance by Twister of its
obligations hereunder and thereunder will not, and the consummation by Twister
of the transactions contemplated to be performed by it hereby and thereby will
not (i) violate or conflict with any provision of any Laws in effect on the date
of this Agreement and applicable to Twister or any Twister Subsidiary or by
which any of their respective properties or assets is bound or subject, (ii)
require Twister or any Twister Subsidiary to obtain any consent, waiver,
approval, license or authorization or permit of, or make any filing with, or
notification to, any Governmental Entities, based on laws, rules, regulations
and other requirements of Governmental Entities in effect and of the date of
this Agreement (other than (a) the filing of a Pre-Merger Notification Report
under the HSR Act and the expiration of the applicable waiting period, (b)
filings or authorizations required in connection or in compliance with the
provisions of the Exchange Act, the Securities Act, the KGCC, the Bylaws of the
AMEX or the "takeover" or "blue sky" laws of various states and (c) any other
filings and approvals expressly contemplated by this Agreement or listed in
Section 4.5 to the Twister Disclosure Schedule), (iii) require the consent,
waiver, approval, license or authorization of any person (other than
Governmental Entities) other than as listed on Section 4.5 of the Twister
Disclosure Schedule, (iv) violate, conflict with or result in a breach of or the
acceleration of any obligation under, or constitute a default (or an event which
with notice or the lapse of time or both would become a default) under, or give
to others any rights of, or result in any, termination, amendment, acceleration
or cancellation of, or loss of any benefit or creation of a right of first
refusal, or require any payment under, or result in the creation of a lien or
other encumbrance on any of the properties or assets of Twister or any Twister
Subsidiary pursuant to or under any provision of any indenture, mortgage, note,
bond, lien, lease, license, agreement, contract, order, judgment, ordinance,
Twister Permit (as defined below) or other instrument or obligation to which
Twister or Twister Subsidiary is a party or by which Twister or any Twister
Subsidiary or any of their respective properties is bound or subject to, or (v)
conflict with or violate the Articles of Incorporation or Bylaws, or the
equivalent organizational documents, in each case as amended or restated, of
Twister or any of the Twister Subsidiaries, except for any such conflicts or
violations described in clause (i) or breaches, defaults, events, rights of
termination, amendment, acceleration or cancellation, payment obligations or
liens or encumbrances described in clause (iv) that would not have a Material
Adverse Effect on Twister and except where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications
would not, either individually or in the aggregate, prevent Twister from
performing any of its obligations under this Agreement or the Cross Option
Agreement and would not have a Material Adverse Effect on Twister. Neither
Twister nor any of its affiliates or associates (as each such term is defined in
Section 203 of the DGCL) is, prior to the date hereof, an "interested
stockholder" (as such term is defined in Section 203 of the DGCL) of Tango.
4.6 Compliance with Laws. (a) As of the date of this Agreement, each of
Twister and the Twister Subsidiaries holds all licenses, franchises, grants,
permits, easements, variances, exemptions, consents, certificates,
identification numbers, approvals, orders, and other authorizations
(collectively, "Twister Permits") necessary to own, lease and operate its
properties and to carry on its business as it is now being conducted, are
certified as providers under all applicable Medicare and Medicaid programs to
the extent required to be so certified, and are in compliance with all Twister
Permits and all Laws governing their respective businesses, including, without
limitation, the requirements, guidelines, rules and regulations of Medicare,
Medicaid, state approved Medicaid waiver programs and other third-party
reimbursement programs, except where the failure to hold such Twister Permits or
to so comply, individually or in the aggregate, would not have a Material
Adverse Effect on Twister.
(b) To Twister's knowledge, all health care personnel employed by Twister
or any Twister Subsidiary are properly licensed to the extent required to
perform the duties of their employment in each jurisdiction where such duties
are performed, except where the failure to be so licensed, individually or in
the aggregate, would not have a Material Adverse Effect on Twister.
(c) Except as set forth in Section 4.6(c) of the Twister Disclosure
Schedule, no action or proceeding is pending or, to Twister's knowledge,
threatened that may result in the suspension, revocation or termination of any
Twister Permit, the issuance of any cease-and-desist order, or the imposition of
any administrative or judicial sanction, and neither Twister nor any Twister
Subsidiary has received any notice from any
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governmental authority in respect of the suspension, revocation or termination
of any Twister Permit, or any notice of any intention to conduct any
investigation or institute any proceeding, in any such case where such
suspension, revocation, termination, order, sanction, investigation or
proceeding would result, individually or in the aggregate, in a Material Adverse
Effect on Twister.
(d) Neither Twister nor any Twister Subsidiary has received notice that
Medicare, Medicaid, state approved Medicaid waiver programs or any other
third-party reimbursement program has any claims for disallowance of costs
against any of them which could result in offsets against future reimbursement
or recovery of prior payments, which offsets or recoveries, individually or in
the aggregate, would have a Material Adverse Effect on Twister.
4.7 Litigation. As of the date of this Agreement, except as may be
disclosed in the Twister 10-K (as defined below), reports filed on Forms 10-Q or
8-K or proxy statements filed on Schedule 14-A for periods subsequent to the
period covered by such Twister 10-K, in each case filed prior to the date hereof
(such reports and filings, collectively, the "Twister Current Reports"), or
except as set forth on Section 4.7 of the Twister Disclosure Schedule, there is
no claim, litigation, suit, arbitration, mediation, action, proceeding, unfair
labor practice complaint or grievance pending or, to Twister's knowledge,
investigation of any kind, at law or in equity (including actions or proceedings
seeking injunctive relief), pending or, to Twister's knowledge, threatened in
writing against Twister or any Twister Subsidiary or with respect to any
property or asset of any of them, except for claims, litigations, suits,
arbitrations, mediations, actions, proceedings, complaints, grievances or
investigations which, individually or in the aggregate, would not have a
Material Adverse Effect on Twister. Neither Twister nor any Twister Subsidiary
nor any property or asset of any of them is subject to any continuing order,
judgment, settlement agreement, injunction, consent decree or other similar
written agreement with or, to Twister's knowledge, continuing investigation by,
any Governmental Entity, or any judgment, order, writ, injunction, consent
decree or award of any Governmental Entity or arbitrator, including, without
limitation, cease-and-desist or other orders, except for such matters which
would not reasonably be expected to have a Material Adverse Effect on Twister.
4.8 Financial Statements and Reports. Twister has made available to Tango
true and complete copies of (i) its Annual Report on Form 10-K for the year
ended December 31, 1996 (the "Twister 10-K"), as filed with the Commission, (ii)
its proxy statement relating to the annual meetings of its stockholders held on
May 23, 1997, (iii) all registration statements filed by Twister and declared
effective under the Securities Act (other than registration statements on Form
S-8) and (iv) all other reports, statements and registration statements
(including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K but
excluding preliminary material and reports pursuant to Sections 13(d) or 13(g)
of the Exchange Act) filed by it with the Commission. The reports, statements
and registration statements referred to in the immediately preceding sentence
(including, without limitation, any financial statements or schedules or other
information included or incorporated by reference therein) are referred to in
this Agreement as the "Twister SEC Filings." As of the respective times such
documents were filed or, as applicable, were effective, the Twister SEC Filings
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and the rules and regulations promulgated
thereunder, except for such noncompliance which, individually or in the
aggregate, would not have a Material Adverse Effect on Twister, and did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
financial statements of Twister included in the Twister SEC Filings comply as to
form in all material respect with applicable accounting requirements and with
the published rules and regulations of the Commission with respect thereto, were
prepared in accordance with generally accepted accounting principles (as in
effect from time to time) applied on a consistent basis during the periods
involved (except as may be indicated therein or in the notes thereto or, in the
case of the unaudited interim financial statements, as permitted by Form 10-Q of
the Commission) and present fairly the consolidated financial position,
consolidated results of operations and consolidated cash flows of Twister and
the Twister Subsidiaries as of the dates and for the periods indicated, except
(i) in the case of unaudited interim consolidated financial statements, to
normal recurring year-end adjustments and any other adjustments described
therein and (ii) any pro forma financial information contained therein is not
necessarily indicative of the consolidated financial position of Twister and the
Twister
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Subsidiaries as of the respective dates thereof and the consolidated results of
operations and cash flows for the periods indicated. No Twister Subsidiary is
required to file any form, report or other document with the Commission.
4.9 Absence of Certain Changes or Events. Other than as disclosed in the
Twister Current Reports, or otherwise disclosed in this Agreement or in Section
4.9 of the Twister Disclosure Schedule, since December 31, 1996 and through the
date hereof, the business of Twister and of each of the Twister Subsidiaries has
been conducted in the ordinary course, and there has not been (i) any Material
Adverse Effect on Twister; (ii) any material indebtedness incurred by Twister or
any Twister Subsidiary for money borrowed, except under credit facilities
disclosed in the Twister SEC Current Reports, if any; (iii) any material
transaction or commitment, except in the ordinary course of business or as
contemplated by this Agreement, entered into by Twister or any of the Twister
Subsidiaries; (iv) any damage, destruction or loss, whether covered by insurance
or not, which, individually or in the aggregate, would have a Material Adverse
Effect on Twister; (v) any material change by Twister in accounting principles
or methods except insofar as may be required by a change in generally accepted
accounting principles; (vi) any declaration, setting aside or payment of any
dividend (whether in cash, securities or property) with respect to the Twister
Common Stock; or (vii) any material agreement to acquire any assets or stock or
other interests of any third-party; (viii) any increase in the compensation
payable or to become payable by Twister or any Twister Subsidiary to any
employees, officers, directors, or consultants or in any bonus, insurance,
welfare, pension or other employee benefit plan, payment or arrangement made to,
for or with any such employee, officer, director or consultant (other than as
provided in employment agreements, consulting agreements and welfare and benefit
plans set forth on the Twister Disclosure Schedule, and except for increases
consistent with past practice); (ix) any material revaluation by Twister or any
Twister Subsidiary of any asset (including, without limitation, any writing down
of the value of inventory or writing off of notes or accounts receivable); (x)
any mortgage or pledge of any of the assets or properties of Twister or any
Twister Subsidiary or the subjection of any of the assets or properties of
Twister or any Twister Subsidiary to any material liens, charges, encumbrances,
imperfections of title, security interest, options or rights or claims of others
with respect thereto other than in the ordinary course consistent with past
practice; or (xi) any assumption or guarantee by Twister or a Twister Subsidiary
of the indebtedness of any person or entity, other than in the ordinary course
consistent with past practice.
4.10 Employee Benefit Plans and Employment Matters. (a) Section 4.10(a) of
the Twister Disclosure Schedule lists all employee benefit plans, collective
bargaining agreements, labor contracts, and employment agreements not otherwise
disclosed in the Twister Current Reports in which Twister or any Twister
Subsidiary participates, or by which any of them are bound, including, without
limitation, (i) any profit sharing, deferred compensation, bonus, stock option,
stock purchase, pension, welfare, and incentive plan or agreement; (ii) any plan
providing for "fringe benefits" to their employees, including, but not limited
to, vacation, sick leave, medical, hospitalization and life insurance; (iii) any
written employment agreement and any other employment agreement not terminable
at will; and (iv) any other "employee benefit plan" (within the meaning of
Section 3(3) of ERISA). Twister and the Twister Subsidiaries are in compliance
in all material respects with the requirement prescribed by all laws currently
in effect applicable to employee benefit plans and to any employment agreement,
including, but not limited to, ERISA and the Code. Twister and the Twister
Subsidiaries have each performed all of its obligations under all such employee
benefit plans and employment agreements in all material respects. There is no
pending or, to the knowledge of Twister, threatened legal action, proceeding or
investigation against or involving any Twister or Twister Subsidiary employee
benefit plan which could result in a material amount of liability to such
employee benefit plan or to Twister.
(b) Neither Twister, nor the Twister Subsidiaries, sponsors or participates
in, and have not sponsored or participated in, any employee benefit pension plan
to which Section 4021 of ERISA applies that would create a material amount of
liability to Twister under Title IV of ERISA.
(c) Neither Twister, nor the Twister Subsidiaries, sponsors or participates
in, and have not sponsored or participated in, any employee benefit pension plan
that is a "multiemployer plan" (within the meaning of Section 3(37) of ERISA).
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(d) All group health plans of Twister and the Twister Subsidiaries have
been operated in compliance with the group health plan continuation coverage
requirements of Section 4980B of the Code in all material respects, to the
extent such requirements are applicable.
(e) There have been no acts or omissions by Twister or any Twister
Subsidiary or by any fiduciary, disqualified person or party in interest with
respect to an employee benefit plan of Twister or any Twister Subsidiaries that
have given rise to or may give rise to a material amount of fines, penalties,
taxes, or related charges under Sections 502(c), 502(i) or 4071 of ERISA or
under Chapter 43 of the Code.
(f) No "reportable event," as defined in ERISA Section 4043, other than
those events with respect to which the Pension Benefit Guaranty Corporation has
waived the notice requirement, has occurred with respect to any of the employee
benefit plans of Twister.
(g) Section 4.10(g) of the Twister Disclosure Schedule sets forth the name
of each director, officer or employee of Twister or any Twister Subsidiary
entitled to receive any benefit or payment under any existing employment
agreement, severance plan or other benefit plan solely as a result of the
consummation of any transaction contemplated by this Agreement, and with respect
to each such person, the nature of such benefit or the amount of such payment,
the event triggering the benefit or payment, and the date of, and parties to,
such employment agreement, severance plan or other benefit plan.
(h) Twister has furnished Tango with true and correct copies of all plan
documents and employment agreements referred to on the Twister Disclosure
Schedule, including all amendments thereto, and all related summary plan
descriptions to the extent that one is required by law.
(i) For purposes of this Section 4.10, any reference to "Twister" shall be
deemed to include a reference to any entity that is aggregated with Twister
under the provisions of Section 414 of the Code, to the extent that those
aggregation rules apply.
4.11 Labor Matters. Neither Twister nor any Twister Subsidiary is a party
to any collective bargaining agreement with respect to any of their employees.
None of the employees of Twister or any Twister Subsidiary is represented by any
labor union. To the knowledge of Twister, there is no activity involving any
employees of Twister or the Twister Subsidiaries seeking to certify a collective
bargaining unit or engaging in any similar organizational activity.
4.12 Insurance. Twister and the Twister Subsidiaries maintain insurance
against such risks and in such amounts as Twister reasonably believes are
necessary to conduct its business. Twister and the Twister Subsidiaries are not
in default with respect to any provisions or requirements of any such policy,
nor have any of them failed to give notice or present any claim thereunder in a
due and timely fashion, except for defaults or failures which, individually or
in the aggregate, would not have a Material Adverse Effect on Twister. Neither
Twister nor any Twister Subsidiary has received any notice of cancellation or
termination in respect of any of its insurance policies.
4.13 Environmental Matters. Except as disclosed in Section 4.13 of the
Twister Disclosure Schedule, Twister and the Twister Subsidiaries are in
compliance with all environmental laws, and have obtained all necessary licenses
and permits required to be issued pursuant to any environmental law, except
where the failure to so comply or to obtain such licenses or permits,
individually or in the aggregate, would not have a Material Adverse Effect on
Twister. Neither Twister nor any Twister Subsidiary has received notice or
communication from any governmental agency with respect to (i) any hazardous
substance relative to its operations, property or assets or (ii) any
investigation, demand or request pursuant to enforcing any environmental law
relating to it or its operations, and no such investigation is pending or, to
the knowledge of Twister threatened, in any case, which would lead to a Material
Adverse Effect on Twister.
4.14 Tax Matters. Neither Twister nor, to the knowledge of Twister, any of
its affiliates has taken or agreed to take any action that would, nor does
Twister have any knowledge of any fact or circumstance that is reasonably likely
to, prevent the Merger from qualifying as a reorganization under the provisions
of Section 368(a) of the Code. Twister has paid, or made adequate provision for
on its December 31, 1996 balance sheet, all federal, state, local, foreign or
other governmental income, franchise, payroll, F.I.C.A.,
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unemployment, withholding, real property, personal property, sales, payroll,
disability and all other taxes imposed on Twister or any Twister Subsidiary or
with respect to any of their respective properties, or otherwise payable by
them, including interest and penalties, if any, in respect thereof
(collectively, "Twister Taxes"), for the Twister taxable period ended December
31, 1996 and all fiscal periods of Twister prior thereto, except such
nonpayment, or failure to make adequate provision, which, individually or in the
aggregate, would not have a Material Adverse Effect on Twister and except as set
forth in Section 4.14 to the Twister Disclosure Schedule. Twister Taxes paid
and/or incurred from December 31, 1996 until the Closing Date shall include only
Twister Taxes incurred in the ordinary course of business determined in the same
manner as in the taxable period ending on December 31, 1996. Twister and each of
the Twister Subsidiaries have timely filed all income tax, excise tax, sales
tax, use tax, gross receipts tax, franchise tax, employment and payroll related
tax, property tax, and all other tax returns which Twister and/or such Twister
Subsidiary (as the case may be) are required to file ("Twister Tax Returns"),
and have paid or provided for all the amounts shown to be due thereon, except
where such failure to make such timely filings, individually or in the
aggregate, would not have a Material Adverse Effect on Twister, and except for
the nonpayment of such amounts which, individually or in the aggregate, would
not have a Material Adverse Effect on Twister. Neither Twister nor any Twister
Subsidiary (i) has filed or entered into, or is otherwise bound by, any
election, consent or extension agreement that extends any applicable statute of
limitations with respect to taxable periods of Twister, (ii) is a party to any
contractual obligation requiring the indemnification or reimbursement of any
person with respect to the payment of any Twister Taxes, other than among
Twister and the Twister Subsidiaries, or (iii) has received any claim by an
authority in a jurisdiction where neither Twister nor any Twister Subsidiary
files Twister Tax Returns that they are or may be subject to Twister Taxes by
that jurisdiction, except for any such claims as, individually or in the
aggregate, would not have a Material Adverse Effect on Twister. No action or
proceeding is pending or, to Twister's knowledge, threatened by any governmental
authority for any audit, examination, deficiency, assessment or collection from
Twister or any Twister Subsidiary of any Twister Taxes, no unresolved claim for
any deficiency, assessment or collection of any Twister Taxes has been asserted
against Twister or any Twister Subsidiary, and all resolved assessments of
Twister Taxes have been paid or are reflected on the Twister balance sheet at
December 31, 1996 included in the Twister 10-K, except for any of the foregoing
which, individually or in the aggregate, would not have a Material Adverse
Effect on Twister.
4.15 Intellectual Property. Except as disclosed in Section 4.15 of the
Twister Disclosure Schedule, Twister and the Twister Subsidiaries own, possess
or have the right to use all franchises, patents, trademarks, service marks,
tradenames, licenses and authorizations (collectively, "Twister Intellectual
Property Rights") which are necessary to the conduct of their respective
businesses. To the knowledge of Twister, neither Twister nor any Twister
Subsidiary is infringing or otherwise violating the intellectual property rights
of any person which infringement or violation would subject Twister or any
Twister Subsidiary to liabilities which, individually or in the aggregate, would
have a Material Adverse Effect on Twister or which would prevent Twister or any
Twister Subsidiary from conducting their respective businesses substantially in
the manner in which they are now being conducted. No claim has been made or, to
Twister's knowledge, threatened against Twister or any Twister Subsidiary
alleging any such violation.
4.16 Related Party Transactions. Except as disclosed in the Twister SEC
Filings or in Section 4.16 of the Twister Disclosure Schedule, there have been
no material transactions between Twister or any Twister Subsidiary on the one
hand, and any (i) officer or director of Twister or any Twister Subsidiary, (ii)
record or beneficial owner of five percent or more of the voting securities of
Twister or (iii) affiliate (as such term is defined in Regulation 12b-2
promulgated under the Exchange Act) of any such officer, director or beneficial
owner, on the other hand, other than payment of compensation for services
rendered to Twister or the Twister Subsidiaries or the grant of stock options to
purchase shares of Twister Common Stock.
4.17 No Undisclosed Material Liabilities. Except as disclosed in the
Twister Current Reports, neither Twister nor any of the Twister Subsidiaries has
incurred any liabilities of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise, that, individually or in the
aggregate, would have a Material Adverse Effect on Twister other than (i)
liabilities incurred in the ordinary course of business consistent with past
practice since December 31, 1996, (ii) liabilities that have been repaid,
discharged or otherwise extinguished and (iii) liabilities under or contemplated
by this Agreement.
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4.18 No Default. Except as set forth in Section 4.18 of the Twister
Disclosure Schedule, neither Twister nor any of the Twister Subsidiaries is in
default or violation (and no event has occurred which with notice or the lapse
of time or both would constitute a default or violation) of any term, condition
or provision of (a) its charter or bylaws or other organizational document, (b)
indenture, mortgage, note, bond, lien, lease, license, agreement, contract,
order, judgment, ordinance, Twister Permit or other instrument or obligation to
which Twister or Twister Subsidiary is a party or by which Twister or any
Twister Subsidiary or any of their respective properties is bound or subject to,
or (c) any order, writ, injunction, decree or Law applicable to Twister or any
of the Twister Subsidiaries, except in the case of clauses (b) and (c) above for
defaults or violations which would not have a Material Adverse Effect on
Twister.
4.19 Title to Properties; Encumbrances. Section 4.19 of the Twister
Disclosure Schedule sets forth all real property owned or leased by Twister and
the Twister Subsidiaries (the "Twister Real Property"), indicating which
facilities are owned and which are leased. Except as disclosed in the Twister
Current Reports and as described in clause (ii) below: (i) each of Twister and
the Twister Subsidiaries has good, valid and marketable title to, or a valid
leasehold interest in, as applicable, all of its properties and assets (real,
personal and mixed, tangible and intangible), including, without limitation, all
Twister Real Property and all the other properties and assets reflected in the
consolidated balance sheet of Twister and the Twister Subsidiaries at December
31, 1996 (except for properties and assets disposed of in the ordinary course of
business and consistent with past practices since December 31, 1996) and (ii)
none of such properties or assets are subject to any liability, obligation,
claim, lien, mortgage, pledge, security interest, conditional sale agreement,
charge or encumbrance of any kind (whether absolute, accrued, contingent or
otherwise), except for liens securing repayment of indebtedness incurred in the
ordinary course consistent with past practice subsequent to March 31, 1997 and
liens for taxes not yet due and payable, easements and restrictions of record,
unrecorded and undelivered mortgages between a Twister Subsidiary and a joint
venture entity in which Twister is a limited partner or a managing member and
minor imperfections of title and encumbrance, if any, which are not substantial
in amount, do not materially detract from the value of the property or assets
subject thereto and do not impair the operations of Twister and the Twister
Subsidiaries. Each of the leases is in full force and effect and there is no
default by landlord or tenant existing thereunder (and no event has occurred
which, with notice and the passage of time or both, would constitute a default
under such lease) which would have a Material Adverse Effect on Twister. Except
as would not cause a Material Adverse Effect on Twister, all of the properties
and assets of Twister and the Twister Subsidiaries are, in all material
respects, in good operating condition and repair, and maintenance thereon has
not been deferred beyond industry standards, and are suitable for the purposes
for which they are presently being used.
4.20 Pooling of Interests. Neither Twister nor any of the Twister
Subsidiaries nor, to the knowledge of Twister, any of their respective
directors, officers or stockholders has taken any action which would interfere
with the parties' ability to account for the Merger as a "pooling of interests"
in accordance with Accounting Principles Board Opinion No. 16, the interpretive
releases issued pursuant thereto, and the pronouncements of the Commission.
4.21 Brokers. Except as set forth in Section 4.21 of the Twister
Disclosure Schedule, neither Twister nor any Twister Subsidiary has paid or is
obligated to pay any brokerage, finders or other fee or commission to any
broker, finder, investment banker or other intermediary in connection with this
Agreement or the Cross Option Agreement, except that Twister has retained
Schroder & Co. Inc. as its financial advisor for the transactions contemplated
hereby.
4.22 Opinion of Financial Advisor. Twister has received the opinion of
Schroder & Co. Inc. to the effect that, as of the date hereof, consideration to
be paid to the holders of shares of Twister Common Stock pursuant to this
Agreement is fair to the holders of Twister Common Stock, from a financial point
of view.
4.23 Contracts. Except as set forth in Section 4.24 of the Twister
Disclosure Schedule, neither Twister nor any Twister Subsidiary has entered into
any agreement involving amounts in excess of $50,000 which is not terminable
upon 30 days notice.
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ARTICLE V
COVENANTS AND AGREEMENTS
5.1 Joint Proxy Statement/Prospectus; Registration Statement; Stockholders'
Meeting. (a) Each of Tango and Twister agrees that this Agreement shall be
submitted to their respective stockholders for approval at meetings (the
"Meetings") duly called and held pursuant to applicable state law. As soon as
practicable after the date of this Agreement, each of Twister and Tango shall
take all action, to the extent necessary in accordance with applicable law and
their respective charters and bylaws, to convene each Meeting promptly to
consider and vote upon the approval of the Merger and such other matters as may
be necessary or desirable to consummate the Merger and the transactions
contemplated hereby. As soon as practicable after the date of this Agreement,
Twister and Tango shall jointly prepare and file with the Commission, subject to
the prior approval of the other party, which approval shall not be unreasonably
withheld, preliminary joint proxy materials relating to each Meeting as required
by the Exchange Act, and a registration statement on Form S-4 (as amended or
supplemented, the "Registration Statement") relating to the registration under
the Securities Act of the shares of Tango Common Stock issuable to the holders
of the Twister Shares. Tango shall also prepare and file with state securities
administrators, such registration statements or other documents as may be
required under applicable blue sky laws to qualify or register the shares of
Tango Common Stock issuable to the holders of the Twister Shares (the "Blue Sky
Filings"). Twister, Merger Sub and Tango will use all reasonable efforts to
cause the Registration Statement to be declared effective under the Securities
Act as soon as practicable. Promptly after the Registration Statement has become
effective and all applicable blue sky laws have been complied with, Twister and
Tango shall mail the joint proxy statement/prospectus included in the
Registration Statement to their respective stockholders. Such joint proxy
statement/prospectus at the time it initially is mailed to the stockholders of
Twister and the stockholders of Tango and all duly filed amendments or revisions
made thereto, if any, similarly mailed are hereinafter referred to as the "Proxy
Statement." Notice of the Twister Meeting shall be mailed to the stockholders of
Twister and notice of the Tango Meeting shall be mailed to the stockholders of
Tango, in each case along with the Proxy Statement.
(b) The information supplied by Twister for inclusion in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. The information supplied by Twister for
inclusion in the Proxy Statement to be sent to the stockholders of Twister in
connection with the Meeting of Twister's stockholders to consider the Merger
shall not, at the date the Proxy Statement (or any amendment thereof or
supplement thereto) is first mailed to stockholders, at the time of such Meeting
or at the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they are made, not misleading. The information supplied by Tango for
inclusion in the Registration Statement shall not, at the time the Registration
Statement is declared effective, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading. The information supplied by
Tango for inclusion in the Proxy Statement to be sent to the stockholders of
Tango in connection with the Meeting of Tango's stockholders shall not, at the
date the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to stockholders, at the time of such Meeting or at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading.
(c) Each party covenants and agrees that (i) if, at any time prior to the
Effective Time, any event relating to it or any of its affiliates, officers or
directors is discovered that should be set forth in an amendment to the
Registration Statement or Blue Sky Filings or a supplement to the Proxy
Statement, such party will promptly inform the other parties, and such amendment
or supplement will be promptly filed with the Commission and appropriate state
securities administrators and disseminated to the stockholders of Twister and
Tango, to the extent required by applicable Federal and state securities laws,
and (ii) documents which either party files or is responsible for filing with
the Commission and any regulatory agency in connection with
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the Merger (including, without limitation, the Proxy Statement) will comply as
to form and content in all material respects with the provisions of applicable
law. Notwithstanding the foregoing, no party makes any representations or
warranties with respect to any information that has been supplied by the other
party or by its auditors, attorneys, financial advisors, other consultants or
advisors specifically for use in the Registration Statement, Blue Sky Filing,
the Proxy Statement, or any other documents to be filed with the Commission or
any regulatory agency in connection with the transactions contemplated hereby.
(d) Twister hereby represents that its Board of Directors has (i)
determined that the Merger is fair to and in the best interests of Twister's
stockholders, (ii) approved the Merger and (iii) resolved to and will recommend
in the Proxy Statement adoption of this Agreement an authorization of the Merger
by the stockholders of Twister; provided, however, that such determination,
approval or recommendation may be amended, modified or withdrawn to the extent
required by the fiduciary obligations of Twister's Board of Directors under
applicable law, as advised as to legal matters by outside counsel. Tango hereby
represents that its Board of Directors has (i) determined that the Merger is
fair to and in the best interests of Tango's stockholders, (ii) approved the
Merger and (iii) resolved to and will recommend in the Proxy Statement adoption
of this Agreement an authorization of the Merger by the stockholders of Tango,
provided, however, that such determination, approval or recommendation may be
amended, modified or withdrawn to the extent required by the fiduciary
obligations of Tango's Board of Directors under applicable law, as advised as to
legal matters by outside counsel.
(e) Twister shall use all reasonable efforts to cause to be delivered to
Tango a letter of Ernst & Young LLP, Twister's independent accountants, dated a
date within two (2) business days before the date on which the Registration
Statement shall become effective and addressed to Tango, of the kind
contemplated by the Statement of Auditing Standards with respect to Letters to
Underwriters promulgated by the American Institute of Certified Public
Accountants (the "AICPA Statement"), in form and substance reasonably
satisfactory to Tango and customary in scope and substance for letters delivered
by independent public accountants in connection with registration statements
similar to the Registration Statement. Tango shall use all reasonable efforts to
cause to be delivered to Twister a letter of KPMG Peat Marwick LLP, Tango's
independent accountants, dated a date within two (2) business days before the
date on which the Registration Statement shall become effective and addressed to
Twister, of the kind contemplated by the AICPA Statement, in form and substance
reasonably satisfactory to Twister and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement. Twister shall,
and shall cause Ernst & Young LLP and its other representatives to, fully
cooperate with Tango, KPMG Peat Marwick LLP and its other representatives in
seeking to respond to any comments of the Commission regarding the
appropriateness of accounting for the Merger as a "pooling of interests." Tango
shall, and shall cause KPMG Peat Marwick LLP and its other representatives to,
fully cooperate with Twister, Ernst & Young LLP and its other representatives in
seeking to respond to any comments of the Commission regarding the
appropriateness of accounting for the Merger as a "pooling of interests."
5.2 Conduct of the Business of Twister Prior to the Effective Time. Prior
to the Effective Time, except as set forth in Section 5.2 of the Twister
Disclosure Schedule or otherwise consented to or approved in writing by Tango,
which consent shall not be unreasonably withheld, or expressly permitted by, or
required to consummate the transactions contemplated by, this Agreement or the
Cross Option Agreement:
(a) Twister and the Twister Subsidiaries shall conduct their
respective businesses to the extent commercially reasonable only in the
ordinary course and consistent in all material respects with past practice
and shall use all commercially reasonable efforts to preserve substantially
intact their respective business organizations, to keep available the
services of their present officers, employees and consultants and to
maintain their present relationships with customers, suppliers, payors and
other persons with whom they have a significant business relationship;
provided, however, that the loss of any officer, employee, consultant,
customer, payor or supplier prior to the Effective Time shall not
constitute a breach of this covenant unless such loss would have a Material
Adverse Effect on Twister;
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(b) Neither Twister nor any Twister Subsidiary shall (i) amend its
charter or bylaws or other organizational document, (ii) declare, set aside
or pay any dividend or other distribution, payable in cash, securities or
property, in respect of outstanding shares of capital stock, except for
dividends by a Twister Subsidiary to Twister or another Twister Subsidiary,
(iii) make any direct or indirect redemption, retirement, purchase or other
acquisition of any of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital stock (other
than any such acquisition directly from any wholly owned Tango Subsidiary
in exchange for capital contributions or loans to such Tango Subsidiary) or
any options, warrants or conversion or other rights to acquire any shares
of Tango's or any Tango Subsidiary's capital stock or any such securities
or obligations (except (A) in connection with the exercise of outstanding
stock options referred to in Section 4.2 in accordance with their terms,
(B) in connection with the conversion of Tango Debentures in accordance
with their terms, and (C) if required by written agreement existing as of
the date hereof) or (iv) reclassify, combine, split or subdivide any of its
outstanding shares of capital stock;
(c) Except as described in Section 5.2(c) of the Twister Disclosure
Schedule, neither Twister nor any Twister Subsidiary shall, directly or
indirectly, (i) other than in the ordinary course of business and
consistent with past practices, issue, grant, sell or pledge or agree or
propose to issue, grant, sell or pledge any shares of, or rights or
securities of any kind to acquire any shares of, the capital stock of
Twister or such Twister Subsidiary, except that Twister may grant,
consistent with past practice and in the ordinary course, stock options to
employees (other than executive officers) and consultants under the Twister
Option Plans (as defined in Section 5.7) and may issue shares of Twister
Common Stock upon the exercise of stock options outstanding on the date
hereof pursuant to the terms thereof existing as of the date hereof or
issued hereafter in accordance herewith, (ii) other than in the ordinary
course of business and consistent with past practices incur any material
indebtedness for borrowed money, except under credit facilities existing as
of the date hereof and as they may be amended from time to time or pursuant
to a substitute credit facility on terms comparable to such existing credit
facilities, (iii) waive, release, grant or transfer any rights of material
value, except in the ordinary course of business, (iv) except as provided
in clause (v) below, merge or consolidate with any person or adopt a plan
of liquidation or dissolution, (v) acquire (or enter into an agreement to
acquire) any assets, stock or other interests of a third-party except for
cash transactions involving total cash consideration in any individual
transaction not in excess of $10 million or, taking all such acquisitions
in the aggregate, involving consideration not in excess of $10 million and
which are of a nature so as not to require a merger or consolidation with
Twister or to cause the Registration Statement or the Proxy Statement to
need to be amended by Tango or would otherwise materially delay or prevent
the consummation of the transactions contemplated hereby (other than
purchases of assets from suppliers or vendors in the ordinary course of
business and consistent with past practices), (vi) transfer, lease,
license, sell or dispose of a material portion of assets or any material
assets, other than in the ordinary course of business and consistent with
past practices, (vii) change any accounting principles or methods except
insofar as may be required by changes in generally accepted accounting
principles, (viii) other than in the ordinary course of business consistent
with past practices, mortgage or pledge any of their assets or properties
or subject any of their assets or properties to any material liens,
charges, encumbrances, imperfections of title, security interests, options
or rights or claims of others with respect thereto (and shall maintain such
assets in good condition, reasonable wear and tear excepted), or (ix)
except as otherwise would be permitted by Section 5.2(c)(v) above, enter
into any joint venture, affiliation, partnership or similar agreement, or
amend, modify or alter any such transaction to which Twister or any Twister
Subsidiary is presently a party;
(d) Neither Twister nor any Twister Subsidiary will, directly or
indirectly, (i) increase the compensation payable or to become payable by
it to any of its employees, officers, consultants or directors (except in
accordance with employment or consulting agreements, and welfare and
benefit plans set forth on the Twister Disclosure Schedule, and except for
increases consistent with past practice and which are otherwise reasonably
necessary for the operation of the business of Twister and the Twister
Subsidiaries), (ii) establish, enter into, adopt or amend any stock option,
stock purchase, profit sharing, pension, retirement, deferred compensation,
restricted stock or severance plan, agreement or arrangement for the
benefit of employees, officers, directors or consultants of Twister or any
Twister Subsidiary, (iii) enter
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into or amend any employment or consulting agreement, except in the
ordinary course of business, or (iv) make any loan or advance to, or enter
into any written contract, lease or commitment with, any officer, employee,
consultant or director of Twister or any Twister Subsidiary, except in the
ordinary course of business, except, in any such case, as may be required
by applicable Law;
(e) Neither Twister nor any Twister Subsidiary shall, directly or
indirectly, assume, guarantee, endorse or otherwise become responsible for
the obligations of any other individual, corporation or other entity, or
make any loans or advances to any individual, corporation or other entity
except in the ordinary course of business and consistent with past
practices;
(f) Neither Twister nor any Twister Subsidiary shall take any action
which would interfere with the parties' abilities to account for the merger
as a "pooling of interests"; and
(g) Neither Twister nor any Twister Subsidiary shall authorize or
enter into any agreement to do any of the things described in clauses (a)
through (f) of this Section 5.2.
5.3 Conduct of the Business of Tango Prior to the Effective Time. Prior to
the Effective Time, except as set forth in Section 5.3(c) of the Tango
Disclosure Schedule or otherwise consented to or approved in writing by Twister,
which consent shall not be unreasonably withheld, or expressly permitted by, or
required to consummate the transactions contemplated by, this Agreement or the
Cross Option Agreement:
(a) Tango and the Tango Subsidiaries shall conduct their respective
businesses to the extent commercially reasonable only in the ordinary
course and consistent in all material respects with past practice and shall
use all commercially reasonable efforts to preserve substantially intact
their respective business organizations, to keep available the services of
their present officers, employees and consultants and to maintain their
present relationships with customers, suppliers, payors and other persons
with whom they have a significant business relationship; provided, however,
that the loss of any officer, employee, consultant, customer, payor or
supplier prior to the Effective Time shall not constitute a breach of this
covenant unless such loss would have a Material Adverse Effect on Tango;
(b) Neither Tango nor any Tango Subsidiary shall (i) amend its charter
or bylaws or other organizational document, (ii) declare, set aside or pay
any dividend or other distribution, payable in cash, securities or
property, in respect of outstanding shares of capital stock, except for
dividends by a Tango Subsidiary to Tango or another Tango Subsidiary, (iii)
make any direct or indirect redemption, retirement, purchase or other
acquisition of any of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital stock (other
than any such acquisition directly from any wholly owned Tango Subsidiary
in exchange for capital contributions or loans to such Tango Subsidiary) or
any options, warrants or conversion or other rights to acquire any shares
of Tango's or any Tango Subsidiary's capital stock or any such securities
or obligations (except (A) in connection with the exercise of outstanding
stock options referred to in Section 3.2 in accordance with their terms,
(B) in connection with the conversion of Tango Debentures in accordance
with their terms, and (C) if required by written agreement existing as of
the date hereof) or (iv) reclassify, combine, split or subdivide any of its
outstanding shares of capital stock;
(c) Except as described in Section 5.3(c) of the Tango Disclosure
Schedule, neither Tango nor any Tango Subsidiary shall, directly or
indirectly, (i) other than in the ordinary course of business and
consistent with past practices, issue, grant, sell or pledge or agree or
propose to issue, grant, sell or pledge any shares of, or rights or
securities of any kind to acquire any shares of, the capital stock of Tango
or such Tango Subsidiary, except that Tango may grant, consistent with past
practice and in the ordinary course, stock options to employees (other than
executive officers) and consultants under the 1995 Plan (as defined in
Section 3.2) and may issue shares of Tango Common Stock upon the exercise
of stock options outstanding on the date hereof pursuant to the terms
thereof existing as of the date hereof or issued hereafter in accordance
herewith, (ii) other than in the ordinary course of business and consistent
with past practices incur any material indebtedness for borrowed money,
except under credit facilities existing as of the date hereof and as they
may be amended from time to time or pursuant to a substitute credit
facility on terms comparable to such existing credit facilities, (iii)
waive, release, grant or transfer
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any rights of material value, except in the ordinary course of business,
(iv) except as provided in clause (v) below, merge or consolidate with any
person or adopt a plan of liquidation or dissolution, (v) acquire (or enter
into an agreement to acquire) any assets, stock or other interests of a
third-party except for cash transactions involving total cash consideration
in any individual transaction not in excess of $10 million or, taking all
such acquisitions in the aggregate, involving consideration not in excess
of $10 million and which are of a nature so as not to require a merger or
consolidation with Tango or to cause the Registration Statement or the
Proxy Statement to need to be amended by Tango or would otherwise
materially delay or prevent the consummation of the transactions
contemplated hereby (other than purchases of assets from suppliers or
vendors in the ordinary course of business and consistent with past
practices), (vi) transfer, lease, license, sell or dispose of a material
portion of assets or any material assets, other than in the ordinary course
of business and consistent with past practices, (vii) change any accounting
principles or methods except insofar as may be required by changes in
generally accepted accounting principles, (viii) other than in the ordinary
course of business consistent with past practices, mortgage or pledge any
of their assets or properties or subject any of their assets or properties
to any material liens, charges, encumbrances, imperfections of title,
security interests, options or rights or claims of others with respect
thereto (and shall maintain such assets in good condition, reasonable wear
and tear excepted), or (ix) except as otherwise would be permitted by
Section 5.3(c)(v) above, enter into any joint venture, affiliation,
partnership or similar agreement, or amend, modify or alter any such
transaction to which Tango or any Tango Subsidiary is presently a party;
(d) Neither Tango nor any Tango Subsidiary will, directly or
indirectly, (i) increase the compensation payable or to become payable by
it to any of its employees, officers, consultants or directors (except in
accordance with employment or consulting agreements, and welfare and
benefit plans set forth on the Tango Disclosure Schedule, and except for
increases consistent with past practice and which are otherwise reasonably
necessary for the operation of the business of Tango and the Tango
Subsidiaries), (ii) establish, enter into, adopt or amend any stock option,
stock purchase, profit sharing, pension, retirement, deferred compensation,
restricted stock or severance plan, agreement or arrangement for the
benefit of employees, officers, directors or consultants of Tango or any
Tango Subsidiary, (iii) enter into or amend any employment or consulting
agreement, except in the ordinary course of business, or (iv) make any loan
or advance to, or enter into any written contract, lease or commitment
with, any officer, employee, consultant or director of Tango or any Tango
Subsidiary, except in the ordinary course of business, except, in any such
case, as may be required by applicable law;
(e) Neither Tango nor any Tango Subsidiary shall, directly or
indirectly, assume, guarantee, endorse or otherwise become responsible for
the obligations of any other individual, corporation or other entity, or
make any loans or advances to any individual, corporation or other entity
except in the ordinary course of business and consistent with past
practices;
(f) Neither Tango nor any Tango Subsidiary shall take any action which
would interfere with the parties' abilities to account for the merger as a
"pooling of interests"; and
(g) Neither Tango nor any Tango Subsidiary shall authorize or enter
into any agreement to do any of the things described in clauses (a) through
(f) of this Section 5.3.
5.4 Access to Properties and Records. Each party shall afford to the other
and their respective accountants, counsel and representatives ("Respective
Representatives"), reasonable access during normal business hours upon
reasonable prior notice throughout the period prior to the Effective Time to all
of their respective properties (including, without limitation, books, contracts,
commitments and written records) and shall make reasonably available during
normal business hours upon reasonable prior notice their respective officers and
employees to answer fully and promptly questions put to them thereby; provided,
however, that no investigation pursuant to this Section 5.4 shall alter any
representation or warranty of any party hereto or the conditions to the
obligations of the parties hereto.
5.5 No Solicitation of Transactions. (a) None of Twister or any Twister
Subsidiary shall, or shall authorize or permit any of its officers, directors or
employees or any investment banker, financial advisor, attorney, accountant or
other representative or agent retained by Twister or any Twister Subsidiary to,
initiate
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or solicit or knowingly encourage (including by way of furnishing non-public
information), or take any other action to facilitate knowingly, any inquiries or
the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Third Party Transaction (as such term is defined below in this
Section 5.5), or enter into or maintain or continue discussions or negotiate
with any person or entity in furtherance of such inquiries or to obtain a Third
Party Transaction. Twister shall promptly notify Tango orally and in writing of
all relevant details relating to all proposals which it or any Twister
Subsidiary or any such officer, director, employee, investment banker, financial
advisor, attorney, accountant or other representative may receive relating to
any of such matters and, if such inquiry or proposal is in writing, Twister
shall forthwith deliver to Tango a copy of such inquiry or proposal; provided,
however, that nothing contained in this Section 5.5(a) shall prohibit the Board
of Directors of Twister from (i) furnishing information to, or entering into
discussions or negotiations or an agreement with, any person or entity that
makes an unsolicited offer of a Third Party Transaction (a "Proposed Twister
Transaction") if, and only to the extent that, (A) the Board of Directors of
Twister determines in its good faith judgment, after consultation with
independent legal counsel (which may include its regularly engaged independent
legal counsel) that such action is required for the Board of Directors of
Twister to comply with its fiduciary duties to stockholders under applicable
law, (B) in making the determination referenced in Clause (A) above, the Board
of Directors of Twister shall have determined in good faith, after consultation
with its financial advisors, that the Proposed Twister Transaction would result
in a transaction more favorable to Twister's stockholders than the transaction
contemplated by this Agreement (any such Proposed Twister Transaction, as
contemplated by clauses (A) through (C) of this paragraph, referred to herein as
a "Superior Twister Proposal") and (C) prior to furnishing such information to,
or entering into discussions or negotiations with, such person or entity,
Twister (x) provides written notice to Tango to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such person
or entity and (y) receives from such person or entity an executed
confidentiality agreement in reasonably customary form on terms not more
favorable to such person or entity than the terms contained in the
Confidentiality Agreement (as hereinafter defined); (ii) complying with Rule
14e-2 promulgated under the Exchange Act with regard to a tender or exchange
offer not made in violation of this Section 5.5(a) or (iii) failing to make or
withdrawing or modifying its recommendation referred to in Section 5.1(d) if
there exists a Third Party Transaction that the Board of Directors of Twister
determines, in its good faith judgment, is a Superior Twister Proposal.
(b) None of Tango or any Tango Subsidiary shall, or shall authorize or
permit any of its officers, directors or employees or any investment banker,
financial advisor, attorney, accountant or other representative or agent
retained by Tango or any Tango Subsidiary to, initiate or solicit or knowingly
encourage (including by way of furnishing non-public information), or take any
other action to facilitate knowingly, any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any Third
Party Transaction, or enter into or maintain or continue discussions or
negotiate with any person or entity in furtherance of such inquiries or to
obtain a Third Party Transaction. Tango shall promptly notify Twister orally and
in writing of all relevant details relating to all proposals which it or any
Tango Subsidiary or any such officer, director, employee, investment banker,
financial advisor, attorney, accountant or other representative may receive
relating to any of such matters and, if such inquiry or proposal is in writing,
Tango shall forthwith deliver to Twister a copy of such inquiry or proposal;
provided, however, that nothing contained in this Section 5.5(b) shall prohibit
the Board of Directors of Tango from (i) furnishing information to, or entering
into discussions or negotiations or an agreement with, any person or entity that
makes an unsolicited offer of a Third Party Transaction (a "Proposed Tango
Transaction") if, and only to the extent that, (A) the Board of Directors of
Tango determines in its good faith judgment, after consultation with independent
legal counsel (which may include its regularly engaged independent legal
counsel) that such action is required for the Board of Directors of Tango to
comply with its fiduciary duties to stockholders under applicable law, (B) in
making the determination referenced in Clause (A) above, the Board of Directors
of Tango shall have determined in good faith, after consultation with its
financial advisors, that the Proposed Tango Transaction would result in a
transaction more favorable to Tango's stockholders than the transaction
contemplated by this Agreement (any such Proposed Tango Transaction, as
contemplated by clauses (A) through (C) of this paragraph referred to herein as
a "Superior Tango Proposal") and (C) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity, Tango (x)
provides written notice to Twister to the
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effect that it is furnishing information to, or entering into discussions or
negotiations with, such person or entity and (y) receives from such person or
entity an executed confidentiality agreement in reasonably customary form on
terms not more favorable to such person or entity than the terms contained in
the Confidentiality Agreement; (ii) complying with Rule 14e-2 promulgated under
the Exchange Act with regard to a tender or exchange offer not made in violation
of this Section 5.5(b) or (iii) failing to make or withdrawing or modifying its
recommendation referred to in Section 5.1(d) if there exists a Third Party
Transaction that the Board of Directors of Tango determines, in its good faith
judgment, is a Superior Tango Proposal.
(c) For purposes of this Agreement, "Third Party Transaction" shall mean
with respect to a party hereto any of the following (other than transactions
between Tango, Merger Sub and Twister contemplated hereby): (i) any merger,
consolidation, share exchange, business combination, or other similar
transaction involving such party; (ii) any sale, exchange, transfer or other
disposition of 20% or more of the assets of such party and its Subsidiaries,
taken as a whole, in a single transaction or series of transactions; (iii) any
sale of or tender offer or exchange offer for 20% or more of the outstanding
shares of capital stock of such party or the filing of a registration statement
under the Securities Act in connection therewith; (iv) any person acquiring
beneficial ownership or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder) having been formed for the purpose
of effecting a Third Party Transaction referred to in Sections 5.5(c)(i), (ii)
or (iii) which beneficially owns or has the right to acquire beneficial
ownership of, 20% or more of the then outstanding shares of capital stock of
such party; or (v) any public announcement by such party of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing with respect to such party.
5.6 Employee Benefit Plans. Except as otherwise provided in this
Agreement, the Twister employee benefit plans listed on the Twister Disclosure
Schedule which are in effect at the date of this Agreement shall remain in
effect for at least one year following the Effective Time. Tango and Twister
shall cooperate in coordinating their respective benefit plans, and any Twister
employee benefit plan may be terminated after the Effective Time, but solely to
the extent that benefits are provided to the employees of Twister under one or
more employee benefits plans of Tango or any Tango Subsidiary ("Tango Plans")
which are least comparable to those provided under the employee benefit plans or
arrangements then provided under the Tango Plans and are not less beneficial
than the benefits provided to the employees of Twister under the employee
benefit plans or arrangements of Twister as of the Closing Date. For all
purposes of determining eligibility and any and all entitlements under any Tango
Plan, service performed by employees of Twister prior to the Closing Date shall
be credited.
5.7 Treatment of Options and Debentures. (a) Each Twister Stock Option
issued pursuant to Twister's 1995 Stock Option Plan, as amended (the "Twister
Option Plan") or issued other than pursuant to the Twister Option Plan set forth
in the Twister Disclosure Schedule, whether or not vested or exercisable, shall
be assumed by Tango and shall constitute an option to acquire, on the same terms
and conditions as were applicable under such assumed Twister Stock Option, a
number of shares of Tango Common Stock equal to the product of the Exchange
Ratio and the number of shares of Twister Common Stock subject to such Twister
Stock Option, at a price per share equal to the aggregate exercise price for the
shares of Twister Common Stock subject to such Twister Stock Option divided by
the number of full shares of Tango Common Stock deemed to be purchasable
pursuant to such Twister Stock Option; provided, however, that (i) subject to
the provisions of clause (ii) below, the shares of Tango Common Stock that may
be purchased upon exercise of such Twister Stock Option shall not include any
fractional shares and, upon the last such exercise of such Twister Stock Option,
a cash payment shall be made for any fractional shares based upon the per share
average of the highest and lowest sale price of the Tango Common Stock as
reported on the AMEX on the date of such exercise, and (ii) in the case of any
Twister Stock Option to which Section 421 of the Code applies by reason of its
qualification under Section 422 or Section 423 of the Code ("Qualified Stock
Options"), the option price, the number of shares purchasable pursuant to such
Twister Stock Option and the terms and conditions of exercise of such Twister
Stock Option shall be determined in order to comply with Section 424 of the
Code; provided, further that all Twister Stock Options shall become vested and
exercisable
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in full as of the Effective Time. As soon as practicable after the Effective
Time, Tango shall deliver to holders of Twister Stock Options appropriate option
agreements representing the right to acquire shares of Tango Common Stock on the
same terms and conditions as contained in the outstanding Twister Stock Options
(subject to any adjustments required by the preceding sentence), upon surrender
of the outstanding Twister Stock Options. Tango shall comply with the terms of
the Twister Option Plan and the terms of the Twister Stock Options issued other
than pursuant to the Twister Option Plan as they apply to the Twister Stock
Options assumed as set forth above, including, but not limited to, any other
provisions regarding changes of control that may apply with respect to the
Merger.
(b) Tango shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of Tango Common Stock for delivery upon exercise
of the Twister Stock Options assumed in accordance with this Section 5.7. Tango
shall file a registration statement on Form S-8 (or any successor form) or
another appropriate form, effective as of the Effective Time, with respect to
shares of Tango Common Stock subject to such Twister Stock Options and shall use
all reasonable efforts to maintain the effectiveness of such registration
statement or registration statements (and maintain the current status of the
prospectus or prospectuses contained therein) for so long as such Twister Stock
Options remain outstanding. With respect to those individuals who subsequent to
the Merger will be subject to the reporting requirements under Section 16(a) of
the Exchange Act, Tango shall administer the Twister Option Plan and the Twister
Stock Options assumed pursuant to this Section 5.7 in a manner that complies
with Rule 16b-3 promulgated under the Exchange Act.
(c) The Twister Debentures issued pursuant to the Indenture dated as of May
23, 1996 (the "Twister Indenture") shall be assumed by Tango at the Effective
Time by Tango's execution and delivery of a supplemental indenture as
contemplated by the Twister Indenture (the "Supplemental Indenture"). To the
extent required by the Twister Indenture, such Supplemental Indenture shall
provide that holders of the Twister Debentures have the right to convert, on the
same terms and conditions as were applicable immediately prior to the Merger,
the principal amount of any Twister Debentures into Tango Common Stock at a
conversion price (the "New Conversion Price") equal to the quotient of the
conversion price in effect for the Twister Debentures immediately prior to the
Merger divided by the Exchange Ratio. Promptly following the Closing, Tango
shall prepare and file a registration statement on Form S-3 or another
appropriate form with the Commission to permit the sale under the Securities Act
of the Twister Debentures and the shares of Tango Common Stock issuable upon
conversion thereof, and Tango shall assume and satisfy the obligations of
Twister arising out of those certain Registration Rights Agreements dated as of
May 17, 1996 by and between Twister and the purchasers of the Twister
Debentures.
(d) Upon the execution of the Supplemental Indenture, Tango shall take all
corporate action necessary to reserve for issuance a sufficient number of shares
of Tango Common Stock for issuance and delivery upon conversion of the Twister
Debentures assumed in accordance with this Section 5.7.
5.8 Indemnification. (a) From and after the Effective Time, Tango shall
indemnify, defend and hold harmless to the fullest extent permitted under
Delaware law each person who is now, or has been at any time prior to the date
hereof, an officer or director of Twister (individually, an "Indemnified Party"
and collectively, the "Indemnified Parties"), against all losses, claims,
damages, liabilities, costs or expenses (including attorneys' fees), judgments,
fines, penalties and amounts paid in settlement of or otherwise in connection
with any claim, action, suit, proceeding or investigation (a "Claim") arising
out of or pertaining to acts or omissions, or alleged acts or omissions, by them
in their capacities as such occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by this Agreement
and the Option Agreement). In the event of any such Claim, Tango shall pay
expenses in advance of the final disposition of any such action or proceeding to
each Indemnified Party to the fullest extent permitted under the DGCL, upon
receipt from the Indemnified Party to whom expenses are advanced of the
undertaking to repay such advances contemplated by Section 145(e) of the DGCL.
(b) Tango shall cause the Surviving Corporation to keep in effect
provisions in its Articles of Incorporation and Bylaws with respect to
indemnification and director and officer exculpation from liability identical to
such provisions contained in the Articles of Incorporation and Bylaws of Twister
on the date
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hereof, which provisions shall not be amended, repealed or otherwise modified
for a period of six years from the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who at any time prior to
the Effective Time were directors or officers of Twister in respect of actions
or omissions at or prior to the Effective Time (including, without limitation,
the transactions contemplated by this Agreement and the Cross Option Agreement,
except as required by applicable law or except to make changes permitted by law
that would not materially diminish the Indemnified Parties' right of
indemnification.
(c) For a period of six years after the Effective Time, Tango shall cause
to be maintained in effect the current officers' and directors' liability
insurance maintained by Twister (provided that Tango may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions which are no less advantageous than such existing insurance) with
respect to Claims arising from facts or events which occurred prior to the
Effective Time; provided, however, that Tango shall not be required in order to
maintain or procure such coverage to pay an annual premium in excess of two and
one-half times the current annual premium paid by Twister for its existing
coverage (the "Cap"); and provided, further, that if existing coverage cannot be
maintained or equivalent coverage cannot be obtained, or can be obtained only by
paying an annual premium in excess of the Cap, Tango shall only be required to
obtain as much coverage as can be obtained by paying an annual premium equal to
the Cap.
(d) This Section 5.8 shall survive the closing of all of the transactions
contemplated hereby, is intended to benefit the officers and employees of
Twister and of the Twister Subsidiaries at the Effective Time and each of the
Indemnified Parties and their respective heirs and personal representatives
(each of which shall be entitled to enforce this Section 5.8 against Tango and
the Surviving Corporation, as the case may be, as a third-party beneficiary of
this Agreement), and shall be binding on all successors and assigns of Tango and
the Surviving Corporation.
5.9 Confidentiality. The Amended and Restated Confidentiality Agreement,
dated even herewith (the "Confidentiality Agreement") between Twister and Tango
(a copy of which is attached hereto as Exhibit B) is hereby affirmed by Tango
and Twister and the terms thereof are herewith incorporated herein by reference
and shall continue in full force and effect until the Effective Time shall have
occurred, and if this Agreement is terminated or if the Effective Time shall not
have occurred for any reason whatsoever, the Confidentiality Agreement shall
thereafter remain in full force and effect in accordance with its terms;
provided, however, to the extent there are any provisions in the Confidentiality
Agreement inconsistent with the terms of this Agreement, the terms of this
Agreement shall control.
5.10 Reasonable Best Efforts. Subject to the terms and conditions herein
provided, the parties hereto shall: (i) promptly make their respective filings,
and thereafter make any other required submissions, with respect to this
Agreement and the Merger required under (A) the Securities Act (in the case of
Tango) and the Exchange Act and the rules and regulations thereunder, and any
other applicable Federal or state securities laws, (B) the HSR Act and (C) any
other applicable Laws; (ii) use all reasonable efforts to cooperate with one
another in (A) determining which filings are required to be made prior to the
Effective Time with, and which consents, approvals, permits or authorizations
("Third Party Consents") are required to be obtained prior to the Effective Time
from Governmental Entities or other third parties in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and (B) timely making all such filings and
timely seeking all such Third Party Consents; and (iii) use all reasonable
efforts to take, or cause to be taken, all other action and do, or cause to be
done, all other things necessary, proper or appropriate to consummate and make
effective the transactions contemplated by this Agreement. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purpose of this Agreement, the proper officers and directors of the parties
hereto shall take all such necessary action. Each of the parties hereto shall
promptly give (or cause their respective subsidiaries to give) any notices
regarding the Merger, this Agreement or the transactions contemplated hereby or
thereby to third parties required under applicable Law or by any contract,
license, lease or other agreement to which it or any of its subsidiaries is
bound, and use, and cause its Subsidiaries to use, all reasonable efforts to
obtain any Third Party Consents required under any such contract, license, lease
or other agreement in connection with the consummation of the Merger or the
other transactions contemplated by this Agreement. No party hereto shall (i)
take any action for the purpose of delaying, impairing or impeding the receipt
of any Third Party Consent,
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or the making of any required filing or registration, (ii) take any action that
could reasonably have the effect of preventing Tango and Twister from accounting
for the Merger as a "pooling of interests" or (iii) subject to compliance with
mandatory disclosure requirements under applicable securities laws, take any
action (or fail to take any action) that could reasonably be expected to have an
adverse effect on the price of the Tango Common Stock. Each party hereto shall
use all reasonable efforts to overturn or vacate any Law or Order (hereinafter
defined) (whether temporary, preliminary or permanent) enacted, issued,
promulgated, enforced or entered by any Governmental Entity or Federal or state
court of competent jurisdiction which is in effect and has effect of making the
Merger illegal or otherwise prohibiting consummation of the transactions
contemplated by this Agreement.
5.11 Certification of Stockholder Vote. At or prior to the Closing of the
transactions contemplated by this Agreement, Twister and Tango shall deliver to
each other a certificate of their respective Secretary setting forth the number
of shares of Twister Common Stock or Tango Common Stock, as the case may be,
voted in favor of adoption of this Agreement and consummation of the Merger and
the number of shares of Twister Common Stock or Tango Common Stock voted against
adoption of this Agreement and consummation of the Merger.
5.12 Affiliate Agreements. (a) Not fewer than 45 days prior to the
Effective Time, Twister shall deliver to Tango a list of names and addresses of
each person who was, in Twister's reasonable judgment, at the record date for
the Twister Meeting, an "affiliate" of Twister within the meaning of Rule 145
promulgated under the Securities Act or applicable Commission accounting
releases with respect to "pooling of interests" accounting treatment (each a
"Pooling Affiliate"). Twister shall provide Tango such information and documents
as Tango shall reasonably request for purposes of reviewing such list. Twister
shall use all reasonable efforts to deliver or cause to be delivered to Tango,
prior to the Effective Time, an affiliate agreement substantially in the form
attached hereto as Exhibit C-1 (each, a "Twister Affiliate Agreement"), executed
by each of the Pooling Affiliates of Twister identified in the above-referenced
list.
(b) Tango shall use all reasonable efforts to obtain or cause to be
obtained, prior to the Effective Time, an affiliate agreement in substantially
the form attached hereto as Exhibit C-2 (each, a "Tango Affiliate Agreement"),
executed by each person who was, in Tango's reasonable judgment, at the record
date for the Tango Meeting, a Pooling Affiliate of Tango.
5.13 Listing Application. Tango shall promptly prepare and submit to the
AMEX a listing application covering the shares of Tango Common Stock issuable in
the Merger, and shall use its best efforts to obtain, prior to the Effective
Time, approval for the listing of such Tango Common Stock, subject to official
notice of issuance.
5.14 Supplemental Disclosure Schedules. Each of Tango and Twister shall
supplement their respective Disclosure Schedules delivered in connection with
this Agreement as of the Effective Time to the extent necessary to reflect
matters permitted by, or consented to by, the other party under this Agreement.
In addition, from time to time prior to the Effective Time, each of Tango and
Twister will promptly deliver to the other party such amended or supplemental
Disclosure Schedules as may be necessary to make the Schedules accurate and
complete in all material respects as of the Effective Time; provided, however,
that no such disclosure shall have any effect for the purpose of determining the
satisfaction of the conditions set forth in Article VI of this Agreement.
5.15 No Action. Except as contemplated by this Agreement, no party hereto
will, nor will any such party permit any of its Subsidiaries to, take or agree
or commit to take any action that is reasonably likely to make any of its
representations or warranties hereunder inaccurate in any material respect at
the date made (to the extent so limited) or as of the Effective Time.
5.16 Conduct of Business of Merger Sub. Merger Sub shall not conduct any
business from the date of this Agreement, other than to consummate the Merger
and the transactions contemplated by this Agreement.
5.17 Corporate Governance. (a) Effective at or immediately prior to the
Effective Time, the Board of Directors of Tango shall take all action necessary
(including any necessary amendments of the Bylaws of Tango) to implement the
provisions of this Section 5.17 and to cause the full Board of Directors of
Tango, at
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and immediately after the Effective Time, to consist of the following ten
directors: William G. Petty, Jr., William F. Lasky, Richard W. Boehlke, Gene E.
Burleson, Robert Haveman, Ronald G. Kenny, Jerry L. Tubergen, Timothy J.
Buchanan, Steven L. Vick and D. Ray Cook, M.D. If any of Messrs. Buchanan, Vick
or Dr. Cook (each an "Initial Twister Director") is unable or unwilling to serve
as a director of Tango at the Effective Time, such Initial Twister Director
shall be replaced by an individual or individuals designated by the Board of
Directors of Twister and approved by the Board of Directors of Tango, such
approval not to be unreasonably withheld, and if any of the remaining
individuals named above are unable or unwilling to serve, such individual or
individuals shall be replaced by an individual or individuals designated by the
Board of Directors of Tango.
(b) Following the Effective Time and continuing through the 1999 Annual
Meeting of Stockholders of Tango, any vacancy on the Board of Directors of Tango
arising among the Initial Twister Directors (or any other individual or
individuals selected by the Board of Directors of Twister as a replacement
director pursuant to Section 5.18(a) or by the Initial Twister Directors or
their successors) and any nominee selected to fill a director position occupied
by any of the foregoing individuals (the "Twister Directors") shall be nominated
on behalf of the Tango Board of Directors, filled or selected by a majority vote
of the remaining Twister Directors and approved by the Board of Directors of
Tango, such approval not to be unreasonably withheld.
(c) At the Effective Time, the Board of Directors of Tango shall take all
actions necessary to create an Executive Committee ("Executive Committee") to be
comprised of Messrs. Petty, Lasky and Buchanan, which committee shall have
authority, acting by unanimous vote of all Executive Committee members, to (i)
approve development, acquisition and financing transactions, without the
separate approval of the Board of Directors of Tango, up to levels approved by
the Board of Directors of Tango in authorizing such committee; (ii) review and
formulate recommendations on matters to be submitted to the Board of Directors
of Tango; (iii) approve and manage the consolidation of the operations of the
Surviving Corporation and its Subsidiaries and Tango and the Tango Subsidiaries;
and (iv) have such additional responsibilities and functions as are delegated
from time to time by the Board of Directors of Tango.
(d) Effective at or immediately prior to the Effective Time, the Board of
Directors of Tango shall (i) take all actions necessary to cause Mark W.
Ohlendorf to be elected a Senior Vice President of Tango and to cause Tango to
execute and deliver to Mr. Ohlendorf an executive employment agreement in
substantially the form attached hereto as Exhibit C-3 (the "Executive Employment
Agreement"); and (ii) take all action necessary to cause Tango to execute and
deliver to the persons listed on Schedule 5.17(d) hereto executive employment
agreements in substantially the form attached hereto as Exhibit C-4 (the "Other
Executive Employment Agreements") with each of the persons listed on Schedule
5.17(d) hereto.
(e) It is the intent of Tango and Twister that the Surviving Corporation
shall continue to operate as a separate and distinct business unit and as a
wholly-owned subsidiary of Tango with its principal executive offices located at
543 S. Webb Road, Wichita, Kansas; provided, however, such manner of operation
shall be at the pleasure of the Executive Committee which shall be delegated the
responsibility of developing and implementing measures to achieve coordination
and integration of the Surviving Corporation with and into Tango and, as such,
shall have responsibility for determining all matters relevant thereto.
(f) At the Tango Meeting, Tango shall seek to secure from the stockholders
of Tango approval of the amendments to the Tango Bylaws set forth on Exhibit C-5
attached hereto (the "Tango Bylaw Amendments"), which Tango Bylaw Amendments are
intended to address the matters described in Sections 5.17(b) and (c) of this
Agreement and which may only be amended, modified or appealed in accordance with
their terms. In addition to such other conditions as may be set forth herein,
the obligation of Twister to effect the Merger and the other transactions
contemplated in this Agreement shall be subject to Tango securing approval of
the Tango Bylaw Amendments by the Tango stockholders at the Tango Meeting, such
that the Tango Bylaw Amendments shall be and become effective as of the
Effective Time.
(g) At the Effective Time, Tango shall adopt the Stay Plan described in
Schedule 5.17(g) hereto.
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5.18 Cross Option Agreement. Simultaneously with the execution of this
Agreement, Tango and Twister have executed and delivered the Cross Option
Agreement in the form attached hereto as Exhibit D (the "Cross Option
Agreement").
5.19 Plan of Reorganization. This Agreement is intended to constitute a
"plan of reorganization" within the meaning of Section 1.368-2(g) of the income
tax regulations promulgated under the Code. From and after the date of this
Agreement, each party hereto shall use all reasonable efforts to cause the
Merger to qualify, and shall not, without the prior written consent of the other
parties hereto, knowingly take any actions or cause any actions to be taken
which could reasonably be expected to prevent the Merger from qualifying as a
reorganization under the provisions of Section 368 of the Code. In the event
that the Merger shall fail to qualify as a reorganization under the provisions
of Section 368 of the Code, then the parties hereto agree to negotiate in good
faith to restructure the Merger in order that it shall qualify as a tax-free
transaction under the Code. Following the Effective Time, and consistent with
any such consent, neither the Surviving Corporation nor Tango nor any of their
respective affiliates knowingly and voluntarily shall take any action or cause
any action to be taken which could reasonably be expected to cause the Merger to
fail to qualify as a reorganization under Section 368 of the Code.
5.20 Compliance by Merger Sub. Tango shall take all action necessary to
cause Merger Sub to perform its obligations hereunder (including, but not
limited to, consummation of the Merger) and to otherwise comply with the terms
hereof.
5.21 Change Corporate Name. Tango and Twister agree to jointly consider
changing the corporate name of Tango after the Effective Time to a name that, in
the judgment of Tango and Twister, better reflects the resulting business of
Tango after the Merger and Tango's long-range strategic plans.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger and the other
transactions contemplated herein shall be subject to the fulfillment at or prior
to the Effective Time of the following conditions, any or all of which may be
waived, in whole or in part, to the extent permitted by applicable Law:
(a) The Registration Statement shall have been declared effective by
the Commission under the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and shall be continuing to be in effect, and no proceedings for
that purpose shall have been initiated or threatened by the Commission. All
state securities laws or "blue sky" permits and authorizations necessary to
issue the Share Consideration and other securities of Tango pursuant to the
Merger and the transactions contemplated hereby shall have been received,
or the issuance of the Share Consideration and other securities shall be
exempt from the requirements of such state laws.
(b) This Agreement and the Merger contemplated hereby and any other
action necessary to consummate the transactions contemplated hereby shall
have been approved and adopted by the requisite vote of (i) the holders of
the outstanding shares of the Twister Common Stock entitled to vote thereon
at the Twister Meeting and (ii) the holders of the outstanding shares of
Tango Common Stock entitled to vote thereon at the Tango Meeting.
(c) No Governmental Entity or court of competent jurisdiction shall
have enacted, issued, promulgated, enforced or entered any Law or Order
(whether temporary, preliminary or permanent) which is in effect and has
the effect of making the Merger illegal or otherwise prohibiting
consummation of the transactions contemplated by this Agreement, nor shall
any proceeding by any Governmental Entity seeking any of the foregoing be
pending.
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(d) The applicable waiting period under the HSR Act shall have expired
or been terminated without action by the Justice Department or the Federal
Trade Commission to prevent consummation of the Merger.
(e) The shares of Tango Common Stock issuable to Twister's
stockholders and option holders in the Merger or thereafter and the shares
of Tango Common Stock to be issuable upon conversion of the Twister
Debentures shall have been authorized for listing on the AMEX, upon
official notice of issuance.
(f) There shall not have been instituted or pending any action or
proceeding by or before any Governmental Entity or Federal or state court,
nor shall there be any determination by any Government Entity, which, in
either case, would require either party to take any action or do anything
in connection with the foregoing which would compel Tango to dispose of all
or a material portion of the business or assets of Tango and the Tango
Subsidiaries, taken as a whole, or of Twister and the Twister Subsidiaries,
taken as a whole.
(g) Tango and Twister shall have received a letter from each of Ernst
& Young LLP and KPMG Peat Marwick LLP, dated as of the Effective Time, in
form and substance reasonably satisfactory to them, to the effect that the
Merger qualifies for "pooling of interests" treatment for financial
reporting purposes and that such accounting treatment is in accordance with
generally accepted accounting principles.
(h) Twister shall have received the opinion of Stroock & Stroock &
Lavan LLP dated as of the Effective Time, to the effect that (i) the Merger
will be treated for Federal income tax purposes as a reorganization within
the meaning of Section 368(a) of the Code, (ii) that each of Tango, Merger
Sub and Twister will be a party to the reorganization within the meaning of
Section 368(b) of the Code and (iii) that no gain or loss will be
recognized by a stockholder of Twister as a result of the Merger with
respect to the Twister Shares converted solely into shares of the Tango
Common Stock.
(i) Tango shall have received the opinion of Rogers & Hardin, dated as
of the Effective Time, to the effect that (i) the Merger will be treated
for Federal income tax purposes as a reorganization within the meaning of
section 368(a) of the Code, (ii) that each of Tango, Merger Sub and Twister
will be a party to the reorganization within the meaning of Section 368(b)
of the Code and (iii) no gain or loss will be recognized by Twister, Tango
or Merger Sub as a result of the Merger.
(j) Twister shall have obtained from each holder of a Twister Stock
Option a waiver of such holder's right, if any, to elect to receive a cash
payment upon the cancellation or surrender of all or a portion of the
Twister Stock Option held by such holder as a result or consequence of any
"change in control" of Twister, including, without limitation, a waiver of
any rights to receive a cash payment pursuant to clause (ii) of Section
6(I) of the Twister Option Plan.
6.2 Additional Conditions to the Obligations of Twister. The obligation of
Twister to effect the Merger and the other transactions contemplated in this
Agreement shall be subject to the fulfillment by Tango at or prior to the
Effective Time of the following additional conditions, any or all of which may
be waived, to the extent permitted by applicable Law:
(a) Each of Tango and Merger Sub shall have performed in all material
respects its obligations under this Agreement required to be performed by
it on or prior to the Effective Time pursuant to the terms hereof.
(b) Each of the representations and warranties of Tango and Merger Sub
in this Agreement which are qualified with respect to a Material Adverse
Effect on Tango or materiality shall be true and correct as of the
Effective Time, and all such representations or warranties that are not so
qualified shall be true and correct in all material respects as of the
Effective Time, in each case as if such representation or warranty was made
as of the Effective Time, except to the extent that any such representation
or warranty is made as of a specified date, in which case such
representation or warranty shall have been true and correct as of such
specified date and, with respect to Section 3.3, to the extent it is
permitted to change by the provisions of this Agreement.
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(c) From the date hereof through the Effective Time, there shall not
have been (except as expressly permitted by Section 5.3 hereof) (i) any
Material Adverse Effect on Tango; (ii) any material indebtedness incurred
by Tango or any Tango Subsidiary for money borrowed, except under credit
facilities disclosed in the Tango Current Reports, if any; (iii) any
material transaction or commitment, except in the ordinary course of
business or as contemplated by this Agreement, entered into by Tango or any
of the Tango Subsidiaries; (iv) any damage, destruction or loss, whether
covered by insurance or not, which, individually or in the aggregate, would
have a Material Adverse Effect on Tango; (v) any material change by Tango
in accounting principles or methods except insofar as may be required by a
change in generally accepted accounting principles; (vi) any declaration,
setting aside or payment of any dividend (whether in cash, securities or
property) with respect to the Tango Common Stock; or (vii) any material
agreement to acquire any assets or stock or other interests of any
third-party; (viii) any increase in the compensation payable or to become
payable by Tango or any Tango Subsidiary to any employees, officers,
directors, or consultants or in any bonus, insurance, welfare, pension or
other employee benefit plan, payment or arrangement made to, for or with
any such employee, officer, director or consultant (other than as provided
in employment agreements, consulting agreements and welfare and benefit
plans set forth on the Tango Disclosure Schedule, and except for increases
consistent with past practice); (ix) any material revaluation by Tango or
any Tango Subsidiary of any asset (including, without limitation, any
writing down of the value of inventory or writing off of notes or accounts
receivable); (x) any mortgage or pledge of any of the assets or properties
of Tango or any Tango Subsidiary or the subjection of any of the assets or
properties of Tango or any Tango Subsidiary to any material liens, charges,
encumbrances, imperfections of title, security interest, options or rights
or claims of others with respect thereto; or (xi) any assumption or
guarantee by Tango or a Tango Subsidiary of the indebtedness of any person
or entity.
(d) Each of Tango and Merger Sub shall have delivered a certificate of
its Chief Executive Officer or President and its Chief Financial Officer
certifying the fulfillment (or waiver by Twister) of the conditions set
forth in clauses (a), (b), (c) and (e) of this Section 6.2 and, as to Tango
and Merger Sub, the conditions set forth in Section 6.1.
(e) Tango and Merger Sub shall have obtained all Third Party Consents
(applicable to Tango, any Tango Subsidiary or Merger Sub) contemplated by
subsection (ii) of Section 5.10, except for (i) such Third Party Consents
which, if not obtained, would not, individually or in aggregate, reasonably
be anticipated to have a Material Adverse Effect on Tango and (ii) such
Third Party Consents which, in accordance with applicable Law, cannot be
obtained prior to the Effective Time.
(f) Twister shall have received from Rogers & Hardin, counsel to
Tango, an opinion or opinions dated as of the Effective Time covering such
matters as shall be reasonably agreed upon by Twister and Tango.
6.3 Conditions to the Obligations of Tango and Merger Sub to Effect the
Merger. The obligations of Tango and Merger Sub to effect the Merger shall be
subject to the fulfillment by Twister at or prior to the Effective Time of the
following additional conditions, any or all of which may be waived, to the
extent permitted by applicable law:
(a) Twister shall have performed in all material respects each of its
obligations under this Agreement required to be performed by it on or prior
to the Effective Time pursuant to the terms hereof.
(b) All representations or warranties of Twister in this Agreement
which are qualified with respect to a Material Adverse Effect on Twister or
materiality shall be true and correct as of the Effective Time, and all
such representations or warranties that are not so qualified shall be true
and correct in all material respects as of the Effective Time, in each case
as if such representation or warranty were made as of the Effective Time
except to the extent that any such representation or warranty is made as of
a specified date, in which case such representation or warranty shall have
been true and correct as of such specified date and with respect to Section
4.3, to the extent permitted to change by the provisions of this Agreement.
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(c) From the date hereof through the Effective Time, there shall not
have been (except as expressly permitted by Section 5.2 hereof) (i) any
Material Adverse Effect on Twister; (ii) any material indebtedness incurred
by Twister or any Twister Subsidiary for money borrowed, except under
credit facilities disclosed in the Twister Current Reports, if any; (iii)
any material transaction or commitment, except in the ordinary course of
business or as contemplated by this Agreement, entered into by Twister or
any of the Twister Subsidiaries; (iv) any damage, destruction or loss,
whether covered by insurance or not, which, individually or in the
aggregate, would have a Material Adverse Effect on Twister; (v) any
material change by Twister in accounting principles or methods except
insofar as may be required by a change in generally accepted accounting
principles; (vi) any declaration, setting aside or payment of any dividend
(whether in cash, securities or property) with respect to the Twister
Common Stock; or (vii) any material agreement to acquire any assets or
stock or other interests of any third-party; (viii) any increase in the
compensation payable or to become payable by Twister or any Twister
Subsidiary to any employees, officers, directors, or consultants or in any
bonus, insurance, welfare, pension or other employee benefit plan, payment
or arrangement made to, for or with any such employee, officer, director or
consultant (other than as provided in employment agreements, consulting
agreements and welfare and benefit plans set forth on the Twister
Disclosure Schedule, and except for increases consistent with past
practice); (ix) any material revaluation by Twister or any Twister
Subsidiary of any asset (including, without limitation, any writing down of
the value of inventory or writing off of notes or accounts receivable); (x)
any mortgage or pledge of any of the assets or properties of Twister or any
Twister Subsidiary or the subjection of any of the assets or properties of
Twister or any Twister Subsidiary to any material liens, charges,
encumbrances, imperfections of title, security interest, options or rights
or claims of others with respect thereto; or (xi) any assumption or
guarantee by Twister or a Twister Subsidiary of the indebtedness of any
person or entity.
(d) Twister shall have delivered a certificate of its Chief Executive
Officer or President and its Chief Financial Officer certifying the
fulfillment (or waiver by Tango) of the conditions set forth in clauses
(a), (b), (c) and (e) of this Section 6.3 and, as to Twister, of the
conditions set forth in Section 6.1.
(e) Twister shall have obtained all Third Party Consents (applicable
to Twister or any Twister Subsidiary) contemplated by subsection (ii) of
Section 5.10, except for (i) such Third Party Consents which, if not
obtained, would not individually or in aggregate, reasonably be anticipated
to have a Material Adverse Effect on Twister and (ii) such Third Party
Consents which, in accordance with applicable Law, cannot be obtained prior
to the Effective Time.
(f) Merger Sub shall have received letters of resignation addressed to
Twister from the members of Twister's board of directors not listed on
Schedule 1.6(a) hereto, which resignations shall be effective as of the
Effective Time.
(g) Tango shall have received from Stroock & Stroock & Lavan LLP and
Klenda, Mitchell, Austerman & Zuercher, L.L.C., as to matters of Kansas
law, counsel to Twister, an opinion or opinions dated as of the Effective
Time covering such matters as shall be reasonably agreed upon by Tango and
Twister.
(h) Tango shall have received a Twister Affiliate Agreement from each
of the Pooling Affiliates of Twister and a Tango Affiliate Agreement from
each of the Pooling Affiliates of Tango, as provided in Section 5.13.
ARTICLE VII
TERMINATION
7.1 Termination. (a) Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, before or after the approval of this Agreement by the stockholders of
Tango or Twister, by the mutual consent of Tango and Twister.
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(b) Termination by Either Twister or Tango. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Twister or Tango at any time prior to the Effective Time, whether
before or after the approval of this Agreement by the stockholders of Tango or
Twister, if (i) the Merger shall not have been consummated by March 31, 1998
(provided, however, that this date may be extended to a date not later than June
30, 1998 by written notice of either Tango or Twister if the Merger shall not
have been consummated as a result of Tango or Twister having failed by March 31,
1998 to receive all Third Party Consents with respect to the Merger or as a
result of an order, writ, judgment, injunction, consent decree, stipulation,
determination or award entered by or with any Governmental Entity), or (ii) the
approval of Tango's stockholders required by Section 6.1(b) shall not have been
obtained at the Tango Meeting or at any adjournment thereof, or (iii) the
approval of Twister's stockholders required by Section 6.1(b) shall not have
been obtained at the Twister Meeting or at any adjournment thereof, or (iv) a
court of competent jurisdiction or Governmental Entity shall have issued an
order, decree or ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement (an "Order") and such Order shall have become final and
non-appealable; provided, that the party seeking to terminate this Agreement
pursuant to this clause (iv) must have used all reasonable efforts to remove
such Order; provided further, in the case of a termination pursuant to clause
(i) above, that the terminating party shall not have breached in any material
respect its obligations under this Agreement in any manner that proximately
caused the occurrence of the failure referred to in said clause.
(c) Termination by Tango. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before or after the
adoption and approval by the stockholders of Tango referred to in Section
6.1(b), by action of the Board of Directors of Tango if (i) a Superior Tango
Proposal for a Third Party Transaction involving Tango has been made or received
and such Board determines, in the exercise of its good faith judgment (based on
the advice of independent legal counsel) that such termination is required for
such Board to comply with its fiduciary duties to the Tango stockholders; (ii)
there has been a breach (provided that such breach would have or would be
reasonably likely to have a Material Adverse Effect on Twister) of any
representation, warranty, covenant or agreement on the part of Twister set forth
in this Agreement, or if any representation or warranty of Twister shall have
become untrue (provided that such untruth would have or would be reasonably
likely to have a Material Adverse Effect on Twister), in either case such that
the conditions in Section 6.3(a) or Section 6.3(b) would not be satisfied (a
"Terminating Twister Breach"); provided that, if such Terminating Twister Breach
is curable by Twister through the exercise of its reasonable efforts and for so
long as Twister continues to exercise such reasonable efforts, Tango may not
terminate this Agreement under this Section 7.1(c)(ii); (iii) following the
receipt of a proposal of a Third Party Transaction by Twister (including a
Superior Twister Proposal), the Board of Directors of Twister shall have altered
its determination to recommend that the stockholders of Twister approve this
Agreement and the transactions contemplated hereby; or (iv) following the
receipt of a proposal for a Third Party Transaction by Twister (including a
Superior Twister Proposal), Twister shall have failed to proceed to hold the
Twister Meeting of its stockholders as contemplated by Section 5.1, provided
Tango gives Twister 24 hours' prior written notice of its election to terminate
under this clause (iv).
(d) Termination by Twister. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the adoption and approval by the stockholders of Twister referred to in Section
6.1(b) by action of the Board of Directors of Twister if (i) a Superior Twister
Proposal for a Third Party Transaction involving Twister has been made or
received and such Board determines, in the exercise of its good faith judgment
(based on the advice of independent legal counsel) that such termination is
required for such Board to comply with its fiduciary duties to the Twister
stockholders; (ii) there has been a breach (provided that such breach would have
or would be reasonably likely to have a Material Adverse Effect on Tango) of any
representation, warranty, covenant or agreement on the part of Tango set forth
in this Agreement, or if any representation or warranty of Tango shall have
become untrue (provided that such untruth would have or would be reasonably
likely to have a Material Adverse Effect on Tango), in either case such that the
conditions in Section 6.2(a) or Section 6.2(b) would not be satisfied (a
"Terminating Tango Breach"); provided that, if such Terminating Tango Breach is
curable by Tango through the exercise of its reasonable efforts and for so long
as Tango continues to exercise such reasonable efforts, Twister may not
terminate this Agreement under this Section 7.1(d)(ii); (iii) following the
receipt of a proposal of a Third
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Party Transaction by Tango (including a Superior Tango Proposal), the Board of
Directors of Tango shall have altered its determination to recommend that the
stockholders of Tango approve this Agreement and the transactions contemplated
hereby; or (iv) following the receipt of a proposal for a Third Party
Transaction by Tango (including a Superior Tango Proposal), Tango shall have
failed to proceed to hold the Tango Meeting of its stockholders as contemplated
by Section 5.1, provided Twister gives Tango 24 hours' prior written notice of
its election to terminate under this clause (iv).
7.2 Effects of Termination. (a) If (A) Tango terminates this Agreement
pursuant to clause (i) of Section 7.1(c), (B) Twister terminates this Agreement
pursuant to clause (iii) or (iv) of Section 7.1(d) following receipt by Tango of
a proposal for a Third Party Transaction (including a Superior Tango Proposal),
or (C) either Twister or Tango terminates this Agreement pursuant to clause (i)
or (ii) of Section 7.1(b) and prior to any Tango Meeting a proposal for a Third
Party Transaction (including a Superior Tango Proposal) was received by Tango
and such Third Party Transaction (or any revised transaction based upon such
proposal for a Third Party Transaction) is consummated (including, in the case
of a tender offer, acceptance of shares upon the expiration of the tender offer)
within one year after such termination, then, within two business days of such
termination in the case of clauses (A) and (B) or within two business days of
such consummation in the case of clause (C), Tango (or the successor thereto)
shall pay Twister by wire transfer in immediately available funds a fee of $8
million; provided, however, that for purposes of this Section 7.2(a), Third
Party Transaction shall refer only to those transactions described in Section
5.5(c)(i), (ii) and (iii) of this Agreement.
(b) If (A) Twister terminates this Agreement pursuant to clause (i) of
Section 7.1(d), (B) Tango terminates this Agreement pursuant to clause (iii) or
(iv) of Section 7.1(c) following receipt by Twister of a proposal for a Third
Party Transaction (including a Superior Twister Proposal), or (C) either Tango
or Twister terminates this Agreement pursuant to clause (i) or (iii) of Section
7.1(b) provided that prior to any Twister Meeting a proposal for a Third Party
Transaction (including a Superior Twister Proposal) was received by Twister and
such Third Party Transaction (or any revised transaction based upon such
proposal for a Third Party Transaction) is consummated (including, in the case
of a tender offer, acceptance of shares upon the expiration of the tender offer)
within one year after such termination, then, within two business days of such
termination in the case of clauses (A) and (B) or within two business days of
such consummation in the case of clause (C), Twister (or the successor thereto)
shall pay Tango by wire transfer in immediately available funds a fee of $8
million; provided, however, that for purposes of this Section 7.2(b), Third
Party Transaction shall refer only to those transactions described in Section
5.5(c)(i), (ii) and (iii) of this Agreement.
(c) Except as provided in this Section 7.2 or Section 8.3 or Section 8.4,
in the event of the termination of this Agreement pursuant to Section 7.1, this
Agreement shall be void, there shall be no liability on the part of the parties
or any of their respective officers or directors to the other and all rights and
obligations of any party hereto shall cease; provided, however, that nothing
herein shall relieve any party from liability for the wilful breach of any of
its representations, warranties, covenants or agreements set forth in this
Agreement, or from any obligation under the Confidentiality Agreement; provided,
however, if either party has received the $8 million fee contemplated by Section
7.2(a) or (b), the party receiving such fee shall not assert or pursue in any
manner, directly or indirectly, any claim or cause of action (other than
pursuant to the Cross Option Agreement) against the party paying such fee or any
of its officers or directors based in whole or in part upon its or their
receipt, consideration, recommendation or approval of a proposal for a Third
Party Transaction or the exercise of the right of the party paying such fee to
terminate this Agreement under clause (i) of Section 7.1(c) or clause (i) of
Section 7.1(d), as the case may be.
ARTICLE VIII
MISCELLANEOUS
8.1 Amendment. Subject to the applicable provisions of state law, this
Agreement may be amended by the parties hereto solely by action taken by their
respective Boards of Directors at any time prior to the Effective Time;
provided, however, that after the approval of the Merger by a party's
stockholders, no
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amendment may be made which would reduce the amount or change the type of
consideration into which each Twister Share shall be converted pursuant hereto.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
8.2 Waiver. At any time prior to the Effective Time, the parties hereto,
by action taken by their respective Boards of Directors, may (i) extend the time
for the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties of the
other party contained herein or in any documents delivered pursuant hereto, and
(iii) waive compliance by the other party with any of the agreements or
conditions herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party. No waiver by either party of any default with
respect to any provision, condition or requirement hereof shall be deemed to be
a waiver of any other provision, condition or requirement hereof; nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right accruing to it thereunder.
8.3 Survival. All representations, warranties and agreements contained in
this Agreement or in any instrument delivered pursuant to this Agreement shall
terminate and be extinguished at the Effective Time or the earlier date of
termination of this Agreement pursuant to Section 7.1, as the case may be,
except that the agreements set forth in Article I and Article II and in Sections
5.6, 5.7, 5.8, 5.17, 8.3 and 8.4 will survive the Effective Time indefinitely
and those set forth in Sections 5.9, 7.2 and Article VIII will survive the
termination of this Agreement indefinitely.
8.4 Expenses and Fees. Subject to Section 7.2, whether or not the Merger
is consummated, all costs and expenses incurred by the parties hereto in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expenses except as expressly provided herein
and except that (i) the filing fee in connection with the HSR Act filing, (ii)
the filing fee in connection with the filing of the Registration Statement or
Proxy Statement with the Commission and (iii) the expenses incurred in
connection with printing and mailing the Registration Statement and the Proxy
Statement, shall be shared equally by Tango and Twister; provided, however that
if the Merger is consummated, Tango may, at its option, pay Twister's expenses.
8.5 Notices. All notices and other communications given or made pursuant
hereto shall be in writing and shall be given (and shall be deemed to have been
duly given upon receipt) by delivery in person, by telecopy or facsimile, by
registered or certified mail (postage prepaid, return receipt requested), or by
a nationally recognized courier service to the parties at the following
addresses (or at such other address for a party as shall be specified by like
changes of address) or, if sent by telecopy or facsimile, to the parties at the
telecopier numbers specified below:
<TABLE>
<S> <C>
If to Merger Sub or Tango: Alternative Living Services, Inc.
450 N. Sunnyslope Road, Suite 300
Brookfield, Wisconsin 53005
Attention: William F. Lasky
Telecopier: (414) 789-6677
With copies to: Rogers & Hardin LLP
2700 International Tower,Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Telecopier: (404) 525-2224
If to Twister: Sterling House Corporation
453 S. Webb Road, Suite 500
Wichita, Kansas 67207
Attention:Timothy J. Buchanan
Telecopier: (316) 684-8948
</TABLE>
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With copies to: Stroock & Stroock & Lavan LLP
2029 Century Park East, Suite 1800
Los Angeles, California 90067
Attention: Richard S. Forman, Esq.
Telecopier: (310) 556-5959
and Klenda, Mitchell, Austerman & Zuercher, L.L.C.
1600 Epic Center
301 N. Main Street
Wichita, Kansas 67202
Attention: Jeffrey D. Peier, Esq.
Telecopier: (316) 267-0333
8.6 Headings. The headings contained in this Agreement are inserted for
convenience only, do not constitute a part of this Agreement and shall not
affect the meaning or interpretation of this Agreement.
8.7 Public Announcements. Twister and Tango shall consult with each other
before issuing any press release or otherwise making any public statements with
respect to this Agreement or the transactions contemplated hereby (other than
statements in response to inquiries received with respect to this Agreement or
the transactions contemplated hereby) and shall not issue any such press release
or make any such public statement (other than statements in response to
inquiries received with respect to this Agreement or the transactions
contemplated hereby) without the prior consent of the other party, which shall
not be unreasonably withheld; provided, however, that a party may, without the
prior consent of the other party, issue such press release or make such public
statement as may be required by Law or any listing agreement with a national
securities exchange to which Twister or Tango is a party if it has used
reasonable efforts to consult with the other party and to obtain such party's
consent but has been unable to do so in a timely manner.
8.8 Certain Definitions. For purposes of this Agreement, the term:
(a) "affiliate" means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person;
(b) "business day" means any day other than a day on which banks in
the State of New York are authorized or obligated to be closed;
(c) "control" (including the terms "controlled", "controlled by" and
"under common control with") means the possession, directly or indirectly
or as trustee or executor, of the power to direct or cause the direction of
the management or policies of a person, whether through the ownership of
stock or as trustee or executor, by contract or credit arrangement or
otherwise;
(d) "knowledge" or "known" shall mean, with respect to any matter in
question, if an executive officer of Tango or Twister, as the case may be,
has actual knowledge of such matter or, after reasonable diligence, should
know of such matter;
(e) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d) of the Exchange Act); and
(f) "subsidiary" or "subsidiaries" of Tango, Twister, the Surviving
Corporation or any other person, means any corporation, partnership, joint
venture or other legal entity of which Tango, Twister, the Surviving
Corporation or such other person, as the case may be (either alone or
through or together with any other subsidiary), owns, directly or
indirectly, 50% or more of the stock or other equity interests the holders
of which are generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal
entity.
8.9 Entire Agreement. This Agreement (together with the Exhibits), the
Cross Option Agreement and the Confidentiality Agreement constitute the entire
agreement among the parties and supersede all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof.
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8.10 Assignment; Parties in Interest. This Agreement and all of the
provisions hereof shall be binding upon and inure solely to the benefit of the
parties hereto and their respective successors and permitted assigns. Neither
this Agreement nor any of the rights, interests or obligations shall be assigned
by any of the parties hereto by operation of law or otherwise. Except as set
forth in Section 5.9 hereof, nothing in this Agreement, express or implied, is
intended to confer upon any other person any rights, benefits or remedies of any
nature whatsoever under or by reason of this Agreement.
8.11 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
8.12 Invalidity; Severability. In the event that any provision of this
Agreement shall be deemed contrary to law or public policy or invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions shall remain in full force and effect to the extent that such
provisions can still reasonably be given effect in accordance with the
intentions of the parties, and the invalid and unenforceable provisions shall be
deemed, without further action on the part of the parties, modified, amended and
limited solely to the extent necessary to render the same valid and enforceable.
Upon such determination that any term or other provision is invalid, illegal, or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that transactions
contemplated hereby are fulfilled to the extent possible.
8.13 Governing Law. The validity and interpretation of this Agreement
shall be governed by, and construed in accordance with, the laws of the State of
Delaware, without reference to the conflict of laws principles thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Tango, Merger Sub and Twister have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
<TABLE>
<S> <C>
"TWISTER" "TANGO"
STERLING HOUSE CORPORATION ALTERNATIVE LIVING SERVICES, INC.
By: /s/ TIMOTHY J. BUCHANAN By: /s/ WILLIAM F. LASKY
---------------------------------------- ----------------------------------------
Name: Timothy J. Buchanan Name: William F. Lasky
Title: President Title: President and CEO
TANGO MERGER CORPORATION
By: /s/ WILLIAM F. LASKY
----------------------------------------
Name: William F. Lasky
Title: President
</TABLE>
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<PAGE> 181
APPENDIX B
MCDONALD LETTERHEAD
MEMBER NEW YORK STOCK EXCHANGE
McDONALD INVESTMENT CENTER
800 SUPERIOR AVENUE
CLEVELAND, OHIO 44114-2603
216-443-2300
September 22, 1997
Board of Directors
Alternative Living Services, Inc.
450 North Sunnyslope Road, Suite 30
Brookfield, WI 53005
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the outstanding shares of Common Stock, par value
$.01 per share ("ALS Common Stock"), of Alternative Living Services, Inc. ("ALS"
or the "Company") of the exchange ratio of 1.1 shares of ALS Common Stock for
each share of Common Stock, no par value ("Sterling Common Stock") of Sterling
House Corporation ("Sterling"), to be received by holders of Sterling Common
Stock pursuant to the Agreement and Plan of Merger (the "Merger Agreement"),
dated as of July 30, 1997, as amended, among Sterling, ALS and Tango Merger
Corporation, a wholly owned subsidiary of ALS.
McDonald & Company Securities, Inc. ("McDonald"), as part of its investment
banking business, is customarily engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
In connection with rendering this opinion, we have reviewed and analyzed,
among other things, the following: (i) the Merger Agreement, including the
exhibits and schedules thereto; (ii) Annual Reports to shareholders and Annual
Reports on Form 10-K of the Company for the year ended December 31, 1996 and
Sterling for the two years ended December 31, 1996 and Quarterly Reports on Form
10-Q of the Company and Sterling for the periods subsequent to December 31,
1996; (iii) certain internal information, primarily financial in nature,
including projections, concerning the business and operations of the Company and
Sterling furnished to us for purposes of our analysis; (iv) certain publicly
available information concerning the trading of, and the trading market for, the
ALS Common Stock and the Sterling Common Stock; (v) certain publicly available
information with respect to certain other companies that we believe to be
comparable to the Company or to Sterling and the trading markets for certain of
such other companies' securities; and (vi) certain publicly available
information concerning the nature and terms of certain other transactions that
we consider relevant to our inquiry. We have also met with certain officers and
employees of the Company and Sterling to discuss the past and current business
operations, financial condition and future prospects of their respective
companies, as well as other matters we believe relevant to our inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available and have assumed and relied
upon the representations and warranties of the Company and Sterling contained in
the Merger Agreement and were not engaged to, nor have we independently
attempted to, verify any of such information. We have also relied upon the
managements of the Company and Sterling as to the reasonableness and
achievability of the financial and operating projections (and the assumptions
and bases therefor) provided to us and, with your consent, we have assumed that
such projections, including projected cost savings and operating synergies,
reflect the best currently available estimates and judgments of the respective
manage-
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ments of the Company and Sterling and that such projections and forecasts will
be realized in the amounts and in the time periods currently estimated by the
managements of the Company and Sterling. We express no view as to such
projections or the assumptions on which they are based. In addition, we were not
engaged to, nor have we conducted, any physical inspection or appraisal of any
of the assets, properties or facilities of either the Company or Sterling nor
have we been furnished with any such evaluation or appraisal. Furthermore, we
assumed the consummation of the transaction contemplated pursuant to the Merger
Agreement will qualify (i) for pooling of interests accounting treatment and
(ii) as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended.
In the ordinary course of our business, we may actively trade securities of
both the Company and Sterling for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion, as investment bankers, that as of the date
hereof, the Exchange Ratio pursuant to the Merger Agreement is fair, from a
financial point of view, to the holders of ALS Common Stock.
We hereby consent to the inclusion of this opinion as an exhibit to any
proxy or registration statement distributed in connection with the merger as
contemplated by the Merger Agreement.
Very truly yours,
MCDONALD & COMPANY SECURITIES, INC.
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<PAGE> 183
APPENDIX C
[SCHRODERS LOGO]
September 22, 1997
The Board of Directors
Sterling House Corporation
453 South Webb Road
Suite 500
Wichita, Kansas 67207
Dear Members of the Board:
On July 30, 1997, Schroder & Co. Inc. ("Schroders") rendered an opinion to
the Board of Directors of Sterling House Corporation (the "Company") attached
hereto as Annex A (the "Opinion Letter") that the Exchange Ratio (as defined in
the Opinion Letter) was fair to the holders of common stock of the Company from
a financial point of view.
We have revisited the matters addressed in the Opinion Letter to satisfy
ourselves that relevant and material changes with respect to these matters
during the period from July 30, 1997 to September 22, 1997 were identified and
properly taken into account, and performed such other analyses and assumptions
and limitations set forth in the Opinion Letter, we hereby reconfirm the opinion
expressed therein that the Exchange Ratio is fair to the holders of common stock
of the Company from a financial point of view.
Very truly yours,
SCHRODER & CO. INC.
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<PAGE> 184
ANNEX A
[SCHRODERS LOGO]
July 30, 1997
The Board of Directors
Sterling House Corporation
453 South Webb Road
Suite 500
Wichita, KS 67207
Dear Members of the Board:
You have told us that Sterling House Corporation (the "Company") and
Alternative Living Services, Inc. ("ALS") propose to enter into a merger
agreement (the "Agreement") providing for the merger (the "Merger") of ALS or
one its subsidiaries with the Company. The Agreement contemplates that, upon
consummation of the Merger, each outstanding share of common stock of the
Company ("Company Common Stock") will be converted into the right to receive
1.10 shares (the "Exchange Ratio") of the Common Stock of ALS ("ALS Common
Stock").
In accordance with the terms of our engagement letter dated July 30, 1997
(the "Engagement Letter"), you have requested that Schroder & Co. Inc.
("Schroders") render an opinion (the "Opinion") to the Company's Board of
Directors, as investment bankers, as to the fairness, from a financial point of
view, of the Exchange Ratio to the holders of the Company Common Stock (the
"Shareholders").
In connection with the Opinion set forth herein, we have among other
things:
(i) reviewed the July 30, 1997 draft of the Agreement in the form
provided to us and have assumed that the final form of such agreement will
not vary in any regard that is material to our analysis;
(ii) reviewed certain internal non-public financial and operating data
provided to us by the management of each of the Company and ALS relating to
its business, including certain forecast and projection information as to
future results of such business prepared by the Company or ALS, as the case
may be;
(iii) discussed with members of the Company's and ALS's senior
management the Company's and ALS's respective operations, historical
financial results and future prospects;
(iv) compared the financial and operating performance of the Company
with publicly available information concerning certain other companies
generally comparable to the Company and reviewed the relevant historical
stock prices and trading volumes of the Company Common Stock and ALS Common
Stock and certain publicly traded securities of such other companies;
(v) reviewed the terms of certain recent business combination and
acquisition transactions generally comparable to the Merger; and
(vi) made such other analyses, investigations and examinations,
including a discounted cash flow analysis, and took into account such other
matters as we have deemed necessary or appropriate.
We have assumed, at your direction, and relied upon without assuming any
responsibility for the verification, the accuracy and completeness of all the
financial and other information provided to, discussed with or reviewed by or
for us, or publicly available, for purposes of the Opinion, and have further
relied, at your direction, upon the assurances of management of the Company that
they are not aware of any facts that would make such information inaccurate or
misleading. We have, at your direction, neither made nor obtained any
independent valuations or appraisals of the assets or liabilities (contingent or
otherwise) of the Company or ALS, nor have we assumed any responsibility to
conduct a physical inspection of the property and facilities of either the
Company or ALS. We have, at your direction, assumed that the financial forecast
and projection
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information provided to us by the Company and ALS has been reasonably prepared
on bases reflecting the best currently available estimates and judgment of the
management of the Company and ALS, respectively, as to the future financial
performance of the Company and ALS, and that in all material respects they will
be realized in the amounts and time indicated thereby. We express no view as to
such forecast or projection information or the assumptions on which they were
based. In addition, we have assumed, at your direction, that the payment of the
consideration to Shareholders in the Merger will not be a taxable transaction
with respect to the Shareholders, the Company or ALS and that the Merger will be
accounted for as a pooling of interests.
The Opinion is necessarily based on financial, economic, market and other
conditions, as they exist, and the information made available to us, at the date
hereof. The Opinion is limited to the fairness, from a financial point of view,
of the Exchange Ratio to the Shareholders and we express no other opinion,
including as to the merits of the underlying business decision of the Company to
enter into the Agreement, the relative merits of the Merger and alternative
potential strategies or transactions, any matters of a legal, regulatory tax or
accounting nature, or the price or trading range at which the ALS Common Stock
will trade following the date of this letter. The Opinion does not constitute a
recommendation to the Shareholders or any other person concerning whether or not
to vote in favor of the Merger or to take or to refrain from taking any other
action in connection with the Merger.
Schroders, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuation for estate,
corporate and other purposes. Schroders has acted as financial advisor to the
Company in connection with the Merger and will receive fees for its services. In
the ordinary course of business, we or our affiliates may trade in the
securities of the Company or ALS for our own accounts and for the accounts of
our customers and, accordingly, may at any time hold a long or short position in
such securities.
Based upon and subject to the foregoing, we are of the opinion, as
investment bankers, that, as of the date hereof, the Exchange Ratio is fair,
from a financial point of view, to the holders of Company Common Stock.
The Opinion has been furnished to the Board of Directors of the Company
solely in connection with its consideration of the Merger. Except as
specifically permitted by the Engagement Letter, the Company will not furnish
the Opinion or any other material prepared by Schroders to any other person or
persons or use or refer to the Opinion or this letter for any other purpose
without Schroders' prior written approval. The Opinion is not being rendered on
behalf of, and is not intended to confer rights or remedies upon, the Company,
any Shareholder or any other person, other than the Board of Directors of the
Company.
Very truly yours,
SCHRODER & CO. INC.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the General Corporation Law of the State of Delaware
permits a Delaware corporation to limit the personal liability of its directors
in accordance with the provisions set forth therein. The Restated Certificate of
Incorporation of the Registrant provides that the personal liability of its
directors shall be limited to the fullest extent permitted by applicable law.
Section 145 of the General Corporation Law of the State of Delaware
contains provisions permitting Delaware corporations to indemnify directors,
officers, employees or agents against expenses, including attorneys' fees,
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person was or is a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, provided that (i) such person acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the corporation's best interest, and (ii) in the case of a criminal proceeding
such person had no reasonable cause to believe his or her conduct was unlawful.
In the case of actions or suits by or in the right of the corporation, no
indemnification shall be made in a case in which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
have determined 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. Indemnification as described
above shall only be granted in a specific case upon a determination that
indemnification is proper in the circumstances because the indemnified person
has met the applicable standard of conduct. Such determination shall be made (a)
by a majority vote of the directors who are not parties to such proceeding, even
though less than a quorum, (b) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (c)
by the stockholders of the corporation. Notwithstanding the foregoing, to the
extent that a director, officer, employee or agent of the corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) or (b) of Section 145, or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith. The Restated Certificate of Incorporation and the Restated
Bylaws of the Registrant provide for indemnification of its directors and
officers to the fullest extent permitted by applicable law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following exhibits are filed pursuant to Item 601 of Regulation
S-K.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
2.1 -- Agreement and Plan of Merger, dated as of July 30, 1997
among Alternative Living Services, Inc., Tango Merger
Corporation and Sterling House Corporation, as amended as of
September 2, 1997, attached to this Registration Statement
as Appendix A to the Joint Proxy Statement/ Prospectus, is
hereby incorporated herein by reference
5.1 -- Opinion and Consent of Rogers & Hardin LLP, as to the
legality of the shares of the Registrant's Common Stock
being registered.*
8.1 -- Form of Opinion of Rogers & Hardin LLP, as to certain
federal income tax consequences of the Merger.
8.2 -- Form of Opinion of Stroock & Stroock & Lavan LLP, as to
certain federal income tax consequences of the Merger.
</TABLE>
II-1
<PAGE> 187
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
10.1 -- Employment Agreement between Timothy J. Buchanan and the
Registrant, filed as Exhibit 99.4 to Registrant's Current
Report on Form 8-K filed with the Commission on August 13,
1997, and hereby incorporated herein by reference.
10.2 -- Employment Agreement between Steven L. Vick and the
Registrant, filed as Exhibit 99.5 to Registrant's Current
Report on Form 8-K filed with the Commission on August 13,
1997, and hereby incorporated herein by reference.
10.3 -- Cross Option Agreement, dated July 30, 1997, between the
Registrant and Sterling House Corporation, filed as Exhibit
99.6 to Registrant's Current Report on Form 8-K filed with
the Commission on August 13, 1997, and hereby incorporated
herein by reference.
10.4 -- Form of Employment Agreement between Mark W. Ohlendorf and
the Registrant.*
10.5 -- Form of Stockholder Voting Agreement with Sterling
affiliates, filed as Exhibit 99.2 to Registrant's Current
Report on Form 8-K filed with the Commission on August 13,
1997, and hereby incorporated herein by reference.
10.6 -- Form of Stockholder Voting Agreement with Registrant's
affiliates, filed as Exhibit 99.3 to Registrant's Current
Report on Form 8-K filed with the Commission on August 13,
1997, and hereby incorporated herein by reference.
10.7 -- Form of Alternative Living Services Affiliate Agreement.*
10.8 -- Form of Sterling Affiliate Agreement.*
10.9 -- Amended and Restated Confidentiality Agreement dated as of
July 30, 1997, between the Registrant and Sterling.*
23.1 -- Consent of Rogers & Hardin LLP (also included in Exhibit
5.1).
23.2 -- Consent of Stroock & Stroock & Lavan LLP.
23.3 -- Consent of KPMG Peat Marwick LLP.
23.4 -- Consent of Ernst & Young LLP.
23.5 -- Consent of Schroder & Co. Inc.
23.6 -- Consent of McDonald & Company Securities, Inc. (included in
Appendix B to the Joint Proxy Statement/Prospectus which is
a part of this Registration Statement).
24.1 -- Powers of Attorney.*
99.1 -- Registrant's Proxy.*
99.2 -- Sterling House Corporation Proxy.*
</TABLE>
- ---------------
* Previously filed
(b) Financial Statement Schedules.
Schedules 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 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(b) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment
II-2
<PAGE> 188
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.
(c) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
(d) 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 foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against the public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted 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.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 189
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to its Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Brookfield, State of Wisconsin, on September 22, 1997.
ALTERNATIVE LIVING SERVICES, INC.
By: /s/ WILLIAM F. LASKY
------------------------------------
William F. Lasky
President and Chief Executive
Officer
In accordance with requirements of the Securities Act of 1933, this
Amendment No. 1 has been signed by the following persons in their capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM F. LASKY President, Chief Executive September 22, 1997
- --------------------------------------------------- Officer and Director
William F. Lasky (Principal Executive
Officer)
* Senior Vice President, September 22, 1997
- --------------------------------------------------- Treasurer and Chief
Thomas E. Komula Financial Officer and
Assistant Secretary
(Principal Financial
Officer)
* Vice President and Controller September 22, 1997
- --------------------------------------------------- (Principal Accounting
John D. Peterson Officer)
* Chairman of the Board and September 22, 1997
- --------------------------------------------------- Director
William G. Petty, Jr.
* Vice Chairman and Director September 22, 1997
- ---------------------------------------------------
Richard W. Boehlke
* Director September 22, 1997
- ---------------------------------------------------
Gene E. Burleson
* Director September 22, 1997
- ---------------------------------------------------
Robert Haveman
* Director September 22, 1997
- ---------------------------------------------------
Ronald G. Kenny
* Director September 22, 1997
- ---------------------------------------------------
Jerry L. Tubergen
*By: /s/ WILLIAM F. LASKY
----------------------------------------------
William F. Lasky
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 1
EXHIBIT 8.1
[FORM OF OPINION OF ROGERS & HARDIN LLP]
October ___, 1997
Alternative Living Services, Inc.
450 N. Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the merger (the "Merger") of Tango Merger Corporation ("Merger
Sub"), a wholly-owned subsidiary of Alternative Living Services, Inc. ("ALS"),
with and into Sterling House Corporation ("Sterling") pursuant to the Agreement
and Plan of Merger dated as of July 30, 1997, as amended as of September 2,
1997, by and among ALS, Merger Sub and Sterling (as amended, the "Agreement").
This opinion is being furnished pursuant to Section 6.1(i) of the Agreement.
Unless otherwise defined herein, capitalized terms shall have the meanings
ascribed to them in the Agreement.
The opinions expressed herein are based solely upon current law,
including the Internal Revenue Code of 1986, as amended (the "Code"), applicable
Treasury Regulations promulgated or proposed thereunder, current positions of
the Internal Revenue Service contained in published Revenue Rulings and Revenue
Procedures, other current administrative positions of the Internal Revenue
Service, and existing judicial decisions, all of which are subject to change or
modification at any time.
In rendering the opinions set forth herein, we have examined copies of
(i) the Agreement; (ii) the Registration Statement on Form S-4 (Registration No.
333-34851) of ALS filed with the Securities and Exchange Commission (the
"Commission") on September 3, 1997, as amended by Amendment No. 1 filed with the
Commission on September 22, 1997 (collectively, the "Registration Statement"),
which was declared effective by the Commission on September __, 1997; and (iii)
the Joint Proxy Statement/Prospectus dated September __, 1997 of ALS and
Sterling included in the Registration Statement. In addition to these documents,
we have relied upon the attached certification letters containing
representations of members of management of ALS and Sterling as to certain
factual matters.
Also, in rendering the opinions set forth herein, we have assumed (i) the
genuineness of all signatures on documents we have examined; (ii) the
authenticity of all documents submitted to us as originals; (iii) the conformity
to the original documents of all documents submitted to
<PAGE> 2
Alternative Living Services, Inc.
October ___, 1997
Page 2
us as copies; (iv) the authority and capacity of the individual or individuals
who executed any such documents on behalf of any person, (v) the accuracy and
completeness of all documents made available to us, and (vi) the accuracy as to
facts of all representations, warranties and written statements. We have also
assumed, without investigation, that all documents, warranties and covenants
relating to the Merger on which we have relied in rendering the opinions set
forth herein and that were given or dated earlier than the date of this letter
continue to remain accurate, insofar as relevant to the opinions set forth
herein, from such earlier date through and including the date of this letter.
Based on and subject to the foregoing, it is our opinion that:
1. The Merger will be treated for Federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code;
2. ALS, Merger Sub and Sterling will each be a party to the
reorganization within the meaning of Section 368(b) of the Code; and
3. No gain or loss will be recognized by ALS, Merger Sub or Sterling as a
result of the Merger.
This opinion is solely for your information and is not to be quoted in
whole or in part or summarized or otherwise referred to, nor is it to be filed
with or supplied to or relied upon by any governmental agency or other person
without our written consent (which consent we hereby grant with respect to the
filing of the Registration Statement). This opinion is as of the date hereof. We
disclaim any responsibility to update or supplement this opinion to reflect any
events or state any facts which may hereafter come to our attention or any
changes in statutes or regulations or any court decisions which may hereafter
occur.
Very truly yours,
<PAGE> 1
EXHIBIT 8.2
[FORM OF OPINION OF STROOCK & STROOCK & LAVAN LLP]
October ___, 1997
Sterling House Corporation
453 S. Webb Road
Wichita, Kansas 67207
Alternative Living Services, Inc.
450 N. Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Ladies and Gentlemen:
We have acted as special counsel to Sterling House Corporation, a Kansas
corporation ("Sterling"), in connection with an Agreement and Plan of Merger,
dated as of July 30, 1997, among Sterling, Alternative Living Services, Inc., a
Delaware corporation ("ALS"), and Tango Merger Corporation, a Kansas
corporation and a wholly-owned subsidiary of ALS ("Tango Merger Sub"), as
amended as of September 2, 1997 (the "Agreement"). Terms defined in the
Agreement and not otherwise defined herein shall have the same meaning when
used herein.
In rendering the opinions set forth herein, we have examined copies of (i) the
Agreement, (ii) the Registration Statement on Form S-4 (Registration No.
333-34851) of ALS filed with the Securities and Exchange Commission (the
"Commission") on September 3, 1997, as amended by Amendment No. 1 filed with
the Commission on September ___, 1997 (collectively, the "Registration
Statement"), which was declared effective by the Commission on September ___,
1997 and (iii) the Joint Proxy Statement/Prospectus dated September ___, 1997
of ALS and Sterling included in the Registration Statement (the "Proxy
Statement/Prospectus"). In addition to these documents, we have relied upon
the written representations of ALS and Sterling as to certain factual matters.
In rendering the opinions set forth herein, we have assumed
<PAGE> 2
Sterling House Corporation
Alternative Living Services, Inc.
October __, 1997
Page 2
(i) the genuineness of all signatures on documents we have examined, (ii) the
authenticity of all documents submitted to us as originals, (iii) the conformity
to the original documents of all documents submitted to us as copies, (iv) the
authority and capacity of the individual or individuals who executed any such
documents on behalf of any person, (v) the accuracy and completeness of all
documents made available to us and (vi) the accuracy as to facts of all
representations, warranties and written statements. We have also assumed,
without investigation, that all documents, warranties and covenants relating to
the Merger on which we have relied in rendering the opinions set forth herein
and that were given or dated earlier than the date of this letter continue to
remain accurate, insofar as relevant to the opinions set forth herein, from such
earlier date through and including the date of this letter.
With regard to the Merger, we are of the opinion that:
1) The Merger will constitute a "reorganization" within the meaning of
Section 368 (a) of the Internal Revenue Code of 1986, as amended (the
"Code").
2) Each of ALS, Tango Merger Sub and Sterling will be a party to the
reorganization within the meaning of Section 368(b) of the Code.
3) No gain or loss will be reorganized by a stockholder of Sterling as a
result of the Merger with respect to the Twister Shares converted solely
into shares of Tango Common Stock, except that gain or loss will be
recognized by a stockholder of Sterling with respect to the receipt of
cash in lieu of a fractional share of Tango Common Stock.
We note that our opinions expressed herein are based on our examination of such
law, our review of the documents described above, the statements and
representations referred to above, the provisions of the Internal Revenue Code
of 1986, as amended, the regulations, published rulings and announcements
thereunder, and the judicial interpretations thereof currently in effect.
Furthermore, this opinion will not be binding on the Internal Revenue Service
(the "Service"), and there can be no assurance that the Service will not
challenge the conclusions stated herein or that, if the issue were decided in
court, such a challenge
<PAGE> 3
Sterling House Corporation
Alternative Living Services, Inc.
October __, 1997
Page 3
would not ultimately succeed. Any change in applicable law or any of the facts
and circumstances described in the Registration Statement, or inaccuracy of any
statements or representations on which we have relied, may affect the continuing
validity of our opinions.
Very truly yours,
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ROGERS & HARDIN LLP
We hereby consent to the reference to our firm name under the caption
"THE MERGER--Certain Federal Tax Considerations" and to the inclusion of our
form of tax opinion as an exhibit to the Registration Statement of Alternative
Living Services, Inc. on Form S-4.
ROGERS & HARDIN LLP
September 22, 1997
Atlanta, Georgia
<PAGE> 1
EXHIBIT 23.2
CONSENT OF STROOCK & STROOCK & LAVAN LLP
We hereby consent to the reference to our firm name under the caption
"THE MERGER--Certain Federal Tax Considerations" and to the inclusion of our
form of tax opinion as an exhibit to the Registration Statement of Alternative
Living Services, Inc. on Form S-4.
STROOCK & STROOCK & LAVAN LLP
September 22, 1997
Los Angeles, California
<PAGE> 1
EXHIBIT 23.3
ACCOUNTANTS' CONSENT
The Board of Directors
Alternative Living Services, Inc.:
We consent to incorporation by reference in the Joint Proxy Statement and
Prospectus of Alternative Living Services, Inc. that is a part of the
registration statement dated September 2, 1997, as amended by Amendment No. 1
thereto, on Form S-4 (No. 333-34851) of our report dated February 21, 1997,
relating to the consolidated balance sheets of Alternative Living Services, Inc.
and subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996 and all
related schedules, which report appears in the December 31, 1996, annual report
on Form 10-K (as amended May 12, 1997) of Alternative Living Services, Inc., and
to the reference to our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Chicago, Illinois
September 19, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 10, 1997, with respect to the financial
statements of Sterling House Corporation included in the Amendment No. 1 to the
Joint Proxy Statement of Alternative Living Services, Inc. that is made a part
of the Registration Statement and Prospectus (Form S-4 No. 333-34851) of
Alternative Living Services, Inc. for the registration of shares of its common
stock.
/s/ Ernst & Young LLP
--------------------------------------
Wichita, Kansas
September 17, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF SCHRODER & CO. INC.
We hereby consent to the use of our opinion, dated as of July 30, 1997,
and the written confirmation thereof dated as of September 22, 1997, to the
Board of Directors of Sterling House Corporation included as Appendix C to the
Joint Proxy Statement/Prospectus which forms a part of the Registration
Statement on Form S-4 relating to the proposed merger involving Sterling House
Corporation and to the references to such opinion in such Joint Proxy
Statement/Prospectus under the captions "JOINT PROXY STATEMENT/PROSPECTUS
SUMMARY-The Merger-Opinion of Sterling's Financial Advisor" and THE
MERGER-Opinions of Financial Advisors."
In giving such consent, we do not admit that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder, nor do we thereby admit that we are experts with respect
to any part of such Registration Statement within the meaning of the term
"experts" as used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
SCHRODER & CO. INC.
September 22, 1997
New York, New York
