AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON ______________, 1997
REGISTRATION NO. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STAR MULTI CARE SERVICES, INC.
(Exact name of Registrant as specified in its charter)
99 Railroad Station Plaza
Hicksville, New York 11801
(516) 938-2016
(Address, including zip code, telephone number and
area code of Registrant's principal executive offices)
NEW YORK 11-1975534 7361
(State or other jurisdiction (I.R.S. Employer (Primary Standard Industrial
of incorporation Identification Classification Code Number)
or organization) Number)
------------------------
MR. WILLIAM FELLERMAN
SECRETARY
STAR MULTI CARE SERVICES, INC.
99 RAILROAD STATION PLAZA
HICKSVILLE, NEW YORK 11801
(516) 938-2016
(Name, address including zip code, and telephone
number, including area code of agent for service)
Copies to:
JAMES ALTERBAUM, ESQ. RICHARD A. LIPPE, ESQ.
PARKER CHAPIN FLATTAU & KLIMPL, LLP ALLAN GRAUBERD, ESQ.
1211 AVENUE OF THE AMERICAS MELTZER, LIPPE, GOLDSTEIN, WOLF
NEW YORK, NEW YORK 10036 & SCHLISSEL, P.C.
190 WILLIS AVENUE
MINEOLA, NEW YORK 11501
-------------------------
Approximate date of commencement of proposed sale of the securities
to the public: As soon as practicable after this Registration Statement becomes
effective.
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, please check the following box. [_]
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<PAGE>
CALCULATION OF REGISTRATION FEE
PROPOSED
PROPOSED MAXIMUM
TITLE OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO AMOUNT TO BE OFFERING OFFERING REGISTRATION
BE REGISTERED REGISTERED(1) PRICE(2) PRICE(2) FEE
- ------------------ ------------- -------- --------- ------------
Common Stock, par
value $.001 per
share.............1,021,052 shares $ 2.95 $3,012,103.40 $ 912.76 (3)
================================================================================
================================================================================
(1) This Registration Statement relates to the Common Stock of the Registrant
issuable to holders of Common Stock of Extended Family Care Corporation, a
New York corporation ("EFCC"), in the proposed merger of EFCC with a wholly
owned subsidiary of the Registrant and the related transactions described
herein.
(2) Pursuant to Rule 457(f), the registration fee was computed on the basis of
the market value of the EFCC Common Stock to be exchanged in the merger,
computed in accordance with Rule 457(c) on the basis of the average of the
high and low prices per share of such stock on The Nasdaq Bulletin Board on
July 22, 1997.
(3) $1,052.81 of the registration fee was previously paid on April 29, 1997
with the preliminary proxy statement/prospectus filings made by the
Registrant and EFCC pursuant to Rule 457(b).
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
EXTENDED FAMILY CARE CORPORATION
ONE OLD COUNTRY ROAD
SUITE 335
CARLE PLACE, NEW YORK 11514
Notice of a Special Meeting of Shareholders
to be held on September 5, 1997
To the Shareholders of
Extended Family Care Corporation:
A Special Meeting of Shareholders (the "EFCC Meeting") of Extended
Family Care Corporation, a New York corporation ("EFCC"), will be held at the
offices of Arbor Health Care Holdings LLC, 333 Earle Ovington Blvd., Uniondale,
New York 11553 at 10:00 A.M., local time, on September 5, 1997, for the
following purposes:
1. To approve and adopt the Agreement and Plan of Merger
dated as of January 3, 1997 (the "Merger Agreement"), between EFCC
and Star Multi Care Services, Inc., a New York corporation ("STAR"),
providing for the merger (the "Merger") of EFCC with and into EFCC
Acquisition Corp. ("Merger Sub"), a New York corporation and a wholly
owned subsidiary of STAR, and the transactions contemplated thereby;
and
2. To transact such other business as may properly come
before the EFCC Meeting and any adjournments or postponements
thereof.
The Merger and other related matters are more fully described in the
accompanying Joint Proxy Statement/Prospectus and the appendices thereto, which
form a part of this Notice.
The Board of Directors of EFCC has fixed the close of business on
August 11, 1997 as the record date (the "EFCC Record Date") for the
determination of shareholders entitled to notice of and to vote at the EFCC
Meeting or any adjournments or postponements thereof. Only shareholders of
record at the close of business on the EFCC Record Date are entitled to notice
of and to vote at the EFCC Meeting and any adjournments or postponements
thereof.
AFTER CAREFUL CONSIDERATION, THE EFCC BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY. THE BOARD BELIEVES THAT THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE
BEST INTERESTS OF, THE SHAREHOLDERS OF EFCC AND UNANIMOUSLY RECOMMENDS THAT YOU
VOTE IN FAVOR OF THE MERGER AT THE EFCC MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND THE EFCC MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN PROMPTLY THE ENCLOSED FORM OF PROXY. A RETURN ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE AND REQUIRES NO POSTAGE FOR MAILING IN THE UNITED
STATES.
By Order of the Board of Directors,
Robert Kohlmeyer
Secretary
August 11, 1997
<PAGE>
STAR MULTI CARE SERVICES, INC.
99 RAILROAD STATION PLAZA
HICKSVILLE, NEW YORK 11801
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
To Be Held on September 5, 1997
To the Shareholders of
Star Multi Care Services, Inc.:
You are hereby notified that a Special Meeting of Shareholders (the
"STAR Meeting") of Star Multi Care Services, Inc., a New York corporation
("STAR"), will be held at the offices of Parker Chapin Flattau & Klimpl, LLP,
1211 Avenue of the Americas (18th Floor), New York, New York at 10:00 A.M.,
local time, on September 5, 1997, to consider and act upon:
1. A proposal to approve and adopt the Agreement and Plan
of Merger dated as of January 3, 1997(the "Merger Agreement"),
between Extended Family Care Corporation, a New York corporation
("EFCC") and STAR, providing for the merger (the "Merger") of EFCC
with and into EFCC Acquisition Corp. ("Merger Sub"), a New York
corporation and a wholly owned subsidiary of STAR, and the
transactions contemplated thereby;
2. A proposal to adopt an amendment to STAR's 1992 Stock
Option Plan, limiting the number of shares of STAR Common Stock
subject to options granted to any optionee in any fiscal year to
100,000;
3. A proposal to adopt STAR's 1997 Non-Employee Director
Stock Option Plan; and
4. Such other business as properly may come before the
STAR Meeting or any adjournments or postponements thereof.
The Merger and other related matters are more fully described in the
accompanying Joint Proxy Statement/Prospectus and the appendices thereto, which
form a part of this notice.
The Board of Directors of STAR has fixed the close of business on
July 25, 1997 as the record date (the "STAR Record Date") for the determination
of shareholders entitled to notice of and to vote at the STAR Meeting or any
adjournments or postponements thereof. Only shareholders of record at the close
of business on the STAR Record Date are entitled to notice of and to vote at the
STAR Meeting and any adjournments or postponements thereof. A list of such
shareholders will be available for inspection at the offices of STAR located at
99 Railroad Station Plaza, Hicksville, New York 11801, at least ten days prior
to the STAR Meeting.
AFTER CAREFUL CONSIDERATION, THE STAR BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY. THE STAR BOARD BELIEVES THAT THE TERMS OF THE MERGER ARE FAIR TO, AND
IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF STAR AND UNANIMOUSLY RECOMMENDS
THAT YOU VOTE IN FAVOR OF APPROVING THE MERGER AGREEMENT AT THE STAR MEETING.
THE STAR BOARD OF DIRECTORS HAS ALSO UNANIMOUSLY APPROVED THE PROPOSAL TO ADOPT
AN AMENDMENT TO STAR'S 1992 STOCK OPTION PLAN AND THE PROPOSAL TO ADOPT STAR'S
1997 NON-EMPLOYEE DIRECTOR STOCK
<PAGE>
OPTION PLAN AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF EACH PROPOSAL
AT THE STAR MEETING.
IF YOU DO NOT EXPECT TO BE PRESENT PERSONALLY AND YOU WISH YOUR SHARES TO BE
VOTED AT THE STAR MEETING, PLEASE SIGN, DATE AND RETURN THE PROXY BY MAIL IN THE
POSTAGE-PAID ENVELOPE ENCLOSED HEREWITH FOR THAT PURPOSE. IF YOU LATER FIND THAT
YOU CAN BE PRESENT AT THE STAR MEETING OR FOR ANY OTHER REASON DESIRE TO REVOKE
OR CHANGE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS VOTED.
By Order of the Board of Directors,
___________________________
William Fellerman
Secretary
August 11, 1997
YOUR VOTE IS IMPORTANT
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND MAIL
IT PROMPTLY. A RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE AND REQUIRES NO
POSTAGE FOR MAILING IN THE UNITED STATES.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
STAR MULTI CARE SERVICES, INC.
EXTENDED FAMILY CARE CORPORATION
JOINT PROXY STATEMENT
FOR MEETINGS OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 5, 1997
-------------------------
STAR MULTI CARE SERVICES, INC.
PROSPECTUS
-------------------------
This Joint Proxy Statement/Prospectus is being furnished to the
shareholders of Star Multi Care Services, Inc., a New York corporation ("STAR"),
and to the shareholders of Extended Family Care Corporation, a New York
corporation ("EFCC"), in connection with the solicitation of proxies by their
respective Boards of Directors to be used at a Special Meeting of Shareholders
of STAR (the "STAR Meeting") and a Special Meeting of Shareholders of EFCC (the
"EFCC Meeting"), each of which is to be held on September 5, 1997, and at any
adjournments or postponements thereof.
At each of the STAR Meeting and EFCC Meeting, the respective
shareholders will be asked to consider and vote upon a proposal to approve and
adopt the Agreement and Plan of Merger dated as of January 3, 1997, (the "Merger
Agreement"), between STAR and EFCC, providing for the merger (the "Merger") of
EFCC Acquisition Corp. ("Merger Sub"), a New York corporation and a wholly owned
subsidiary of STAR, with EFCC, with EFCC merging with and into Merger Sub and
the cessation of EFCC's separate existence, and the transactions contemplated
thereby. Upon consummation of the Merger, each share of EFCC Common Stock, par
value $.01 per share (the "EFCC Common Stock"), which is issued and outstanding
immediately prior to the effective time of the Merger (the "Effective Time"),
except those held by shareholders of EFCC who validly and properly demand and
perfect dissenters' rights under the New York Business Corporation Law (the
"BCL"), will be converted into the right to receive the following consideration
(the "Merger Consideration"): (a) the Cash Consideration (defined below),
without interest; and (b) the number (the "Conversion Number") of duly
authorized, validly issued, fully paid and non-assessable shares of common stock
$.001 par value, of STAR (the "STAR Common Stock"), as calculated below.
"Cash Consideration" means the amount equal to: (a) $2,400,000
divided by (b) the EFCC Share Number. "EFCC Share Number" means the number of
shares of EFCC Common Stock issued and outstanding
<PAGE>
immediately prior to the Effective Time increased by that number of additional
shares of EFCC Common Stock that would have to be issued and outstanding
immediately prior to the Effective Time assuming that no shareholders of TPC
Home Care Services, Inc. ("TPC"), an 83% owned subsidiary of EFCC, validly and
properly demand and perfect, pursuant to the BCL, dissenters' rights in the
proposed merger of TPC with and into EFCC, which EFCC Share Number shall not be
less than 37,600,000. "Conversion Number" means the amount equal to: (a) such
number of STAR Common Stock as has an aggregate market price, calculated in
accordance with the terms of the Merger Agreement, equal to $4,850,000; divided
by (b) the EFCC Share Number. See "THE MERGER AGREEMENT."
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION
OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN
EVALUATING THE MERGER DESCRIBED HEREIN
AND THE SECURITIES OFFERED HEREBY
At the STAR Meetings the shareholders of STAR will also be asked to
vote on proposals to: (a) adopt an amendment to STAR's 1992 Stock Option Plan
(the "STAR 1992 Plan"), limiting the number of shares of STAR Common Stock
subject to options granted to any optionee in any fiscal year to 100,000; and
(b) adopt STAR's 1997 Non-Employee Director Stock Option Plan (the "STAR 1997
Plan"). See "APPROVAL OF AMENDMENT TO STAR'S 1992 STOCK OPTION PLAN" and
"APPROVAL OF STAR'S 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN."
STAR has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") on Form
S-4 (Commission File No. 333-_____) under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the shares of STAR Common Stock to be
issued pursuant to the Merger Agreement. This Joint Proxy Statement/Prospectus
constitutes the Prospectus of STAR filed as part of the Registration Statement.
All information contained herein with respect to STAR has been furnished by
STAR. All information contained herein with respect to EFCC and TPC has been
furnished by EFCC.
Assuming that the average trading price of the shares of Common Stock
of STAR for the 120 trading days ending three business days prior to the
Effective Time of the Merger is $4.50, that the number of shares of EFCC issued
and outstanding immediately prior to the Effective Time of the Merger is
37,600,000, and that no holder of shares of either TPC or EFCC has exercised his
or her dissenter's rights, the Company would be required to pay each holder of
one share of EFCC Common Stock approximately $.06 and a fractional share of STAR
Common Stock equal to .028664. If the aggregate number of shares of STAR Common
Stock issuable to any one shareholder results in fractional shares, in lieu of
any fractional shares resulting therefrom, the recipient of such fractional
share will receive cash in an amount equal to the fractional share of STAR
Common Stock to be issued multiplied by the Market Price. The term Market Price
for purposes of determining the number of shares of STAR Common Stock to be
issued for each share of EFCC Common Stock outstanding on the Effective Time is
the average of the closing sales price of a share of STAR Common Stock as
reported on the Nasdaq National Market during the 120 trading days immediately
preceding the third business day prior to the Effective Time, calculated by
adding all of such 120 closing sales prices and dividing the sum by 120.
The STAR Common Stock is quoted in the over-the-counter market on The
Nasdaq Stock Market's National Market System (the "Nasdaq National Market")
under the symbol"SMCS." On July 24, 1997, the high and low sales prices for a
share of STAR Common Stock on the Nasdaq National Market were $5.50. The EFCC
Common Stock is quoted in the over-the-counter market on the "Nasdaq Bulletin
Board" and on the "Pink Sheets" as reported by the National Quotations Bureau,
Inc. under the symbol "CXCS". On July 22, 1997 the high and low bid quotations
for a share of EFCC Common Stock were $.08.
<PAGE>
Based on the terms set forth in the Merger Agreement and based upon
the assumption that the average sales price of STAR Common Stock on for the
preceding 120 days ending 3 business days prior to the Effective Time is $4.75,
the dollar value of the Merger Consideration, including the STAR Common Stock,
to be received for each share of EFCC Common Stock exchanged in the Merger is
$.0871.
It is anticipated that the closing will take place no later than one
month after the last shareholder meeting of TPC, EFCC and STAR to be held for
the purposes of voting upon the proposed merger of EFCC into the STAR
subsidiary.
The EFCC meeting of shareholders to approve the STAR merger will be
scheduled approximately 15 days after the TPC meeting in order to include TPC
shareholders as shareholders of record of EFCC.
-------------------------
THE SECURITIES ISSUABLE 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/PRO-
SPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE ACCOMPANYING FORM OF
PROXY ARE FIRST BEING MAILED OR DELIVERED TO THE SHAREHOLDERS OF STAR AND EFCC
ON OR ABOUT AUGUST 11, 1997.
-------------------------
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS [___________], 1997.
<PAGE>
TABLE OF CONTENTS
PAGE
AVAILABLE INFORMATION........................................................ 1
SUMMARY...................................................................... 2
General................................................................... 2
STAR...................................................................... 3
Merger Sub................................................................ 4
EFCC...................................................................... 4
The Meetings.............................................................. 6
The Merger................................................................ 7
Summary Historical Consolidated Financial Data............................ 13
Summary Unaudited Pro Forma Condensed Combined Financial Data............. 17
Adoption of Amendment to STAR 1992 Plan and adoption of STAR
1997 Plan............................................................... 18
RISK FACTORS................................................................. 19
Risks Relating to an Investment in STAR................................... 19
Risks Relating to the Merger.............................................. 22
COMPARATIVE PER SHARE DATA................................................... 24
COMPARATIVE MARKET DATA...................................................... 25
THE STAR MEETING............................................................. 26
General................................................................... 26
Matters to be Considered at the STAR Meeting.............................. 26
STAR Record Date.......................................................... 26
Proxies................................................................... 26
Quorum.................................................................... 27
Vote Required............................................................. 27
Sternbach Proxy........................................................... 28
THE EFCC MEETING............................................................. 28
General................................................................... 28
Matters to Be Considered at the EFCC Meeting.............................. 28
EFCC Record Date.......................................................... 28
Proxies................................................................... 28
Quorum.................................................................... 29
Vote Required............................................................. 29
EFCC Shareholders Agreement............................................... 30
THE MERGER................................................................... 30
Background of the Merger.................................................. 30
STAR's Reasons for the Merger; Recommendation of the STAR Board........... 34
Financial Advisor; Fairness Opinion....................................... 38
Certain Federal Income Tax Consequences................................... 42
Dissenters' Rights of Appraisal........................................... 44
Regulatory Approvals...................................................... 45
Accounting Treatment...................................................... 45
Resale Restrictions....................................................... 45
Consulting Agreement...................................................... 45
Management Agreement...................................................... 46
THE MERGER AGREEMENT......................................................... 48
The Merger................................................................ 48
Effective Time of the Merger.............................................. 48
Conversion of Securities.................................................. 48
Dissenters' Rights........................................................ 49
Exchange of Certificates.................................................. 49
Representations and Warranties............................................ 50
- i -
<PAGE>
TABLE OF CONTENTS (CONT'D)
PAGE
Covenants; Conduct of Business Prior to Effective Time.................... 51
Negotiations with Others.................................................. 51
Management after the Merger............................................... 52
Conditions of the Merger.................................................. 52
Termination............................................................... 53
Effect of Termination and Abandonment..................................... 54
Amendment and Waiver...................................................... 55
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS.................................. 56
COMPARISON OF RIGHTS OF HOLDERS OF
STAR COMMON STOCK AND EFCC COMMON STOCK...................................... 61
General................................................................... 61
DESCRIPTION OF STAR CAPITAL STOCK............................................ 66
STAR Common Stock......................................................... 66
Certain Provisions of the Certificate of Incorporation and ByLaws......... 66
BUSINESS OF STAR............................................................. 68
General................................................................... 68
Home Care Services........................................................ 69
Hospital Staffing......................................................... 70
Competition............................................................... 71
Marketing................................................................. 71
Customers................................................................. 72
Government Regulations and Licensing...................................... 72
Liability Insurance....................................................... 73
Employees................................................................. 74
Description of Property................................................... 74
Legal Proceedings......................................................... 75
STAR'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................ 76
Financial Condition, Liquidity and Capital Resources...................... 78
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF STAR................ 79
MANAGEMENT OF STAR........................................................... 82
EXECUTIVE COMPENSATION OF STAR............................................... 84
Summary Compensation Table................................................ 84
Option Grants in Last Fiscal Year......................................... 84
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year
End Option Values....................................................... 85
Standard Remuneration of Directors........................................ 85
Employment Agreements..................................................... 85
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................... 86
BUSINESS OF EFCC............................................................. 87
General................................................................... 87
Home Care Services........................................................ 88
Procedure for a Typical Home Care Placement............................... 89
Care Givers............................................................... 89
ORGANIZATIONAL STRUCTURE..................................................... 90
Branch Description........................................................ 90
Customers................................................................. 90
Percent of Total TPC Revenues by Type of Customer......................... 91
Percent of Total TPC Revenues by State.................................... 91
- ii -
<PAGE>
TABLE OF CONTENTS (CONT'D)
PAGE
TPC Medicaid Revenues as Percentages of
Total State Revenues...................................................... 91
Governmental Regulation and Licensing..................................... 91
Competitive Conditions.................................................... 92
Marketing and Sales....................................................... 93
Liability Insurance....................................................... 93
Employees................................................................. 93
Securities Filings........................................................ 93
The Special Dividend...................................................... 94
Description of Property................................................... 94
Bankruptcy Proceedings.................................................... 94
EFCC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............. 95
Overview.................................................................. 95
Industry Information...................................................... 95
Results of Operations..................................................... 95
Liquidity and Capital Resources........................................... 97
Inflation and Seasonality................................................. 98
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................................... 98
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF EFCC................ 99
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF EFCC.........101
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF EFCC.......................103
PROPOSAL TO ADOPT AMENDMENT TO STAR'S 1992 PLAN..............................105
Type of Options...........................................................105
Administration............................................................105
Eligibility...............................................................105
Terms and Conditions of Options...........................................106
Adjustment in Event of Capital Changes....................................107
Duration and Amendment of the 1992 STAR Plan..............................107
Federal Income Tax Treatment..............................................107
Benefits Granted During Last Fiscal Year Under 1992 STAR Plan.............109
PROPOSAL TO ADOPT STAR'S 1997 NONEMPLOYEE DIRECTOR
STOCK OPTION PLAN............................................................111
Eligibility...............................................................111
Stock Subject to the NonEmployee Director Plan............................111
Administration............................................................111
Eligibility...............................................................111
Terms and Conditions of Options...........................................111
Adjustment Upon Changes in Capitalization, and
Conversion of Options on Stock for Stock Exchange.........................112
Term of and Amendment of STAR 1997 Plan...................................113
Compliance with Securities Laws ..........................................113
Federal Income Tax Consequences...........................................113
Benefits Granted During Last Fiscal Year Under 1992 STAR Plan.............115
LEGAL MATTERS................................................................115
EXPERTS......................................................................115
Shareholder Proposals.....................................................116
- iii -
<PAGE>
TABLE OF CONTENTS (CONT'D)
PAGE
APPENDIX A - Merger Agreement................................................A-1
APPENDIX B - Opinion of Telesis..............................................B-1
APPENDIX C - Sections 623 and 910 of the New York Business Corporation Law...C-1
APPENDIX D - STAR's 1997 Non-Employee Director Stock Option Plan.............D-1
- iv -
<PAGE>
AVAILABLE INFORMATION
STAR and EFCC 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. The Registration Statement, as well as reports, proxy statements
and other information filed by each of STAR and EFCC can be inspected and copied
at the Commission's Public Reference Room, Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the public reference facilities
maintained by the Commission at its regional offices located at Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can
be obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Electronic registration statements filed through the Commission's Electronic
Data Gathering, Analysis and Retrieval system are publicly available through the
Commission's Web site (http://www.sec.gov). Additionally, material filed by STAR
can be inspected at the offices of the Nasdaq National Market System Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006.
STAR has filed the Registration Statement with the Commission
covering the STAR Common Stock to be issued pursuant to the Merger Agreement. As
permitted by the rules and regulations of the Commission, this Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto. For further information, please
refer to the Registration Statement, including the exhibits thereto. Statements
contained in this Joint Proxy Statement/Prospectus relating to the contents of
any contract or other document referred to herein are not necessarily complete,
and reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
All information concerning STAR contained in this Joint Proxy
Statement/Prospectus has been furnished by STAR and all information concerning
EFCC and TPC contained in this Joint Proxy Statement/Prospectus has been
furnished by EFCC. No person is authorized to provide any information or to make
any representation with respect to the matters described in this Joint Proxy
Statement/Prospectus other than those contained herein and, if given or made,
such information or representation must not be relied upon as having been
authorized by STAR, EFCC or any other person. This Joint Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation of
any offer to purchase, any securities, or a solicitation of a proxy, in any
jurisdiction in which, or to or from any person to or from whom, it is unlawful
to make such an offer or solicitation. Neither the delivery of this Joint Proxy
Statement/Prospectus nor any distribution of securities hereunder shall under
any circumstances be deemed to imply that there has been no change in the
assets, properties or affairs of STAR or EFCC since the date hereof or that the
information set forth herein is correct as of any time subsequent to the date
hereof.
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus. Reference is made to, and this summary
is qualified in its entirety by, the more detailed information contained
elsewhere in this Joint Proxy Statement/Prospectus and the appendices hereto.
Shareholders of STAR and EFCC are urged to read this Joint Proxy
Statement/Prospectus and its appendices before voting on the matters discussed
herein. As used herein, the term "STAR" refers to Star Multi Care Services,
Inc., a New York corporation, and the term "EFCC" refers to Extended Family Care
Corporation, a New York corporation, in both cases including, unless the context
otherwise requires, their respective subsidiaries.
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to
shareholders of STAR in connection with the solicitation of proxies by the Board
of Directors of STAR, for use at a Special Meeting of Shareholders of STAR (the
"STAR Meeting") which is scheduled to be held on September 5, 1997. This Joint
Proxy Statement/Prospectus is also being furnished to shareholders of EFCC in
connection with the solicitation of proxies by the Board of Directors of EFCC,
for use at a Special Meeting of Shareholders of EFCC (the "EFCC Meeting") which
is also scheduled to be held on September 5, 1997. At the STAR Meeting and the
EFCC Meeting, the respective shareholders of STAR and EFCC will be asked to
consider and vote upon, among other things, the proposed merger (the "Merger")
of EFCC Acquisition Corp., a New York corporation ("Merger Sub") and a wholly
owned subsidiary of STAR, with EFCC pursuant to the terms of the Agreement and
Plan of Merger dated January 3, 1997 (the "Merger Agreement"). The Merger
Agreement is included in this Joint Proxy Statement/Prospectus as Appendix A. In
connection with the Merger, each share of EFCC Common Stock, par value $.01 per
share (the "EFCC Common Stock"), which is issued and outstanding immediately
prior to the effective time of the Merger (the "Effective Time"), except those
held by shareholders of EFCC who validly and properly demand and perfect their
dissenters' rights under the New York Business Corporation Law (the "BCL"), will
be converted into the right to receive the following consideration (the "Merger
Consideration"): (a) the Cash Consideration (defined below), without interest;
and (b) the number (the "Conversion Number") of duly authorized, validly issued,
fully paid and non-assessable shares of common stock $.001 par value, of STAR
(the "STAR Common Stock"), as calculated below.
"Cash Consideration" means the amount equal to: (a) $2,400,000
divided by (b) the EFCC Share Number. "EFCC Share Number" means the number of
shares of EFCC Common Stock issued and outstanding immediately prior to the
Effective Time increased by that number of additional shares of EFCC Common
Stock that would have to be issued and outstanding immediately prior to the
Effective Time assuming that no shareholders of TPC Home Care Services, Inc.
("TPC"), an 83% owned subsidiary of EFCC, validly and properly demand and
perfect, pursuant to the BCL, dissenters' rights in the proposed merger of TPC
with and into EFCC (the "TPC Merger"), which EFCC Share Number shall not be less
than 37,600,000. See "CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF
EFCC." "Conversion Number" means the amount equal to: (a) such number of shares
of STAR Common Stock as has an aggregate market price, calculated in accordance
with the terms of the Merger Agreement, equal to $4,850,000; divided by (b) the
EFCC Share Number.
In addition, at the STAR meeting, the shareholders of STAR will be
asked to vote on proposals to: (a) adopt an amendment to STAR's 1992 Stock
Option Plan (the "STAR 1992 Plan"), limiting the number of shares of STAR Common
Stock subject to options granted to any optionee in any fiscal year to 100,000
and (b) adopt STAR's 1997 Non-Employee Director Stock Option Plan (the "STAR
1997 Plan").
The information in this Joint Proxy Statement/Prospectus concerning STAR and
EFCC has been furnished by each of such entities respectively.
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STAR
STAR is in the business of providing placement services of registered
and licensed nurses and home health aides to patients for care at home ("Home
Care") and, to a lesser extent, temporary health care personnel recruiting to
hospitals and nursing homes ("Hospital Staffing"). In addition, STAR maintains
registries of registered nurses, licensed practical nurses, nurses' aides,
certified home health aides and certified personal care workers from which
personnel are recruited on a per diem basis to meet the requirements of STAR's
clients.
Prior to its acquisition by present management in 1987, STAR's
business related primarily to providing private duty nurses to patients in
hospitals and staffing to hospitals. Under its current management, STAR expanded
its Hospital Staffing arrangements to nursing homes and additional hospitals to
provide licensed nurses on a per diem basis for general staff. In 1988, STAR
further extended its Hospital Staffing business to include providing licensed
practical nurses and nurses' aides. In 1989, STAR began providing Home Care
Services in New York City pursuant to a license from the New York State Health
Department. In 1990, STAR expanded its Home Care services to include
transportation of patients from hospital to home in ambulettes, arrangements to
purchase and supply equipment and pharmaceuticals as prescribed by the patient's
physicians, and home infusion care. In 1991, STAR was licensed by the New York
State Department of Health to operate an office in Nassau County, New York.
In 1992, STAR expanded its existing Home Care business through the
acquisition of certain assets from Unity Health Care Holding Company, Inc. and
its subsidiaries ("Unity"), including contract rights to provide Home Care
services through various hospitals, community agencies and other institutional
health care providers. These contract rights complemented the existing home
health care businesses of STAR in geographic areas such as New Jersey and New
York where STAR already operated. In addition, in these locations, STAR obtained
from Unity client referral lists to further expand existing operations. In
addition to expanding STAR's existing regional business, the acquisition of
Unity added new operations to STAR in new geographic locations. STAR acquired
Unity's Florida operations, which included certification to receive
reimbursement from Medicare and Medicaid in Broward and Dade Counties. Most of
such Medicare and Medicaid reimbursed operations are located in Dade County.
STAR also acquired the assets representing Unity's operations in Florida that do
not have Medicare and Medicaid certification, but which operate under state
license.
In 1993, STAR further expanded its existing Home Care business
through the acquisition of certain assets of DSI Health Care Services, Inc.
("DSI") including contract rights to provide Home Care services through various
hospitals, community agencies and other institutional health care providers.
These contract rights complimented the existing Home Care business of STAR in
the Long Island, New York area.
In May 1995, STAR acquired certain assets of Long Island Nursing
Registry, Inc. ("LINR") thereby further expanding its Home Care business. LINR
provided nursing and other skilled health care services with both Medicaid and
non-Medicaid reimbursement eligibility compatible with the business of STAR.
LINR maintains offices and does business under the STAR name in the Long Island
area and as "Comprehensive Care America" in the Syracuse, New York area. The
acquired assets included all of the fixed assets, certain of the contract and
intellectual property rights and all of the records, lists, files and books
(including certain customer and personnel lists) with respect to or in
connection with the health care business conducted by LINR. The acquisition
expanded STAR's New York market area into Suffolk County, augmented its presence
in Nassau County and gave it significant market share in central New York.
On August 23, 1996, STAR and AMSERV HEALTHCARE INC. ("Amserv")
consummated a merger whereby STAR acquired control of Amserv and Amserv became a
wholly owned subsidiary of STAR. Amserv operates in a one-industry segment as a
health care service company. Amserv provides Home Care services to individuals
from its six branch offices in New Jersey and Ohio. Home Care services provided
by Amserv include
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personal care, such as assistance with the activities of daily living (e.g.,
eating, walking and grooming), and skilled nursing services, such as wound care
and assistance with medications, injections and patient education.
Historically, a greater portion of STAR's revenues have been derived
from Home Care services and a lesser portion of such revenues have been derived
from Hospital Staffing. STAR believes that this is a result of changing social
and economic attitudes toward the de-institutionalization of patients as well as
STAR's changing customer base.
STAR's principal executive offices are located at 99 Railroad Station
Plaza, Hicksville, New York 11801, and its telephone number is (516) 938-2016.
MERGER SUB
Merger Sub is a New York corporation recently organized as a wholly
owned subsidiary of STAR for the purpose of effecting the Merger. It has no
material assets and has not engaged in any activities except in connection with
such proposed acquisition.
The initial directors of the Merger Sub are Messrs. Sternbach and
Fellerman. Neither of them is an affiliate of EFCC.
Merger Sub's principal executive offices are located at 99 Railroad
Station Plaza, Hicksville, New York 11801, and its telephone number is (516)
938-2016.
EFCC
EFCC is in the business of providing home health care services,
principally personal hygiene, homemaking, general patient safety, and to a
lesser extent nursing services ("Home Care"), primarily through contracts with
government agencies under the Medicaid program. EFCC is a holding company which
derives 100 percent of its revenues from the operation of TPC Home Care
Services, Inc. ("TPC"), an 83 percent owned subsidiary. Prior to, and as a
condition to the consummation of the Merger, TPC will be merged into EFCC (the
"TPC Merger") and the separate corporate existence of TPC will end. See "THE
MERGER AGREEMENT --Conditions of the Merger." Pursuant to the TPC Merger, all
shareholders of TPC, other than EFCC, will receive 18.745545 shares of EFCC
Common Stock in exchange for each share of TPC Common Stock they own. Stock
certificates previously issued to TPC shareholders do not give effect to a 1:4
reverse stock split which occurred in 1985. Accordingly, shareholders of TPC
actually own only one share of TPC Common Stock for every four shares for which
they possess a share certificate for TPC Common Stock. TPC shares owned by EFCC
will be cancelled as a result of the TPC Merger and no shares of EFCC will be
issued in respect thereof. A proxy statement/prospectus relating to a meeting of
shareholders of EFCC and TPC has been mailed to shareholders of EFCC and TPC
contemporaneous with the mailing of this Joint Proxy Statement/Prospectus.
EFCC was incorporated in New York on May 10, 1978 under the name
M.A.E. Enterprises, Inc. In 1980, the name of this corporation was changed to
Cosmetic Sciences, Inc.; which was changed again in 1996 to Extended Family Care
Corporation, its current name.
In 1980, EFCC completed its initial public offering of 1.5 million
shares of common stock, raising gross proceeds of $1.5 million. Between 1980 and
1985, EFCC engaged in research, development, marketing and distribution of
medical devices and cosmetics. These products never proved to be commercially
viable, and by the mid-1980's the development of these products were
discontinued and the subsidiaries through which these businesses were operated
were dissolved.
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In August 1984, EFCC entered the Home Care industry by acquiring all
of the outstanding shares of TPC, which at the time was providing Home Care
services in New York and New Jersey. In December 1984, the then shareholders of
EFCC received as a dividend approximately 17 percent of the outstanding common
stock of TPC (the "TPC Dividend"), leaving TPC as an approximately 83 percent
owned subsidiary of EFCC.
On April 25, 1985, TPC entered into an agreement to acquire all of
the outstanding stock of A-Round the Clock Nursing Services, Inc. ("A-Round the
Clock"), a home health care company doing business in New Jersey. In December
1985, a Registration Statement was declared effective in anticipation of an
initial public offering by TPC. Proceeds from this offering were to provide the
funding for the acquisition of A-Round the Clock. However, the underwriter
terminated the offering, and TPC was unable to find another underwriter to
complete the offering. TPC was forced to borrow the funds required to consummate
the acquisition of A-Round the Clock. The burden of the additional debt service,
coupled with the increased demand for working capital, further reduced cash
flow. Facing bank foreclosure of liens upon TPC's accounts receivable,
significant tax arrears and cash shortfalls, EFCC and TPC filed a petition under
Chapter 11 of the U.S. Bankruptcy Code, in the U.S. Bankruptcy Court, Southern
District, New York, in August 1986.
Following the filing of the bankruptcy petition, TPC continued to
operate its Home Care business as a debtor in possession. In July 1987, a
secured lender foreclosed its lien on the common stock of A-Round the Clock, and
took possession and control of the business of A-Round the Clock. TPC continued
to provide Home Care services with operating branches in Hempstead, New York and
Hackensack, New Jersey.
In 1992, the Company's headquarters were moved from Hempstead, New
York to Carle Place, New York. In March 1994, TPC opened a branch office in
Irvington, New Jersey, which moved in March 1996 to East Orange. In February
1995, a satellite office of the Hackensack branch office was opened in Paterson,
New Jersey, which relocated to Clifton, New Jersey on or about April 15, 1996.
In August 1995, a TPC satellite office was opened in Jersey City, New Jersey,
which office was sold in December, 1996. In March 1996, a satellite office was
opened in Elizabeth, New Jersey, which office was closed in September, 1996. In
May 1996, a branch office was opened in Allentown, Pennsylvania. In the first
quarter of 1997 the staff and patient files of EFCC's East Orange office and
Hempstead office were moved into existing facilities of STAR; and the Hackensack
office was closed and integrated into EFCC's Clifton office.
In October 1993, and in connection with EFCC's Amended Plan of
Reorganization adopted in 1992, an investment group, COSS Holding Corp.
("Coss"), invested cash of $250,000 in EFCC and thereby became the holder of
approximately 66 percent or 12,749,658 shares of EFCC's Common Stock.
On October 31, 1995, EFCC, TPC and Coss entered into an agreement
with Arbor Home Health Care Holdings, LLC. ("Arbor"), pursuant to which EFCC
granted Arbor the option to purchase 13 million newly issued shares of its
common stock for $1.3 million, ($.10 per share). Mr. Ivan Kaufman ("Kaufman")
owns 99% of the membership interests in Arbor. Arbor exercised this option in
two installments, on August 21, 1996 and October 31, 1996, thus becoming the
owner of approximately 40% of EFCC's outstanding stock. In addition, in June
1996, Coss placed its holdings of EFCC's common stock in a voting trust,
providing Arbor the right to direct the voting of such shares and to thus elect
a majority of the board of directors of EFCC. EFCC, Coss and Arbor have also
entered into various agreements relating to Coss' holdings of EFCC's common
stock, but these agreements, as well as the voting trust arrangement as to Coss'
shares, will terminate upon the completion of the Merger.
On October 31, 1995, EFCC entered into an agreement with Arbor
Management, LLC (in which Kaufman owns a 99% membership interest) ("Arbor
Management"), for a two year term pursuant to which EFCC will pay $7,500 a month
to Arbor Management, LLC for management services, including accounting, finance,
human resources and marketing, rendered to EFCC. This agreement will also
terminate as of the completion of the Merger.
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EFCC's principal executive offices are located at One Old Country
Road, Suite 335, Carle Place, New York 11514, and its telephone number is (516)
248-2273.
THE MEETINGS
The STAR Meeting
The STAR Meeting will be held on September 5, 1997 at 10:00 A.M.,
local time, at the offices of Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue
of the Americas (18th Floor), New York, New York. At the STAR Meeting, including
any adjournments or postponements thereof, the shareholders of STAR will
consider and vote on (i) a proposal to approve and adopt the Merger Agreement
and the transactions contemplated thereby; (ii) adopt an amendment to the STAR
1992 Plan, limiting the number of shares of STAR Common Stock subject to options
granted to any optionee in any fiscal year to 100,000; (iii) adopt the STAR 1997
Plan; and (iv) such other business as properly may come before the STAR Meeting.
The close of business on July 25, 1997, has been fixed as the record
date (the "STAR Record Date") for the determination of the shareholders of STAR
entitled to notice of and to vote at the STAR Meeting. Holders of STAR Common
Stock are entitled to one vote for each share of STAR Common Stock held by them.
The holders of a majority of the outstanding shares of STAR Common Stock,
present either in person or by properly executed proxies, will constitute a
quorum at the STAR Meeting.
The affirmative vote of the holders of a majority of the shares of
STAR Common Stock voted at the STAR Meeting is required to approve and adopt the
Merger Agreement. The affirmative vote of the majority of votes cast at the STAR
Meeting will be required to approve the amendment to the STAR 1992 Plan and to
approve the adoption of the STAR 1997 Plan. As of the STAR Record Date,
4,212,387 shares of STAR Common Stock were issued and outstanding, of which
approximately 37.4% were beneficially owned by directors, executive officers and
affiliates of STAR (excluding 137,574 shares which may be acquired upon exercise
of options which are exercisable within 60 days of the STAR Record Date). See
"THE STAR MEETING--Vote Required."
The EFCC Meeting
The EFCC Meeting will be held on September 5, 1997 at 10:00 A.M.,
local time, at the offices of Arbor Health Care Holdings LLC, 333 Earle Ovington
Blvd., Uniondale, New York 11553. At the EFCC Meeting, including any
adjournments or postponements thereof, the shareholders of EFCC will consider
and vote on a proposal to approve and adopt the Merger Agreement and the
transactions contemplated thereby and such other business as properly may come
before the EFCC Meeting.
The close of business on August 11, 1997, has been fixed as the
record date (the "EFCC Record Date") for the determination of the shareholders
of EFCC entitled to notice of and to vote at the EFCC Meeting. Holders of EFCC
Common Stock are entitled to one vote for each share of EFCC Common Stock held
by them. The holders of a majority of the outstanding shares of EFCC Common
Stock, present either in person or by properly executed proxies, will constitute
a quorum at the EFCC Meeting.
The affirmative vote of holders of two-thirds of all outstanding
shares of EFCC Common Stock is required to approve and adopt the Merger
Agreement. Shares representing approximately 68% of the outstanding Common Stock
of EFCC, after giving effect to the TPC Merger, are covered by a shareholders
agreement pursuant to which those shares will be voted in favor of the Merger.
Accordingly, approval and adoption of the Merger by the EFCC shareholders is
assured. See "THE EFCC MEETING - EFCC Shareholders Agreement." See "THE EFCC
MEETING--Vote Required."
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THE MERGER
Risk Factors. There are a number of risks relating to an investment
in STAR, including those relating to: (i) STAR's liquidity and possible cash
flow difficulties; (ii) adverse effects of possible health care reform; (iii)
the regulatory environment in which the parties operate; (iv) competition in the
home health care and temporary health care personnel placement markets; (v) a
shortage of qualified personnel; (vi) government regulation and licensing
regulations relative to STAR's business; (vi) certain proposals by state
legislatures and Congress to contain health care costs; (vii) potential
liability for services provided by STAR; and (viii) STAR's failure to pay cash
dividends since 1991. In addition, there are a number of risks relating to the
Merger, including those relating to: (i) no assurance that shareholders will
realize any benefits from the Merger; (ii) the existence of special interests of
certain persons in the Merger; (iii) the fact that Mr. Sternbach will continue
to have substantial influence on STAR after the Merger; (iv) the lack of an
updated fairness opinion by the financial advisor of EFCC; (v) EFCC's and TPC's
non-compliance with certain securities laws; (vi) the dilutive effect of the
Merger on the voting power of the shareholders of EFCC and STAR; (vii) the fact
that a significant portion of STAR's revenues are subject to audit and
adjustment; and (viii) the possible adverse tax effect on the EFCC shareholders
if the Merger were not to constitute a tax-free reorganization. See "RISK
FACTORS" for a more complete discussion of the factors which should be
considered in evaluating the Merger and the securities offered hereby.
Conversion of Securities. Upon consummation of the transactions
contemplated by the Merger Agreement, Merger Sub will be merged with EFCC, with
Merger Sub being the surviving corporation, and each share of EFCC Common Stock,
par value $.01 per share (the "EFCC Common Stock"), which is issued and
outstanding immediately prior to the effective time of the Merger (the
"Effective Time"), except those held by shareholders of EFCC who validly and
properly demand and perfect dissenters' rights under the New York Business
Corporation Law (the "BCL"), will be converted into the right to receive the
following consideration (the "Merger Consideration"): (a) the Cash Consideration
(defined below), without interest; and (b) the number (the "Conversion Number")
of duly authorized, validly issued, fully paid and non-assessable shares of
common stock $.001 par value, of STAR (the "STAR Common Stock"), as calculated
below.
For illustrative purposes only, set forth below is a chart listing a
range of conversion ratios assuming a range of stock prices for shares of STAR
Common Stock.
- --------------------------------------------------------------------------------
Average Market Price of a Share
of STAR Common Stock for the 120
Trading Days ending Three Business
Days Before the Effective Time $5.00 $4.75 $4.50
- --------------------------------------------------------------------------------
Exchange Ratio for each Share of
EFCC Common Stock Outstanding on
the Effective Time* .0258** .0271** .0287**
- --------------------------------------------------------------------------------
Total Number of Shares of STAR
Common Stock to be issued in the
Exchange 970,000 1,021,052 1,077,778
- --------------------------------------------------------------------------------
* Assumes that there are 37,600,000 shares of EFCC outstanding immediately
prior to the Effective Time and no shareholders of either EFCC or TPC have
exercised dissenter's rights.
** Rounded to the nearest ten thousandth of a share.
"Cash Consideration" means the amount equal to: (a) $2,400,000
divided by (b) the EFCC Share Number. "EFCC Share Number" means the number of
shares of EFCC Common Stock issued and outstanding immediately prior to the
Effective Time increased by that number of additional shares of EFCC
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Common Stock that would have to be issued and outstanding immediately prior to
the Effective Time assuming that no shareholders of TPC Home Care Services, Inc.
("TPC"), an 83% owned subsidiary of EFCC, validly and properly demand and
perfect, pursuant to the BCL, dissenters' rights in the proposed merger of TPC
with and into EFCC, which EFCC Share Number shall not be less than 37,600,000.
"Conversion Number" means the amount equal to: (a) such number of shares of STAR
Common Stock as has an aggregate market price, calculated in accordance with the
terms of the Merger Agreement, equal to $4,850,000; divided by (b) the EFCC
Share Number.
Prior to the mailing of this Joint Proxy Statement/Prospectus, STAR
had the right under the Merger Agreement to acquire all of the shares of EFCC
Common Stock in consideration of the payment of $7,250,000 in cash. The all cash
option, by its terms, expired upon the mailing of the joint proxy materials to
the shareholders of EFCC and STAR.
STAR Common Stock is quoted on the Nasdaq National Market under the
symbol "SMCS." No certificates or scrip representing fractional shares of STAR
Common Stock will be issued in the Merger, but cash will be paid to shareholders
in lieu thereof. See "THE MERGER AGREEMENT--Conversion of Securities."
Recommendations of the Boards of Directors. The Board of Directors of
STAR believes that the terms of the Merger are fair to, and in the best
interests of, STAR and its shareholders. Accordingly, STAR's Board of Directors
has unanimously approved the Merger Agreement and unanimously recommends a vote
FOR approval and adoption of the Merger Agreement by the shareholders of STAR.
The STAR Board of Directors considered a number of positive factors concerning
the Merger, including that since both STAR and EFCC are engaged in the Home Care
services business, the businesses of STAR and EFCC are complimentary; its
concurrence with the analysis of STAR's management that the Merger would
increase STAR's cash flow, reduce STAR's financial leverage and improve STAR's
overall financial position and results of operations; that since EFCC is also
engaged in the Home Care services business the Merger fits within STAR's
strategic objective to acquire complimentary businesses; that STAR will be able
to achieve significant cost savings and economies of scale while providing other
synergistic benefits; that approximately $1.0 million in selling, general and
administrative expenses would be eliminated as a result of increased
efficiencies; and that the terms of the Merger Agreement are generally fair to
the shareholders of STAR. The Board of Directors of STAR also considered a
number of negative factors concerning the Merger, including the fact that the
Exchange Ratio was fixed based on the average price of STAR's Common Stock for
the 120 trading day period preceding the Merger, that the representations and
warranties set forth in the Merger Agreement generally did not survive the
signing of the Merger Agreement, that EFCC had operated in bankruptcy for nine
years, that STAR would be giving certain shareholders of EFCC registration
rights for the shares of STAR Common Stock to be received in the Merger and the
factors described under the heading "RISK FACTORS". The factors considered and
conclusions reached and relied upon by the STAR Board of Directors in reaching
its recommendation are described in greater detail in "THE MERGER -- Background
of the Merger," "-- STAR's Reasons for the Merger; Recommendation of the STAR
Board" and "-- Interests of Certain Persons in the Merger; Conflicts of
Interest."
The EFCC Board of Directors believes that the terms of the Merger are
fair to, and in the best interests of, EFCC and its shareholders. Accordingly,
EFCC's Board of Directors has unanimously approved the Merger Agreement and
unanimously recommends a vote FOR approval and adoption of the Merger Agreement
by the shareholders of EFCC. The EFCC Board of Directors considered a number of
positive and negative factors concerning the Merger. The positive factors the
EFCC Board considered included, synergies to be gained by the widening of the
customer base of the combined entity, savings in administrative overhead,
enhanced liquidity of the STAR Common Stock as compared to the EFCC Common
Stock, EFCC's continuing struggle with profitability, STAR's greater depth of
management, the avoidance of large capital
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expenditures for automation and quality control, and the chance to benefit from
appreciation in STAR's Common Stock. The negative factors considered by the EFCC
Board were the possibility that the EFCC shareholders would gain more by EFCC
remaining independent, the difficulty of reversing the relocation of certain of
EFCC's patients and staff which now share STAR's facilities if the Merger fails
to close and the uncertainty of whether the Merger would ultimately benefit the
two companies. The primary factors considered and conclusions reached and relied
upon by the EFCC Board of Directors in reaching its recommendation are described
in greater detail in "THE MERGER -- Background of the Merger," "-- EFCC's
Reasons for the Merger; Recommendation of the EFCC Board," "-- Financial
Advisor; Fairness Opinion" and "-- Interests of Certain Persons in the Merger."
Opinion of Financial Advisor. Telesis Mergers & Acquisitions, Inc.
("Telesis") delivered to the Board of Directors of EFCC a written opinion dated
December 31, 1996 that, as of such date and based upon and subject to certain
matters as stated therein, the terms of the Merger are fair to the shareholders
of EFCC from a financial point of view. See "THE MERGER -- Financial Advisor;
Fairness Opinion." The full text of the written opinion of Telesis, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken by Telesis, is attached as Appendix B hereto and is incorporated
herein by reference. EFCC shareholders are urged to read the opinion carefully
in its entirety.
Effective Time of the Merger. The Merger will be effected at the time
of the filing of a Certificate of Merger (the "Certificate of Merger") with the
New York Department of State or such later date as is designated in such filing.
The date and time of such filing (the "Effective Time") is currently expected to
occur on or shortly after the date of the STAR Meeting and the EFCC Meeting and
satisfaction or waiver of the conditions precedent to the Merger set forth in
the Merger Agreement. See "THE MERGER AGREEMENT -- Effective Time of the Merger"
and "-- Conditions of the Merger."
Conditions to the Merger; Termination. The obligations of each of
STAR and EFCC to consummate the Merger are subject to the satisfaction of
certain conditions, certain of which may be waived by the mutual consent of STAR
and EFCC, including, among others, (i) the Registration Statement shall have
been declared effective, and no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission, (ii) STAR shall
have received all state securities laws or "blue sky" permits and authorizations
necessary to issue the shares of STAR Common Stock, (iii) the Merger Agreement
and the Merger shall have been approved and adopted by the requisite vote of the
holders of the outstanding shares of the STAR Common Stock and the holders of
the outstanding shares of the EFCC Common Stock, (iv) 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 (whether temporary, preliminary or permanent) which is
in effect and has the effect of making the Merger illegal, (v) the shares of
STAR Common Stock issuable to EFCC's shareholders in the Merger shall have been
authorized for listing on the Nasdaq National Market, (vi) all third party and
governmental approvals necessary to effect the Merger shall have been received,
and (vii) each of STAR and EFCC shall have received the opinion, addressed to
each of them, of Meltzer, Lippe, Goldstein, Wolf & Schlissel, P.C., counsel to
EFCC, with respect to the tax consequences of the Merger. There is currently no
intention on the part of either STAR or EFCC to waive any of the conditions set
out above. In the event that the condition set forth above in (vi) was to be
waived, STAR would file a post-effective amendment to the Registration Statement
and both STAR and EFCC would resolicit their respective shareholders regarding
their approval and adoption of the Merger Agreement. See "THE MERGER AGREEMENT
- -- Conditions of the Merger."
As security for the indemnification granted to STAR by each of Arbor
and Coss under the EFCC Shareholders Agreement , dated as of January 3, 1997,
each of Arbor and Coss agreed to deposit with an escrow agent, the sum of
$125,000. The escrow fund may be claimed against by STAR upon the determination
of the existence of a claim under the escrow agreement for a breach of certain
representations
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or warranties of EFCC with respect to Compliance with Laws, Litigation, Employee
Benefit Plans, Employment Matters and Labor Matters. A claim may be made against
the escrow by STAR by the submission of a notice to each of Arbor and Coss, with
a copy to the escrow agent (the "Escrow Notice"). Each of Coss and Arbor have
the right within 10 days of the receipt of an Escrow Notice to notify STAR and
the escrow agent of its dispute of such claim. If no claims are made under the
escrow agreement, the escrow fund will, by its terms, be released to Arbor and
Coss on the second anniversary of the closing date of the proposed transaction
between EFCC and STAR.
The Merger Agreement is subject to termination by either STAR or EFCC
if the Merger is not consummated by September 15, 1997. In addition, the Merger
Agreement may be terminated under certain circumstances by either EFCC or STAR,
including circumstances under which STAR may be entitled to receive a
termination fee of $350,000. See "THE MERGER AGREEMENT -- Termination" and "--
Effect of Termination and Abandonment."
Surrender of EFCC Common Stock Certificates. After the Effective
Time, holders of EFCC Common Stock will be furnished with a transmittal letter
to be used to exchange their certificates for the Merger Consideration. Holders
of EFCC Common Stock should not return any stock certificates with the form of
proxy accompanying this Joint Proxy Statements/Prospectus. See "THE MERGER
AGREEMENT--Exchange of Certificates."
Certain Federal Income Tax Consequences. Assuming the Merger is
consummated at the Effective Time pursuant to the terms of the Merger Agreement,
Meltzer, Lippe, Goldstein, Wolf & Schlissel, P.C. is of the opinion that, more
likely than not, (i) the shareholders of EFCC should be deemed to have received
and retained a sufficient amount of stock in STAR to satisfy the continuity of
interest requirement, and assuming that EFCC is merged into Merger Sub pursuant
to the BCL, the Merger will be treated for United States 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"), (ii) STAR, Merger Sub
and EFCC will each be a party to the reorganization within the meaning of
Section 368(b) of the Code, (iii) no gain or loss will be recognized by EFCC
shareholders as a result of the exchange of EFCC Common Stock solely for STAR
Common Stock pursuant to the Merger, except that gain, if any, (but not loss)
will be recognized on the receipt of cash, other than cash received in lieu of
fractional shares, and gain or loss, if any, will be recognized in connection
with the receipt of cash in lieu of fractional shares, (iv) any gain or loss
recognized upon such exchange will be capital gain or loss provided the shares
would constitute a capital asset in the hands of the exchanging shareholder, (v)
each shareholder of EFCC who elects to dissent from the Merger and receive cash
in exchange for his shares of EFCC Common Stock will be treated as receiving
such payment in complete redemption of his shares of EFCC, provided such
shareholder does not actually or constructively own any EFCC Common Stock after
the Merger, (vi) the tax basis of the STAR Common Stock received by EFCC
shareholders will be the same as the basis of the EFCC Common Stock surrendered
in exchange therefor, decreased by the amount of basis allocated to the
fractional shares that are hypothetically received by the shareholder and
redeemed for cash, and decreased by any money received in the exchange (other
than cash received in lieu of fractional shares) and increased by any gain
recognized on the exchange, (vii) the holding period of the STAR Common Stock
received by the EFCC shareholders will include the period during which the EFCC
Common Stock surrendered was held, provided that the EFCC Common Stock is held
as a capital asset in the hands of the EFCC shareholders at the Effective Time,
(viii) no gain or loss will be recognized by EFCC on the transfer of all of its
assets to Merger Sub pursuant to the Merger Agreement, (ix) no gain or loss will
be recognized by STAR or Merger Sub pursuant to the Merger, (x) the tax basis of
EFCC's assets in the hands of Merger Sub will be the same as the basis of those
assets in the hands of EFCC immediately prior to the Merger and (xi) the holding
period of the assets of EFCC in the hands of Merger Sub will include the period
during which such assets were held by EFCC. The opinion of Meltzer, Lippe,
Goldstein, Wolf & Schlissel, P.C. is based on the accuracy of certain
representations that it will receive from STAR, EFCC and
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<PAGE>
Coss Holding Corp., a New York corporation ("Coss") at the Effective Time and
represents only counsel's best legal judgment as to the likely outcome of an
issue if properly presented to a court. See "THE MERGER--Certain Federal Income
Tax Consequences" and "THE MERGER AGREEMENT--Conditions of the Merger."
Prior to the mailing of this Joint Proxy Statement/Prospectus, STAR
had the right under the Merger Agreement to acquire all of the shares of EFCC
Common Stock in consideration of the payment of $7,250,000 in cash. The all cash
option, by its terms, expired upon the mailing of the joint proxy materials to
the shareholders of EFCC and STAR.
Accounting Treatment. The Merger will be accounted for by STAR under
the "purchase method" of accounting in accordance with generally accepted
accounting principles. Accordingly, the aggregate consideration paid by STAR in
connection with the Merger will be allocated to EFCC's assets based upon their
fair values, and the results of operations of EFCC will be included in the
results of operations of STAR only for periods subsequent to the Effective Time.
See "THE MERGER -- Accounting Treatment."
Interests of Certain Persons in the Merger. In considering the
recommendations of the Board of Directors of STAR and the Board of Directors of
EFCC with respect to the Merger Agreement and the transactions contemplated
thereby, shareholders of STAR and EFCC should be aware that certain members of
EFCC's management and EFCC's Board have interests in the Merger that are in
addition to and may conflict with the interests of shareholders of STAR and EFCC
generally. The Boards of Directors of STAR and EFCC were aware of these
interests and considered them, among other factors, in approving the Merger
Agreement and the transactions contemplated thereby. See "THE MERGER --
Interests of Certain Persons in the Merger."
Following the Merger, the persons who are directors of Merger Sub
immediately prior to the Effective Time will continue to serve as directors of
Merger Sub. The Merger Agreement also provides that after the Merger is
effected, Mr. Ivan Kaufman, who controls Arbor Home Health Care Holdings, LLC
("Arbor"), which in turn owns approximately 40% of the outstanding Common Stock
of EFCC and controls the vote of 80% of such EFCC Common Stock, will be
appointed to the Board of Directors of STAR. EFCC does not anticipate that any
officers or directors of EFCC, other than Mr. Kaufman, would become officers or
directors of STAR or the surviving entity. See "THE MERGER - Interest of Certain
Persons in the Merger" and "THE MERGER AGREEMENT -- Management after the
Merger."
Under the terms of the Merger Agreement, STAR has agreed to insure
and guaranty that any provision with respect to indemnification by EFCC and its
subsidiaries existing in favor of any present or former director, officer,
employee or agent of EFCC or an EFCC subsidiary, set forth in the Certificate of
Incorporation or by-laws of EFCC and its subsidiaries or pursuant to any other
agreements (including insurance policies), will survive the Merger, will not be
amended, repealed or modified in any manner that would adversely affect an
indemnified party, and will continue in full force and effect for a period of at
least six years from the Effective Time. STAR has agreed to maintain or retain
the same level of insurance coverage as currently maintained by EFCC only (i) if
it is available for an annual premium not in excess of 125% of the last annual
premium paid by EFCC or the EFCC subsidiaries prior to the date of the Merger
Agreement, and (ii) for six years after the Effective Time. If such insurance
were not available for 125% or less of the amount of the last annual premium
paid by EFCC or its subsidiaries prior to the date of the Merger Agreement, STAR
will be obligated to purchase as much coverage as possible for an amount not to
exceed 125% of the last premium paid EFCC or its subsidiaries. See "THE MERGER -
Interests of Certain Persons in the Merger."
11
<PAGE>
Sternbach Proxy. Stephen Sternbach, Chairman, President and Chief
Executive Officer of STAR, granted to the directors of EFCC an irrevocable proxy
pursuant to which he agreed to vote all shares over which he has direct
beneficial ownership (863,262), currently constituting 20.77% of STAR's
outstanding Common Stock, and any shares subsequently acquired by him, in favor
of the Merger at the STAR Meeting.
See "THE STAR MEETING -- Sternbach Proxy."
EFCC Shareholders Agreement. Coss, and Arbor (collectively, the
"Shareholders"), shareholders of EFCC and Kaufman, an individual having voting
control of the shares of EFCC owned by the Shareholders and John Natalone, Vice
President of Arbor Management, as voting trustee (replacing Gary Melius, the
original voting trustee), as to the shares of EFCC Common Stock owned by Coss
(the "Voting Trustee") under a Voting Trust Agreement, dated as of June 20, 1996
by and between EFCC, Kaufman, Coss, Arbor and the Voting Trustee entered into a
shareholders agreement (the "EFCC Shareholders Agreement") pursuant to which the
Shareholders and the Voting Trustee are agreeing to vote in favor of the Merger
and the Merger Agreement. The shares of EFCC Common Stock subject to the EFCC
Shareholders Agreement represent approximately 68% of the outstanding EFCC
Common Stock, assuming consummation of the TPC Merger. Accordingly, approval and
adoption of the Merger Agreement and the transactions contemplated thereby by
the EFCC shareholders is assured since the shares of EFCC Common Stock subject
to the EFCC Shareholders Agreement is in excess of the two-thirds vote required
to approve and adopt the Merger Agreement under the BCL. See "THE EFCC MEETING
- -- EFCC Shareholders Agreement."
In addition, Coss, Arbor and the Voting Trustee granted to the
directors of STAR an irrevocable proxy to vote their shares in the manner
described above.
Consulting Agreement. STAR and EFCC have entered into a consulting
agreement (the "Consulting Agreement") pursuant to which STAR agreed that upon
EFCC's request it will render to EFCC, by and through such of its officers,
employees and agents as STAR, in its sole discretion, designates from time to
time, consulting services with respect to the management and operation of EFCC.
The consulting services to be rendered by STAR under the Consulting Agreement
consist of those consulting services relating to the management and operation of
EFCC's healthcare business reasonably requested by EFCC. STAR and EFCC have
agreed that STAR's role is that of a consultant and advisor to, and not that of
a manager of, EFCC. Under the Consulting Agreement, STAR has no duty or
responsibility to manage the affairs of EFCC which duty and responsibility
remains at all times with the Board of Directors and management of EFCC. See
"THE MERGER -- Consulting Agreement."
Management Agreement. STAR and EFCC have also entered into a
management agreement (the "Management Agreement") pursuant to which STAR agreed
to act as manager of EFCC. The Management Agreement is subject to approval of
the Commissioner of the New York State Department of Health (the
"Commissioner"). Pursuant to the Management Agreement STAR will have the
authority and responsibility to conduct, supervise and effectively manage the
day-to-day operation of EFCC. In the absence of oral or written direction or
written policies of the Board of Directors of EFCC, STAR will be expected to
exercise the reasonable judgment of a management company in its management
activities.
The Management Agreement will become effective upon the date it is
approved by the Commissioner. The Management Agreement may be terminated by the
Commissioner, not more than sixty (60) days after notification to the parties by
the Department of Health of a determination that the management of EFCC is so
deficient that the health and safety of patients would be threatened by
continuation of the Management Agreement. The Management Agreement may be
terminated by EFCC without cause on 60 days' notice and with cause on 14 days'
notice. Unless sooner terminated in accordance with the terms of the Management
Agreement, or extended or renewed by mutual agreement of the parties thereto,
the Management Agreement will remain in effect until the Effective Time or
December 31, 1998,
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<PAGE>
whichever is sooner. The Management Agreement may only be terminated by STAR
upon the occurrence of an Event of Default as such term is defined in the
Management Agreement. See "THE MERGER -- Management Agreement."
Dissenters' Rights. Under the BCL, holders of EFCC Common Stock are
entitled to dissenters' rights of appraisal in connection with the Merger. See
"THE MERGER -- Dissenters' Rights of Appraisal."
Resales of STAR Common Stock. The shares of STAR Common Stock to be
issued pursuant to the Merger Agreement have been registered under the
Securities Act, and therefore may be resold without restriction by persons who
are not deemed to be "affiliates" (as such term is defined under the Securities
Act) of either STAR or EFCC. See "THE MERGER -- Resale Restrictions."
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The respective summary historical data presented in the tables below
have been derived from STAR's Consolidated Financial Statements and the notes
thereto and EFCC's Consolidated Financial Statements and the notes thereto
included elsewhere herein and should be read in conjunction therewith. See
"STAR'S" and "EFCC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."
Data for STAR for the nine months ended February 29, 1996 and
February 28, 1997 have been derived from unaudited consolidated financial
statements. The unaudited financial statements of STAR include all adjustments
which are of a normal recurring nature that STAR considered necessary for a fair
presentation of the financial position and results of operations for those
periods. Operating results for the nine months ended February 28, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ending May 31, 1997.
Data for EFCC for the three months ended March 31, 1996 and March 31,
1997 have been derived from unaudited consolidated financial statements. The
unaudited financial statements of EFCC include all adjustments which are of a
normal recurring nature that EFCC considers necessary for a fair presentation of
the financial position and results of operations for those periods. Operating
results for the three months ended March 31, 1997 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1997.
13
<PAGE>
STAR Summary Historical Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
-------------------------------------------------------------- -----------------------
May 31
-------------------------------------------------------------- February 28, February 29,
1996 1995(2)(3) 1994(4) 1993(5) 1992(6) 1997 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT RATIO AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
DATA (1)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues $ 49,163 $ 38,430 $ 29,694 $ 23,428 $ 14,110 $ 39,164 $ 35,464
Income from Operations 1,832 1,251 576 118 49 2,406 1,450
Other Income (Expense) (120) (21) 67 130 122 (2,911) (74)
Income (Loss) from Continuing 1,143 758 358 135 55 (298) 766
Operations
Income (Loss) from Discontinued -- -- (711) (359) 290 -- --
Operations
Gain (Loss) on Disposal of -- 30 (1,168) -- 1,405 -- --
Discontinued Operations
Cumulative Effect of Change in -- 24(7) 65(8) -- -- -- --
Accounting Principle
Net Income (Loss) $ 1,143 $ 812 $ (1,456) $ (224) $ 1,750 $ (298) $ 766
Income Per Share
Income (Loss) from Continuing $ 0.28 $ 0.20 $ 0.10 $ 0.04 $ 0.01 $ (0.07) $ 0.18
Operations
Income (Loss) from Discontinued -- -- (0.20) (0.10) 0.08 -- --
Operation
Gain (Loss) on Disposal of -- 0.01 (0.33) -- 0.38 -- --
Discontinued Operations
Cumulative Effect of Change in -- 0.01 0.02 -- -- -- --
Accounting Principle
Net Income $ 0.28 $ 0.22 $ (0.41) $ (0.06) $ 0.47 $ (0.07) $ 0.18
Shares Used in Computing Per Share 4,012 3,799 3,529 3,621 3,699 4,278 4,257
Amounts
BALANCE SHEET DATA: (1)
Cash and Cash Equivalents $ 1,882 $ 1,497 $ 1,069 $ 2,334 $ 3,475 $ 79
Working Capital 9,415 6,774 5,525 6,650 7,901 9,197
Total Assets 19,369 16,798 14,196 13,436 14,867 18,258
Total Long-Term Obligations 3,604 2,156 832 115 745 3,345
(TABLE CONTINUED ON NEXT PAGE)
14
<PAGE>
Redeemable Preferred Stock 341 683 -- -- -- --
Shareholders' Equity 12,045 10,622 9,577 11,201 11,403 12,142
Current Ratio 3.79 3.03 2.46 4.14 3.91 4.32
Cash Dividend Declared Per Common $ -- $ -- $ -- $ -- $ -- $ --
Share
</TABLE>
(1) In August 1996, STAR acquired AMSERV HEALTHCARE SERVICES, INC. ("Amserv")
in a transaction accounted for as a pooling-of- interests, accordingly, all
periods presented have been restated to include the accounts and operations
of Amserv for the periods prior to the acquisition.
(2) In May 1995, STAR acquired certain assets of Long Island Nursing Registry,
Inc. in a transaction accounted for as a purchase.
(3) In June 1994, STAR acquired certain assets of North Central Personnel, Inc.
in a transaction accounted for as a purchase.
(4) In November 1993, STAR acquired certain assets of DSI Health Care Services,
Inc. in a transaction accounted for as a purchase.
(5) In August 1992, STAR acquired certain assets of Unity Care Services,
Inc.-New York Medicaid Operations in a transaction accounted for as a
purchase.
(6) In May 1992, STAR acquired certain assets of Unity Healthcare Holding
Company, Inc., Unity Care Services, Inc.-New York Operations and Unity Home
Care of Florida, Inc. in a transaction accounted for as a purchase.
(7) Effective July 1994, STAR adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." See Note 3 of STAR's Notes to
Consolidated Financial Statements.
(8) Effective June 1, 1993, STAR adopted SFAS No. 109, "Accounting for Income
Taxes." See Note 9 of STAR's Notes to Consolidated Financial Statements.
15
<PAGE>
EFCC Summary Historical Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended Three Months Ended
------------------------------------------------------- --------------------
December 31,
------------------------------------------------------- March 31, March 31,
1996 1995 1994(1) 1993 1992 1997 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT RATIO AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net Revenues $ 8,929 $ 7,368 $ 4,610 $ 3,053 $ 2,550 $ 2,322 $ 1,985
Income (Loss) from Operations 68 482 1 (189) (76) 18 (100)
Interest Income (Expense) 6 (4) (21) -- (47) 2 (2)
Income (Loss) from Continuing Operations 19 268 (56) (187) (123) 8 (64)
Minority Interest in Subsidiary (Income) -- (46) 9 11 -- (2) 11
Loss
INCOME PER SHARE
Income (Loss) from Continuing Operations $ 0.009 $ 0.0127 $(0.0029) $(0.0221) $(0.0238) $ 0.0002 $(0.0027)
Shares Used in Computing Per Share 21,809 21,034 19,300 8,454 5,162 32,000 19,300
Amounts
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 1,066 $ 512 $ 97 $ 25 $ 18 $ 445
Working Capital 1,528 286 (179) (30) 95 815
Total Assets 3,572 2,458 2,043 1,302 688 2,962
Total Long-Term Obligations 106 95 62 239 511 98
Minority Interest 140 140 94 17 -- 141
Shareholders' Equity 2,225 956 734 363 (335) 1,481
Current Ratio 2.39 1.23 0.84 0.96 1.19 1.66
Cash Dividend Per Common Share $ -- $ -- $ -- $ -- $ -- $0.0234
</TABLE>
(1) In 1993, EFCC implemented Statement of Position 90-70 "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code."
16
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table presents summary unaudited pro forma selected
operations data for the year ended May 31, 1996 and for the nine months ended
February 28, 1997. The income statement data has been prepared as if the Merger
and the other transactions requiring pro forma adjustments had occurred on June
1, 1995 assuming that the Merger had been consummated and accounted for using
the purchase method of accounting. The balance sheet data has been prepared
assuming the Merger had been consummated on February 28, 1997.
The following summary unaudited pro forma condensed combined
financial data are provided for comparative purposes only and should be read in
conjunction with the unaudited pro forma condensed combined financial statements
and the notes thereto and the separate audited consolidated financial statements
and related notes thereto of STAR and EFCC. See "UNAUDITED PRO FORMA CONDENSED
COMBINED 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 had been consummated on
the dates indicated or which may be obtained in the future.
<TABLE>
<CAPTION>
Year Ended May 31, Nine Months Ended
------------------ -----------------
February 28,
1996 1997
---- ----
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
INCOME STATEMENT DATA:
<S> <C> <C>
Net revenues $ 57,281 $ 46,212
Operating expenses 55,557 43,815
Operating income 1,724 2,397
Other (income) expense 384 3,093
Income (loss) from continuing operations
before provision for income taxes 1,340 (696)
Provision (benefit) for income taxes 422 (258)
Income (loss) from continuing operations 918 (438)
Income (loss) from continuing operations per $ .18 $ (.08)
common share
Weighted average shares outstanding 5,089 5,356
February 28,
BALANCE SHEET DATA: 1997
--------------
(IN THOUSANDS)
Cash and cash equivalents $ 524
Working capital 9,693
Total assets 27,483
Long-term obligations, excluding current
maturities 6,478
Shareholders' equity 16,992
</TABLE>
17
<PAGE>
ADOPTION OF AMENDMENT TO STAR 1992 PLAN AND ADOPTION OF STAR 1997 PLAN.
At the STAR Meeting, the STAR shareholders will also be asked to vote
on two proposals. One proposal will be to adopt an amendment to the STAR 1992
Plan to limit the number of shares of STAR Common Stock that may be subject to
options to any one optionee in any fiscal year to 100,000, subject to the STAR
1992 Plan antidilution provisions. The other proposal to be submitted at the
STAR Meeting is to adopt the STAR 1997 Plan. The STAR 1997 Plan is designed to
provide an incentive to directors who are not employees of STAR and to offer an
additional inducement in obtaining the services of such individuals.
18
<PAGE>
RISK FACTORS
The following factors should be considered carefully by the
shareholders of STAR and EFCC in evaluating the terms of the Merger Agreement,
the Merger and the STAR Common Stock offered hereby.
Certain statements in this Joint Proxy Statement/Prospectus are not
historical facts and constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results of STAR and EFCC, after consummation of the
Merger to be materially different from historical results or from any results
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors include, but are not limited to, the following
risks:
Risks Relating to an Investment in Star
---------------------------------------
LACK OF LIQUIDITY. STAR pays its employees on a weekly basis. STAR
typically does not receive payment from hospitals, insurance companies and
governmental agencies earlier than 60 to 180 days, or longer, after rendering an
invoice. Accordingly, STAR's operating cash flow may, at times, be insufficient
to meet certain of its obligations. STAR has a revolving line of credit
permitting borrowings up to $8,000,000, which STAR borrows against from time to
time to meet its outstanding obligations. This line of credit expires on October
31, 1998 and is subject to renewal. As STAR's business expands, however,
significant additional financing is likely to be required. If STAR were unable
to secure such financing on terms deemed favorable by management, such inability
would have a material adverse effect on STAR's financial condition, including
its ability to meet certain of its obligations as they come due.
HEALTH CARE REFORM. As a result of the escalation of health care
costs and the inability of many individuals and employers to obtain affordable
health insurance, numerous proposals have been or may be introduced in the
United States Congress and state legislatures, and other proposals are being
considered, relating to health care reform. Such proposals have included, among
other things, provision of universal access to health care, reforming the
payment methodology for health care goods and services by both the public
(Medicare and Medicaid) and private sectors, and methods to control or reduce
public and private spending on health care. The ultimate timing or effect such
reforms may have on STAR cannot be predicted and no assurance can be given that
any such reforms will not have a material adverse effect on STAR's revenues
and/or earnings. Short-term cost containment initiatives may vary substantially
from long-term reforms and may have a material adverse effect on STAR.
REGULATORY ENVIRONMENT; THIRD PARTY PAYORS. As a provider of services
under the Medicare and Medicaid programs, STAR is subject to the federal fraud
and abuse and the so-called "Stark" anti-referral laws, violations of which may
result in civil and criminal penalties and exclusion from participation in the
Medicare and Medicaid programs. In addition, several states have enacted their
own statutory analogs of the federal fraud and abuse and anti-referral laws.
There can be no assurance that administrative or judicial interpretations of
existing statutes or regulations or enactments of new laws or regulations will
not have a material adverse effect on STAR's operations or financial condition.
Health care is subject to laws and regulations of federal, state and
local governments. The failure to obtain, renew or maintain any of the required
regulatory approvals or licenses could adversely affect the business of STAR and
could prevent it from offering its products or services.
Virtually all of STAR's revenues are attributable to payments
received from third-party payors, including the Medicare and Medicaid programs
and private insurers. There are increasing pressures from
19
<PAGE>
many payor sources to control health care costs. In addition, there are
increasing pressures from public and private payors to limit increases in
reimbursement rates for medical services. The levels of revenues and
profitability of STAR, similar to other health care companies, will be subject
to the effect of possible reductions in coverage or payment rates by third-party
payors. Such payments are subject to audit and adjustment, including retroactive
adjustment. During the fiscal years 1994, 1995 and 1996 such adjustments have
been insignificant. In the event that future audits result in adjustments that
are not insignificant, then such adjustments could have a material adverse
effect on STAR. Such changes could have a material adverse effect on the
business and results of operations of STAR. In addition, the payments of third
party payors are subject to audit and adjustment, including retroactive
adjustment.
COMPETITION. The home health care and temporary health care personnel
placement markets are highly fragmented and significant competitors are often
localized in particular geographical markets. STAR's largest competitors include
Olsten Company and Staff Builders. Some of the entities with which STAR competes
have substantially greater financial and other resources than STAR. Accordingly,
STAR may be unable to successfully compete in this environment.
NEED FOR QUALIFIED PERSONNEL. STAR's business is dependent in large
part upon its ability to recruit and retain qualified registered nurses and
other professional and medical support personnel to fill positions in a timely
manner. STAR faces intense competition from other companies in recruiting such
qualified health care personnel for its Home Care and Hospital Staffing
operations. STAR's growth may depend, to a significant degree, on its ability to
continue to recruit and retain such qualified health care personnel. There can
be no assurance that such qualified health care personnel will continue to be
available to STAR in the future. If STAR were to be unable to attract or retain
such qualified health care personnel, it would have a material adverse effect on
the business of STAR.
GOVERNMENT REGULATIONS AND LICENSING. STAR is currently licensed to
provide home health care in the five boroughs of New York City, Nassau, Suffolk,
Westchester, Oswego, Oneida, Onondaga, Cayuga, Madison, Jefferson and Herkimer
Counties in New York State and the State of Florida. In Broward and Dade
Counties in Florida, STAR also maintains a Certified Home Health Care Agency
which participates in both the Medicare and Medicaid programs. STAR, through its
wholly owned subsidiary, Amserv, is also licensed to provide health care
services in New Jersey and Ohio, with the Ohio office also maintaining
certification to provide medicare reimbursed services.
STAR's business is subject to substantial regulations by Federal,
state and local authorities which impose a significant compliance
responsibilities on STAR. STAR, among other things, must comply with state
licensing and certificate of need ("CON") requirements as well as Federal and
state eligibility standards for certification as a Medicare and Medicaid
provider. The denial or revocation of any license or permit necessary for STAR
to operate in a particular market could have a material adverse effect on STAR's
operations. In addition, STAR will be required to comply to the extent
applicable, with the licensing and/or CON requirements and other regulations in
any jurisdiction in which it may plan to provide services in the future.
Applicable laws and regulations in all states are subject to change
by state legislatures and appropriate regulatory authorities and also may be
affected by changes in federal legislation, as well as local county legislation.
The imposition of more stringent regulatory requirements could have a materially
adverse impact on STAR's operations. In addition, STAR will be required to
comply with applicable laws and regulations in any new state in which it may
operate. If STAR should not be able to comply for any reason, it would be unable
to conduct business in such state.
20
<PAGE>
AUDITS. Under current reimbursement regulations under Medicare and
Medicaid, funds received under Medicare and Medicaid programs are subject to
audit with respect to proper application of the various payment formulas and
regulations. These audits can result in retroactive adjustment of payments
received from these programs, resulting in either amounts due to the government
agency from STAR or amounts due to STAR from the governmental agency.
STAR has a Medicaid audit pending with the State of New York and does
not anticipate that any material adjustment will result from such audit.
However, there can be no assurance that this audit will be resolved
satisfactorily in favor of STAR. In addition, STAR has agreed to submit its
books and record to a voluntary survey to be performed by the State of New York
with respect to Medicaid patients. There can be no assurance that this voluntary
review will be resolved satisfactorily in favor of STAR.
In May 1997, STAR was advised that an audit of American Health Care
Services, STAR's Medicare agency, by the Office of Audit Services, Office of
Inspector General of the United States Department of Health and Human Services
which had been forwarded to the Medicare intermediary assigned to administer
Medicare payments in Florida had been referred to the Civil Division of the
United States Attorney for the Southern District of Florida. STAR has been
advised by Broad and Cassel ("Regulatory Counsel") that they have been in
contact with the Assistant United States Attorney assigned to the matter, and
they do not know at this time the extent of STAR's liability. Regulatory Counsel
has also advised STAR that STAR could pursue claims against third parties (e.g.
subcontractors and licensed home health agencies) for a portion of any liability
of STAR. Management anticipates that this matter should be satisfactorily
resolved. This is grounded upon the advice of Regulatory Counsel to the Company
as to (i) the resolution of similar types of audits or claims based upon their
experience in the health care industry and dealing with similar matters before
the Department of Justice even though there has been no final determination of
liability and can be no assurance as to the ultimate liability; and (ii) the
fact that STAR should have the right, whether or not this audit or claim is
resolved in whole or in part in STAR's favor, to claim against third-party
independent contractors and other parties that may have rendered services to
STAR, even though there is no assurance that any such claims would be ultimately
collectible.
PRICE CONSTRAINTS. Certain proposals by state legislatures and by
Congress to contain health care costs, such as proposals for cutbacks in
Medicare and Medicaid reimbursement levels, governmentally imposed freezes on
prices charged by physicians, hospitals and other health care providers, and
greater state flexibility in the administration of Medicaid, could adversely
affect STAR. During the fiscal years ended May 31, 1994, 1995 and 1996, 62%, 62%
and 59%, respectively, of STAR's revenues were attributable to Medicare,
Medicaid and other state and federal government payments. A number of states
have reduced funding for health care services or have placed certain limits on
reimbursable expenses. There can be no assurance that additional state
legislatures and Congress will not further reduce funding or impose additional
limits on reimbursements, particularly with respect to expenses to be reimbursed
through Medicaid. Such reductions in funding and limits on reimbursement, if
enacted, could have a material adverse effect on STAR's operating results.
LIABILITY FOR SERVICES AND INSURANCE. STAR's employees and
independent contractors routinely confront life threatening situations and also
make decisions which can have significant medical consequences to the patients
in their care. As a result, STAR is exposed to substantial liability in the
event of negligence or wrongful acts of its personnel. STAR maintains medical
professional insurance providing for coverage in a maximum amount of $1,000,000
per claim, subject to a limitation of $10,000,000 for all claims in any single
year. In addition, STAR requires that any independent contractor whom STAR
refers to institutions for employment supply a certificate of insurance
evidencing that such person maintains their own medical professional liability
insurance providing for coverage of no less than $1,000,000 per claim, subject
to a limitation of no more than $3,000,000 for all claims in a single policy
year. Although there are currently no material claims pending against STAR,
there can be no assurance that STAR will be able to maintain its existing
insurance at an acceptable cost or obtain additional insurance in the future as
required or that such level of insurance will be sufficient to cover liabilities
from claims that may be brought. A partially or completely uninsured claim, if
successfully asserted and of sufficient magnitude, could have a material adverse
effect on STAR and its financial condition.
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<PAGE>
PENDING LITIGATION. In November 1996, Eugene J. Mora commenced an
action in the Superior Court of the State of California, San Diego County,
against STAR, Amserv, William Fellerman and Stephen Sternbach. The complaint
arose out of the termination of Mr. Mora, the former Chief Executive Officer of
Amserv. Mr. Mora alleges that the defendant caused Amserv to breach his
employment contract with Amserv. Mr. Mora seeks monetary and punitive damages,
as well as penalties. See "Business of STAR - Legal Proceedings."
NO CASH DIVIDENDS. Since prior to its initial public offering in May
1991, STAR has not paid cash dividends on the STAR Common Stock. It is the
present policy of STAR to retain earnings, if any, to finance the development
and growth of its business. Accordingly, STAR does not anticipate that cash
dividends will be paid until earnings of STAR warrant such dividends, and there
can be no assurance that STAR can achieve such earnings or any earnings.
Risks Relating to the Merger
----------------------------
NO ASSURANCE THAT STAR WILL REALIZE ANTICIPATED BENEFITS FROM THE
MERGER. The Merger involves the combination of certain aspects of two companies
that have operated independently. Accordingly, there can be no assurance that
EFCC can be successfully integrated into STAR or that STAR and its shareholders
(including persons who become shareholders as a result of the Merger) will
ultimately realize any of the anticipated benefits of the Merger.
POTENTIAL CONFLICTS OF INTEREST. In considering the recommendation of
the Board of Directors of STAR and the Board of Directors of EFCC with respect
to the Merger Agreement and the transactions contemplated thereby, shareholders
should be aware that certain members of EFCC's management, EFCC's Board and Mr.
Ivan Kaufman have interests in the Merger that are in addition to the interests
of shareholders of STAR and EFCC generally. The Boards of Directors of STAR and
EFCC were aware of these interests and considered them, among other factors, in
approving the Merger Agreement and the transactions contemplated thereby. See
"THE MERGER -- Interests of Certain Persons in the Merger."
CONTROL BY MANAGEMENT. After completion of the Merger, Mr. Sternbach
will have voting power over approximately 19.1% of the outstanding STAR Common
Stock. While Mr. Sternbach's ownership will not allow him to exercise control
over STAR, his stock ownership as well as his position as Chairman of the Board
of Directors, President and Chief Executive Officer will enable him to exercise
significant influence on the management and operation of the combined entity.
LACK OF UPDATE TO TELESIS OPINION. EFCC has received an opinion from
Telesis, dated December 31, 1996 to the effect that, as of such date and based
upon certain matters as stated therein, the terms of the Merger are fair to the
shareholders of EFCC from a financial point of view. EFCC's obligation to
consummate the Merger is not conditional upon receipt of an updated financial
opinion. EFCC does not intend to obtain, and Telesis is under no obligation to
provide, an update of such opinion. Accordingly, there can be no assurance that
Telesis would render a similar opinion as of a date subsequent to December 31,
1996. See "THE MERGER -- EFCC's Reasons for the Merger; Recommendation of the
EFCC Board of Directors; Financial Advisor; Fairness Opinion."
NON-COMPLIANCE WITH CERTAIN SECURITIES LAWS. Since filing its
petition for bankruptcy in 1986, until the filing of its Form 10-KSB for the
period ending December 31, 1995 (the "1995 10-KSB"), EFCC has not filed any
required reports under the Exchange Act. The last such report filed was EFCC's
Form 10-K for the fiscal year ended December 31, 1985. During the years while in
bankruptcy, EFCC did not possess adequate financial and staffing resources to
produce audited financial statements and other reports as required
22
<PAGE>
by the Exchange Act. EFCC has filed all reports required under the Exchange Act
commencing with the 1995 10-KSB.
TPC was required to and failed to file Exchange Act reports, which
obligation arose as a result of the registration statement filed with the
Commission in connection with its aborted 1985 offering having been declared
effective, coupled with its subsequent failure to withdraw this registration
statement. See "Business of EFCC and TPC."
As a result of EFCC's and TPC's past non-compliance with the Exchange
Act, the Securities and Exchange Commission may determine to bring civil and
administrative proceedings against EFCC and TPC. While the likelihood of such
proceedings being brought is uncertain, if such proceedings were to be brought,
EFCC and TPC could be subject to substantial monetary penalties and other
administrative remedies.
DILUTION OF VOTING POWER. Consummation of the Merger will result in
an approximate 24.2% increase in the number of shares of STAR Common Stock
outstanding. Shareholders of STAR will, therefore, experience a corresponding
dilution of their voting power. In exchange for 100% of the outstanding EFCC
Common Stock, shareholders of EFCC will receive approximately 19.5% of the
outstanding voting stock of STAR. Accordingly, they will experience a dilution
of approximately 19.5% of their relative voting authority after the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The Merger is intended to
qualify as a "tax-free reorganization" for federal income tax purposes under
Section 368(a)(1) of the Code. If the Merger so qualifies, no gain or loss will
be recognized for United States Federal income tax purposes by each shareholder
of EFCC as a result of the exchange of shares of EFCC Common Stock for shares of
STAR Common Stock with respect to that portion of the merger consideration paid
in shares of STAR Common Stock. However, if in lieu of the issuance of shares of
STAR Common Stock the cash option is exercised by STAR, the receipt of cash by
each of the shareholders of EFCC may give rise to a taxable gain or loss. Such
gain or loss would be long-term capital gain or loss, provided such shares of
EFCC Common Stock had been held more than one year.
Each shareholder of EFCC is urged to consult his or her tax advisor
to determine the specific tax consequences of the Merger to such shareholder.
The obligations of both EFCC and STAR to consummate the Merger are subject to
the receipt of an opinion of EFCC's tax counsel to the effect that the Merger
will be a "tax-free reorganization" for federal income tax purposes. For a
further discussion of certain federal income tax consequences of the Merger, see
"THE MERGER - Certain Federal Income Tax Consequences" and "THE MERGER AGREEMENT
- -- Conditions of the Merger."
POSSIBLE ADVERSE IMPACT IF STAR MERGER IS NOT CONSUMMATED. Certain of
TPC's operations have been administered by STAR in furtherance of the STAR
Merger Agreement. If, for any reason, the STAR Merger were not to occur,
transferring these functions back to EFCC could be costly and time consuming and
may adversely affect EFCC.
23
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents historical and equivalent unaudited pro
forma per share data of STAR and EFCC after giving effect to the Merger using
the purchase method of accounting, assuming the Merger had been effective during
all periods presented. 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 the notes thereto of STAR and EFCC and the unaudited pro forma
condensed combined financial statements included elsewhere in this Joint Proxy
Statement/Prospectus.
The Pro Forma Combined and EFCC equivalent Pro Forma amounts were
calculated assuming the issuance of 1,077,778 shares of STAR Common Stock in
exchange for the outstanding shares of EFCC Common Stock assuming a price per
share of STAR Common Stock of $4.50 (See "Notes to Unaudited Pro Forma Condensed
Combined Financial Statements").
<TABLE>
<CAPTION>
STAR EFCC
---------------------- ----------------------
Pro Forma Equivalent Equivalent
Combined Historical Pro Forma Historical Pro Forma
<S> <C> <C> <C> <C> <C>
Book value per share of common
stock outstanding at February 28, 1997 $ 3.34 $ 3.02 $ -- $ 0.05 $ 0.14
Cash Dividends Declared (1) $ 0.15 $ -- $ -- $ 0.02 $ 0.01
Income (loss) per share from continuing operations:
Nine months ended February 28, 1997 $(0.08) $ (0.07) $ -- $ 0.00 $ 0.00
Year ended May 31, 1996 $ 0.18 $ 0.28 $ -- $ 0.00 $ 0.01
</TABLE>
(1) On January 21, 1997, pursuant to the Merger Agreement, EFCC paid a special
cash dividend of $750,000 to its shareholders of record on January 13,
1997. Neither STAR nor EFCC has paid any other cash dividends during the
past five years.
24
<PAGE>
COMPARATIVE MARKET DATA
STAR Common Stock is listed on the Nasdaq National Market under the
symbol "SMCS." EFCC Common Stock is quoted in the over-the-counter market of the
"Nasdaq Bulletin Board" and on the "Pink Sheets" as reported by the National
Quotation Bureau, Inc. under the symbol "CXCS." The table below sets forth, for
the fiscal quarters (based upon the respective fiscal years of STAR and EFCC)
indicated, the high and low sales prices per share.
<TABLE>
<CAPTION>
STAR COMMON STOCK EFCC COMMON STOCK
----------------- -----------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1996/1995:
First Quarter.................................... $ 4.375 $3.50 $.125 $.031
Second Quarter................................... 7.375 4.1875 .250 .063
Third Quarter.................................... 8.125 5.50 .250 .063
Fourth Quarter................................... 7.50 5.125 .375 .063
Fiscal 1997/1996:
First Quarter.................................... $10.9375 $5.9375 $.437 $.250
Second Quarter................................... 7.25 5.8125 .500 .187
Third Quarter.................................... 7.0 5.50 .250 .125
Fourth Quarter (through April 21, 1997 for STAR). 6.0 4.50 .156 .040
Fiscal 1997 (for EFCC)
First Quarter ................................... N/A N/A .16 .062
Second Quarter (through May 30, 1997............. N/A N/A .10 .062
</TABLE>
The last reported sale prices per share of STAR Common Stock and EFCC
Common Stock on January 2, 1997, the last trading day preceding public
announcement of the Merger, were $5.875 and $0.15, respectively. On July 24,
1997 the closing sale price per share of STAR Common Stock was $5.50 and the
closing sale price per share of EFCC Common Stock was $.08.
As of July 24, 1997 the number of holders of record of STAR Common
Stock and EFCC Common Stock were 218 and 1,271, respectively. Since prior to its
initial public offering in May 1991, STAR has not paid cash dividends on the
STAR Common Stock. It is the present policy of STAR to retain earnings, if any,
to finance the development and growth of its business. Accordingly, STAR does
not anticipate that cash dividends will be paid until earnings of STAR warrant
such dividends, and there can be no assurance that STAR can achieve such
earnings or any earnings. On January 21, 1997, in accordance with the terms of
the Merger Agreement, the Board of Directors of EFCC paid a special cash
dividend on shares of its common stock in an aggregate amount of $750,000 (the
"Special Dividend"). Other than the Special Dividend, EFCC paid no cash
dividends during the past two fiscal years. It is the policy of EFCC to retain
all earnings, if any, to finance the development and growth of its business.
Accordingly, EFCC does not anticipate paying cash dividends in the foreseeable
future. In addition, the Merger Agreement prohibits the payment of any dividends
by EFCC prior to the Effective Time.
SHAREHOLDERS OF STAR AND EFCC ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR STAR COMMON STOCK AND EFCC COMMON STOCK. NO ASSURANCE CAN BE
GIVEN AS TO THE MARKET PRICE OF STAR COMMON STOCK AFTER THE MERGER.
25
<PAGE>
THE STAR MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished by STAR to
the holders of STAR Common Stock in connection with the solicitation of proxies
by the Board of Directors of STAR for use at a Special Meeting of Shareholders
of STAR to be held on September 5, 1997 at the offices of Parker Chapin Flattau
& Klimpl, LLP, 1211 Avenue of the Americas (18th Floor), New York, New York at
10:00 A.M., local time, and any adjournments or postponements thereof.
This Joint Proxy Statement/Prospectus, the attached Notice of Meeting
and the accompanying form of proxy are first being mailed to shareholders of
STAR on or about August 11, 1997.
MATTERS TO BE CONSIDERED AT THE STAR MEETING
At the STAR Meeting, holders of shares of STAR Common Stock will
consider and vote upon: (i) a proposal to approve and adopt the Merger Agreement
and the transactions contemplated thereby; (ii) adopt an amendment to STAR's
1992 Stock Option Plan (the "STAR 1992 Plan"), limiting the number of shares of
STAR Common Stock subject to options granted to any optionee in any fiscal year
to 100,000; (iii) adopt STAR's 1997 Non-Employee Director Stock Option Plan (the
"STAR 1997 Plan") and (iv) such other business as properly may come before the
STAR Meeting or any adjournments or postponements thereof.
The STAR Board of Directors has unanimously approved the Merger
Agreement and the transactions contemplated thereby. The STAR Board of Directors
believes that the terms of the Merger are fair to, and in the best interests of,
STAR and its shareholders and unanimously recommends that the holders of STAR
Common Stock vote FOR the approval and adoption of the Merger Agreement and the
transactions contemplated thereby. For further information, see "THE MERGER --
STAR's Reasons for the Merger; Recommendation of the STAR Board." The STAR Board
of Directors has also unanimously approved the adoption of the amendment to the
STAR 1992 Plan and the adoption of the STAR 1997 Plan and recommends that you
vote FOR each such proposal.
STAR RECORD DATE
The Board of Directors of STAR has fixed the close of business on
July 28, 1997 as the STAR record date (the "STAR Record Date") for the
determination of STAR shareholders entitled to notice of, and to vote at, the
STAR Meeting. Accordingly, only holders of record of shares of STAR Common Stock
at the close of business on the STAR Record Date are entitled to notice of, and
to vote at, the STAR Meeting. As of the STAR Record Date, 4,212,387 shares of
STAR Common Stock were outstanding and held of record by 218 STAR shareholders.
PROXIES
When a proxy card is returned, properly signed and dated, the shares
of STAR Common Stock represented thereby will be voted in accordance with the
instructions on the proxy card. If a STAR shareholder does not attend the STAR
Meeting and does not return the signed proxy card, such STAR shareholder's
shares will not be voted. If a STAR shareholder returns a signed proxy card but
does not indicate how his or her shares are to be voted, such shares of STAR
Common Stock will be voted (i) FOR approval of the Merger Agreement and the
transactions contemplated thereby; (ii) FOR approval of the adoption of the
amendment to the STAR 1992 Plan; and (iii) FOR adoption of the STAR 1997 Plan.
As of
26
<PAGE>
the date of this Joint Proxy Statement/Prospectus, the STAR Board of Directors
does not know of any other matters which are to come before the STAR Meeting. If
any other matters are properly presented at the STAR Meeting for consideration,
the persons named in the enclosed form of proxy and acting thereunder will have
discretion to vote on such matters in accordance with their best judgment. The
giving of a proxy, however, will not convey discretionary authority to adjourn
or postpone the STAR Meeting for the purpose of soliciting additional votes.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of STAR, at or before the taking of the vote at the
STAR Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares of
STAR Common Stock and delivering it to the Secretary of STAR before the taking
of the vote at the STAR Meeting or (iii) attending the STAR Meeting and voting
in person (although attendance at the STAR Meeting will not in and of itself
constitute a revocation of a proxy). Any written notice of revocation or
subsequent proxy should be sent so as to be delivered to STAR MULTI CARE
SERVICES, INC., 99 Railroad Station Plaza, Hicksville, New York 11801,
Attention: Corporate Secretary, or hand delivered to the Secretary of STAR at or
before the taking of the vote at the STAR Meeting.
STAR will bear the cost of the solicitation of proxies from STAR
shareholders. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers, and employees of STAR in person or by
telephone or other means of communication. Such directors, officers and
employees of EFCC 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 STAR will reimburse
such custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
QUORUM
The presence, either in person or by properly executed proxies, of
the holders of a majority of the shares of STAR Common Stock entitled to vote is
necessary to constitute a quorum at the STAR Meeting. Both abstentions and
broker non-votes are considered present for purposes of determining a quorum but
are excluded from votes cast.
VOTE REQUIRED
STAR shareholders are entitled to one vote at the STAR Meeting for
each share of STAR Common Stock held of record by them on the STAR Record Date.
The affirmative vote of the holders of a majority of the shares of STAR Common
Stock voted at the STAR Meeting, in person or by proxy, is required to approve
and adopt the Merger Agreement and the transactions contemplated thereby, if a
number of shares of STAR Common Stock equal to more than 20% will be issued as a
result of the Merger. The affirmative vote of the majority of the votes cast at
the STAR Meeting will be required to approve the amendment to the STAR 1992 Plan
and to approve the adoption of the STAR 1997 Plan. Since approval of the Merger
Agreement requires a majority of the votes cast, abstentions and broker
non-votes will not affect the outcome of this proposal.
As of the STAR Record Date, STAR's directors, executive officers and
affiliates may be deemed to be beneficial owners of an aggregate of 1,575,230
shares of STAR Common Stock (excluding 137,574 shares which may be acquired upon
exercise of options or other rights which are exercisable within 60 days of the
STAR Record Date), or approximately 37.4% of the then outstanding shares of STAR
Common
27
<PAGE>
Stock. STAR has been advised that its directors and executive officers intend to
vote in favor of the approval and adoption of the Merger Agreement.
STERNBACH PROXY
Stephen Sternbach, Chairman, President and Chief Executive Officer of
STAR, granted to the directors of EFCC an irrevocable proxy pursuant to which he
agreed to vote all shares over which he has direct beneficial ownership
(863,262), and any shares subsequently acquired by him, in favor of the Merger
at the STAR Meeting.
THE EFCC MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished by EFCC to
the holders of EFCC Common Stock in connection with the solicitation of proxies
by the Board of Directors of EFCC for use at a Special Meeting of Shareholders
of EFCC (the "EFCC Meeting") to be held at the offices of Arbor Health Care
Holdings LLC, 333 Earle Ovington Blvd., Uniondale, New York 11553 on September
5, 1997 at 10:00 A.M., local time, and any adjournments or postponements
thereof.
This Joint Proxy Statement/Prospectus, the attached Notice of Meeting
and the accompanying form of proxy are first being mailed to shareholders of
EFCC on or about August 11, 1997.
MATTERS TO BE CONSIDERED AT THE EFCC MEETING
At the EFCC Meeting, holders of shares of EFCC Common Stock will
consider and vote on a proposal to approve and adopt the Merger Agreement and
the transactions contemplated thereby, and such other business as may properly
come before the EFCC Meeting.
The EFCC Board of Directors has unanimously approved the Merger
Agreement and the transactions contemplated thereby. The EFCC Board of Directors
believes that the terms of the Merger are fair to, and in the best interests of,
EFCC and its shareholders and unanimously recommends that the holders of EFCC
Common Stock vote FOR approval and adoption of the Merger Agreement and the
transactions contemplated thereby. For further information, see "THE MERGER --
EFCC's Reasons for the Merger; Recommendation of the EFCC Board."
EFCC RECORD DATE
The Board of Directors of EFCC has fixed the close of business on
August 11, 1997, as the EFCC record date ("EFCC Record Date") for the
determination of EFCC shareholders entitled to notice of, and to vote at, the
EFCC Meeting. Accordingly, only holders of record of shares of EFCC Common Stock
at the close of business on the EFCC Record Date are entitled to notice of, and
to vote at, the EFCC Meeting. As of the EFCC Record Date, 37,601,975 shares of
EFCC Common Stock were outstanding and held of record by 1,271 EFCC
shareholders.
28
<PAGE>
PROXIES
When a proxy card is returned, properly signed and dated, the shares
of EFCC Common Stock represented thereby will be voted in accordance with the
instructions on the proxy card. If an EFCC shareholder does not attend the EFCC
Meeting and does not return the signed proxy card, such EFCC shareholder's
shares will not be voted. If an EFCC shareholder returns a signed proxy card but
does not indicate how his or her shares are to be voted, such shares of EFCC
Common Stock will be voted FOR approval of the Merger Agreement and the
transactions contemplated thereby. As of the date of this Joint Proxy
Statement/Prospectus, the EFCC Board of Directors does not know of any other
matters which are to come before the EFCC Meeting. If any other matters are
properly presented at the EFCC Meeting for consideration, the persons named in
the enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment. The giving of a proxy,
however, will not convey discretionary authority to adjourn or postpone the EFCC
Meeting for the purpose of soliciting additional votes.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of EFCC, at or before the taking of the vote at the
EFCC Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares of
EFCC Common Stock and delivering it to the Secretary of EFCC before the taking
of the vote at the EFCC Meeting or (iii) attending the EFCC Meeting and voting
in person (although attendance at the EFCC Meeting will not in and of itself
constitute a revocation of a proxy). Any written notice of revocation or
subsequent proxy should be sent so as to be delivered to EFCC, Attention: Joseph
Heller, Vice President, or hand delivered to the Vice President of EFCC at or
before the taking of the vote at the EFCC Meeting.
EFCC will bear the cost of the solicitation of proxies from EFCC
shareholders. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers, and employees of EFCC in person or by
telephone or other means of communication. Such directors, officers and
employees of EFCC 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 EFCC will reimburse
such custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
EFCC SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS. THE PROCEDURES FOR THE EXCHANGE OF SHARES OF EFCC COMMON STOCK
AFTER THE MERGER IS CONSUMMATED ARE SET FORTH BELOW IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
QUORUM
The presence, either in person or by properly executed proxies, of
the holders of a majority of the outstanding shares of EFCC Common Stock is
necessary to constitute a quorum at the EFCC Meeting. Both abstentions and
broker non-votes are considered present for purposes of determining a quorum but
are excluded from votes cast.
29
<PAGE>
VOTE REQUIRED
EFCC shareholders are entitled to one vote at the EFCC Meeting for
each share of EFCC Common Stock held of record by them on the EFCC Record Date.
The affirmative vote of two-thirds of all outstanding shares of EFCC Common
Stock is required to approve and adopt the Merger Agreement. Since approval of
the Merger Agreement requires the affirmative vote of two-thirds of all
outstanding shares of EFCC Common Stock, abstentions and broker non-votes will
have the effect of votes against the Merger Agreement.
EFCC SHAREHOLDERS AGREEMENT
Coss and Arbor (collectively, the "Shareholders"), shareholders of
EFCC and Kaufman, an individual having voting control of the shares of EFCC
owned by the Shareholders and John Natalone, Vice President of Arbor Management,
as voting trustee replacing Gary Melius, the original voting trustee as to the
shares of EFCC Common Stock owned by Coss (the "Voting Trustee") under a Voting
Trust Agreement, dated as of June 20, 1996 by and between EFCC, Kaufman, Coss,
Arbor and the Voting Trustee entered into a shareholders agreement (the "EFCC
Shareholders Agreement") pursuant to which Coss and Arbor and the Voting Trustee
agreed to vote in favor of the Merger and the Merger Agreement. The shares of
EFCC Common Stock subject to the EFCC Shareholders Agreement represent
approximately 68% of the outstanding EFCC Common Stock, giving effect to
consummation of the TPC Merger. Accordingly, approval and adoption of the Merger
Agreement and the transactions contemplated thereby is assured since the shares
of EFCC Common Stock subject to the EFCC Shareholders Agreement is in excess of
the two-thirds required to approve and adopt the Merger Agreement.
In addition, Coss, Arbor and the Voting Trustee granted to the
directors of STAR an irrevocable proxy to vote their shares in the manner
described above.
THE MERGER
BACKGROUND OF THE MERGER
STAR is continually exploring possible acquisitions of comparable
companies in furtherance of its strategic objective of acquiring companies in
the Home Care business in the geographic regions currently served by STAR; as
well as in areas not currently served by STAR. As discussed elsewhere, since
1992 STAR has expanded its Home Care business through a series of acquisitions.
Such acquisitions have allowed STAR to provide Home Care services more
efficiently while reducing marginal costs. Prior to commencing discussions
regarding the Merger, however, STAR was not considering any other specific
alliances or specific acquisitions.
The parties were introduced by Mr. Gary Carpenter, a partner of
Carpenter & Onoroto, EFCC's auditors, whom EFCC had retained to assist it in
seeking potential acquisition candidates. At Mr. Carpenter's suggestion on
February 17, 1996 Stephen Sternbach, the President and Chief Executive Officer
of STAR contacted Mr. Ivan Kaufman to suggest a meeting to discuss a possible
strategic alliance between STAR and EFCC. On February 29, 1996, Stephen
Sternbach met with Mr. Kaufman and Joseph Martello, the Chief Financial Officer
of Arbor Management, an entity controlled by Mr. Kaufman (who in turn controls
Arbor which owns approximately 40% of EFCC's outstanding shares and controls the
voting rights as to an additional 40% of EFCC's outstanding shares). At that
meeting, Mr. Sternbach, Mr. Kaufman and Mr.
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Martello discussed, in general terms, their respective businesses and business
strategies. Messrs. Sternbach, Kaufman and Martello expressed their mutual
interest in pursuing the matter further.
Prior to commencing discussions with STAR, EFCC had a series of
discussions with another home healthcare company, Transworld Home Healthcare,
Inc. ("Transworld"). Transworld held discussions, during February and March
1996, with Joseph Heller, Vice President of Arbor Management and Vice President
of EFCC, concerning the possibility of Transworld acquiring EFCC. A senior
officer of Transworld met with Ivan Kaufman, Joseph Martello and Joseph Heller
on April 24, 1996 to discuss a possible acquisition of EFCC by Transworld. The
parties agreed to exchange information about their respective companies and, in
furtherance thereof, executed confidentiality agreements. EFCC and Transworld
had only a limited amount of discussions after this time because, EFCC believes,
Transworld had been devoting its resources to other acquisitions. After Mr.
Sternbach made his initial proposal to EFCC (as discussed below), EFCC
communicated the range of that proposal to Transworld, at which point,
Transworld and EFCC broke off negotiations and terminated their discussions.
On March 25, 1996, Mr. Martello telephoned Mr. Sternbach to discuss
the possibility of STAR engaging in a joint venture transaction or other
strategic alliance with EFCC. Mr. Martello suggested that a meeting be called
and that Messrs. Sternbach, Kaufman and Heller attend to discuss a possible
transaction.
On May 1, 1996 Messrs. Sternbach and Solof, a member of the STAR
board, met with Messrs. Kaufman, Martello and Heller. At this meeting the
parties exchanged publicly available financial information about their
respective companies (Forms 10-Ks, 10-KSBs, 10-Qs and 10-QSBs) and discussed the
possible operating synergies that would exist between the two companies.
On May 21, 1996, Mr. Sternbach met again with Messrs. Kaufman,
Martello and Heller. At that meeting Mr. Sternbach described the success that
STAR had in its recent acquisitions and how STAR had been able to operate those
acquired companies in a more efficient manner, substantially reducing the level
of selling, general and administrative expenses of the acquired company by
effectively integrating their operations with those of STAR. Mr. Sternbach
suggested that Messrs. Kaufman, Martello and Heller meet with William Fellerman
and Gregory Turchan, the Chief Financial Officer and Chief Operating Officer,
respectively, of STAR to further explore the possibility of a strategic alliance
between STAR and EFCC. At this time, the parties also executed confidentiality
agreements in furtherance of the proposed transaction.
On May 23, 1996, Mr. Fellerman received from Mr. Martello detailed
financial information, including revenue and expense reports by branch,
concerning the business and operations of EFCC (together with the publicly
available information described above, the "Evaluation Material").
On May 29, 1996, a meeting was held at the offices of Arbor, attended
by Messrs. Sternbach, Fellerman, Kaufman, Martello and Heller. At that meeting,
Mr. Sternbach expressed STAR's interest in pursuing a merger or other
acquisition of EFCC. Mr. Kaufman suggested that it would be mutually beneficial
to STAR and EFCC if a merger could be successfully negotiated. Mr. Kaufman
stated that EFCC had to grow to become profitable and create an acceptable
return on investment for its shareholders. He further stated that as EFCC lacked
sufficient capital to do so on its own, and also lacked substantial management
experience in the Home Care industry, it made business sense for EFCC to merge
with a company, such as STAR, which had greater depth of management, better
automation and quality control and greater capital resources. Mr. Fellerman
suggested that, since the parties believed that a strategic alliance would be
mutually beneficial, that he and Mr. Heller hold separate discussions with the
intention of preparing a set of pro forma financial statements and a complete
analysis of the combined entity. Mr. Fellerman stated that after this analysis
was prepared, STAR would be prepared to make a proposal to EFCC. Messrs.
Fellerman, Sternbach
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and Turchan met on several occasions over the next few weeks. At those meetings
they reviewed the Evaluation Materials and they concluded that the acquisition
of EFCC would result in the addition of approximately $9.0 million in additional
revenues to STAR which would increase STAR's cash flow, reduce its financial
leverage and improve its overall financial position and results of operations.
They also concluded that STAR could achieve substantial cost savings for the
operations of the EFCC business through the elimination of many operations that
could be carried out by STAR's existing personnel. Mr. Fellerman stated that he
had concluded that approximately $1.0 million annually in selling, general and
administrative expenses would be eliminated as a result of the increased
efficiencies and economies of scale that were expected to result from the
Merger. Messrs. Sternbach and Fellerman initially concluded that a total
purchase of between $8.0 and $8.5 million, consisting solely of STAR's Common
Stock, would be an appropriate purchase price for all of the outstanding stock
of EFCC.
On May 31, 1996 Messrs. Sternbach, Fellerman and Turchan held a
telephone conference with Mr. Martello and other representatives of EFCC to
discuss the operations of the offices of EFCC and to consider how such offices
could be consolidated into the existing operations of STAR.
On July 2, 1996 Messrs. Sternbach, Fellerman and Turchan held a
telephone conference with Messrs. Martello and Heller to discuss further the pro
forma financial information, prepared by STAR with the assistance of EFCC and to
arrange for a mutually acceptable date at which STAR would present its proposal
to acquire EFCC.
One week later, on July 9, 1996, at a meeting held at the offices of
STAR, attended by Messrs. Sternbach, Fellerman, Turchan, Kaufman, Martello and
Heller, Mr. Sternbach presented STAR's proposal for the acquisition of EFCC. Mr.
Sternbach advised the representatives of Arbor Management and EFCC that, after
analyzing the Evaluation Materials, STAR was prepared to acquire all of the
outstanding stock of EFCC for a total purchase price of $8.5 million, to be paid
in STAR Common Stock. This offer was based on the assumption that $1.3 million
would be injected into EFCC by Arbor exercising its option to acquire 13,000,000
newly issued shares of EFCC Common Stock. Mr. Sternbach said that the offer was
conditioned on the ability of STAR to account for the transaction as a pooling
of interests. Mr Sternbach also advised the representatives of Arbor Management
and EFCC that a precondition to engaging in the proposed transaction was that
EFCC would merge its subsidiary TPC with and into EFCC. Mr. Sternbach also said
that STAR would want to have the option, at its sole discretion to purchase the
stock of EFCC for cash.
EFCC representatives stated that if the purchase price was paid in
STAR Common Stock, then they required the transaction to be structured so that
it qualified as a tax-free reorganization.
On August 9, 1996 a meeting was held at the offices of Arbor
Management. That meeting was attended by Messrs. Sternbach, Fellerman, Kaufman,
Martello and Heller as well as the respective legal counsel of STAR and EFCC. At
that meeting it was agreed that the terms of the proposed transaction would
preclude the Merger from being accounted for as a pooling of interests and that
instead it would be accounted for using the purchase method. Based on the fact
that the transaction could not qualify as a pooling of interests, STAR revised
its offer. Mr. Sternbach advised the representatives of Arbor Management and
EFCC that STAR would be willing to pay a total purchase price of $8.0 million in
STAR Common Stock. In addition, Mr. Sternbach said that STAR would retain the
right to acquire the stock of EFCC for cash. Mr Sternbach also stated that the
transaction was conditioned on EFCC entering into agreements, substantially in
the form of the Consulting Agreement and Management Agreements, described
elsewhere in this Joint Proxy Statement/Prospectus. Mr. Sternbach advised the
representatives of EFCC that the offer was subject to approval of the Board of
Directors of STAR. EFCC representatives stated that they wanted to make certain
that the amount of STAR Common Stock to be received in the Merger would be
subject to adjustment, based
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on the market value of the STAR Common Stock. Mr. Heller advised Mr. Sternbach
and the other representatives of STAR that, while he believed that the terms set
out at the meeting would be acceptable, he would seek the approval of the Board
of Directors of EFCC to continue negotiations.
It was proposed and subsequently integrated into the Merger Agreement
that the number of shares to be issued in exchange for the shares of Common
Stock of EFCC would be based upon the closing price of the STAR Common Stock
quoted on the Nasdaq National Market for the preceding 120 trading days ending
three business days prior to the Effective Time.
On August 12, 1996, the Board of STAR considered and discussed the
proposed transaction. Messrs. Sternbach, Fellerman and Turchan explained the
terms of the proposed transaction as well as the anticipated benefits to STAR.
Mr. Fellerman described the expected savings and efficiencies that could be
expected to occur, as well as how the transaction fit within STAR's strategic
objectives of acquiring complimentary companies. Mr. Fellerman noted in
particular the expected cost savings that could be expected. At the same time,
EFCC's Board also gave Arbor Management permission to continue negotiating the
transaction and to continue cooperating in the due diligence investigation being
conducted by both companies.
During the period from August 13, 1996 to August 23, 1996, Mr.
Fellerman and other representatives of STAR conducted their due diligence review
of the books, records and operations of EFCC including the Evaluation Materials.
At the same time, work was commenced on preparing the necessary documentation to
finalize the proposed transaction. Similarly, Mr. Heller and other EFCC
representatives continued their due diligence investigation of STAR.
Between October and November 1996, legal counsel and representatives
of both parties negotiated and prepared various drafts of the Merger Agreement.
On September 5, 1996, Messrs. Sternbach and Fellerman informed EFCC that it was
concerned that by paying the purchase price entirely in stock, the holdings of
the current owners would be diluted. Accordingly, STAR expressed a strong
preference for paying a portion of the purchase price in cash. Certain of EFCC's
shareholders indicated they would not approve that form of the transaction
unless the stock portion of the transaction qualified as a tax free
reorganization. The transaction would qualify as a tax free reoganization only
if a sufficient level of continuity of interest was maintained by the target
shareholders. It thus became apparent that a substantial portion of what STAR
was purchasing was the cash recently contributed by Arbor in exchange for its
option to purchase EFCC stock. It seemed unnecessary for STAR to pay cash to, in
effect, purchase the cash held by EFCC. To do so would artificially inflate the
cash portion of the purchase price, which would arguably reduce the level of
continuity of interest. The Special Dividend was paid since it reduced the need
for STAR to pay additional cash consideration for the cash held by EFCC.
At the annual meeting of the Board of Directors of STAR, held on
December 18, 1996, a draft of the Merger Agreement was submitted to the Board of
Directors of STAR for their consideration and review. At this meeting, Mr.
Fellerman discussed the anticipated advantages of acquiring EFCC. The reasons
discussed by Mr. Fellerman, as well as the other members of the Board, are
discussed at length under the caption "STAR's Reasons for the Merger;
Recommendation of the STAR Board." At that meeting the STAR Board unanimously
approved the terms of the proposed transaction
At a special meeting of the Board of Directors of EFCC, held on
December 20, 1996, the EFCC Board discussed the transaction in detail and
debated the positive and negative factors with respect to the transaction. It
also determined to hire Telesis Mergers and Acquisitions, Inc. to render an
independent opinion on the fairness of the transaction. At this meeting, the
Board debated and discussed the reasons for
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the Merger set forth in detail under the caption "EFCC's Reasons for the Merger
- -- Recommendations of the EFCC Board." On December 30, 1996, the EFCC Board met
a second time. After again reviewing the terms of the transaction, as well as
the Telesis fairness opinion rendered to the Board, and being advised by counsel
of its responsibilities to its shareholders, the EFCC Board unanimously approved
the terms of the Merger Agreement on December 30, 1996.
On January 3, 1997 the Merger Agreement was signed.
STAR'S REASONS FOR THE MERGER; RECOMMENDATION OF THE STAR BOARD
The STAR Board of Directors believes that the Merger will further its
strategic objective of acquiring companies that provide Home Care services in
the geographic regions currently serviced by STAR as well as opening new areas
of expansion. Accordingly, STAR's Board of Directors has unanimously approved
the Merger Agreement and unanimously recommends that the shareholders of STAR
vote in favor of the Merger. The STAR Board considered the following positive
factors:
(i) that since both STAR and EFCC are engaged in the Home
Care services business, the businesses of STAR and EFCC are complementary. EFCC
has four locations in New Jersey and one on Long Island, the acquisition of
which will allow STAR to expand its existing regional home care business;
(ii) STAR's Board of Directors concurred with STAR's
management's conclusion, based upon the analysis conducted by Messrs. Sternbach
and Fellerman and described above in "Background of the Merger," that the Merger
would result in the addition of approximately $9.0 million in additional
revenues to STAR which would increase STAR's cash flow, reduce its financial
leverage and improve STAR's overall financial position and results of
operations;
(iii) that EFCC's business had grown at a rate of 20-25%
over the last 8 to 9 months;
(iv) that, since EFCC is also engaged in the Home Care
services business, the Merger fits within STAR's strategic objective of
acquiring companies that provide Home Care Services in the geographic regions
currently serviced by STAR. The STAR Board made special note of EFCC's
operations in New Jersey, which it concluded could readily be integrated into
STAR's operations;
(v) that, based upon Messrs. Sternbach and Fellerman's
financial analysis of EFCC, STAR will be able to achieve significant cost
savings and economies of scale and will be able to operate EFCC, as part of the
combined entity, in a manner more efficient and more profitable than its current
operations since, after the Merger, many of the redundant operations that are
currently engaged in by EFCC will be eliminated and such functions will be
carried out by STAR's existing organization; specifically, STAR will be able to
manage EFCC's New Jersey and Long Island operations with existing STAR
personnel;
(vi) STAR's Board of Directors concurred with STAR's
management's determination, that approximately $1.0 million in selling, general
and administrative expense (consisting of approximately $580,000 in back office,
administrative and executive salaries, $125,000 in rent, telephone and
utilities, $100,000 in professional fees, $75,000 in insurance and $120,000 in
other office expense) could be eliminated as a result of the increased
efficiencies that the STAR Board expected would result from the Merger;
(vii) that, after reviewing the Evaluation Materials and
considering the financial analysis conducted by Messrs. Sternbach, Fellerman and
Turchan and described above in "Background of the
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Merger", the Merger would provide certain synergistic benefits from the
consolidation of certain redundant corporate functions which are consistent with
STAR's strategy of providing the highest quality of care at the lowest cost;
(viii) that the terms and conditions of the Merger
Agreement, generally are fair to STAR's shareholders. The Board concluded that,
based upon the increased revenues that would result from the Merger, and
assuming the administrative efficiencies described in (vi) above are realized by
STAR, the issuance of the STAR Common Stock would likely not result in a
dilution of STAR's earnings per share;
(ix) that as a condition to consummating the Merger, STAR
would receive an opinion from EFCC's counsel that the Merger, more likely than
not, would be tax free under the Code;
(x) that two of the shareholders of EFCC would be securing
certain contingent liabilities of EFCC with an aggregate of $250,000 be held in
an Escrow Account for the benefit of STAR; and
(xi) that the Board of Directors of STAR would receive
from the two largest shareholders of EFCC, Coss and Arbor, a five year
irrevocable proxy to vote the STAR Common Stock issued in the Merger on all
matters in addition to a Proxy to vote the shares of EFCC Common Stock held by
such shareholders in favor of the Merger.
The STAR Board also considered the following negative
factors:
(xii) that the purchase price of EFCC would be fixed based
upon the average price of the STAR Common Stock for the 120 trading day period
preceding the Merger and that changes in the relative share values of EFCC and
STAR Common Stock could materially affect the value of the consideration to be
paid by STAR for EFCC but concluded that such risk was outweighed by the
possible benefits to be achieved from the Merger;
(xiii) that the representations and warranties set forth
in the Merger Agreement would not survive the signing of the Merger Agreement
and that the sole recourse of STAR would be the amount of the Escrow Account;
(xiv) that STAR would be entering into a consulting
agreement at the time of signing the Merger Agreement and thereafter, upon
approval by the New York Department of Health, a management agreement pursuant
to which STAR would assume many of the management functions of EFCC and will
also become subject to certain responsibilities as well as potential liability
attendant thereto;
(xv) the fact that EFCC had operated for nine years in
bankruptcy and had only emerged from bankruptcy in 1995 and that during that
period EFCC had not been in compliance with its continuing reporting obligations
under the Exchange Act;
(xvi) that STAR would be giving certain registration
rights in connection with the shares to be issued in the merger; and
(xvii) that certain matters, described above under the
heading "RISK FACTORS," would make the Merger speculative or high risk, but
concluded that such risks were outweighed by the possible benefits to be
achieved from the consummation of the Merger.
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After considering all of the foregoing reasons, STAR's Board of
Directors concluded that a combination with EFCC, on the terms set forth in the
Merger Agreement, is in the best interest of the shareholders of STAR. The STAR
Board of Directors concluded that the favorable factors set forth in items (i)
through (xi) outweighed the negative factors set forth in items (xii) through
(xvii). Due to the wide variety of factors considered in conjunction with the
evaluation of the Merger, the STAR 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 rendering its determination. The
Board of Directors of STAR did not conduct an independent financial analysis in
arriving at its conclusion but relied upon the analysis conducted by Messrs.
Sternbach, Fellerman and Turchan and described above in "Background of the
Merger." STAR's Board of Directors did not believe that it was necessary to and
did not, therefore, commission a financial advisor opinion in connection with
its deliberations regarding the Merger. The Board of STAR believed that it had
adequate information to analyze the merits of the Merger.
THE BOARD OF DIRECTORS OF STAR UNANIMOUSLY HAS DETERMINED THAT THE
MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, SHAREHOLDERS OF STAR, HAS
APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS OF
STAR VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
EFCC'S REASONS FOR THE MERGER; RECOMMENDATION OF THE EFCC BOARD
The EFCC Board of Directors believes that the Merger is in the best
interests of its shareholders as it provides a favorable valuation of EFCC,
immediate cash benefits to its shareholders and provides EFCC's shareholders
with the possibility of a long term stake in the Home Health Care industry with
a company that, subsequent to the Merger, will be a strong entity with greater
potential for growth than EFCC alone. In considering its approval of the Merger,
the EFCC Board of Directors considered the following positive factors:
(i) STAR's and EFCC's businesses are a good strategic fit
in that the referrals to be gained by consolidation of EFCC's and STAR's
offices, which currently operate in close proximity, would add a greater base of
patients to the combined entity;
(ii) because the areas serviced by STAR and EFCC are
relatively similar, administrative overhead currently existing in STAR would be
sufficient, to a great extent, to absorb EFCC's operations, thus creating cost
savings in the combined companies;
(iii) the EFCC Board considered that STAR is a growing
company which is, relative to EFCC, better capitalized, with a greater depth of
management and thus better poised to take advantage of the opportunities in the
Home Health Care field;
(iv) EFCC continues to struggle with profitability. The
net income of EFCC was down by $85,000 in the third quarter of the prior year
and for the year ended December 31, 1996, was estimated to be down approximately
$200,000 from the prior year;
(v) based upon the financial analysis of STAR performed by
Telesis, upon consummation of the Merger, proforma earnings per share of STAR
are projected to increase on a going- forward basis;
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(vi) the consummation of the Merger would save EFCC a
substantial amount that it would otherwise have to spend on hiring additional
management, automation and quality control in order to remain competitive in the
home health care industry;
(vii) cutbacks in Medicaid, intense industry competition,
difficulty in finding good employees and poor economies of scale at EFCC's
current size were additional reasons for finding a stronger partner with which
to combine;
(viii) in addition, EFCC's current capitalization is
inadequate to produce the kind of growth necessary for an acceptable return on
investment; STAR's larger size and market position make it an easier entity to
raise capital;
(ix) STAR's Common Stock trades more actively in the
Nasdaq National Market than EFCC's stock. Therefore, additional liquidity would
be afforded the EFCC shareholders by virtue of the Merger Stock that they will
receive;
(x) other than $250,000 being put in escrow by Arbor and
Coss to indemnify STAR for breaches of certain representations and warranties,
no other shareholder of EFCC will be required to put any money or property in
escrow;
(xi) the terms and conditions of the Merger Agreement
generally are fair and in the best interests of EFCC's shareholders. The Board
concluded that the possibility of appreciation of the STAR Common Stock,
combined with the immediate cash benefit also being paid, when balanced with all
of the costs and challenges EFCC would encounter by remaining independent, made
the transaction fair and in the best interests of the EFCC shareholders.
The EFCC Board also considered the following negative
factors:
(xii) the shareholders of EFCC would be receiving stock in
an entity no longer under the control of the current Board of EFCC;
(xiii) the Consulting Agreement and Management Agreement
are being signed in connection with the Merger Agreement, pursuant to which STAR
will take over many of the operating functions of EFCC, including the transfer
of certain of EFCC's staff and patients to STAR's facilities; if, for any
reason, the Merger was not consummated, unwinding the transfers that had
occurred would be a difficult and expensive process and may not be fully
effective in returning to EFCC the status of its operations prior to the
execution of the Merger Agreement;
(xiv) although EFCC's profitability had declined recently,
its revenue growth had been favorable and the advantage of remaining independent
and possibly capitalizing on this growth would be lost;
(xv) certain matters described above under the heading
"Risk Factors" would make the Merger speculative and of high risk, but the EFCC
Board concluded that such risks were outweighed by the possible benefits to be
achieved upon the consummation of the Merger.
After considering all of the foregoing reasons, EFCC's Board of
Directors concluded that a combination with Star on the terms set forth in the
Merger Agreement is in the best interests of the shareholders of EFCC. The EFCC
Board concluded that the favorable factors set forth in items (i) through
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(xi) outweigh the negative aspects set forth in items (xii) through (xv). The
Board of Directors of EFCC also relied upon an independent financial analysis
performed by Telesis, as discussed below.
The foregoing discussion addresses all of the material factors
considered by the EFCC Board in connection with its evaluation of the Merger. In
view of the wide variety of factors, the EFCC Board did not find it practicable
to, and did not, quantify or otherwise attempt to assign relative weights to the
foregoing factors or determine that any factor was of particular importance.
Rather, the EFCC Board viewed its position and recommendation as being based on
the totality of the information presented to and considered by it.
THE BOARD OF DIRECTORS OF EFCC HAS DETERMINED THAT THE MERGER IS FAIR
TO, AND IN THE BEST INTERESTS OF, EFCC'S SHAREHOLDERS, HAS APPROVED THE MERGER
AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT EFCC'S SHAREHOLDERS VOTE FOR APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT.
FINANCIAL ADVISOR; FAIRNESS OPINION
On December 20, 1996 EFCC retained Telesis Mergers & Acquisitions,
Inc. ("Telesis") to assist EFCC in its consideration and evaluation of possible
transactions and to render an opinion as to the fairness of the Merger to the
holders of EFCC Common Stock from a financial point of view. EFCC's Board did
not place limitations on the investigations to be made or the procedures to be
followed by Telesis in preparing and rendering its opinion. Telesis did not
recommend the form or amount of consideration to be paid in the Merger, which
was determined through arm's length negotiations between EFCC and STAR.
On December 31, 1996, Telesis delivered its written opinion that the
terms of the Merger are fair to the shareholders of EFCC from a financial point
of view.
The full text of the written opinion of Telesis, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached hereto as Appendix B. The Telesis
opinion is directed to EFCC's Board and does not constitute a recommendation to
any individual shareholder as to how such shareholder should vote at the EFCC
Meeting. The summary of Telesis' opinion set forth in this Joint Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of such opinion attached hereto as Appendix B and incorporated herein by
reference.
Telesis relied upon and assumed without independent verification the
accuracy and completeness of all publicly available financial information and
all financial information furnished or otherwise communicated to it by STAR and
EFCC. Telesis did not make any appraisal of the assets of such companies.
Telesis does not express any opinion as to what the value of the STAR Common
Stock actually will be when issued to EFCC shareholders pursuant to the Merger
or the price at any time at which the STAR Common Stock will trade. Telesis'
opinion does not address the underlying business decision to enter into the
Merger.
In connection with rendering its opinion, Telesis, among other things
reviewed: (i) the Merger Agreement; (ii) Proxy Statements for EFCC for September
9, 1996; (iii) EFCC's Annual Report on Form 10- KSB for the fiscal year ended
December 31, 1995, and its Quarterly Reports on Form 10-QSB, for the periods
ended March 31, 1996, June 30, 1996 and September 30, 1996, (iv) the most
recently available Annual Report to Shareholders and Annual Report on Form
10-KSB and certain interim reports to Shareholders and Quarterly Reports on
Forms 10-QSB of STAR; (v) Current Reports of EFCC on Form 8-K dated (date of
earliest event reported) August 21, 1996 and October 31, 1996; Form 8-K/A dated
(date of earliest event reported) June 30, 1996 and July 9, 1996; (vi)
amendments to the Schedule 13D filed by Ivan Kaufman dated September 11, 1996
and November 14, 1996; (vii) certain other communications from EFCC
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and STAR to their shareholders; and (viii) certain internal financial analyses
and forecasts of EFCC and STAR prepared by their respective managements. Telesis
also met with the respective management teams of STAR and EFCC to discuss their
respective businesses and business prospects. Telesis assumed that all financial
projections provided by STAR and EFCC were based upon assumptions reflecting the
best, currently available estimates and good faith judgments of the respective
managements as to the future performance of EFCC and STAR and that the
respective managements of EFCC and STAR do not have any information or beliefs
that would make the projections materially misleading. Telesis assumed that the
operating benefits contemplated by the Merger, as reflected in the financial
projections provided by EFCC and STAR, will be achieved. In addition, Telesis
reviewed financial information for the pro forma combined entity of STAR and
EFCC, compared historical and projected financial and operating performance of
STAR and EFCC with certain other publicly held entities in the health care
industry, and reviewed acquisitions and mergers of certain companies in the home
health industry for which sufficient data was publicly available. Telesis
determined that the EFCC shareholders' equity interests in the combined entity
compared favorably with its pro forma analysis, analysis of selected publicly
traded companies, analysis of selected merger and acquisition transactions and
discounted cash flow analysis.
Pro Forma Analysis. Telesis analyzed the pro forma effects of the
Merger upon the earnings per share of EFCC and the combined companies. Telesis
analyzed the operations and earnings of both EFCC and STAR as individual
companies as well as on a combined basis assuming the merger would be
consummated. The analyses were performed for the years of 1996, 1997, and 1998.
It is Telesis' opinion that the merger of the companies would generate a
combined incremental earnings contribution and cost savings that could not be
achieved by adding together the individual results of each company should the
merger not be consummated. In addition, the pro forma analysis performed by
Telesis reflected certain assumptions made by Telesis and by EFCC, some of which
may be beyond the control of EFCC and which may not reflect what will actually
occur upon the consummation of the Merger. The pro forma analysis assumed that
upon consummation of the Merger (i) EFCC would combine earnings contribution (or
earnings deficit) and (ii) EFCC would be able to generate certain cost savings
by combining the operations of EFCC with STAR. Such analysis did not take into
account the potential impact of the timing of the implementation of such
adjustments on EFCC's earnings. In general the pro forma analysis examined the
ongoing impact of such adjustments on an annual basis as if the Merger had been
consummated on January 1, 1996. In addition, the pro forma analysis did not
factor in the potential cost of implementation of any of the adjustments
referenced above.
Giving effect to the adjustments described above, as well as the
assumptions incorporated in the pro forma analysis, Telesis noted that the pro
forma analysis indicated that the aggregate annual impact of the adjustments
could potentially result in incremental net income to the combined companies of
$1.1 million, $2.4 million and $3.0 million for the years ending December 31,
1996, 1997 and 1998, respectively. On a per share basis the annual impact of
such adjustments could potentially increase earnings per share of the combined
companies by $.03, $.06, and $.08 for the years ended December 31, 1996, 1997
and 1998, respectively. The pro forma analysis included certain assumptions
regarding cost savings, reflecting the combination and the timing of the
implementation of such cost savings which may or may not reflect the actual cost
savings achieved by the combined companies upon the consummation of the Merger.
Telesis noted, based upon the pro forma analysis, that the Merger could
potentially have a substantial positive impact on the combined companies'
earnings per share.
Based upon the pro forma analysis, Telesis concluded that the Merger
was fair, from a financial point of view, to the shareholders of EFCC.
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Comparable public company methodology. Telesis performed an analysis
of selected publicly traded companies which it deemed to have businesses that
were similar to that of EFCC. Telesis reviewed a group of companies that
provide, among other services, home health care services, including Olsten;
Apria Healthcare Group, Inc.; Interim Services, Inc.; The Care Group, Inc.; Home
Health Corporation of America; Career Horizons, Inc.; Home Care Affiliates,
Inc./Housecall Medical Resources, Inc.; Nurse's Housecall/Olsten Heath Services;
Amserv Healthcare/Star Multi Care Services, Inc.; and Staff Builders, Inc. In
its review of the companies referenced above, Telesis focused specifically upon
the companies within this group that provided home nursing services, namely
Olsten; Interim Services, Inc.; Career Horizons, Inc. and Staff Builders, Inc.
(the "Comparable Companies"). Telesis deemed the home health care companies to
incorporate business fundamentals which were similar to the Company's. For each
of the Comparable Companies, Telesis examined certain publicly available
financial data, including net revenue, gross margin, selling, general and
administrative expenses, contribution margin, earnings before interest and taxes
("EBIT"), EBIT margin, net income, earnings per share and net income margin.
Telesis examined the balance sheet items of each of the Comparable Companies and
published earnings forecasts and the trading performance of the various
companies' common stock. In addition, Telesis calculated the ratio of the market
price (as of November 29, 1996) of the stock to the projected earnings per share
for calendar year 1996 of each Comparable Company and the ratio of the
enterprise value (the total market value of the common stock outstanding plus
EFCC's total debt at par less cash and cash equivalents) to the latest twelve
months' ("LTM") net revenue and to the LTM EBIT of each Comparable Company.
Telesis noted that the harmonic mean of the ratio of the stock price to
projected earnings per share of the Comparable Companies was 15.2x and the range
of ratios was from 13.8x to 17.2. The harmonic mean of the ratios of the
enterprise value to LTM net revenue of the Comparable Companies was 0.42x and
the range of ratios was from 0.30x to 0.56x. The harmonic mean to the ratios of
the enterprise value to LTM EBIT of the Comparable Companies was 10.8x and the
range of ratios was from 9.9x to 11.4x.
The ratios referenced above were used by Telesis to impute a range of
values for EFCC. Based upon the harmonic mean and the range of ratios of the
stock price to projected earnings per share for calendar year 1996 of the
Comparable Companies, the imputed value of EFCC was $3.4 million, and the
imputed range of values of EFCC was $3.1 million to $3.8 million. Based upon the
harmonic mean and the range of ratios of the enterprise value to LTM net revenue
of the Comparable Companies, the imputed value of EFCC was $3.7 million, and the
imputed range of values of EFCC was $2.6 million to $4.8 million. Based upon the
ratios of the enterprise value to LTM EBIT of the Comparable Companies, the
imputed values of EFCC were $4.8 million to $5.5 million.
Comparable acquisition transaction methodology. Telesis performed an
analysis of selected precedent merger and acquisition transactions in the home
healthcare industry including (target company/acquiring company): In Home Health
Inc.,/Manor Care, Inc.; Apria Healthcare Group, Inc.; Home Health Corporation of
America; The Care Group, Inc.; Home Care Affiliates, Inc./Housecall Medical
Resources, Inc.; Nurse's Housecall/Olsten Health Services; Amserv
Healthcare/Star Multi Care Services, Inc.; Caremark International Inc.'s home
health care business/Coram Healthcare Corporation, Inc.; Home Nutritional
Services, Inc./W.R. Grace & Co., Inc.; Curaflex Health Services, Inc.,
HealthInfusion, Inc. and Medysis, Inc./T(2) Medical, Inc.; Critical Care
America, Inc./Caremark International Inc.; Lifetime Corporation/Olsten; Clinical
Homecare, Ltd./Curaflex Health Services, Inc.; Total Home Care, Inc./Curaflex
Health Services, Inc.; Critical Care America, Inc./Medical Care International,
Inc.; TeamCare, Inc./Critical Care America, Inc.; Care Plus, Inc./New England
Critical Care, Inc.; Upjohn Healthcare Services, Inc./Olsten; Mentor Clinical
Care, Inc./Lifetime Corporation; Quality Care, Inc./Lifetime Corporation. In its
review of the transactions referenced above, Telesis focused specifically upon
the following transactions within this group (the "Precedent Transactions"): In
Home Health, Inc./Manor Care, Inc.; Caremark International Inc.'s home health
care business/Coram Healthcare Group, Inc.; Critical Care America. (a subsidiary
of Medical
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Care International, Inc.)/Caremark International Inc.; and Lifetime
Corporation/Olsten Corporation. For each of the target companies involved in the
Precedent Transactions, Telesis examined certain publicly available financial
data, including net revenue, gross margin, selling, general and administrative
expenses, contribution margin, EBIT, EBIT margin, net income, earnings per share
and net income margin. Telesis examined the balance sheet items of each of the
target companies involved in the Precedent Transactions and published earnings
forecasts and the trading performance of the various target companies' common
stock. In addition, Telesis calculated the ratio of the purchase price of the
target company in relation to the target company's LTM and projected net income
(for the next calendar year) and the ratio of the transaction value (the total
purchase price of the equity plus the target company's total debt at par less
cash and cash equivalents) of each target company to its LTM net revenue and LTM
EBIT. Telesis noted that the harmonic mean of the ratios of the purchase price
of the equity to LTM net income of the target companies in the Precedent
Transactions was 20.0x and that the range of ratios was from 12.7x to 46.1x. The
harmonic mean of the ratios of the purchase price of the equity to projected net
income of the target companies in the Precedent Transactions was 0.56x and the
range of ratios was from 0.47x to 0.75x. The harmonic mean of the transaction
value to LTM EBIT of the target companies in the Precedent Transactions was
11.8x and the range of ratios was from 5.6x to 41.6x.
The ratios referenced above were used by Telesis to impute a range of
values for EFCC. Based upon the ratios of the purchase price to LTM net income
of the target companies in Precedent Transactions, the imputed range of value of
EFCC was $2.8 million to $10.2 million. Based upon the harmonic mean and the
range of ratios of the purchase price to projected earnings per share of the
target companies in the Precedent Transactions, the imputed value of EFCC was
$4.1 million and the imputed range of values for EFCC was $3.4 million to $5.4
million. Based upon the harmonic mean and the range of ratios of the transaction
value LTM net revenue of the target companies in the Precedent Transactions, the
imputed value of EFCC was $5.7 million and the imputed range of values of EFCC
was $2.0 million to $6.7 million.
Going concern value of EFCC - Discounted cash flow analysis. Telesis
performed a discounted cash flow analysis of EFCC using projected financial
results for EFCC prepared internally by the management of EFCC, which financial
results reflected certain assumptions made by the management of EFCC regarding
EFCC's projected results and certain cost savings which could be achieved by
combining operations. The analysis included certain assumptions including a
range of price-to-earnings ratios in the terminal year of the projection period
of 16.0x to 20.0x and a range of discount rates of 15% to 20%. Based upon the
discounted cash flow analysis, the imputed range of values of EFCC was $2.2
million to $5.2 million.
Valuation of Consideration to be Received for EFCC. In assessing the
value of the consideration to be received by EFCC in the Merger, Telesis
concluded that an appropriate range of values for EFCC was $2.4 million to $5.4
million.
Valuation of EFCC. Telesis noted that EFCC reported an operating loss
for its latest historical period and was not projected to earn a material level
of earnings in the current fiscal period. Telesis reviewed the historical and
projected operating results of EFCC including the contributing factors that
would affect these results such as business mix, reimbursement sources,
diversification of referral sources, strength of management, future opportunity
for business growth, and the operating and regulatory environments in which EFCC
provides services. These factors were then analyzed against the industry
standards and operating and financial profiles of Comparable Companies. Given
Telesis' work in the home health care industry as a financial advisor for more
than 17 years, along with detailed knowledge of the issues affecting valuation
and performance in the industry and based upon analysis set forth in this Joint
Proxy Statement/Prospectus, Telesis concluded that based on the operating and
future results of EFCC that the imputed range of valuations
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for EFCC based on the ratio of the enterprise and transaction value LTM net
revenue was too high. Telesis concluded that the appropriate range of values of
EFCC was $2.4 million to $5.4 million. Telesis noted further that the imputed
range of values of the consideration to be received by EFCC in the Merger for
EFCC, approximately $7.25 million to $8.0 million, was greater than the range of
values of EFCC. Telesis concluded that the Merger was fair, from a financial
point of view, to the shareholders of EFCC.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying Telesis' opinion. In arriving at its opinion, Telesis considered the
results of such analyses but did not ascribe particular weight to any one
analysis. The analyses were prepared solely for the purposes of providing its
opinion as to the fairness of the Merger, from a financial point of view, to the
shareholders of EFCC and do not purport to be appraisals or necessarily reflect
the price at which businesses or securities actually may be sold. Analyses based
upon forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. In addition, Telesis did not, in arriving at its fairness
opinion, evaluate alternatives to the Merger. The foregoing summary does not
purport to be a complete description of the analyses performed by Telesis.
The Board of Directors of EFCC retained Telesis to act as its
financial advisor based upon its qualifications, experience and expertise.
Telesis, as part of its investment banking business, is engaged in the valuation
of businesses and securities in connection with mergers and acquisitions,
private placements and valuations for corporate and other purposes.
Pursuant to a letter agreement, dated December 20, 1996, EFCC agreed
to pay Telesis a fee of $20,000 upon the rendering of its fairness opinion
relating to the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
As indicated, the following sets forth the opinion of Meltzer, Lippe,
Goldstein, Wolf & Schlissel, P.C. as to the material federal income tax
consequences of the Merger to United States holders of EFCC Common Stock who
hold their shares as capital assets. The discussion is based on the current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury Regulations, judicial authority and administrative rulings
and practice in effect as of the date of this Joint Proxy Statement/Prospectus.
It does not address all aspects of federal income taxation that may be relevant
to particular EFCC shareholders in light of their personal investment
circumstances, or to certain types of shareholders subject to special treatment
under the federal income tax laws, including, without limitation, insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign persons, and shareholders who acquired EFCC Common Stock as
compensation. This discussion also does not address the state, local or foreign
tax consequences of the Merger. There can be no assurance that the Internal
Revenue Service will not take a contrary view to those expressed herein. No
rulings have been or will be requested from the Internal Revenue Service with
respect to the tax consequences of the Merger. Moreover, legislative, judicial
or administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conclusions set forth herein.
HOLDERS OF SHARES OF EFCC COMMON STOCK ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL AND FOREIGN
TAX LAWS, AND OF ANY CHANGES IN APPLICABLE TAX LAWS.
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Assuming the Merger is consummated at the Effective Time pursuant to
the terms of the Merger Agreement, Meltzer, Lippe, Goldstein, Wolf and
Schlissel, P.C. is of the opinion that, more likely than not: (i) the
shareholders of EFCC should be deemed to have received and retained a sufficient
amount of stock in STAR to satisfy the continuity of interest requirement, and
assuming that EFCC is merged into Merger Sub pursuant to New York State law, the
Merger will be treated for United States federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code; (ii) STAR,
Merger Sub and EFCC will each be a party to the reorganization within the
meaning of Section 368(b) of the Code; (iii) no gain or loss will be recognized
by EFCC shareholders as a result of the exchange of EFCC Common Stock solely for
STAR Common Stock pursuant to the Merger, except that gain, if any, (but not
loss) will be recognized on the receipt of cash, other than cash received in
lieu of fractional shares, and gain or loss, if any, will be recognized in
connection with the receipt of cash in lieu of fractional shares; (iv) any gain
or loss recognized upon such exchange will be capital gain or loss provided the
share would constitute a capital asset in the hands of the exchanging
shareholder; (v) each shareholder of EFCC who elects to dissent from the Merger
and receive cash in exchange for his shares of EFCC Common Stock will be treated
as receiving such payment in complete redemption of his shares of EFCC, provided
such shareholder does not actually or constructively own any EFCC Common Stock
after the Merger; (vi) the tax basis of the STAR Common Stock received by EFCC
shareholders will be the same as the basis of the EFCC Common Stock surrendered
in exchange therefor, decreased by the amount of basis allocated to the
fractional shares that are hypothetically received by the shareholder and
redeemed for cash, and decreased by any money received in the exchange (other
than cash received in lieu of fractional shares) and increased by any gain
recognized on the exchange; (vii) the holding period of the STAR Common Stock
received by the EFCC shareholders will include the period during which the EFCC
Common Stock surrendered was held, provided that the EFCC Common Stock is held
as a capital asset in the hands of the EFCC shareholders at the Effective Time;
(viii) no gain or loss will be recognized by EFCC on the transfer of all of its
assets to Merger Sub pursuant to the Merger Agreement; (ix) no gain or loss will
be recognized by STAR or Merger Sub pursuant to the Merger; (x) the tax basis of
EFCC's assets in the hands of Merger Sub will be the same as the basis of those
assets in the hands of EFCC immediately prior to the Merger; and (xi) the
holding period of the assets of EFCC in the hands of Merger Sub will include the
period during which such assets were held by EFCC.
Meltzer, Lippe's opinion is based on the accuracy of certain
representations that it will receive from STAR, EFCC and Coss at the Effective
Time, including the following: (i) the Merger will be consummated in accordance
with the Merger Agreement; (ii) to the best of the knowledge of the management
of EFCC, Coss acquired its EFCC Common Stock before the formulation of any plan
in connection with the Merger and not in contemplation of Merger Sub's
subsequent acquisition of the outstanding capital stock of EFCC; (iii) as of the
Effective Time, Coss does not have a binding commitment or preconceived plan or
arrangement for disposing of any of its STAR Common Stock received in the
Merger; and (iv) as of the Effective Time, to the best of the knowledge of the
management of EFCC, none of the shareholders of EFCC have a binding commitment
or preconceived plan or arrangement for disposing of any of their STAR Common
Stock received in the Merger. An opinion represents only counsel's best judgment
as to the likely outcome of an issue if properly presented to a court and is not
binding on the Internal Revenue Service or the courts and, therefore, the
delivery of the Tax Opinion cannot assure that the Internal Revenue Service or
the courts will treat the Merger as a reorganization within the meaning of
Section 368(a) of the Code.
If the Merger were not to constitute a reorganization under Section
368(a) of the Code, each holder of EFCC Common Stock would recognize gain or
loss equal to the difference between the fair market value of the STAR Common
Stock received and cash received in lieu of fractional shares and such holder's
basis in the shares of EFCC exchanged therefor. Such gain or loss would be
long-term capital gain or loss, provided such shares had been held for more than
one year. In addition, EFCC would realize gain in the amount of the difference
between the adjusted tax basis of the property of EFCC transferred to the Merger
Sub pursuant to
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the Merger and the fair market value of the STAR Common Stock received in
exchange therefor. In addition, the Merger Sub would realize gain in the amount
of the difference between the adjusted tax basis of the STAR Common Stock
transferred to the shareholders of EFCC pursuant to the Merger and the fair
market value of the property of EFCC received in exchange therefor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Board of Directors of STAR
and the Board of Directors of EFCC with respect to the Merger Agreement and the
transactions contemplated thereby, shareholders of STAR and EFCC should be aware
that certain members of EFCC's management and EFCC's Board have interests in the
Merger that are in addition to the interests of shareholders of STAR and EFCC
generally. The Boards of Directors of STAR and EFCC were aware of these
interests and considered them, among other factors, in approving the Merger
Agreement and the transactions contemplated thereby.
Following the Merger, the persons who are directors of Merger Sub
immediately prior to the Effective Time will continue to serve as directors of
Merger Sub. The Merger Agreement also provides that after the Merger is
effected, Mr. Ivan Kaufman, who controls Arbor Home Health Care Holdings, LLC
("Arbor"), which in turn owns approximately 40% of the outstanding Common Stock
of EFCC and controls the vote of approximately 80% of such EFCC Common Stock,
will be appointed to the Board of Directors of STAR. EFCC does not anticipate
that any officers or directors of EFCC, other than Mr. Kaufman, would become
officers or directors of STAR or the surviving entity.
Under the terms of the Merger Agreement, STAR has agreed to insure
and guaranty that any provision with respect to indemnification by EFCC and its
subsidiaries existing in favor of any present or former director, officer,
employee or agent of EFCC or an EFCC subsidiary, set forth in the Certificate of
Incorporation or by-laws of EFCC and its subsidiaries or pursuant to any other
agreements (including insurance policies), will survive the Merger, will not be
amended, repealed or modified in any manner that would adversely affect an
indemnified party, and will continue in full force and effect for a period of at
least six years from the Effective Time. STAR has agreed to maintain or retain
the same level of insurance coverage as currently maintained by EFCC only (i) if
it is available for an annual premium not in excess of 125% of the last annual
premium paid by EFCC or the EFCC subsidiaries prior to the date of the Merger
Agreement, and (ii) for six years after the Effective Time. If such insurance
were not available for 125% or less of the amount of the last annual premium
paid by EFCC or its subsidiaries prior to the date of the Merger Agreement, STAR
will be obligated to purchase as much coverage as possible for an amount not to
exceed 125% of the last premium paid EFCC or its subsidiaries.
DISSENTERS' RIGHTS OF APPRAISAL
Section 910 of the BCL ("Section 910") provides that any holder of
EFCC Common Stock as of the Record Date who has not voted in favor of the Merger
Agreement shall have the right, as an alternative to receiving the Merger
Consideration in the Merger, to receive payment of the fair value of his shares
and certain other rights and benefits, subject to complying with Section 623 of
the BCL ("Section 623"). Pursuant to the terms of the Merger Agreement, STAR is
not obligated to consummate the Merger if more than 5% of the outstanding shares
of EFCC Common Stock, after giving effect to the TPC Merger, have properly
demanded appraisal rights. A person having a beneficial interest in shares of
EFCC Common Stock that are held of record in the name of another person, such as
a broker or nominee, must act promptly to cause the record holder to follow the
steps summarized below properly and in a timely manner to perfect whatever
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appraisal rights such beneficial owner may have. See "APPRAISAL RIGHTS OF
DISSENTING SHAREHOLDERS."
REGULATORY APPROVALS
STAR and EFCC are not aware of any license or regulatory permit which
is material to the business of STAR or EFCC and which is likely to be adversely
affected by consummation of the Merger or any approval or other action by any
state, federal or foreign government or governmental agency (other than routine
re-licensing procedures) that would be required prior to the Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for by STAR under the "purchase method"
of accounting in accordance with generally accepted accounting principles.
Accordingly, the aggregate consideration paid by STAR in connection with the
Merger will be allocated to EFCC's assets based upon their fair values, and the
results of operations of EFCC will be included in the results of operations of
STAR only for periods subsequent to the Effective Date of the Merger.
RESALE RESTRICTIONS
All shares of STAR Common Stock received by EFCC shareholders in the
Merger will be freely transferable, except that shares of STAR Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of STAR or EFCC prior to the Merger may be resold by
them only in transactions permitted by the resale provisions of Rule 145
promulgated under the Securities Act (or Rule 144 in the case of such persons
who become affiliates of STAR or as otherwise permitted under the Securities
Act). Persons who may be deemed to be affiliates of STAR or EFCC generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal shareholders of such party. The Merger
Agreement requires EFCC to use all reasonable efforts to cause each of its
affiliates to execute a written agreement to the effect that such person will
not offer to sell, transfer or otherwise dispose of any of his or her shares of
STAR Common Stock except pursuant to an effective registration statement or in
compliance with Rule 145 or another exemption from the registration requirements
of the Securities Act. STAR has granted Coss and Arbor certain registration
rights because of their "affiliate" status, pursuant to the EFCC Shareholders
Agreement.
CONSULTING AGREEMENT
On January 3, 1997, STAR and EFCC entered into a consulting agreement
(the "Consulting Agreement") pursuant to which STAR agreed that, upon EFCC's
request it will render to EFCC, by and through such of its officers, employees
and agents as STAR, in its sole discretion, designates from time to time,
consulting services with respect to the management and operation of EFCC. The
consulting services to be rendered by STAR under the Consulting Agreement
consist of those consulting services relating to the management and operation of
EFCC's healthcare business reasonably requested by EFCC. EFCC and STAR have
agreed that STAR's role is that of a consultant and advisor to, and not that of
a manager of, EFCC. Under the Consulting Agreement, STAR has no duty or
responsibility to manage the affairs of EFCC which duty and responsibility
remains at all times with the Board of Directors and management of EFCC.
For the consulting services to be rendered by STAR, EFCC has agreed
to pay STAR fees in the amount of Twenty-five Thousand Dollars ($25,000) per
month, payable (a) $15,000 in arrears on the last day
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of each month, pro rated for any partial month, and (b) the remaining $10,000 on
the earlier to occur of the Effective Time or the termination of the Merger
Agreement.
The Consulting Agreement will terminate on the earlier of (i) the
date on which the Merger Agreement shall have been terminated pursuant to the
terms thereof other than by reason of the default of EFCC thereunder, (ii) the
Effective Date of the Management Agreement (as defined in the Merger Agreement,
discussed below) or (iii) the Effective Time provided, that STAR has the right
to terminate its obligation to render services under the Consulting Agreement at
any time upon forty-five (45) days prior notice to EFCC.
MANAGEMENT AGREEMENT
On January 3, 1997, STAR and EFCC also entered into a management
agreement (the "Management Agreement") pursuant to which STAR agreed to act as
manager of EFCC. The Management Agreement is subject to approval of the
Commissioner of the New York State Department of Health (the "Commissioner").
Pursuant to the Management Agreement STAR will have the authority and
responsibility to conduct, supervise and effectively manage the day-to-day
operation of EFCC. In the absence of oral or written direction or written
policies of the Board of Directors of EFCC, STAR will be expected to exercise
the reasonable judgment of a management company in its management activities.
STAR will specifically have responsibility and commensurate authority, subject
among other things to the direction of the Board of EFCC to act on its behalf
for the following activities: (i) the establishment, maintenance, revision and
administration of the overall charge structure of EFCC pursuant to pertinent
regulations, including, but not limited to, patient charges, charges for
ancillary services, charges for supplies and special services; (ii) (A) the
hiring, discharge, supervision and management of all employees of EFCC,
including the determination, from time to time, of the numbers and
qualifications of employees needed in the various departments and services of
EFCC, (B) the establishment, revision and administration of wage scales, rates
of compensation, employee benefits, rates and conditions of employment,
in-service training, attendance at seminars or conferences, staffing schedules,
and job and position descriptions with respect to all employees of EFCC; (iii)
the issuance of bills for services and materials furnished by EFCC, and the
collection of accounts and monies owed to EFCC, including the responsibility to
enforce the rights of EFCC as creditor under any contract or in connection with
the rendering of any service; (iv) the payment of payroll, trade accounts,
amounts due on short and long-term indebtedness, taxes and all other obligations
of EFCC; provided, however, that the responsibility will be limited to the
exercise of reasonable diligence and care to apply the funds collected in the
operation of EFCC to its obligations in a timely and prudent manner, and STAR
will not become personally liable or act in a guarantor capacity with respect to
any obligation of EFCC; (v) the establishment and administration of accounting
procedures and controls, in accordance with generally accepted accounting
principles and the establishment and administration of systems for the
development, preparation and safekeeping of records and books of account
relating to the business and financial affairs of EFCC; (vi) the maintenance of
accounts in such banks, savings and loan associations, and other financial
institutions as the Board of EFCC may, from time to time, select (including
certificates of deposit) with such balances therein (which may be interest
bearing or non-interest bearing) as STAR shall, from time to time, deem
appropriate, taking into account the operating needs of EFCC and the
disbursements from such accounts of such amounts of EFCC's funds as STAR shall,
from time to time, determine is appropriate in the discharge of its
responsibilities under the Management Agreement; provided, however, that STAR
will not, in any case, have any obligation to supply, out of its own funds,
working capital for EFCC; (vii) the management of all purchases and leases of
real property, equipment, supplies and all materials and services which STAR
deems to be necessary in the operation of EFCC; (viii) the evaluation of all
quality control aspects of EFCC operation, and the implementation, with approval
of the Board of EFCC, of quality control programs designed to meet standards
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imposed by appropriate certifying agencies and to bring about a high standard of
health care in accordance with Board of EFCC policies and resources available to
EFCC.
Under the Management Agreement, STAR will be empowered to negotiate,
enter into, terminate and administer on behalf of EFCC contracts for services by
medical, paramedical and other persons and organizations.
Notwithstanding any other provision of the Management Agreement, the
Board of EFCC retains and STAR is prohibited from exercising: (i) direct
independent authority to hire or fire STAR or a qualified agency administrator
of EFCC; (ii) independent control of EFCC's books and records; (iii) authority
over the disposition of assets and the authority to incur on behalf of EFCC
liabilities not normally associated with the day-to-day operation of EFCC; and
(iv) authority for the independent adoption and enforcement of policies
affecting the delivery of health care services.
The Management Agreement will become effective upon the date it is
approved by the Commissioner (the "Effective Date"). The Management Agreement
may be terminated by the Commissioner, without financial penalty to the Board,
not more than sixty (60) days after notification to the parties of a
determination that the management of EFCC is so deficient that the health and
safety of patients would be threatened by continuation of the Management
Agreement. The Management Agreement can be terminated by EFCC without cause on
60 days' notice and with cause on 14 days' notice. Unless sooner terminated in
accordance with the terms of the Management Agreement, or extended or renewed by
mutual agreement of the parties thereto, the Management Agreement will remain in
effect until the Effective Time or December 31, 1998, whichever is sooner.
Both the Consulting Agreement and Management Agreement were entered
into because the Boards of EFCC and TPC believed that STAR could more
cost-effectively perform certain functions called for by these agreements. If
the STAR Merger is not consummated, transferring these functions back to EFCC
and TPC could be costly and time consuming and may adversely effect EFCC. See
"RISK FACTORS - Possible Adverse Impact if STAR Merger is not Consummated."
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THE MERGER AGREEMENT
THE DETAILED TERMS AND CONDITIONS TO THE MERGER ARE CONTAINED IN THE
MERGER AGREEMENT, WHICH IS INCLUDED IN FULL AS APPENDIX A TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY
OF THE MATERIAL TERMS OF THE MERGER AGREEMENT IS QUALIFIED IN ITS ENTIRETY BY,
AND MADE SUBJECT TO, THE MORE COMPLETE INFORMATION SET FORTH IN THE MERGER
AGREEMENT.
THE MERGER
Subject to the terms and conditions of the Merger Agreement, at the
Effective Time, EFCC will be merged with and into Merger Sub and thereupon the
separate existence of EFCC will cease and Merger Sub will continue to exist.
EFFECTIVE TIME OF THE MERGER
Upon the satisfaction or waiver of all conditions to the Merger, and
provided that the Merger Agreement has not been terminated or abandoned, STAR
and EFCC will cause the Certificate of Merger to be filed with the Department of
State of the State of New York. The Merger will become effective upon the filing
of the Certificate of Merger or at such later time as STAR and EFCC have agreed
upon and designated in such filing as the "Effective Time."
CONVERSION OF SECURITIES
At the Effective Time: (i) each share of the common stock, $.01 par
value, of Merger Sub (the "Merger Sub Common Stock") which is issued and
outstanding immediately prior to the Effective Time will continue to be
outstanding; and (ii) each share of the EFCC Common Stock, which is issued and
outstanding immediately prior to the Effective Time, except those held by EFCC
shareholders who validly and properly demand and perfect dissenters' rights
under the BCL, will be converted into the right to receive the following
consideration (the "Merger Consideration"): (a) the Cash Consideration (as
defined below), without interest; and (b) the number (the "Conversion Number")
of duly authorized, validly issued, full paid and non-assessable shares of STAR
Common Stock as calculated below. All shares of EFCC Common Stock, and each
holder of a certificate representing such shares of EFCC Common Stock, will
cease to have any rights with respect thereto, except the right to receive the
Merger Consideration to be issued or paid in consideration therefor.
"Cash Consideration" is defined in the Merger Agreement to mean the
amount equal to: (a) $2,400,000 divided by (b) the EFCC Share Number. "EFCC
Share Number" is defined in the Merger Agreement to mean the number of shares of
EFCC Common Stock issued and outstanding immediately prior to the Effective Time
increased by that number of additional shares of EFCC Common Stock that would
have been issued and outstanding immediately prior to the Effective Time
assuming that no shareholders of TPC validly and properly demanded and perfected
dissenters' rights in the TPC Merger, which EFCC Share Number shall not be less
then 37,600,000. Conversion Number is defined in the Merger Agreement to mean
the amount equal to: (a) such number of shares of STAR Common Stock (the "STAR
Share Number") as has an aggregate Market Price on the third business day prior
to the Effective Time equal to $4,850,000; divided by (b) the EFCC Share Number.
As used in the Merger Agreement, the "Market Price" of each share of STAR Common
Stock on any day means the average of the closing sale prices of a share of STAR
Common Stock as reported on the NASDAQ National Market during the one hundred
and twenty (120) trading days
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immediately preceding the date of the determination, calculated by adding all
such one hundred and twenty (120) closing sale prices and dividing the sum by
one hundred and twenty (120).
The Merger Agreement also provides that, prior to the mailing of this
Joint Proxy Statement/Prospectus, STAR, at its option, could elect to pay in
lieu of the Merger Consideration (defined above) an amount in cash equal to
$7,250,000 divided by the EFCC Share Number (defined above).
Based upon the assumption that (i) 1,077,778 shares will be issued to
shareholders of EFCC in the Merger; (ii) the average trading price of shares of
STAR Common Stock is $4.50, for the 120 trading days ending three business days
prior to the Effective Time; and (iii) 4,193,560 shares of STAR Common Stock are
outstanding as of May 31, 1997, EFCC's shareholders will hold approximately
20.44% of the issued and outstanding shares of STAR Common Stock, without giving
effect to the exercise of any options or warrants. After giving effect to
currently exercisable options and/or warrants (as of May 31, 1997 numbering
640,430) the shareholders of EFCC would hold approximately 18.23% of such
shares.
DISSENTERS' RIGHTS
Shares of EFCC Common Stock that have not been voted for the adoption
of the Merger and with respect to which dissenters' rights shall have been
validly and properly demanded and perfected in accordance with the BCL
("Dissenting Shares") will not be converted into the right to receive the Merger
Consideration on or after the Effective Time unless and until the holder of such
shares withdraws his demand for such appraisal in accordance with applicable law
or becomes ineligible for such appraisal, at which time such shares shall be
converted into and represent the right to receive the Merger Consideration,
without interest. See "APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS."
EXCHANGE OF CERTIFICATES
As of the Effective Time, STAR will deposit, or cause to be
deposited, with Continental Stock Transfer and Trust Company, or such other
mutually acceptable bank or trust company (the "Exchange Agent"), for the
benefit of holders of shares of EFCC Common Stock, for exchange in accordance
with the Merger Agreement: (i) certificates representing the STAR Share Number
of shares of STAR Common Stock; (ii) the estimated amount of cash to be paid in
lieu of fractional shares; and (iii) all funds necessary to pay the Cash
Consideration for shares of EFCC Common Stock converted by reason of the Merger
other than with respect to Dissenting Shares (together, all such certificates
and cash being hereinafter referred to as the "Exchange Fund"). The Exchange
Agent will deliver, pursuant to irrevocable instructions, the Cash
Consideration, the shares of STAR Common Stock to be issued pursuant to the
Merger Agreement and the cash to be issued in lieu of fractional shares out of
the Exchange Fund.
As soon as reasonably practicable after the Effective Time, the
Exchange Agent will mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of EFCC Common Stock (the "Certificates") whose shares were
converted into the right to receive the Merger Consideration (i) a letter of
transmittal and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Cash Consideration and certificates
representing shares of STAR Common Stock. Upon surrender of a Certificate for
cancellation to the Exchange Agent, or to such other agent or agents as may be
appointed by STAR, together with such letter of transmittal, duly executed, and
such other documents as may be reasonably required by the Exchange Agent, the
holder of such Certificate will be entitled to receive in exchange therefor the
Merger Consideration which such holder has the right to receive.
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EFCC SHAREHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE
UNTIL THEY RECEIVE A NOTICE AND TRANSMITTAL FORM FROM THE EXCHANGE AGENT.
No dividends or other distributions with respect to STAR Common Stock
with a record date after the Effective Time will be paid to the holder of any
unsurrendered Certificate with respect to the shares of STAR Common Stock
represented thereby and no cash payment (including, without limitation, cash
payment in lieu of fractional shares) will be paid to any such holder until the
surrender of such Certificate in accordance with the terms of the Merger
Agreement. Subject to the effect of applicable laws, following surrender of any
such Certificate, there will be paid to the holder of the Certificates
representing whole shares of STAR Common Stock issued in exchange therefor,
without interest: (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of STAR Common Stock; 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 whole
shares of STAR Common Stock.
All shares of STAR Common Stock issued, together with the Cash
Consideration paid, upon the surrender for exchange of Certificates in
accordance with the terms of the Merger Agreement (including any cash paid in
lieu of fractional shares) will be deemed to have been issued (and/or paid) in
full satisfaction of all rights pertaining to such shares of EFCC Common Stock.
No certificates or scrip representing fractional shares of STAR
Common Stock will be issued upon the surrender for exchange of Certificates, and
such fractional share interests will not entitle the owner thereof to vote or to
any rights of a shareholder of STAR. Notwithstanding any other provision of the
Merger Agreement, each holder of shares of EFCC Common Stock exchanged pursuant
to the Merger who would otherwise have been entitled to receive a fraction of a
share of STAR Common Stock (after taking into account all Certificates delivered
by such holder) will receive, in lieu thereof, cash (without interest) in an
amount equal to such fractional part of a share of STAR Common Stock multiplied
by the Market Price of a share of STAR Common Stock on the Effective Date.
REPRESENTATIONS AND WARRANTIES
STAR has made certain representations regarding the following
matters: (i) corporate organization; (ii) capital stock; (iii) options or other
rights; (iv) authority relative to the Merger Agreement and other agreements;
(v) STAR Common Stock; (vi) absence of violations; (vii) financial statements
and reports; (viii) absence of certain changes or events; (ix) completeness of
representations; (x) absence of defaults; and (xi) the use of brokers. EFCC has
made certain representations regarding the following matters: (i) corporate
organization; (ii) capital stock; (iii) options and other rights; (iv) authority
relative to the Merger Agreement and other agreements; (v) absence of
violations; (vi) compliance with laws; (vii) litigation; (viii) financial
statements and reports; (ix) absence of certain changes or events; (x) employee
benefit plans and employment matters; (xi) labor matters; (xii) insurance;
(xiii) environmental matters; (xiv) tax matters; (xv) intellectual property;
(xvi) related party transactions; (xvii) absence of undisclosed material
liabilities; (xviii) absence of defaults; (xix) title to properties;
encumbrances; (xx) contracts; (xxi) Medicare/Medicaid participation; (xxii) rate
tables and reimbursement; (xxiii) relationships; (xxiv) employees; (xxv)
questionable payments; (xxvi) completeness of representations; (xxvii) the use
of brokers; and (xxviii) minimum net worth.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME
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EFCC has agreed that prior to the Effective Time, except as (i)
otherwise expressly consented to or approved by STAR, (ii) expressly advised by
STAR pursuant to the Consulting Agreement, (iii) expressly directed by STAR
pursuant to the Management Agreement or (iv) required in order to consummate the
transactions contemplated by the Merger Agreement: (a) EFCC and its subsidiaries
will conduct their respective businesses in the ordinary course and consistent
in all material respects with past practice and will use all reasonable efforts
to preserve substantially intact their respective business organizations, to
keep available the services of their 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; (b)
neither EFCC nor any subsidiary will (i) amend its charter or bylaws, (ii) other
than as contemplated by the Merger Agreement, declare, set aside or pay any
dividend or other distribution or payment in cash, securities or property in
respect of shares of the EFCC Common Stock, (iii) make any direct or indirect
redemption, retirement, purchase or other acquisition of any of its capital
stock or (iv) split, combine or reclassify its outstanding shares of capital
stock; (c) neither EFCC nor any subsidiary will, directly or indirectly, (i)
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 EFCC or such subsidiary except that EFCC may issue shares of
EFCC Common Stock upon the exercise of stock options outstanding on the date of
the Merger Agreement, (ii) other than in the ordinary course of business and
consistent with past practice, incur any material indebtedness for borrowed
money, (iii) waive, release, grant or transfer any rights of material value,
(iv) except as permitted by the Merger Agreement, merge or consolidate with any
person or adopt a plan of liquidation or dissolution, (v) acquire, propose to
acquire or enter into an agreement to acquire any assets, stock or other
interests of a third party, (vi) transfer, lease, license, sell or dispose of a
material portion of assets or any material assets, (vii) permit any material
revaluation of any asset (including, without limitation, any writing down of the
value of inventory or writing off of notes or accounts receivable), (viii)
change any accounting principles or methods except insofar as may be required by
changes in generally accepted accounting principles or (ix) 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; (d)
neither EFCC nor any subsidiary will, directly or indirectly, (i) increase the
cash compensation payable or to become payable by it to any of its employees,
officers, consultants or directors; provided that EFCC or any subsidiary may
increase the cash compensation payable to non-officer employees to the extent
consistent with past practice and in no event to a rate of total annual
compensation for any individual that would increase such individual's rate of
total annual compensation by more than five percent (5%) over such individual's
current such rate, (ii) 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 EFCC or any subsidiary, (iii) enter into
or amend any employment or consulting agreement, 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 EFCC or any subsidiary; (e) neither
EFCC nor any subsidiary will, 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; and (f) neither EFCC nor any subsidiary will
authorize or enter into any agreement to do any of the things described in (a)
through (e) above.
NEGOTIATIONS WITH OTHERS
The Merger Agreement provides that, prior to the Effective Time,
unless otherwise permitted by the Merger Agreement, EFCC will not and will cause
each of its officers, directors, employees, agents, legal and financial advisors
and affiliates not to, directly or indirectly, make, solicit, encourage,
initiate or enter into any agreement or agreement in principle, or announce any
intention to do any of the foregoing, with respect to any
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offer or proposal to acquire all or a substantial part of EFCC's business and
properties or a substantial amount of EFCC's equity securities or debt
securities whether by purchase, merger, purchase of assets, tender offer,
exchange offer, business combination or otherwise (any such proposal or offer
being hereinafter referred to as a "Third Party Transaction"). EFCC and its
subsidiaries have also agreed that, prior to the Effective Time, they will not,
and will cause each of their officers, directors, legal and financial advisors,
agents and affiliates not to, directly or indirectly, participate in any
negotiations or discussions regarding, or furnish any information with respect
to, or otherwise cooperate in any way in connection with, or assist or
participate in, facilitate or encourage, any effort or attempt to effect or seek
to effect, a Third Party Transaction with or involving any other person unless
EFCC shall have received an unsolicited written offer to effect a Third Party
Transaction and the Board of Directors of EFCC determines in good faith upon the
written opinion of its outside legal counsel addressed to STAR and EFCC that, in
the exercise of the fiduciary obligations of the Board of Directors under
applicable law, such information is required to be provided to or such
discussions or negotiations are required to be undertaken with the person
submitting such Third Party Transaction. EFCC has agreed that prior to the
Effective Time, EFCC will promptly communicate to STAR the terms of any Third
Party Transaction which it may receive and will keep STAR informed as to the
status of any actions, including negotiations or discussions, taken in
connection therewith.
MANAGEMENT AFTER THE MERGER
After the Effective Time, Merger Sub, the surviving corporation in
the Merger, will remain a wholly owned subsidiary of STAR. The initial directors
of the Merger Sub are Messrs. Sternbach and Fellerman.
Neither of them is an affiliate of EFCC.
CONDITIONS OF THE MERGER
The respective obligations of STAR and EFCC to consummate the Merger
are subject to the fulfillment of certain conditions, certain of which may be
waived by the mutual consent of EFCC and STAR, including, without limitation,
the following: (i) the Registration Statement shall have been declared
effective, and no stop order suspending the effectiveness of the Registration
Statement shall have been issued by the Commission or shall be continuing to be
in effect, and no proceedings for that purpose shall have been initiated or
threatened by the Commission; (ii) STAR shall have received all state securities
laws or "blue sky" permits and authorizations necessary to issue the shares of
STAR Common Stock pursuant to the Merger and the transactions contemplated by
the Merger Agreement; (iii) the Merger Agreement and the Merger contemplated
thereby and any other action necessary to consummate the transactions
contemplated thereby will have been approved and adopted by the requisite vote
of the holders of the outstanding shares of the EFCC Common Stock entitled to
vote thereon at the EFCC Meeting and the holders of the outstanding shares of
the STAR Common Stock entitled to vote thereon at the STAR Meeting; (iv) 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 (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 the Merger Agreement; provided, however, that, prior to invoking
this condition, each party to the Merger Agreement shall use all reasonable
efforts to have such statute, rule, regulation, injunction or order vacated; (v)
the shares of STAR Common Stock issuable to EFCC's shareholders in the Merger or
thereafter shall have been authorized for listing on the Nasdaq National Market,
upon official notice of issuance; (vi) each of EFCC and STAR shall have received
the opinion, addressed to each of them, of Meltzer, Lippe, Goldstein, Wolf &
Schlissel, P.C., counsel to EFCC, dated immediately prior to the mailing of this
Joint Proxy Statement/Prospectus, that among other things the Merger will, more
likely than not, be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code.
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The obligation of EFCC to effect the Merger is subject to the
fulfillment or waiver by EFCC at or prior to the Effective Time of certain
additional conditions, including without limitation, the following: (i) each of
STAR and Merger Sub shall have performed in all material respects its
obligations under the Merger Agreement required to be performed by it on or
prior to the Effective Time pursuant to the terms thereof, unless EFCC shall
have intentionally prevented such performance; (ii) all representations or
warranties of STAR and Merger Sub in the Merger Agreement shall, to the extent
required in the Merger Agreement, be true and correct; and (iii) STAR shall have
obtained all Third Party Consents, including those Third Party Consents required
by TPC, contemplated by the Merger Agreement and applicable to STAR unless the
failure to obtain any such Third Party Consent would not, individually, or in
the aggregate, have a material adverse effect on STAR.
The obligations of STAR and Merger Sub to effect the Merger is
subject to the fulfillment or waiver by STAR at or prior to the Effective Time
of certain additional conditions, including without limitation the following:
(i) EFCC shall have performed in all material respects each of its obligations
under the Merger Agreement, the Consulting Agreement and the Management
Agreement required to be performed by it on or prior to the Effective Time
unless STAR shall have prevented such performance; (ii) all representations or
warranties of EFCC in the Merger Agreement shall, to the extent required
therein, be true and correct; (iii) there shall have been no adverse development
or change or prospective adverse development or change regarding the ability of
EFCC to conduct its Medicaid-related operations in the nature or to the extent
conducted prior to the date of the Merger; (iv) all material federal, state,
local and foreign governmental consents, approvals and filings required to
permit the Merger and the consummation of the transactions contemplated by the
Merger Agreement shall have been received or made and any applicable waiting
period shall have expired or been terminated without the imposition of
conditions that are or would become applicable to EFCC or its subsidiaries or
STAR or its subsidiaries and which would have a material adverse effect on EFCC
or a material adverse effect on STAR; (v) EFCC shall have obtained all third
party consents (applicable to EFCC or any subsidiary) contemplated by, including
without limitation the following: except for such third party consents which, if
not obtained, would not, individually or in aggregate, have a material adverse
effect on EFCC; (vi) Merger Sub shall have received letters of resignation
addressed to EFCC from the members of EFCC's Board of Directors, which
resignations shall be effective as of the Effective Time; (vii) the number of
shares of the EFCC Share Number, as to which dissenters' rights shall have been
validly and properly demanded and perfected, shall not exceed 5% of the EFCC
Share Number; and (viii) the merger of TPC Home Care Services, Inc., an 83%
owned subsidiary of EFCC, into EFCC shall have been completed in compliance with
all applicable law.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at
any time prior to the Effective Time, before or after approval by the
shareholders of STAR and EFCC:
(a) by the mutual consent of STAR and EFCC;
(b) by either EFCC or STAR, if (i) the Merger has not been
consummated by September 15, 1997; (ii) the approval of the shareholders of each
of STAR and EFCC have not been obtained at the meetings duly convened therefor
or at any adjournments or postponements thereof; or (iii) a United States
federal or state court of competent jurisdiction or United States federal or
state governmental regulatory or administrative agency or commission 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 and such order, decree, ruling or other action shall have become
final and non-appealable;
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(c) by EFCC at any time prior to the Effective Time, before or after
the adoption and approval by the shareholders of EFCC, by action of the Board of
Directors of EFCC, if: (i) the Board of Directors of EFCC determines in good
faith with the advice of outside legal counsel that, in the exercise of the
fiduciary obligations of the Board of Directors under applicable law, such
termination is required by reason of a Third Party Transaction; (ii) any of the
representations or warranties of STAR and Merger Sub in the Merger Agreement
shall not have been, or where applicable continue to be, true and correct; or
(iii) there has been a breach in any material respect of any of the covenants or
agreements set forth in this Agreement on the part of STAR, which breach is not
curable or, if curable, is not cured within 30 days after written notice of such
breach is given by EFCC to STAR, unless EFCC shall have intentionally caused
such breach and prevented such cure; or
(d) by STAR at any time prior to the Effective Time, by action of the
Board of Directors of STAR, if: (i) the Board of Directors of EFCC shall have
withdrawn or modified its determination that the Merger is fair to and in the
best interests of EFCC's shareholders or its approval or recommendation of the
Merger Agreement or the Merger; (ii) any of the representations or warranties of
EFCC in the Merger Agreement shall not have been, or where appropriate continue
to be, true and correct; or (iii) there has been a breach in any material
respect of any of the covenants or agreements set forth in the Merger Agreement
on the part of EFCC, which breach is not curable or, if curable, is not cured
within 30 days after written notice of such breach is given by STAR to EFCC,
unless STAR shall have intentionally caused such breach and prevented such cure.
EFFECT OF TERMINATION AND ABANDONMENT
If the Merger Agreement is terminated by EFCC because the Board of
EFCC determines in good faith with the advice of outside legal counsel that, in
the exercise of its fiduciary obligations such termination is required by reason
of a Third Party Transaction or by STAR because the Board of EFCC will have
withdrawn or modified its determination that the Merger is fair to and in the
best interests of EFCC's shareholders or its approval or recommendation of the
Merger Agreement or the Merger is withdrawn, then EFCC will promptly, but in no
event later than ten days after the date of such request, pay STAR a fee of
$350,000, which amount shall be payable by wire transfer of same day funds.
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AMENDMENT AND WAIVER
Subject to the applicable provisions of state law, the Merger
Agreement may be amended by the parties thereto solely by action taken by their
respective Boards of Directors. The Merger Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
At any time prior to the Effective Time, the parties to the Merger
Agreement, 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, (ii) waive any inaccuracies in the representations and
warranties of the other party contained in the Merger Agreement or in any
documents delivered pursuant thereto and (iii) waive compliance by the other
party with any of the agreements or conditions therein. Any agreement on the
part of a party thereto 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 of the Merger Agreement will be deemed to be a waiver of any other
provision, condition or requirement thereof; nor shall any delay or omission of
either party to exercise any right thereunder in any manner impair the exercise
of any such right accruing to it thereunder.
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APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
Section 910 of the BCL ("Section 910") provides that any holder of
EFCC Common Stock as of the Record Date who has not voted in favor of the Merger
Agreement shall have the right, as an alternative to receiving the Merger
Consideration in the Merger, to receive payment of the fair value of his shares
and certain other rights and benefits, subject to complying with Section 623 of
the BCL ("Section 623"). Pursuant to the terms of the Merger Agreement, STAR is
not obligated to consummate the Merger if more than 5% of the outstanding shares
of EFCC Common Stock, after giving effect to the TPC Merger, have properly
demanded appraisal rights. Copies of Section 623 and Section 910 are attached
hereto as Appendix C and a summary of the procedures relating to the exercise of
appraisal rights is set forth below. This summary does not purport to be a
complete statement of the revisions of Section 623 and Section 910 and is
qualified in its entirety by reference to Appendix C. A person having a
beneficial interest in shares of EFCC Common Stock that are held of record in
the name of another person, such as a broker or nominee, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner to perfect whatever appraisal rights such beneficial owner may
have.
THIS DISCUSSION AND APPENDIX C SHOULD BE REVIEWED CAREFULLY BY ANY
SHAREHOLDER OF EFCC WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO
WISHES TO PRESERVE THE RIGHT TO DO SO. FAILURE TO STRICTLY COMPLY WITH ANY OF
THE PROCEDURAL REQUIREMENTS OF SECTION 623 MAY RESULT IN A TERMINATION OR WAIVER
OF APPRAISAL RIGHTS UNDER SECTION 623.
EFCC does not intend to waive compliance with any statutory
procedures. Unless all of the procedures as set out in Section 623 are followed
by a shareholder of EFCC who wishes to exercise appraisal rights, such
shareholder will be bound by the terms of the Merger Agreement.
Each holder of record of EFCC Common Stock who, as of the EFCC Record
Date, desires to exercise appraisal rights must satisfy the following conditions
and otherwise comply with the provisions of Section 623:
(i) A separate, written objection to the Merger must be filed with
EFCC before or at the EFCC Meeting, but prior to the taking of the vote on the
Merger. This objection must include: (a) a notice of the shareholder's election
to dissent, (b) the shareholder's name and residence address, (c) the number of
shares as to which the shareholder dissents and (d) a demand for payment of the
fair value of such shares if the Merger is consummated. Such objection is not
required for any holder of shares of EFCC Common Stock to whom EFCC did not give
notice of the EFCC Meeting. A shareholder may not dissent as to less than all of
the shares which such shareholder owns beneficially, and a nominee or fiduciary
may not dissent on behalf of any beneficial owner as to less than all of the
shares of such owner held of record by such nominee or fiduciary. A record
holder, such as a broker or an agent, who holds shares of EFCC Common Stock as a
nominee or fiduciary for beneficial owners, some of whom desire to demand
appraisal, must exercise appraisal rights on behalf of such beneficial owners
who desire to demand appraisal with respect to the shares of EFCC Common Stock
held for such beneficial owners. A proxy or vote abstaining from voting, or
voting against the Merger, or a failure to vote on the Merger, does not
constitute such an objection within the meaning of Section 623. Failure to vote
against the Merger Agreement, however, will not constitute a waiver of rights
under Sections 623 and 910 of the BCL, provided that a written objection to the
Merger, as described above, has been properly filed. EFCC will treat only those
written demands which are actually received by it before the taking of the vote
on the Merger as being timely.
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(ii) A shareholder wishing to exercise appraisal rights under Section
623 must not vote for the approval and adoption of the Merger Agreement. If a
shareholder returns a signed proxy failing to specify either (a) a vote against
the approval and adoption of the Merger Agreement, or (b) a direction to abstain
from voting on the approval and adoption of the Merger Agreement, the proxy will
be voted "FOR" the approval and adoption of the Merger Agreement, which will
have the effect of waiving such shareholder's appraisal rights and nullifying
any previously filed objection.
All notices of election to dissent should be addressed to EFCC, c/o
Arbor Home Health Care Holdings LLC, 333 Earle Ovington Boulevard, Uniondale, NY
11553, Attention: Joseph Heller, Vice President.
Within ten days after the Effective Time, EFCC will provide written
notice of the consummation of the Merger to all shareholders who filed written
objections to the Merger or from whom a written objection was not required and
have not voted for adoption and approval of the Merger. Within 20 days after the
giving of such notice to any shareholder from whom written objection was not
required, if such shareholder elects to dissent, such shareholder may file with
EFCC a written notice of such election, stating the shareholder's name and
residence address, the number of shares of EFCC Common Stock as to which such
shareholder dissents and a demand for payment of the fair value of such
shareholder's shares of EFCC Common Stock.
Each shareholder who has complied with Section 623 must submit the
certificates representing such shares of EFCC Common Stock to EFCC or its
transfer agent at the time of filing the notice of dissent or within one month
thereafter for notation thereon of the pendency of an appraisal claim, after
which such certificates will be returned to such holder or other person who
submitted them on behalf of the holder. American Stock Transfer & Trust Company
serves as the transfer agent for shares of EFCC Common Stock, and its address is
40 Wall Street, New York, NY 10005. Any such shareholder who fails to submit
such certificates for notation will, at the election of EFCC (exercised by
written notice to such holder within 45 days from the date of filing of the
notice to dissent), lose such dissenter's rights unless a court, for good cause
shown, otherwise directs. Upon transfer of a certificate bearing such notation,
each new certificate issued therefor shall bear a similar notation together with
the name of the original dissenting holder of the shares and a transferee shall
acquire no rights in EFCC except those which the original dissenting shareholder
had at the time of the transfer.
Within 15 days after the expiration of the period within which
holders of shares of EFCC Common Stock may file their notices of election to
dissent, or within 15 days after the Effective Time, whichever is later (but in
no case later than 90 days after the Special Meeting), EFCC (or STAR, if after
the Effective Time) is required to make a written offer by registered mail to
each shareholder who has filed a notice of election to dissent to pay for such
holder's shares of EFCC Common Stock at a specified price which EFCC (or STAR)
considers to be their fair value (which price is to be the same for all
dissenting holders). Such offer will be accompanied by a statement setting forth
the aggregate number of shares of EFCC Common Stock with respect to which
notices of election to dissent from approval and adoption of the Merger
Agreement have been received and the aggregate number of holders of such shares
of EFCC Common Stock. If the Merger has been consummated at the time such offer
is made, such offer will also be accompanied by (i) advance payment to each
dissenting holder who has submitted such holder's certificates to shares of EFCC
for notation thereon of such holder's election to dissent of an amount equal to
80% of the amount of such offer, or (ii) as to each dissenting holder who has
not yet submitted such certificates for such notation, a statement that advance
payment to such holder of an amount equal to 80% of such offer will be made by
EFCC promptly upon submission of such certificates. If the Merger has not been
consummated at the time of such offer, such advance payment or statement as to
advance payment will be sent to each holder entitled
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thereto forthwith upon consummation of the Merger. Every such advance payment or
statement as to advance payment will include advice to such holder that
acceptance of such payment by a dissenting holder will not constitute a waiver
of such holder's dissenter's rights. If the Merger has not been consummated by
the expiration of the above-mentioned 90-day period, the offer by EFCC may be
conditioned upon the consummation of the Merger. If within 30 days after the
making of a written offer by EFCC, EFCC and any dissenting holder agree upon the
price to be paid for such shareholder's shares of EFCC Common Stock, payment
therefor will be made within 60 days after the making of such offer or the
Effective Time, whichever is later, upon the surrender of the certificates
representing such shares of EFCC Common Stock.
If EFCC fails to make such an offer within the 15-day period
described in the preceding paragraph, or if it makes an offer but EFCC and a
dissenting holder do not agree within 30 days of the making of the offer upon
the price to be paid for such holder's shares of EFCC Common Stock, EFCC must,
within 20 days of such 15 or 30-day period, as the case may be, institute a
special proceeding in the New York Supreme Court, Nassau County (the "Court"),
to determine the rights of dissenting shareholders and fix the fair value of
their shares of EFCC Common Stock. It is the current intention of EFCC to
institute any such proceeding within the 20-day period; however, if EFCC does
not institute such proceeding within the 20-day period, any dissenting holder
may, within 30 days after the expiration of the 20-day period, institute a
proceeding for the same purposes. If such proceeding is not instituted within
such 30-day period, dissenting holders who have not agreed with EFCC as to the
price to be paid for the shares of EFCC Common Stock will lose their dissenters
rights, unless the Court, for good cause shown, otherwise directs.
All dissenting holders, other than those who shall have agreed with
EFCC as to the price to be paid for their shares of EFCC Common Stock, will be
made parties to such appraisal proceeding. The Court will determine whether each
dissenting holder, as to whom EFCC requests the Court to make such
determination, is entitled to receive payment for such holder's shares of EFCC
Common Stock. If EFCC does not request any such determination or if the Court
finds that such dissenting shareholder is so entitled, the Court will then
determine the fair value of such holder's shares of EFCC Common Stock as of the
close of business on the day prior to the date of the EFCC Meeting. In fixing
the fair value of the shares of EFCC Common Stock, the Court will consider the
nature of the transaction giving rise to the holder's right to receive payment
for such holder's shares of EFCC Common Stock and its effects on EFCC and its
shareholders, the concepts and methods then customary in the relevant securities
and financial markets for determining the fair value of the shares of a
corporation engaging in a similar transaction under comparable circumstances,
and all other relevant factors. Within 60 days after the completion of any such
Court proceeding, EFCC will be required to pay to each dissenting holder the
amount found to be due (less the advance payment referred to above), with
interest thereon at such rate as the Court finds to be equitable, from the date
the Merger is consummated to the date of payment, upon surrender to EFCC by such
holder of the certificates representing such shares of EFCC Common Stock. If the
Court finds that the refusal of any dissenting holder to accept the offer of
EFCC was arbitrary, vexatious, or otherwise not in good faith, no interest will
be allowed to such holder.
The parties to such appraisal proceeding will bear their own costs
and expenses, including the fees and expenses of their counsel and any experts
employed by them, except that the Court, in its discretion, (i) may apportion
and assess all or any part of the costs, expenses and fees incurred by any or
all dissenting shareholders who are parties to the appraisal proceeding against
EFCC if, among other things, the Court finds (a) that the fair value of the
shares of EFCC Common Stock materially exceeds the offer by EFCC, (b) that no
offer of payment or required advance payment was made by EFCC, (c) that EFCC
failed to institute such appraisal proceeding within the required period, or (d)
that the actions of EFCC in complying with its obligations under Section 623
were arbitrary, vexatious or otherwise not in good faith, or (ii) may apportion
and assess all or any part of the costs, expenses and fees incurred by EFCC
against any or all of the dissenting shareholders who are parties to the
proceeding, including any who have withdrawn their notices of
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election to dissent from the Merger, if the Court finds that their refusal to
accept EFCC's offer of payment was arbitrary, vexatious or otherwise not in good
faith.
Any shareholder who has filed a notice of election to dissent will
not, after the Effective Time, have any of the rights of a shareholder with
respect to such holder's shares of EFCC Common Stock, other than the right to be
paid the fair value of such shares of EFCC Common Stock pursuant to the BCL and
any other rights or benefits provided by the BCL for shareholders who have filed
such a notice. Any notice of election to dissent may be withdrawn by a
dissenting shareholder at any time prior to such shareholder's acceptance in
writing of an offer made by EFCC, as described above, but in no case later than
60 days after the Effective Time (or if EFCC fails to make a timely offer to pay
such shareholder the fair value of such holder's shares of EFCC Common Stock as
described above, at any time within 60 days after any date such an offer is
made), or thereafter with the written consent of EFCC or as provided below. In
order to be effective, withdrawal of a notice of election to dissent must be
accompanied by the return to EFCC of any advance payment to the shareholder made
by EFCC, as described above. Any dissenting shareholder who withdraws such
holder's notice of election to dissent or otherwise loses such dissenter's
rights will thereupon have only the right to receive the consideration provided
for in the Merger Agreement for each of such holder's shares of EFCC Common
Stock.
Under Section 623(j) of the BCL, no payment of the fair value of
shares of EFCC Common Stock may be made to dissenting shareholders by EFCC if
EFCC were to be insolvent or if such payment would render EFCC insolvent. In
that event, such dissenting shareholder would be required to file written notice
with EFCC within 30 days after such shareholder receives a written notice from
EFCC that EFCC was insolvent or payment for such shareholder's shares would
render EFCC insolvent. In such a case, the dissenting shareholder would have the
option to either (i) withdraw such holder's notice of election to dissent (which
would be deemed accepted by EFCC) or (ii) retain such holder's status as a
claimant against EFCC. If a dissenting shareholder were to elect to remain a
claimant against EFCC, such dissenting shareholder's rights would be
subordinated to the rights of the creditors of EFCC but would be superior to
those of non-dissenting shareholders should EFCC be liquidated. If EFCC were not
liquidated, the dissenting shareholder would retain such holder's right to
payment for such holder's shares of EFCC Common Stock, which obligation EFCC
would be required to meet once it was no longer insolvent or if such payment
would not render EFCC insolvent. If a dissenting shareholder fails to exercise
either such option within 30 days after EFCC has given such holder written
notice that payment cannot be made because of the restrictions of Section 623(j)
of the BCL, EFCC would be required to exercise such option by written notice to
such holder within 20 days after the expiration of such period of 30 days. For
purposes of the BCL, an "insolvent corporation" is a corporation that is unable
to pay its debts as they become due in the usual course of its business.
If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that, at the time EFCC
makes any payment in respect of any dissenting shares (each, a "Transfer"), EFCC
(i) made the Transfer with intent to hinder, delay or defraud creditors or (ii)
received less than a reasonably equivalent value or fair consideration for the
Transfer, and (a) was insolvent at the time of the Transfer, (b) was rendered
insolvent by reason of the Transfer, (c) was engaged or about to engage in a
business or transaction for which the assets remaining with EFCC constituted
unreasonably small capital to carry on its business or (d) intended to incur, or
believed that it would incur, debts beyond its ability to pay as such debts
matured, the court could find that the Transfer constituted a "fraudulent
conveyance" under applicable federal or state law. If the Transfer were
determined to be a fraudulent conveyance, there is a risk that holders of
dissenting shares, as recipients of the Transfers, would be ordered to turn over
to EFCC, its creditors or its trustee in bankruptcy, all or a portion of the
payments in respect of dissenting shares. The measure of insolvency for purposes
of the foregoing will vary depending upon the law of the jurisdiction which is
being applied. Generally, however, EFCC would be considered insolvent if at the
time of the
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Transfer in question the fair value (or fair saleable value) of its assets was
less than the amount required to pay its probable liability on its existing
debts (including contingent liabilities) as they become absolute and matured, or
if the sum of EFCC, debts (including any contingent liabilities) at the time of
the Transfer is greater than the fair value of all EFCC assets. The Transfers
could be deemed to be fraudulent conveyances even if EFCC is not deemed to be an
"insolvent corporation" for purposes of Section 623.
In any proceeding to enforce a shareholder's rights to payment for
shares pursuant to Section 623, a shareholder is precluded from seeking the
enforcement of any other right to which he might otherwise be entitled by virtue
of share ownership, except (i) the right to be paid the fair value of his shares
pursuant to Section 623 and (ii) the right to bring or maintain an appropriate
action to obtain relief on the ground that the Merger is unlawful or fraudulent
as to such shareholder.
A VOTE AGAINST THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL
NOT BE DEEMED TO SATISFY THE REQUIREMENTS FOR A WRITTEN OBJECTION TO THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT OR A WRITTEN DEMAND FOR PAYMENT OF
THE VALUE OF THE SHARES OWNED BY A DISSENTING SHAREHOLDER.
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COMPARISON OF RIGHTS OF HOLDERS OF
STAR COMMON STOCK AND EFCC COMMON STOCK
GENERAL
As a result of the Merger, holders of EFCC Common Stock will become
shareholders of STAR, and the rights of such former EFCC shareholders will
thereafter be governed by the STAR Certificate of Incorporation (the "STAR
Charter") and the STAR by-laws (the "STAR By-laws"). The rights of the holders
of EFCC Common Stock are presently governed by the EFCC Certificate of
Incorporation (the "EFCC Charter") and the EFCC by-laws (the "EFCC By-laws").
The rights of the Shareholders of both STAR and EFCC are governed by the BCL.
Therefore, except for those differences that result from the differences of the
respective charters and by-laws of STAR and EFCC, there are no differences in
the respective rights of shareholders of STAR and EFCC. The following summary,
which does not purport to be a complete statement of the differences between the
rights of the shareholders of STAR and the shareholders of EFCC, is an
explanation of the material differences of the EFCC Common Stock and STAR Common
Stock resulting from the differences between the STAR Charter and the EFCC
Charter, the STAR By-laws and the EFCC By-laws. This summary is qualified in its
entirety by reference to the full text of each of such documents and the
applicable state statutes.
VOTING RIGHTS
Generally
Each shareholder of record of STAR or EFCC Common Stock is entitled
to one vote for every share held by such holder. Except as otherwise provided by
the New York Business Corporation Law ("BCL"), whenever any corporate action
other than the election of directors is to be taken by vote of the shareholders
of STAR or EFCC, respectively, it must be authorized by a majority of the votes
cast at a meeting of shareholders by the holders of shares entitled to vote
thereon.
Election of Directors
The BCL provides that the number of directors constituting the entire
board shall not be less than three, except where all the shares of a corporation
are owned beneficially and of record by less than three shareholders. The number
of directors may be less than three but not less than the number of
shareholders. Subject to the above, the number of directors may be fixed by the
by-laws, or by action of the shareholders or of the board under the specific
provisions of a by-law adopted by the shareholders.
The STAR Charter mandates that STAR have not less than three and no
more than fifteen directors. Pursuant to the EFCC By-laws, the number of
directors shall be not less than three nor more than five.
Approval of Certain Transactions
The BCL requires the affirmative vote of two-thirds of all
outstanding shares entitled to vote thereon to effect a merger, a consolidation,
a share exchange or the sale, lease, disposition of all or substantially all of
a corporation's assets. Notwithstanding any provision in the certificate of
incorporation permitting class voting in connection with the transaction of any
business of the corporation, the holders of shares of a class or series are
entitled by the BCL to vote as a class if the proposed transaction contains any
provision which, if contained in an amendment to the certificate of
incorporation of the corporation, would entitle the holder of shares of such
class or series to vote thereon; in such case, in addition to the required
two-thirds vote of all
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outstanding shares, the merger must be authorized by the vote of the holders of
a majority of all outstanding shares of each such class or series.
Neither the STAR nor the EFCC Charter contain special provisions
authorizing class voting in instances other than those where class voting is
required by the BCL.
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
Pursuant to the BCL, amendments to the certificate of incorporation
may be authorized by vote of the board, followed by the vote of the holders of a
majority of all outstanding shares entitled to vote thereon.
This provision applies to both STAR and EFCC shareholders.
SPECIAL MEETINGS
Pursuant to the BCL, special meetings of shareholders may be called
by the board of directors and by such other person or persons authorized to do
so by the corporation's certificate of incorporation or by-laws. In addition,
the BCL provides that if there is a failure to elect a sufficient number of
directors to conduct the business of the corporation for a period of one month
after the date fixed by or under the by-laws for the annual meeting of
shareholders or for a period of 13 months after the last annual meeting, the
board of directors will call a special meeting of directors. If the board fails
to do so within 14 days of the expiration of such period, or if it is so called
but such directors are not elected within two months, the holders of 10% of the
shares entitled to vote in an election of directors may demand the call of a
special meeting for an election of directors.
The STAR By-laws permit special shareholders' meetings to be called
at any time by the board or the president, or by the president or the secretary
at the written request of the holders of 10% of the outstanding shares entitled
to vote at such meeting. The EFCC By-laws permit special shareholder meetings to
be called by the president or the secretary at the written request of a majority
of the board or by shareholders owning a majority in amount of the shares issued
and outstanding.
SHAREHOLDER ACTION WITHOUT A MEETING
The BCL provides that shareholders may take any action without a
meeting by written consent only if such consent is signed by the holders of all
outstanding shares entitled to vote thereon, unless otherwise provided in the
certificate of incorporation.
Neither the STAR nor the EFCC Charter contain provisions limiting the
right of the shareholders to act by written consent.
PREEMPTIVE RIGHTS
The BCL provides, subject to certain exceptions, preemptive rights to
the shareholders of a corporation in the case of an issuance of securities which
would adversely affect certain specified interests of such shareholders,
provided that the certificate of incorporation may provide otherwise.
Neither the STAR nor the EFCC Charter include such a provision
relative to preemptive rights.
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DIVIDENDS
Pursuant to the BCL, a corporation may declare and pay dividends on
its outstanding shares except when such corporation is insolvent or would
thereby be made insolvent, or when the declaration, payment or distribution
would be contrary to any restrictions contained in the certificate of
incorporation. In general, dividends may be declared or paid out of surplus
only. When any dividend is paid or any other distribution is made, in whole or
in part, from sources other than earned surplus, it must be accompanied by a
written notice disclosing the amounts by which such dividend or distribution
affects stated capital, capital surplus and earned surplus, or, if such amounts
are not yet determinable, disclosing the approximate effect of such dividend on
stated capital, capital surplus and earned surplus and stating that such amounts
are not yet determinable.
Neither STAR nor EFCC's Charter contain restrictions on the
declaration, payment or distribution of dividends.
STOCK REPURCHASES
The BCL permits a corporation, subject to restriction imposed by law
or permission in its certificate of incorporation, to repurchase or redeem its
shares out of surplus except when the corporation is insolvent or would thereby
be made insolvent. A corporation may repurchase its shares out of stated capital
(subject to the foregoing exception) if the purchase is made for the purpose of
(i) eliminating fractions of shares, (ii) collecting or compromising
indebtedness to the corporation or (iii) paying shareholders the fair value of
their shares in connection with the exercise of statutory appraisal rights.
The STAR Charter provides that STAR's Common Stock shall not be
subject to redemption. The EFCC Charter does not contain any provision
prohibiting redemption.
ISSUANCE OF RIGHTS OR OPTIONS TO PURCHASE SHARES TO DIRECTORS, OFFICERS AND
EMPLOYEES
The BCL requires that the issuance to officers, directors or
employees of rights or options to purchase shares be authorized by a majority of
all outstanding shares entitled to vote thereon, or authorized by and consistent
with a plan adopted by such vote of shareholders. In the absence of preemptive
rights, such authorization is not required in New York for the issuance of
rights or options in substitution for or upon the assumption of rights or
options of a corporation with which the issuing corporation is merging or
consolidating.
Both BCL provisions apply to STAR and EFCC as neither STAR nor EFCC
shareholders benefit from preemptive rights.
LOANS TO DIRECTORS
The BCL requires that any loan made by the corporation to any
director be authorized by a vote of the shareholders. For purposes of this
authorization, the shares held by the director who would be the borrower are not
entitled to vote.
This provision applies to both STAR and EFCC as neither corporation's
Charter restricts the making of loans to directors by the corporation.
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CLASSIFICATION OF THE BOARD OF DIRECTORS
The BCL provides that a corporation's board of directors may be
divided into classes with staggered terms of office.
Neither the EFCC nor the STAR Charter or By-laws provide for a
classified board of directors.
DUTIES OF DIRECTORS
The BCL specifically authorizes a board of directors to consider
constituencies other than the holders of a corporation's capital stock and to
consider both the long-term and short-term interests of the corporation and such
constituencies when taking any action, including action taken in connection with
a change or potential change in the control of the corporation. The BCL permits
directors to consider the effect that a corporation's action may have in the
short-term and long-term on (i) potential growth, development, productivity and
profitability of a corporation; (ii) current employees; (iii) retired employees
and other beneficiaries receiving or entitled to receive retirement, welfare or
similar benefits from the corporation; (iv) the corporation's customers and
creditors; and (v) the ability of the corporation to continuously provide goods,
services, employment opportunities and employment benefits and otherwise
contribute to the communities in which it does business.
STAR and EFCC directors both have the benefit of the above provision
as neither STAR nor EFCC's Charter or By-laws restrict the constituencies that
directors can consider when taking corporate action.
INTERESTED DIRECTOR TRANSACTIONS
The BCL provides that no transaction between a corporation and one or
more of its directors, or any entity in which one or more of its directors are
directors or officers, or have a substantial financial interest, shall be void
or voidable solely for that reason. In addition, no such transaction shall be
void or voidable solely because the director is present or votes at the meeting
of the board of directors or committee which authorized the transaction. In
order to avoid such a transaction being void or voidable, it must, after
disclosure of material facts (unless such facts were known), (i) be approved by
the disinterested directors or a committee of disinterested directors by a vote
sufficient for such purpose without counting the vote of any interested director
(or, if the vote of disinterested directors is insufficient to constitute an act
of the board under the BCL, by the unanimous vote of the disinterested
directors) or (ii) be approved by a vote of the shareholders. Alternatively, the
transaction will not be void or voidable if it is shown to have been fair to the
corporation at the time it was approved by the board of directors, a committee
thereof or the shareholders.
The above provisions are applicable to STAR and EFCC.
LIMITATIONS ON DIRECTORS' LIABILITY
The BCL permits a corporation to limit or eliminate a director's
personal liability to the corporation or the holders of its capital stock for
breach of duty. This limitation is generally unavailable for acts or omissions
by a director which were (i) in bad faith, (ii) involved intentional misconduct
or a knowing violation of law, or (iii) involved a financial profit or other
advantage to which such director was not legally entitled. The BCL also provides
for joint and several liability of directors who concur in certain corporate
actions resulting in the violation of a statute prohibiting certain dividend
declarations, purchase or redemption of shares, payments to shareholders after
dissolution and particular types of loans.
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Both the STAR and the EFCC Charters provide that, to the extent
permitted by the BCL, no director shall be liable to the Corporation or its
shareholders for damages for any breach of duty in his or her capacity as a
director.
INDEMNIFICATION OF DIRECTOR AND OFFICERS
Pursuant to the BCL, indemnification of directors and officers may be
provided to whatever extent shall be authorized by a corporation's certificate
of incorporation or a by-law or vote adopted by the shareholders. However, the
BCL does not permit indemnification with respect to any matter as to which the
director or officer has been adjudicated not to have acted in good faith in the
reasonable belief that his actions were in the best interest of the corporation.
The BCL provides that no indemnification of directors in shareholder
derivative suits may be made in respect of (i) a threatened action or a pending
action which is settled or otherwise disposed of, or (ii) any claim, issue or
matter as to which the director or officer had been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
was brought or, if no action is brought, any court of competent jurisdiction,
determines upon application that, in view of the circumstances of the case, the
director or officer is fairly and reasonably entitled to indemnity for such
portion of the settlement amount and expenses as the court deems proper. The
statutory provisions for indemnification and advancement of expenses are not
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled independently of the applicable
statutory provision.
The STAR and the EFCC By-laws both provide for indemnification of
directors and officers and advancement of expenses to the extent permitted by
the BCL.
REMOVAL OF DIRECTORS
The BCL provides that any or all of the directors of a corporation
may be removed for cause by a vote of the shareholders and that the certificate
of incorporation or by-laws may provide for removal without cause by vote of the
shareholders. The BCL also imposes additional restrictions on the removal of
directors of corporations with cumulative voting or directors elected by the
holders of a specific class or series of shares.
STAR's By-laws provide that any director may be removed by the
shareholders with or without cause and at any time. EFCC's By-laws provide that
any or all of the directors may be removed for cause by vote of the shareholders
or by action of the Board. Directors may be removed without cause only by a vote
of the shareholders. As STAR and EFCC's By-laws are silent respecting removal of
directors elected through cumulative voting or by the holders of given class or
series of shares, the BCL provisions with respect thereto shall apply in full.
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DESCRIPTION OF STAR CAPITAL STOCK
STAR COMMON STOCK
STAR has two authorized classes of capital stock, the STAR Common
Stock, par value $.001 per share, of which STAR is authorized to issue
10,000,000 shares and STAR's preferred stock, par value $1.00 per share of which
STAR is authorized to issue 5,000,000 shares.
The holders of STAR Common Stock are entitled to one vote for each
share of record held by them on all matters to be voted on by shareholders.
There is no right to cumulative voting; thus, the holders of 50% or more of the
shares outstanding can, if they choose to do so, elect all of the directors of
STAR. The holders of STAR Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor. In the event of liquidation, dissolution or winding up of the affairs
of STAR, the holders of STAR Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of
liabilities. Holders of shares of STAR Common Stock have no preemptive or other
subscription rights.
As of July 24, 1997, there were 4,212,387 shares of STAR Common Stock
issued and outstanding which were held of record by 218 persons. No shares of
preferred stock have been issued.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
(a) Section 722 of the BCL permits, in general, a
New York corporation to indemnify any person made, or threatened to be made, a
party to an action or proceeding by reason of the fact that he or she was a
director or officer of the corporation, or served another entity in any capacity
at the request of the corporation, against any judgment, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees actually and
necessarily incurred as a result of such action or proceeding, or any appeal
therein, if such person acted in good faith, for a purpose he or she reasonably
believed to be in, or, in the case of service for another entity, not opposed
to, the best interests of the corporation and, in criminal actions or
proceedings, in addition had no reasonable cause to believe that his or her
conduct was unlawful. Section 723 of the BCL permits the corporation to pay in
advance of a final disposition of such action or proceeding the expenses
incurred in defending such action or proceeding upon receipt of an undertaking
by or on behalf of the director or officer to repay such amount as, and to the
extent, required by statute. Section 721 of the BCL provides that
indemnification and advancement of expense provisions contained in the BCL shall
not be deemed exclusive of any rights to which a director or officer seeking
indemnification or advancement of expenses may be entitled, whether contained in
the certificate of incorporation or the by-laws of the corporation or, when
authorized by such certificate of incorporation or by-laws, (i) a resolution of
shareholders, (ii) a resolution of directors or (iii) an agreement, provided no
indemnification may be made on behalf of any director or officer if a judgment
or other final adjudication adverse to the director or officer establishes that
his or her acts were committed in bad faith or were the result of active or
deliberate dishonesty and were material to the cause of action so adjudicated,
or that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled.
(b) STAR's Certificate of Incorporation provides in
Article Twelfth as follows: "TWELFTH: To the fullest extent now or hereafter
provided for or permitted by law, no director of the Company shall be personally
liable to the Company or its shareholders for damages for any breach of duty in
such capacity. Neither the amendment or repeal of this Article Twelfth, nor the
adoption of any provision of the Certificate of Incorporation inconsistent with
this Article Twelfth, shall eliminate or reduce the protection by this Article
Twelfth to a director of the Company in respect to any matter which occurred, or
any cause of
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action, suit or claim which but for the Article Twelfth would have accrued or
arisen, prior to such amendment, repeal or adoption."
(c) Article X of STAR's By-Laws provides, in
general, that STAR shall indemnify any officer or director (including officers
and directors serving another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise in any capacity at STAR's request)
made, or threatened to be made, a party to an action or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that he
or she was serving in any of those capacities against judgments, fines, amounts
paid in settlement and reasonable expenses (including attorneys' fees) actually
and necessarily incurred in connection with the defense of or as a result of
such action or proceeding or in connection with any appeal thereof.
Indemnification is not available under Article X if a judgment or other final
adjudication adverse to such director or officer establishes that (i) his or her
acts were committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action so
adjudicated, or (ii) he or she personally gained in fact a financial profit or
other advantage to which he or she was not legally entitled.
(d) Pursuant to By-law Article X, STAR has entered
into indemnification agreements with certain of its directors and officers
providing for the indemnification of such directors and officers in derivative
actions, as well as with respect to third party actions. The BCL mandates
indemnification in derivative actions if the officer or director has been
successful, on the merits or otherwise, in the defense of the action. The
indemnification agreements, as well as Section 722 of the BCL, do not permit
indemnification in derivative actions for (i) proceedings which are settled or
otherwise disposed of or (ii) claims to which a person has been adjudged to be
liable, unless court approved. However, in reliance on Section 721 of the BCL,
which provides that the statutory indemnification provisions are not exclusive
of other rights which may be provided to an officer or director seeking
indemnification, By-law Article X also extends the right of indemnification to
settlements and unsuccessful defenses of derivative actions without the
necessity of a court determination provided the person seeking indemnification
meets the standard described in the preceding paragraph. STAR is not aware of
any judicial determination as to whether indemnification provisions such as
those related to derivative actions in By-Law Article X (which, by their terms,
exceed the scope of BCL Section 722 but where the standard of conduct set forth
in BCL Section 721 has been met) are enforceable pursuant to such nonexclusivity
provision.
(e) By-law Article X, like the indemnification
agreements, provides that the expenses incurred in defending any action to which
a director or officer may be entitled to indemnification shall be advanced by
STAR prior to the final disposition of the action as long as the indemnitee
undertakes to repay such advances if required by law. STAR has been advised that
the BCL currently requires that an officer or director undertake to repay such
advances to the extent they exceed the amount to which the officer or director
ultimately is entitled. The period of time within which STAR is to advance
expenses is fifteen days after request; the time period within which STAR is to
provide indemnification after request is thirty days.
(f) By-law Article X, which by its terms is not the
exclusive basis for granting rights to indemnification or advancement of
expenses, establishes procedures for processing indemnification requests,
confirms the authority of STAR to maintain indemnification insurance and
prohibits the repeal of By-law Article X retroactively. By-law Article X also
provides that it applies, to the fullest extent permitted by law, to acts or
omissions occurring prior to its adoption. By-law Article X further stipulates
that the rights granted therein are contractual in nature, which is meant to
prevent any retroactive denial or reduction of indemnification if By-law Article
X is later amended.
(g) Under By-law Article X, the Board of Directors
is permitted, to the fullest extent permitted by law, to establish an
appropriate scope of and procedure for the indemnification of, and
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advancement of expenses to, employees and other persons to whom STAR is
permitted to provide indemnification or advancement of expenses.
BUSINESS OF STAR
GENERAL
STAR is in the business of providing placement services of registered
and licensed nurses and home health aides to patients for care at home ("Home
Care") and, to a lesser extent temporary health care personnel recruiting to
hospitals and nursing homes ("Hospital Staffing"). In addition, STAR maintains
registries of registered nurses, licensed practical nurses, nurses' aides,
certified home health aides and certified personal care workers from which
personnel are recruited on a per diem basis to meet the requirements of STAR's
clients.
Prior to its acquisition by present management in 1987, STAR's
business related primarily to providing private duty nurses to patients in
hospitals and staffing to hospitals. Under its current management, STAR expanded
its Hospital Staffing arrangements to nursing homes and additional hospitals to
provide licensed nurses on a per diem basis for general staff. In 1988, STAR
further extended its Hospital Staffing business to include providing licensed
practical nurses and nurses' aides. In 1989, STAR began providing Home Care
services in New York City pursuant to a license from the New York State Health
Department. In 1990, STAR expanded its Home Care services to include
transportation of patients from hospital to home in ambulettes, arrangements to
purchase and supply equipment and pharmaceuticals, as prescribed by the
patients' physicians, and home infusion care. In 1991, STAR was licensed by the
New York State Department of Health to operate an office in Nassau County, New
York.
In 1992, STAR expanded its existing Home Care business through the
acquisition of certain assets from Unity Healthcare Holding Company, Inc. and
its subsidiaries ("Unity"), including contract rights to provide Home Care
services through various hospitals, community agencies and other institutional
health care providers. These contract rights complemented the existing home
health care businesses of STAR in areas such as New Jersey and New York where
STAR already operated. In addition, in these locations, STAR obtained from Unity
client referral lists to further expand existing operations.
In addition to expanding STAR's existing regional business, the Unity
acquisition added new operations to STAR in new locations. STAR acquired Unity's
Florida operations, which included certification to receive reimbursement from
Medicare and Medicaid in Broward and Dade Counties. Most of such Medicare and
Medicaid reimbursed operations are located in Dade County. STAR also acquired
the assets representing Unity's operations in Florida that do not have Medicare
and Medicaid certification, but which operate under state license.
In 1993, STAR further expanded its existing Home Care business
through the acquisition of certain assets of DSI Health Care Services, Inc.
("DSI") including contract rights to provide Home Care services through various
hospitals, community agencies and other institutional health care providers.
These contract rights complimented STAR's existing Home Care businesses in the
Long Island, New York area.
In May 1995, STAR acquired certain assets of Long Island Nursing
Registry, Inc. ("LINR") thereby further expanding its Home Care business. LINR
provided nursing and other skilled health care services with both Medicaid and
non-Medicaid reimbursement eligibility compatible with the business of STAR.
LINR maintains offices and does business under STAR's name in the Long Island
area and as Comprehensive Care
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America in the Syracuse, New York area. The acquired assets included all of the
fixed assets, certain of the contract and intellectual property rights and all
of the records, lists, files and books (including certain customer and personnel
lists) with respect to or in connection with the health care business conducted
by LINR. The acquisition expanded STAR's New York market area into Suffolk
County, augmented its presence in Nassau County and gave it significant market
share in central New York.
During the fiscal years ended May 31, 1994, 1995 and 1996, 62%, 62%
and 59%, respectively, of STAR's revenues were attributable to Medicare,
Medicaid and other state and federal government payments. Historically, a
greater portion of STAR's revenues have been derived from Home Care services and
a lesser portion of such revenues have been derived from Hospital Staffing. STAR
believes that this is a result of changing social and economic attitudes toward
the de-institutionalization of patients as well as STAR's changing customer
base.
On August 23, 1996, STAR and AMSERV HEALTHCARE INC. ("Amserv")
consummated a merger whereby STAR acquired control of Amserv and Amserv became a
wholly owned subsidiary of STAR. Amserv operates in a one-industry segment as a
health care service company. Amserv provides Home Care services to individuals
from its six branch offices in New Jersey and Ohio. Home Care services provided
by Amserv include personal care, such as assistance with the activities of daily
living (e.g., eating, walking and grooming), and skilled nursing services, such
as wound care and assistance with medications, injections and patient education.
HOME CARE SERVICES
A substantial portion of the revenues from STAR's Home Care business
relates to services provided to patients referred to STAR by physicians, county
medical services, community organizations, hospital social service workers,
nurses, insurance companies and HMO's. Other patients are referred through such
sources as the patient's family. The remaining revenues attributable to STAR's
Home Care business are received as a result of subcontracting arrangements with
certified home health agencies ("primary contractors") that are authorized to
receive reimbursement from Medicare and Medicaid in the States of New York and
Florida.
STAR provides Home Care nurses and paraprofessionals, including
registered nurses, licensed practical nurses, certified home health aides,
certified personal care workers and companions. These individuals are temporary
employees of STAR who work for STAR as needed. As of April 21, 1997, STAR's
roster of Home Care personnel included approximately 3,000 nurses and health
care paraprofessionals.
It is STAR's policy that all of its Home Care nurses and
paraprofessionals meet certain licensing, certification and other requirements.
Upon registering with STAR for temporary employment, STAR's Home Care nurses and
paraprofessionals are required to attend inservice classes given by STAR. STAR
conducts ongoing inservice training for its nurses and paraprofessionals both to
meet New York State Department of Health and New York State Licensing Board
continuing education requirements and to fulfill STAR's own additional quality
assurance goals. STAR is implementing similar requirements in Florida. These
classes and inservice trainings each of which typically lasts three hours, are
offered bi-weekly. They are taught by health care professionals selected by STAR
for their expertise in their fields, including nurses, physical therapists,
social workers and occasionally physicians.
When STAR admits a new patient for service, STAR's Director of
Nursing confers with the patient's physician and other medical and health care
professionals (collectively, the patient's "health care team") to:
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obtain physician's orders; acquire a detailed description of the patient's
medical problem; determine the patient's specific Home Care requirements (the
"protocol"), including the plan of treatment and pharmaceutical services,
products and equipment which will be needed; and determine the type of
personnel, the number of hours and shifts required. The Director of Nursing
and/or a nursing supervisor first visits the patient to conduct a personal
examination and assessment in order both to verify all information received from
the referral source and to select the appropriate Home Care personnel to care
for the patient.
In a typical Home Care case, STAR's nurse or paraprofessional
assigned to the case visits the patient on a prescribed schedule to administer
the protocol and to provide other general care to the patient. Often the nurse
or paraprofessional spends the entire day with the patient. All of the Home Care
cases are supervised by a nursing supervisor to ascertain whether any problems
have arisen in connection with the services. Home Care services provided on a
subcontracting basis for a primary contractor are supervised only by the primary
contractor. STAR's personnel are instructed to remain in continuous contact with
the patient's health care team.
STAR has contracted with the Departments of Social Services in
Nassau, Suffolk and Onondaga Counties in New York to provide and be reimbursed
for custodial services under Medicaid. STAR is a direct provider for skilled
nursing services through Medicaid in New York State.
Approximately 15% of STAR's revenues from Home Care services are paid
by insurance carriers. Payments for STAR's Home Care services typically are made
by assignment of insurance benefits from the patient, by the primary contracting
organization or by the patient. Once a claim is submitted to an insurer, the
insurer generally is required to act upon that claim within 60 days. STAR
typically receives payments from 60 to 180 days after its services are rendered,
although such time period is sometimes greater. Accordingly, STAR is often
required to carry accounts receivable over substantial periods of time and to
utilize a line of credit to meet its ongoing expenses. Medicaid claims are
billed weekly and are usually paid in 60 to 90 days.
STAR was surveyed by the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO") and, in February 1996, was found to meet the
requirements for accreditation. JCAHO, which is the accrediting body for
hospitals, is associated with the provision of quality services and its
accreditation is vital to STAR's contractual business. STAR's accreditation
expires in February 1999, at which time STAR must be resurveyed for the
following three-year term.
HOSPITAL STAFFING
STAR provides temporary (or "per diem") nursing placement services to
hospitals, nursing homes, clinics and other health-related institutions that
make use of supplemental staffing for emergencies, vacations and peak periods.
These personnel are supervised directly by the institutions, with STAR acting
solely as an employment agency matching the requirements of the institutions
with the names and skills of persons listed in its registries.
The personnel placed by STAR with hospitals and other health and
medical institutions include registered nurses, licensed practical nurses,
nurses' aides and other health care paraprofessionals. STAR's nurses and nurses'
aides placed in hospitals must meet the competency requirements determined by
STAR and by the facility. Temporary health care personnel are recruited in the
local market in which STAR offers its temporary personnel services.
Some of the hospitals in New York City that have utilized STAR's
Hospital Staffing services include Methodist Hospital and Maimonides Medical
Center.
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COMPETITION
The temporary health care personnel market is highly fragmented and
significant competitors are often localized in particular geographic markets.
STAR's largest competitors include the Olsten Company and Staff Builders.
Management of STAR believes that, given the high current level of demand for the
types of services provided by STAR, significant additional competition can be
expected to develop in the future. Some of the companies with which STAR
presently competes have substantially greater financial and other resources than
STAR. STAR also competes with many other smaller temporary medical staffing
agencies. STAR expects that it will compete with other temporary health care
services providers in the future if and when they enter STAR's existing
geographic markets, as well as in any new geographic market STAR may enter.
STAR's success to date has depended, to a significant degree, on its
ability to recruit qualified personnel. These persons may be registered with,
and may accept placements from or through competitors of STAR. STAR periodically
experiences intense competition from other companies in recruiting qualified
health care personnel for its temporary health care operations because the
United States health care industry, at times, faces shortages of qualified
personnel. STAR believes it is able to compete successfully for personnel by
aggressive recruitment through newspaper advertisements, flexible work schedules
and competitive compensation arrangements. There can be no assurance, however,
that STAR will be able to continue to attract and retain qualified personnel.
The inability to either attract or retain such qualified personnel would have a
material adverse effect on STAR's business.
MARKETING
Prior to its recently completed acquisition of Amserv, which expanded
the geographic area serviced by STAR, STAR marketed its temporary health care
services in the New York metropolitan area, the central New York area and in
Broward and Dade Counties, Florida. As a result of the acquisition of Amserv,
these marketing activities also include New Jersey and Ohio. STAR's services are
marketed by a team of personnel headed by the Chief Operating Officer of STAR.
STAR promotes its services through print advertising, direct mail efforts
focused on health care institutions and field sales calls. STAR makes periodic
mailings to approximately 50 hospitals and 75 nursing homes in the New York City
metropolitan area. In addition, in the New York metropolitan area and in
Florida, representatives of STAR periodically visit or telephone medical
facilities to establish or maintain relationships with individuals in those
institutions who are responsible for staffing, discharge of patients and
personnel recruitment. STAR's representatives also attend health care functions
and trade shows to further enhance STAR's marketing efforts. STAR intends to
continue these marketing programs and to increase its marketing staff in the
future as its business so requires, especially in view of the recent acquisition
of Amserv.
STAR has acquired the necessary expertise, through its acquisition of
LINR, to provide Shared Aide Services ("Shared Aide"). Shared Aide, which is a
task-oriented, patient-specific care plan designed to condense the amount of
hours caregivers must devote to patients, has recently been adopted as a cost
cutting mechanism by New York State. The New York State Department of Social
Services, in consultation with the New York State Department of Health, has
developed agency specific cost savings for each certified home health agency. A
portion of the cost savings are to be achieved through development and
implementation of Shared Aide.
STAR believes it is one of the few providers in New York State with
the expertise and experience required to offer Shared Aide. To date, Shared Aide
has not constituted a material portion of STAR's
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business. However, STAR intends to market this service in an effort to generate
increased revenues from this developing area of home health care.
CUSTOMERS
STAR does not depend upon any single customer and does not believe
that the loss of any one or more of its customers would have a material adverse
effect on STAR. STAR continues to submit proposals to potential contractors to
provide Home Care services while maintaining and expanding its present contract
base.
GOVERNMENT REGULATIONS AND LICENSING
STAR's business is subject to substantial and frequently changing
regulations by Federal, state and local authorities which imposes a significant
compliance responsibilities on STAR. STAR, among other things, must comply with
state licensing and certificate of need ("CON") requirements as well as Federal
and state eligibility standards for certification as a Medicare and Medicaid
provider. The imposition of more stringent regulatory requirements or the denial
or revocation of any license or permit necessary for STAR to operate in a
particular market could have a material adverse effect on STAR's operations. In
addition, STAR will be required to comply to the extent applicable, with the
licensing and/or CON requirements and other regulations in any jurisdiction in
which it may plan to provide services in the future.
STAR, as a provider of services under the Medicare and Medicaid
programs is required by the Health Care Financing Administration ("HCFA") to
receive reimbursement for services from Medicare and Medicaid. In order for one
to participate as a home health agency in the Medicare and Medicaid program,
HCFA requires, among other things, the preparation of annual budgets and capital
expenditure plans. The health regulatory agencies of the states in which STAR
operates require satisfaction of certain standards with respect to personnel,
services and supervision and the establishment of a professional advisory group
that includes at least one physician, one registered nurse and other
representatives from related disciplines or consumer groups. Applicable state
"anti-kickback" regulations, in general, provide that STAR may not make certain
payments in order to receive referrals of patients. In addition, Federal
"anti-kickback" regulations provide similar restrictions for health care
providers to the extent they are certified to participate in the Medicare and
Medicaid programs. STAR does not believe that compliance with applicable state
and Federal "anti-kickback" regulations has a material impact on STAR's business
and operations.
STAR is licensed to provide home healthcare services and durable
medical equipment in the five boroughs of New York City, Nassau, Suffolk,
Westchester, Oswego, Oneida, Onondaga, Cayuga, Madison, Jefferson and Herkimer
Counties in New York State and in the state of Florida. It is also licensed as a
temporary help services firm to provide personnel on a per diem basis for
hospital staffing. STAR believes that it has all licenses necessary to operate
its business as currently conducted in New York and Florida. In Broward and Dade
Counties in Florida, STAR's also maintains a Certified Home Health Agency which
allows STAR to participate in both the Medicare and Medicaid programs. Amserv is
also licensed to provide health care services in New Jersey and Ohio, with the
Ohio office also maintaining certification to provide Medicare reimbursed
services.
New York State requires the approval by the Public Health Council of
the New York State Department of Health ("NYPHC") of any change in the
"controlling person" of an operator of a licensed health care services agency (a
"LHCSA"). Control of an entity is presumed to exist if any person owns, controls
or holds the power to vote 10% or more of the voting securities of such entity.
To the extent STAR may seek to acquire control of a LHCSA, STAR would have to be
granted the approval of the NYPHC prior
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to exercising control over such LHCSA. The NYPHC approved the application to
permit STAR's control over EFCC pursuant to the Merger Agreement on June 27,
1997.
Under current reimbursement regulations under Medicare and Medicaid,
funds received under Medicare and Medicaid programs are subject to audit with
respect to proper application of the various payment formulas and regulations.
These audits can result in retroactive adjustment of payments received from
these programs, resulting in either amounts due to the government agency from
STAR or amounts due to STAR from the governmental agency.
STAR is subject to surveys and audits by various governmental
agencies.
STAR has a Medicaid audit pending with the State of New York. STAR
does not anticipate that any material adjustment will result form such audit,
however, there can be no assurance that this audit will be resolved
satisfactorily in favor of STAR. In addition, STAR has agreed to submit its
books and record to a voluntary survey to be performed by the State of New York
with respect to Medicaid patients. There can be no assurance that this voluntary
review will be resolved satisfactorily in favor of STAR.
In May 1997, STAR was advised that an audit of American Health Care
Services ("American"), STAR's Medicare agency, by the Office of Audit Services,
Office of Inspector General of the United States Department of Health and Human
Services which had been forwarded to the Medicare intermediary assigned to
administer Medicare payments in Florida has been referred to the Civil Division
of the United States Attorney for the Southern District of Florida. STAR has
been advised by its regulatory counsel that they have been in contact with the
Assistant United States Attorney assigned to the matter and they do not know at
this time the extent of STAR's liability. Regulatory counsel has also advised
STAR that it is likely STAR will have claims against third-parties (e.g.,
subcontractors and licensed home health agencies) for a portion of any liability
of STAR. Management anticipates that this matter should be satisfactorily
resolved.
In December 1996, a survey by state and federal regulatory agencies
was conducted at American. The findings of the initial survey indicated that a
follow up survey was warranted. The findings of the survey, held in March 1997,
were favorable and STAR was orally advised that only minor deficiencies existed.
The final written report, confirming the surveyor's findings, has been received
by STAR and confirmed the surveyor's verbal representations.
LIABILITY INSURANCE
STAR's employees and independent contractors routinely make decisions
which can have significant medical consequences to the patients in their care.
As a result, STAR is exposed to substantial liability in the event of negligence
or wrongful acts of its personnel. STAR maintains medical professional liability
insurance providing for coverage in a maximum amount of $1,000,000 per claim,
subject to a limitation of $10,000,000 for all claims in any single year. In
addition, STAR requires that each independent contractor it refers to
institutions for employment supply a certificate of insurance evidencing that
such person maintains medical professional liability insurance providing for
coverage of no less than $1,000,000 per claim. There can be no assurance,
however, that STAR will be able to maintain its existing insurance at an
acceptable cost or obtain additional insurance in the future, as required.
Although, to date, no claim has been asserted against STAR, there can be no
assurance that STAR's insurance will be sufficient to cover liabilities
resulting from claims that may be brought in the future. A partially or
completely uninsured claim, if successfully asserted and of significant
magnitude, could have a material adverse effect on STAR and its financial
condition.
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EMPLOYEES
As of April 21, 1997, STAR had 134 permanent employees. STAR also has
a roster of temporary professional and paraprofessional employees (including
registered nurses, licensed practical nurses, certified home health aides,
certified personal care workers and nurses' aides). In the past, certain of
STAR's registered nurses were compensated on an independent contractor basis.
However, STAR currently treats such persons as employees. STAR has no union
contracts with any of its employees and believes that its relationship with its
employees and independent contractors is good. STAR pays its temporary employees
at rates that it believes are competitive.
As of April 21, 1997, Amserv and its subsidiaries employed 55
full-time and 1,200 part-time employees for its continuing operations. No
employees are covered by a collective bargaining agreement.
DESCRIPTION OF PROPERTY
STAR's executive offices consist of approximately 1,500 square feet
of office space located in Hicksville, New York. The lease, from an unaffiliated
landlord, expires on December 31, 1998 and provides for a base rent of $2,894
per month. STAR believes that its executive office space is sufficient for its
present and reasonably foreseeable future needs.
As of April 21, 1997, STAR had leases for office space in Brooklyn,
New York, Huntington, New York, Coram, New York, Riverhead, New York, Long
Beach, New York, Rome, New York, Oswego, New York, Syracuse, New York, Albany,
New York, Yonkers, New York, Jamaica, New York, Miami, Florida, Hollywood,
Florida and Lake Worth, Florida, from landlords unaffiliated with STAR or any of
its executive officers or directors. The Brooklyn lease, which expires February
14, 2002, consists of 3,700 square feet and provides for a base rent of $7,655
per month. The Huntington lease, which expires May 31, 2001, consists of 2,000
square feet and provides for a base rent of $3,194 per month. The Coram lease,
which expires July 1, 1999, consists of 1,200 square feet and provides for a
base rent of $1,352 per month. The Riverhead lease expired January 31, 1997.
STAR occupies such property as tenant, month to month, and it consists of 1,000
square feet and provides for a base rent of $1,087 per month. The Long Beach
lease, which expires June 30, 2001, consists of 1,000 square feet and provides
for a base rent of $1,183 per month, with annual increases of 2.5%. The Rome
lease, which expires September 30, 1997, consists of 500 square feet and
provides for a base rent of $400 per month. The Oswego lease, which expires
September 1, 1997, consists of 500 square feet and provides a base rent of $395
per month. The Syracuse lease, which expires July 1, 2000, consists of 1,000
square feet and provides for a base rent of $1,292 per month. The Albany lease,
which expires December 31, 1999, consists of 1,008 square feet and provides for
a base rent of $1,092 per month with annual increases of 3%. The Yonkers lease,
which expires January 1, 2002, consists of 750 square feet and provides for a
base rent of $1,164 per month with annual increases of 4%. The Jamaica lease,
which expires September 30, 1997, consists of 300 square feet and provides for a
base rent of $575 per month. The Miami lease, which expires August 31, 1999,
consists of 15,331 square feet and provides for a base rent plus tax of $27,657
per month. The Hollywood lease, which expires November 30, 1999, consists of
2,000 square feet and provides for a base rent plus tax of $3,195 per month. The
Lake Worth lease, which expires February 15, 2000, consists of 1,200 square feet
and provides for a base rent of $1,272 per month.
Amserv leases, from unaffiliated landlords, seven office facilities,
which are located in Edison, Elizabeth, Fairlawn, South Orange and Union City,
New Jersey; Mansfield, Ohio; and La Jolla, California. The Edison lease, which
expires December 31, 1998, consists of 4,215 square feet and provides for a base
rent of $6,147 per month. The Elizabeth lease, which expires June 30, 1999,
consists of 1,500 square feet and provides for a base rent of $2,000 per month.
The Fairlawn lease, which expires June 14, 1999, consists
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of 2,113 square feet and provides for a base rent of $2,563 per month. The South
Orange lease, which expires June 30, 1997, consists of 950 square feet and
provides for a base rent of $1,873 per month. The Union City lease, which
expires September 30, 1999 consists of 1,250 square feet and provides for a base
rent of $1,458. The Mansfield lease, which expires May 28, 1999, consists of
8,100 square feet and provides for a base rent of $2,000 per month. STAR
believes that these facilities are adequate for the operations of Amserv.
LEGAL PROCEEDINGS
A lawsuit was filed on November 14, 1996 in San Diego Superior Court
(Case No. 705475), by Eugene J. Mora against Amserv, STAR, William Fellerman and
Stephen Sternbach. Mr. Mora alleges that he was the President and Chief
Executive Officer of Amserv, at the time of the merger between Amserv and STAR
and that his employment contract with Amserv was breached when he was terminated
by Amserv and STAR following the Merger.
The complaint, which is for an aggregate of $2,300,000, alleges that
pursuant to his employment contract, upon termination he would be entitled to
five years of continued salary at $298,000 per year; an annual car allowance of
$450 per month for the five year period; payment for unutilized vacation days
for a total of $112,000; and the cash value of a whole life policy of life
insurance, which premiums had been paid by Amserv, for an approximate value of
$350,000 and approximately $48,000 in various fringe benefits. Mr. Mora further
alleges that he had a contract which would result in him being hired as a
consultant upon termination and this too was breached. Under this allegation,
Mr. Mora seeks damages for two years consulting fee at $129,200 per year. Mr.
Mora also seeks punitive damages, penalties and reimbursement of attorneys'
fees.
STAR does not believe that this matter will result in a material
adverse impact on it.
Except as otherwise provided in this Joint Proxy
Statement/Prospectus, there are no legal proceedings to which STAR is currently
a party or to which any of its property is subject, and STAR knows of no legal
proceeding pending or threatened against either STAR or any director or officer
of STAR in his or her capacity as such.
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STAR'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which
STAR's management believes is relevant to an assessment and understanding of
STAR's results of operations and financial condition. This discussion should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere herein.
RESULTS OF OPERATIONS.
On August 23, 1996, STAR completed a merger (the "Amserv Merger"),
accounted for as a pooling of interests, with AMSERV HEALTHCARE, INC.
("Amserv"), a health care service company that provides home care services,
including personal care, such as assistance with the activities of daily living
(e.g., eating, walking and grooming), and skilled nursing services, such as
wound care and assistance with medications, injections and patient education, in
New Jersey and Ohio. In accordance with the terms of the Amserv Merger, each
share of common stock of Amserv, outstanding immediately prior to consummation
of the Amserv Merger, was converted into .4090 shares of common stock of STAR. A
total of 1,410,731 shares of STAR Common Stock were issued upon consummation of
the Amserv Merger. STAR also assumed all outstanding options and other rights to
acquire Amserv stock. The following results of combined operations for the
periods ending February 28, 1997 and 1996 include the operations of both STAR
and Amserv.
Nine months ended February 28, 1997 compared to quarter ended and nine months
ended February 29, 1996.
For the nine months ended February 28, 1997 net revenues increased
$3,700,387 or 10% to $39,163,979 from net revenues of $35,463,592 for the nine
months ended February 29, 1996. Such increase is primarily attributable to
internal growth of revenue from Home Care.
STAR's decided shift towards providing placement services of
registered nurses and home health aides to patients for care at home ("Home
Care") mirrors a changing social and economic attitude toward the
de-institutionalization of patients. Due to the long hospital stays of some
terminally ill patients and the greater costs associated with institutional
treatment plans, STAR believes that the industry (i.e., hospital, insurance
companies and home care agencies) trend is to find ways to care for patients in
the home. STAR continues to devote its resources toward the growth in Home Care
and believes this upward trend will continue in the future. Home Care revenues
represented approximately 99% of fiscal 1997 net revenues and providing
temporary health care personnel recruiting to hospitals and nursing homes
represented approximately 1% of fiscal 1997 net revenues.
Gross profit margins were approximately 35% for the nine months ended
February 28, 1997 and 1996.
Selling, general and administrative expenses ("SG&A") and
depreciation and amortization as a percentage of net revenues were 28% for the
nine months ended February 28, 1997 as compared with 31% for the nine months
ended February 29, 1996. Such decrease is primarily attributable to the increase
in revenues being without a proportionate increase in back office overhead.
Income from operations increased $231,733 or 36% to $874,440 for the
quarter ended February 28, 1997 compared with $642,707 for the quarter ended
February 29, 1996. Income from operations increased $956,699 or 66% to
$2,406,319 for the nine months ended February 28, 1997 compared with $1,449,620
for
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the nine months ended February 29, 1996. Such increases are primarily
attributable to increased revenues and stabilization of costs, mainly back
office overhead.
The Company incurred a one-time charge of $2,808,223 for acquisition
costs, legal fees and restructuring expenses associated with the Merger, which
contributed to a net loss for the nine months ended February 28, 1997 of
$297,561 compared with net income of $766,342 for the nine months ended February
29, 1996.
Year Ended May 31, 1996 Compared to Year Ended May 31, 1995
Net revenues increased $10,732,899 or 28% to $49,162,934 for the
fiscal year ended May 31, 1996 over net revenues of $38,430,035 for the fiscal
year ended May 31, 1995. Approximately 53% of the increase was due to the
acquisition of certain assets of Long Island Nursing Registry ("LINR") (see Note
2 to the Consolidated Financial Statements included elsewhere in this report).
LINR was exclusively involved in the business of providing Home Care. The
remainder of the increase was due to a general upward trend in Home Care. Net
revenues from Home Care increased by $10,313,394 or 41% while net revenues from
Hospital Staffing decreased by $419,505 or 25%.
STAR's decreased revenues from temporary health care personnel
recruiting to hospitals and nursing homes ("Hospital Staffing") resulted from a
general decline in demand for these services.
Home Care revenues represented approximately 98% of 1996 net revenues
and Hospital Staffing represented approximately 2% of 1996 net revenues.
Gross profit margin percentages for the fiscal years ended May 31,
1996 and 1995 were 35%.
SG&A as a percentage of net revenues were 30% in both 1996 and 1995.
Net income increased by $331,238 or 41% to $1,143,259 for the fiscal
year ended May 31, 1996 over net income of $812,021 for the fiscal year ended
May 31, 1995. The increase occurred primarily because of the increased revenues
from Home Care.
STAR's effective tax rate for 1996 was 33% as compared to 38% in
1995. The decrease in the effective tax rate is due to the reversal of the
valuation allowance that fully reversed net deferred tax assets at May 31, 1995
that is now judged more likely than not to be realized.
Year Ended May 31, 1995 Compared to Year ended May 31, 1994
Net revenues increased $8,735,857 or 29% to $38,430,035 for the
fiscal year ended May 31, 1995 over net revenues of $29,694,178 for the fiscal
year ended May 31, 1994. Approximately 27% of the increase was due to a full
year of operations of STAR's North Central division, which was acquired in June
1994. (See Note 2 to the Supplemental Consolidated Financial Statements included
elsewhere in this report). Approximately 20% of the increase was due to the
acquisition of certain assets of DSI Health Care Services in November 1993. (See
Note 2 to the Consolidated Financial Statements included elsewhere in this
report). The remaining increase was due to a general upward trend in the Home
Care business which required the opening of new locations which were in
operation for all of fiscal 1995 and 1994. Net revenues from Home Care increased
$9,923,240 or 37% while net revenues from Hospital Staffing decreased by
$1,187,383 or 41%.
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STAR's decreased revenues from Hospital Staffing resulted from a
general decline in demand for these services.
Home Care revenues represented approximately 95% of 1996 net revenues
and Hospital Staffing represented approximately 5% of 1995 net revenues.
The Gross profit margin percentage for each of the fiscal years ended
May 31, 1995 and 1994 was 35%.
SG&A as a percentage of net revenues was 30% in both 1995 and 1994.
Income from continuing operations increased by $400,490 or 112% to
$758,036 for the fiscal year ended May 31, 1995 over income from continuing
operations of $357,546 for the fiscal year ended May 31, 1994. The increase
occurred primarily because of the increased revenues from Home Care.
During fiscal 1994, STAR discontinued operation of its temporary
nursing services business and recorded a loss from discontinued operations of
$710,636 and an after-tax loss on the anticipated disposal of discontinued
operations of $1,167,949. During fiscal 1995, the temporary nursing services
business was sold and after recognizing the 1994 writedown, an after-tax gain of
$30,302 was recognized. The 1995 gain resulted from the difference between the
actual and estimated loss on the disposal. See Note 7 of the Notes to
Supplemental Consolidated Financial Statements included elsewhere in this report
for additional details.
STAR's effective tax rate for 1995 was 38% as compared to 44% in
1994. The decrease in the effective tax rate is due to the result of the tax
benefit from measuring cumulative temporary differences in connection with the
disposal of the temporary nursing services business which reversed in fiscal
1995, and growth of STAR's business in Florida which has a lower rate than New
York, as well as the use of certain federal tax credits.
In October 1994, a subsidiary of STAR received from the Internal
Revenue Service ("IRS") a formal report proposing an adjustment in taxes of
$1,222,220 for the years 1989 through and including 1993. On October 12, 1995,
that subsidiary signed a closing agreement with the IRS providing for zero tax
liability. The subsidiary agreed to treat all skilled nurses providing Hospital
Staffing services as employees for federal employment tax purposes commencing
January 1, 1996. As skilled Hospital Staffing services currently represent only
2% of revenues, this change is not expected to have a significant impact on
earnings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1997 cash and cash equivalents were $78,574 as
compared with $1,881,979 at May 31, 1996. The net decrease of $1,803,405
resulted primarily from the repayment of its revolving credit line.
The nature of STAR's business requires weekly payments to its
personnel at the time they render services, while it receives payment for
services rendered over an extended period of time (60 to 180 days or longer),
particularly when the payor is an insurance company, medical institution or
governmental unit. Accounts receivable represent a substantial portion of
current and total assets at February 28, 1997 and May 31, 1996. During the nine
months ended February 28, 1997 and for the year ended May 31, 1996, accounts
receivable turnover was approximately 71 days.
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STAR currently has available a line of credit with a bank which
allows for maximum borrowings of $8,000,000. This line of credit expires on
October 31, 1998 and is subject to renewal. However, as STAR's business expands,
additional financing may be required. Short-term borrowings at February 28, 1997
were $1,997,000 as compared to $3,280,000 at May 31, 1996.
On January 3, 1997, STAR entered into the Merger Agreement Pursuant
to the terms of the Merger, STAR will pay $2,400,000 in cash (plus cash payments
to dissenting shareholders, if any) and $4,850,000 in stock (less the amount
that would have been paid to dissenting shareholders, if any) or $7,250,000 cash
at STAR's option (the "Cash Option").
Unless STAR exercises the Cash Option, in which case STAR would have
to raise $7,250,000 through additional borrowing or otherwise, STAR does not
anticipate any extraordinary material cash commitments for capital expenditures
for STAR's current fiscal year and STAR believes that cash generated from
operations, together with borrowings available under its existing line of
credit, will be sufficient to meet its short-term and long-term liquidity needs.
Unless STAR exercises the Cash Option, STAR intends to meet its
long-term liquidity needs through available cash, cash flow and, if necessary,
STAR's bank line of credit. To the extent that such sources are inadequate, STAR
will be required to seek additional financing. In such event, there can be no
assurance that additional financing will be available to STAR on satisfactory
terms.
In addition, STAR is continually exploring possible acquisitions of
compatible companies in the health care business. If any such acquisition were
to be made with available cash, STAR's long-term liquidity would depend to a
greater extent on cash flow and the line of credit.
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF STAR
Set forth below is the ownership of the STAR Common Stock at April
21, 1997 by (i) the only persons or groups who were owners of record or were
known by STAR to beneficially own more than 5% of the outstanding shares of STAR
Common Stock; (ii) each director of STAR; (iii) the executive officer named in
the Summary Compensation Table under the caption "EXECUTIVE COMPENSATION OF
STAR" below; and (iv) all directors and executive officers of STAR as a group.
STAR understands that, except as noted below, each beneficial owner has sole
voting and investment power with respect to all shares of STAR Common Stock
attributable to such owner.
Number of
Name and Address Beneficially Percent
of Beneficial Owner Shares Owned* of Class (1)
------------------- ------------- ------------
Stephen Sternbach 1,139,692(2) 27.64%
c/o STAR Multi Care Services, Inc.
99 Railroad Station Plaza
Hicksville, NY 11801
William Fellerman 56,236(3) 1.39%
c/o STAR Multi Care Services, Inc.
99 Railroad Station Plaza
Hicksville, NY 18801
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Number of
Name and Address Beneficially Percent
of Beneficial Owner Shares Owned* of Class (1)
------------------- ------------- ------------
Charles Berdan 1,019 **
281 Potomac Drive
Basking Ridge, NJ 07920
John P. Innes II 1,113 **
8 Breckenridge Lane
Savannah, GA 31411
Matthew Solof 3,540 **
33 Fairbanks Boulevard
Woodbury, NY 11797
Melvin L. Katten 56,913 1.46%
1480 Tower Road
Winnetka, IL 60093
Gary L. Weinberger 8,400 **
38 Clayton Drive
Dix Hills, NY
Eugene J. Mora 210,175(4) 5.20%
3252 Holiday Court, Suite 204
LaJolla, CA 92037
Heartland Advisors, Inc. 235,716(5) 5.85%
790 North Milwaukee Street
Milwaukee, WI 53202
All directors and executive 1,712,804 40.93%
officers of STAR as a group
(7 persons)
- ------------------------
* All share amounts have been adjusted to take into account the stock
dividends effectuated on May 30, 1995, January 12, 1996 and November 4,
1996, respectively.
** Indicates less than 1% of the outstanding shares of STAR's Common Stock.
(1) Shares subject to options are considered outstanding only for the purpose
of computing the percentage of outstanding Common Stock which would be
owned by the optionee if the options were so exercised, but (except for the
calculation of beneficial ownership by all executive officers and directors
as a group) are not considered outstanding for the purpose of computing the
percentage of outstanding Common Stock owned by any other person.
(2) Includes 119,606 shares of STAR's Common Stock owned by the Stephen
Sternbach Family Trust; Mr. Sternbach disclaims beneficial ownership with
respect to these shares. Also includes 137,574
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shares of the STAR's Common Stock which Mr. Sternbach has a currently
exercisable option to purchase pursuant to the STAR's 1992 Stock Option
Plan.
(3) Includes 24,068 shares of STAR's Common Stock owned by Mr. Fellerman's
wife; Mr. Fellerman disclaims beneficial ownership with respect to these
shares of STAR's Common Stock. Also includes 3,406 shares owned by the
William Fellerman CPA PC Pension Trust Fund. Also includes 28,512 shares of
the STAR's Common Stock which Mr. Fellerman has a currently exercisable
option to purchase pursuant to the STAR's 1992 Stock Option Plan.
(4) Includes 15,030 shares of STAR's Common Stock which Mr. Mora has a
currently exercisable option to purchase pursuant to the options assumed by
STAR upon consummation of the Amserv Merger.
(5) Based upon a copy of a Schedule 13G/A (dated February 12, 1997) received by
STAR.
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<PAGE>
MANAGEMENT OF STAR
The directors and executive officers of STAR, their ages and present
positions with STAR are as follows:
DIRECTOR
NAME AGE POSITION HELD WITH STAR SINCE
Stephen Sternbach 43 Chairman of the Board of Directors,
President and 1987
Chief Executive Officer
William Fellerman# 53 Chief Financial Officer, 1990
Secretary, Treasurer,
Director
Charles Berdan +*x# 48 Director 1994
John P. Innes II +*x 63 Director 1991
Matthew Solof +*x 44 Director 1992
Melvin L. Katten 61 Director 1996
Gary L. Weinberger# 48 Director 1996
- ------------------------
+ Member of Compensation Committee
* Member of Stock Option Committee
x Member of Audit Committee
# Member of Compliance Committee
BACKGROUND OF DIRECTORS:
Stephen Sternbach has been the Chairman of the Board of Directors,
President and Chief Executive Officer of STAR since 1987.
William Fellerman has been the Chief Financial Officer, Secretary and
Treasurer of STAR since November 1992 and a director of STAR since 1990. Mr.
Fellerman is a certified public accountant and was, until June 15, 1994, a
partner in the accounting firm of Fellerman, Cohen and Tempesta and had been for
more than the five years prior thereto.
Charles Berdan became a director of STAR in April 1994 and served as
a Branch Manager of STAR from September 1993 to March 1994. Since April 1994,
Mr. Berdan has served as a Sales Executive for Automatic Data Processing, Inc.
("ADP"), a provider of information services. From January 1993 to September
1993, Mr. Berdan was a Vice President of the Senior Bulletin, a newspaper, which
STAR purchased in September 1993. He also served from July 1990 through July
1992 as a Division Vice President of Managistics, Inc., a payroll services
company. For at least the two years prior to July 1990, Mr.
Berdan was a Vice President of ADP.
John P. Innes II has been a director of STAR since 1991. Since May of
1996, he has been Special Counsel to ValuJet Airlines. He has acted as a private
investor and consultant since July 1994. Previously, he was the Chairman of
Commonwealth Associates, an investment bank, from January 1992 to June 1994. Mr.
Innes also has served as Managing Director of Sabre Insurance Company, a
casualty insurance company (1986-
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1991), President of Boxhall Group, Inc., a holding company for Sabre Insurance
Company (1986- 1991), Vice Chairman of the Board of Directors of
Wheeling-Pittsburgh Steel Corporation, an integrated steel manufacturing company
(1987-1990) and a private investor and consultant (1990-1992).
Matthew Solof has been a director of STAR since November 1992. Since
1991, he has been the President and Chief Executive Officer of AMI Group, a real
estate development and acquisition company, and President and Chief Executive
Officer of Mercantile Mortgage Association, a mortgage lending company. From
1983 to 1992, Mr. Solof was a trader at IRV Companies, a firm which specializes
in oil trading, and from 1981 to 1991 he was President and Chief Executive
Officer of Matthew Solof Trading Company, a firm which also specializes in oil
trading.
Melvin L. Katten, an attorney, has been a Senior partner in the
Chicago law firm of Katten Muchin & Zavis since 1974. He was a director of
Amserv from 1985 until consummation of the Amserv Merger in August 1996. Mr.
Katten also serves as a director of Washington Scientific Industries, Inc., a
publicly-held company.
Gary L. Weinberger has been engaged in the private practice of
orthodontics for more than the past twenty years. In addition, Dr. Weinberger is
engaged as a consultant on financial planning and management. Dr. Weinberger is
a member of the International Board of Standards and Practices for Financial
Planners, the International Association of Financial Planners and the American
Association of Orthodontists.
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EXECUTIVE COMPENSATION OF STAR
The following table provides information with respect to all
compensation paid or accrued by STAR during the three fiscal years ended May 31,
1996 to Stephen Sternbach, STAR's Chief Executive Officer, the only executive
officer of STAR whose salary and bonus for fiscal 1996 exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NAME AND ANNUAL COMPENSATION LONG TERM COMPENSATION
PRINCIPAL AWARDS ALL OTHER
POSITION YEAR SALARY($) BONUS($) SECURITIES UNDERLYING OPTIONS(#)
- -------- ---- --------- -------- --------------------------------
COMPENSATION(1)
- ---------------
<S> <C> <C> <C> <C> <C>
Stephen Sternbach 1996 $250,000 $34,371 21,000 $10,000
Chief Executive Officer, 1995 $225,000 -- -- $10,000
President and 1994 $225,000 -- 61,938 $ 5,000
Chairman of the Board
</TABLE>
- -----------------------
(1) Represents amounts credited by STAR to a book reserve account as contingent
deferred compensation for the benefit of Mr. Sternbach pursuant to a
Non-Qualified Retirement and Death Benefit Agreement between STAR and Mr.
Sternbach.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS TO EMPLOYEES EXERCISE PRICE POTENTIAL REALIZABLE VALUE AT
NAME GRANTED (#) IN FISCAL YEAR ($/SH) EXPIRATION DATE ASSUMED ANNUAL RATES OF STOCK
---- ----------- -------------- -------- --------------- PRICE APPRECIATION FOR
OPTION TERM(1)
--------------
5%($) 10%($)
----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen 21,000 26% $6.53 May 16, 2001 $38,000 $84,000
Sternbach
</TABLE>
- ----------------
(1) Represents possible gains, assuming that the market price for STAR's Common
Stock appreciates during the option term at annualized rates of 5% and 10%,
respectively.
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
No options were exercised by Mr. Sternbach during the fiscal year
ended May 31, 1996. The following table contains information concerning the
number and value, at May 31, 1996, of unexercised options held by Mr. Sternbach:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS HELD AT
OPTIONS HELD AT FISCAL YEAR-END FISCAL YEAR-END
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(1)
<S> <C> <C> <C>
Stephen Sternbach 162,574/0 $735,484
- ----------
</TABLE>
(1) Fair market value of underlying securities (the closing price of STAR's
Common Stock on the Nasdaq National Market) at fiscal year end (May 31,
1996), minus the then effective exercise price.
STANDARD REMUNERATION OF DIRECTORS
STAR's non-employee directors are paid a fee of $750 for each Board
of Directors meeting which they attend. They are not paid any additional fee for
serving on any committees of the Board of Directors.
EMPLOYMENT AGREEMENTS
STAR has an employment agreement with Stephen Sternbach dated as of
December 18, 1996 (the "Sternbach Employment Agreement"). The Sternbach
Employment Agreement has a term of five years and provides for an initial annual
salary of $250,000 (subject to annual increase by the amount of the increase in
the Consumer Price Index from the immediate preceding year) plus a bonus of 6%
of STAR's net profit before taxes in excess of $1,200,000, not to exceed an
aggregate annual bonus of $500,000. The Sternbach Employment Agreement provides
that after a Change in Control (as defined in the Sternbach Employment
Agreement) of STAR has occurred, if either Mr. Sternbach terminates his
employment within six months after he has obtained actual knowledge of the
Change in Control or STAR (or any successor thereto) terminates his employment
with STAR within one year after the Change in Control, Mr. Sternbach will be
entitled to receive (i) his salary, bonuses, awards, perquisites and benefits
including, without limitation, benefits and awards under STAR's stock option
plans and pension and retirement plans and programs, accrued through the date
Mr. Sternbach's employment with STAR is terminated and (ii) a lump-sum payment
in cash equal to 2.99 times Mr. Sternbach's base amount.
STAR and Mr. Sternbach are also parties to a Consulting Agreement
(the "Sternbach Consulting Agreement") pursuant to which STAR has agreed to
retain Mr. Sternbach as a consultant for a period of two years from the time
that his employment with STAR terminates. Pursuant to the Sternbach Consulting
Agreement, STAR has agreed to pay Mr. Sternbach $150,000 per year and he will be
entitled to participate in the health insurance and similar benefits which STAR
provides to any of its other consultants.
In addition, STAR and Mr. Sternbach are parties to a Non-Qualified
Retirement and Death Benefit Agreement dated February 1, 1994, pursuant to which
STAR credits to a bank reserve (the "Deferred Compensation Account") established
for that purpose, an amount not to exceed 10% of Mr. Sternbach's gross annual
salary during Mr. Sternbach's employment with STAR. Any funds so credited to the
Deferred
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<PAGE>
Compensation Account may be kept in cash or invested and reinvested in mutual
funds, stocks, bonds, securities or other assets as may be selected by the
Company's Chief Financial Officer in his discretion. Mr. Sternbach has agreed to
assume all risk in connection with any decrease in value of the funds which are
invested. Unless otherwise forfeited, Mr. Sternbach shall be entitled to the
Deferred Compensation Account upon his termination, disability or death or if
STAR is involved in a merger or is acquired by another company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stephen Sternbach has outstanding loans in the principal amount, as
of April 21 , 1997 of $94,937 from STAR and a subsidiary of STAR. The loan from
the subsidiary has been assigned to the Company. These loans bear interest at 6%
per annum and each have a scheduled maturity date of August 1, 1998.
In connection with services provided to STAR during the fiscal years
ended May 31, 1995 and 1996, STAR paid William Fellerman, CPA, P.C.,
approximately $100,000 each year. Mr. Fellerman, a director, Chief Financial
Officer, Treasurer and Secretary of STAR, is the sole shareholder of that
corporation.
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<PAGE>
BUSINESS OF EFCC
GENERAL
EFCC is in the business of providing home health care services,
principally personal hygiene, homemaking, general patient safety, and to a
lesser extent nursing services ("Home Care"), primarily through contracts with
government agencies under the Medicaid program. EFCC is a holding company which
derives 100 percent of its revenues from the operation of TPC, an 83 percent
owned subsidiary. Prior to, and as a condition to the consummation of the
Merger, TPC will be merged into EFCC and the separate corporate existence of TPC
will end. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF EFCC."
EFCC was incorporated in New York on May 10, 1978 under the name
M.A.E. Enterprises, Inc. In 1980, its name was changed to Cosmetic Sciences,
Inc; which was changed again in 1996 to Extended Family Care Corporation, its
current name.
In 1980, EFCC completed its initial public offering of 1.5 million
shares of common stock, raising gross proceeds of $1.5 million. Between 1980 and
1985, EFCC engaged in research, development, marketing and distribution of
medical devices and cosmetics. These products never proved to be commercially
viable, and by the mid-1980's the development of these products were
discontinued and the subsidiaries through which these businesses were operated
were dissolved.
In August 1984, EFCC entered the Home Care industry by acquiring all
of the outstanding shares of TPC, which at the time was providing Home Care
services in New York and New Jersey. In December 1984, the then shareholders of
EFCC received as a dividend approximately 17 percent of the outstanding common
stock of TPC, leaving TPC as an approximately 83 percent owned subsidiary of
EFCC.
On April 25, 1985, TPC entered into an agreement to acquire all of
the outstanding stock of A-Round the Clock Nursing Services, Inc. ("A-Round the
Clock"), a home health care company doing business in New Jersey. In December
1985, a Form S-1 Registration Statement was declared effective in anticipation
of an initial public offering by TPC. Proceeds from this offering were to
provide the funding for the acquisition of A-Round the Clock. However, the
underwriter terminated the offering, and TPC was unable to find another
underwriter to complete the offering. TPC was forced to borrow the funds
required to consummate the acquisition of A-Round the Clock. The burden of the
additional debt service, coupled with the increased demand for working capital,
further reduced cash flow. Facing bank foreclosure of liens upon TPC's accounts
receivable, significant tax arrears and cash shortfalls, EFCC and TPC filed a
petition under Chapter 11 of the U.S. Bankruptcy Code, in the U.S. Bankruptcy
Court, Southern District, New York, in August 1986.
Following the filing of the bankruptcy petition, TPC continued to
operate its Home Care business as a debtor in possession. In July 1987, a
secured lender foreclosed its liens on the common stock of A-Round the Clock,
and took possession and control of the business of A-Round the Clock. TPC
continued to provide Home Care services with operating branches in Hempstead,
New York and Hackensack, New Jersey.
In 1992, the EFCC's headquarters were moved from Hempstead, New York
to Carle Place, New York. In March 1994, TPC opened a branch office in
Irvington, New Jersey, which moved in March 1996 to East Orange. In February
1995, a satellite office of the Hackensack branch office was opened in Paterson,
New Jersey, which relocated to Clifton, New Jersey on or about April 15, 1996.
In August 1995, a TPC satellite office was opened in Jersey City, New Jersey,
which office was sold in December, 1996. In March
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<PAGE>
1996, a satellite office was opened in Elizabeth, New Jersey, which office was
closed in September, 1996. In May 1996, a branch office was opened in Allentown,
Pennsylvania. In the first quarter of 1997 (i) the East Orange office and
Hempstead office were closed and its staff and patients integrated into existing
facilities of STAR; and (ii) the Hackensack office was closed and integrated
into EFCC's Clifton office.
In October 1993, and in connection with EFCC's Amended Plan of
Reorganization adopted in 1992, an investment group, COSS Holding Corp.
("Coss"), invested cash of $250,000 in EFCC and thereby became the holder of
approximately 66 percent or 12,748,658 shares of EFCC's common stock. See
"Bankruptcy Proceedings"
On October 31, 1995, EFCC, TPC and Coss entered into an agreement
with Arbor, pursuant to which EFCC granted Arbor the option to purchase 13
million newly issued shares of its common stock for $1.3 million, ($.10 per
share). Arbor exercised this option in two installments, on August 21, 1996 and
October 31, 1996, thus becoming the owner of approximately 40% of EFCC's
outstanding stock. In addition, in June of 1996, Coss placed its holdings of
EFCC's common stock in a voting trust, providing Arbor the right to direct the
voting of such shares and to thus elect a majority of the board of directors of
EFCC. EFCC, Coss and Arbor have also entered into various agreements relating to
Coss' holdings of EFCC's common stock, but these agreements, as well as the
voting trust arrangement as to Coss' shares of EFCC, will terminate upon the
completion of the STAR Merger. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS OF EFCC."
On October 31, 1995, EFCC entered into an agreement with Arbor
Management, LLC (in which Ivan Kaufman owns a 99% interest), for a two year
term, pursuant to which EFCC will pay $7,500 a month to Arbor Management, LLC
for management services, including accounting, finance, human resources and
marketing, rendered to EFCC. This agreement will also terminate as of the
completion of the STAR Merger.
HOME CARE SERVICES
According to published industry data, the home care industry in 1994
constituted a $23 billion market with an annual growth rate exceeding 20
percent. Primary reasons cited for such rapid growth include: (1) the general
aging of the United States' population; (2) the cost savings achievable through
at-home treatment as an alternative to hospital care; (3) medical and
technological advances which enable a growing number of treatments to be
administered at home rather than in a medical facility; and (4) insurance (both
government regulated and private) reimbursement policies which provide certain
incentives to minimize the length of in-patient hospital care.
TPC provides its patients the services of certified home health
aides, personal care aides, homemakers and to a lesser extent registered and
licensed practical nurses. These individuals are part-time employees of TPC who
work for TPC as needed. TPC's active roster of Home Care personnel includes
approximately 487 paraprofessionals and 30 nurses.
TPC requires its paraprofessionals and nurses to meet certain
licensing, certification, and/or other requirements. TPC conducts mandatory
in-service classes for its nurses and paraprofessionals both to meet New York
and New Jersey continuing education requirements and to fulfill TPC's own
quality assurance standards. These in-service classes typically last between
three and six hours and are offered periodically. They are taught by health care
professionals selected by TPC for their expertise in their fields, including
nurses, physical therapists, social workers and occasionally physicians. All
field staff employees are subject to an internal review not less than every 60
days.
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TPC was recently surveyed by the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO) and, in February 1996, was found to meet the
requirements for accreditation. JCAHO is the accrediting body for hospitals; its
accreditation enhances TPC's contractual business. TPC's accreditation will
expire in October 1998, at which time TPC must be resurveyed for the following
three-year term.
PROCEDURE FOR A TYPICAL HOME CARE PLACEMENT
When TPC accepts a new patient for service, TPC's Director of Nursing
or nursing supervisor confers with the patient's physician and other medical and
health care professionals (collectively, the patient's "Health Care Team") to
(1) obtain the physician's orders; (2) acquire a detailed description of the
patient's medical problem; (3) determine the patient's specific home care
requirements (the "Protocol"), including the plan of treatment and
pharmaceutical services, products and equipment which will be needed; and (4)
determine the type of personnel and the number of hours and shifts required. The
Director of Nursing and/or a nursing supervisor seeks to verify all initial
information received and selects the appropriate Home Care personnel to care for
the patient.
In a typical Home Care case, TPC's personnel assigned to the case
visit the patient on a prescribed schedule to administer the Protocol and to
provide other general care to the patient. All Home Care cases are supervised by
a nursing supervisor to ascertain whether any problems have arisen in connection
with the services. Occasionally EFCC acts as a subcontractor for other home care
companies, implementing the patient Protocol under the direct supervision of the
primary contractor. TPC's nurses and paraprofessionals are in frequent contact
with the patient's Health Care Team.
CARE GIVERS
TPC employs a variety of clinical and ancillary personnel as follows:
1. Certified Home Health Aides ("CHHA") provide assistance as prescribed
by the physician in accordance with the Protocol and assist with personal
hygiene, housekeeping, general patient safety and other supportive tasks. CHHAs
hold a higher level of education, classroom training and field supervision than
Personal Care Aides.
2. Personal Care Aides ("PCA") assist the patient with personal hygiene,
dressing, bathing, meal preparation/feeding, housekeeping, general patient
safety and other activities of daily living.
3. Homemakers assist with light housekeeping, meal preparation and
shopping.
4. Registered Nurses ("RN") supervise and implement plans of treatment
as mandated by a physician, administer medication, maintain required
documentation and supervise all other non-RN health care employees.
5. Licensed Practical Nurses ("LPN") can administer certain medications
and assist the RN's in performing certain procedures.
ORGANIZATIONAL STRUCTURE
BRANCH DESCRIPTION
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TPC presently has two operating branches, utilizes space in two of
STAR's facilities, and has a corporate headquarters. The branches are located in
New York, New Jersey and Pennsylvania with a corporate headquarters located in
New York. Each operating branch is licensed by the appropriate state agency for
its location. Each operating branch is staffed by a director of nursing, nursing
supervisors, a branch director, a personnel manager, staffing coordinator(s) and
clerical personnel. TPC conducts its own in house state approved training
courses to prepare qualified employees for employment. In addition, TPC
maintains a recruiting program to attract qualified personnel to its staff.
CUSTOMERS
TPC has four types of customers: public assistance agencies, other
third party payers, insurance companies and private pay customers.
Public assistance agencies, which provided approximately 80 percent,
81 percent and 71 percent of total TPC's revenues in 1996, 1995 and 1994,
respectively, are billed directly for Home Care services provided to individuals
who have qualified for Medicaid benefits. TPC's business in Nassau County, New
York is tied directly to a single contract between TPC and the Department of
Social Services in Nassau County. A substantial portion of TPC's business would
be lost should this single contract be terminated. The contract with Nassau
County is renewable on an annual basis and has been in existence in excess of
ten years. TPC has no reason to believe that this contract will not be renewed
in the future, however, there is no assurance that the contract will be renewed.
However, if the Merger is consummated, TPC's contract with Nassau County will
not be renewed because STAR already has a contract with the Department of Social
Services providing Home Care services in Nassau County.
In New Jersey, unlike New York, the New Jersey Department of Medicaid
will grant a Medicaid contract to any accredited home health care agency. New
business is obtained through referrals from physicians, county medical services,
community organizations, hospital social service workers, nurses, insurance
companies and the patient's family.
Other third party payers, such as hospitals and other health care
institutions, provided 14 percent, 11 percent and 12 percent of total TPC
revenues, in 1996, 1995 and 1994, respectively. The third party payor
subcontracts with TPC for Home Care services. These contracts are generally
non-exclusive.
The insurance segment of TPC's business represented approximately 1
percent, 2 percent and 7 percent of TPC's total revenues in 1996, 1995 and 1994,
respectively. This business is dependent upon the insurer's decision to enter
into various preferred provider networks ("PPO") and health maintenance
organization networks ("HMO"). The insurance segment has become more closely
linked to associations with various PPOs and HMOs. Therefore, TPC will have to
develop alliances with such networks or risk the loss of business.
Private pay customers represented approximately 5 percent, 6 percent
and 10 percent of TPC's revenues in 1996, 1995 and 1994, respectively. These
customers have determined, for a variety of reasons, including ineligibility of
public assistance, or insurance benefits, to personally pay for the Home Care
services provided by TPC. These customers are referred to TPC from a variety of
sources.
The charts below sets forth: (a) the percent of total TPC revenues by
type of customer; (b) percent of total TPC revenues by state; and (c) TPC
Medicaid revenues as percentages of total state revenues.
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PERCENT OF TOTAL TPC REVENUES BY TYPE OF CUSTOMER
1996 1995 1994
---- ---- ----
Medicaid (Through public assistance agencies) 80% 81% 71%
Other third party payers 14% 11% 12%
Insurance 1% 2% 7%
Private pay 5% 6% 10%
--- --- ---
100% 100% 100%
PERCENT OF TOTAL TPC REVENUES BY STATE
1996 1995 1994
---- ---- ----
New York 15% 25% 36%
New Jersey 84% 75% 64%
Pennsylvania 1% NA NA
--- --- ---
100% 100% 100%
TPC MEDICAID REVENUES AS PERCENTAGES OF
TOTAL STATE REVENUES
1996 1995 1994
---- ---- ----
New York 74% 82% 84%
New Jersey 81% 80% 63%
Pennsylvania 65% NA NA
GOVERNMENTAL REGULATION AND LICENSING
EFCC's business is subject to substantial regulation by state and
local authorities. These regulations can cause significant time delays, as well
as additional costs, as TPC must comply with state eligibility standards for
licensing and/or accreditation as a Home Care provider. The imposition of more
stringent regulatory requirements or the denial, revocation, or suspension of
any license or accreditation necessary for TPC to operate in a particular market
could have a material adverse effect on TPC's operations.
Medicaid reimbursement rates in New York and New Jersey are not
negotiated by TPC, but are established by the respective states. Recent
budgetary pressures at the federal and state governmental level, may in the
future, reduce the allocation of federal and state budgetary dollars
appropriated for the Medicaid program. Reductions may have a negative impact on
TPC's revenues and profitability. Federal and state budgetary pressures may
adversely impact TPC by: (1) reducing the Medicaid reimbursement rates paid by
the state; (2) reducing the number of hours that will be reimbursed per case;
and (3) reducing the funding of one or more public assistance agencies with
which TPC presently does business. See "EFCC'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
On July 9, 1996, authorities of the State of New Jersey met to
discuss the reduction of Medicaid reimbursement rates for the year July 1, 1996
to July 1, 1997. This meeting did not result in material reduction in the
Medicaid reimbursement rates for the period July 1, 1996 to July 1, 1997. During
the quarter
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ended March 31, 1996, a reduction in authorized Medicaid reimbursable hours per
case was imposed by New York State. The results of this reduction did not have a
material adverse effect on EFCC's results of operations for the fiscal year
ended December 31, 1996. However, if a similar Medicaid reduction is imposed by
the State of New Jersey, the results of this reduction would have a material
adverse effect on EFCC's results of operations, as EFCC currently derives a
majority of its revenues from New Jersey Medicaid reimbursements. EFCC cannot
predict the magnitude of future reductions, if any, in Medicaid reimbursement
rates or reimbursable hours.
New York State requires approval of the Public Health Council of the
New York State Department of Health ("NYPHC") for any change in a "Controlling
Person" of an operator of a licensed health care services agency ("LHCSA").
Control of an entity is presumed to exist if any person owns, controls or holds
the power to vote 10% or more of the voting securities of such entity. To the
extent TPC or EFCC may seek to acquire control of an LHCSA, TPC would have to be
granted the approval of the NYPHC prior to exercising control over such LHCSA.
NYPHC approval is also required if any entity seeks control of more than 10
percent of the voting securities of EFCC or TPC. The NYPHC has approved the
change of control that occurred from the acquisition by Coss of approximately 66
percent of EFCC's Common Stock and the change of control which occurred when
Arbor acquired approximately 40 percent of EFCC's Common Stock. An application
to permit STAR's control over EFCC pursuant to the Merger Agreement was approved
on June 27, 1996. Such approval is a condition of the completion of the Merger.
Health regulatory agencies of New York and New Jersey, where TPC
operates, require satisfaction of certain standards with respect to personnel,
services and supervision. Health regulatory agencies also require the
establishment of a professional advisory group that includes at least one
physician, one registered nurse and other representatives from related
disciplines or consumer groups. TPC is currently in compliance with such
standards.
Applicable federal and state "anti-kickback" regulations in general
provide that TPC may not make certain payments in order to receive referrals of
patients. EFCC believes that it and TPC are in compliance with both state and
Federal "anti-kickback" regulations.
COMPETITIVE CONDITIONS
TPC's health care operations face competition in recruiting qualified
health care personnel, securing customers and providing services, from numerous
proprietary health care agencies and not-for-profit organizations, some of which
are substantially larger and better financed than TPC.
In New York, TPC has an annual contract with the Department of Social
Services in Nassau County representing approximately 21 percent of TPC's total
revenue in 1995 and 11 percent in 1996. This type of contract was awarded to
approximately sixty home health care agencies, and currently, no additional
agencies are permitted to bid on this contract. Cases are referred to agencies
on a rotating basis. TPC is at a competitive disadvantage in other locations in
New York State, since TPC does not have Medicaid contracts in areas other than
Nassau County.
In New Jersey, unlike New York, the New Jersey Department of Medicaid
will grant Medicaid contracts to any accredited home health care agency. Each
branch office of TPC has a contract with the New Jersey Department of Medicaid
for billing and administrative purposes. For New Jersey, new business is
dependent on referrals through physicians, county medical services, community
organizations, hospital social service workers, nurses, insurance companies and
the patient's family. Consequently, all of TPC's New Jersey business is subject
to numerous competitive factors. TPC believes that prompt service, price
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(excluding Medicaid which by virtue of fixed reimbursement rates cannot be a
differentiating factor), quality of service and the range of services offered
are the principal factors which enable it to compete effectively in the New
Jersey market.
MARKETING AND SALES
TPC currently markets its health care personnel and services in
Nassau and Queens counties in New York, in the eastern and northern counties in
New Jersey and in Allentown, Pennsylvania. TPC's services are marketed by a team
of professionals headed by a Regional Director, in each state. All of TPC's
services are promoted through print and yellow page advertising, brochures,
direct mail and visual presentations through field sales calls. Targeted clients
are hospitals, nursing homes, retirement centers, social service agencies,
senior citizen centers and other home care companies for sub-contract referrals.
TPC's representatives maintain telephonic contact not only to maintain a
relationship with existing referral sources, but also to establish new sources
and markets. TPC's staff attend health care sponsored seminars and various trade
shows and exhibitions.
LIABILITY INSURANCE
TPC is exposed to potential liability in the event of negligence or
wrongful acts of its personnel. TPC maintains liability insurance which it
believes to be adequate. There can be no assurance, however, that TPC will be
able to maintain its existing insurance at an acceptable cost or obtain
additional insurance in the future as required. There can be no assurance that
TPC's insurance will be sufficient to cover liabilities resulting from claims
that may be brought in the future.
EMPLOYEES
EFCC currently has approximately 557 active employees, 40 of which
are full-time employees. TPC has no union contracts with any of its employees
and believes that its relationship with its employees is good. TPC pays its
employees at rates that it believes are competitive.
EFCC is not aware of any current efforts to unionize in any of its
branches. If such an effort were made, it is uncertain if same would be
successful and if successful whether it would have a material effect upon EFCC's
operations or financial condition.
SECURITIES FILINGS
Since filing its petition for bankruptcy in 1986, until the filing of
its Form 10-KSB for period ending December 31, 1995 (the "1995 10-KSB") EFCC has
not filed any required reports under the Securities Exchange Act of 1934 (the
"Exchange Act"). The last such report filed was EFCC's Form 10-K for the fiscal
year ended December 31, 1985. During the years while in bankruptcy, EFCC did not
possess adequate financial and staffing resources to produce audited financial
statements and other reports as required by the Exchange Act. EFCC has filed
reports required under the Exchange Act commencing with its 1995 Form 10- KSB.
As a result of EFCC's past non-compliance with the Commission may
determine to bring civil and administrative proceedings against EFCC. While the
likelihood of such proceedings being brought is uncertain, if such proceedings
were brought, EFCC could be subject to substantial monetary penalties and other
administrative remedies.
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THE SPECIAL DIVIDEND
On January 21, 1997, EFCC paid a special cash dividend of $750,000 to
its shareholders of record on January 13, 1997. This dividend was paid in
contemplation of the Merger transaction. See the "THE MERGER - Background of the
Merger" and "THE MERGER - Conditions of the Merger."
DESCRIPTION OF PROPERTY
EFCC's corporate office is located in Carle Place, New York. The
lease expires on November 30, 2000. EFCC leases 2,060 gross square feet at an
annual rental of $39,140, with annual escalations of 12%.
TPC's New York branch is located in Hempstead, New York. The space
consists of 1,688 square feet for a rental period expiring on July 31, 2000 at
an annual rental of $20,286. Employees and patient files of the Hempstead office
were transferred to STAR's Hicksville office during the first quarter of 1997.
TPC leases space for three locations in New Jersey.
The East Orange, New Jersey branch office occupies approximately
2,250 square feet. The lease term runs from March 1, 1996 through February 28,
2001 at an annual rental of $29,400. The East Orange office's employees and
patient files were transferred to STAR's South Orange, New Jersey office in the
first quarter of 1997.
The Hackensack, New Jersey branch office occupies approximately 2,000
square feet at an annual rental of $27,600, pursuant to a lease that expires on
February 28, 2000. The employees of the Hackensack office were integrated into
EFCC's Clifton, New Jersey office in the first quarter of 1997.
The Clifton, New Jersey location serves as the New Jersey Regional
Office. This location occupies approximately 3,500 square feet with an annual
rental of $61,250. The lease term expires January 31, 2006. The Patterson, New
Jersey satellite office was integrated into the Clifton Regional Office during
April, 1997.
TPC operates one office in Allentown, Pennsylvania. This office
occupies 1,360 square feet. The base term runs from June 1, 1996 to June 30,
1999 at an annual rental of $22,576, plus 2.7% of total operating expense.
BANKRUPTCY PROCEEDINGS
In 1986 EFCC and TPC filed for protection from their respective
creditors under Chapter 11 of the U.S. Bankruptcy Code in the Southern District,
New York. An Amended Joint Plan of Reorganization (the "Plan") dated February 5,
1992 was filed for both EFCC and TPC. The Plan was approved on March 23, 1992.
Shareholders of EFCC prior to the bankruptcy filing retained ownership of their
shares.
There were seven classes of creditors. Some creditors withdrew their
claims, some received cash or negotiated extended payment terms, and some were
offered an option of receiving cash or newly issued common stock. The latter
group of creditors received 1,388,959 shares of newly issued common stock in
exchange for their claims.
As noted above, COSS received 12,749,658 shares of newly issued
common stock, representing, at that time, 66 percent of EFCC's outstanding
common stock for a $250,000 cash investment.
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A Final Decree was entered on January 13, 1995 confirming that the
Plan has been consummated permitting EFCC and TPC to emerge from bankruptcy
proceedings.
EFCC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis provides information which
EFCC's management believes is relevant to an assessment and understanding of
EFCC's results of operations and financial condition. This discussion should be
read in conjunction with the audited consolidated financial statements and
related notes contained elsewhere in this filing.
OVERVIEW
TPC's revenues are derived from providing Home Care services to
individuals, in New York and New Jersey, through various contracts with
government agencies (under the Medicaid program) and to a lesser extent
hospitals, insurance companies, private pay and other third party payers.
INDUSTRY INFORMATION
According to published industry data, the home care industry in 1994
constituted a $23 billion market with an annual growth rate exceeding 20 percent
for this industry sector. Primary reasons cited for such rapid growth include:
(1) the general aging of the United States' population; (2) the substantial cost
savings achievable through at-home treatment as an alternative to hospital care;
(3) medical and technological advances which enable a growing number of
treatments to be administered at home rather than in a medical facility; and (4)
insurance (both government regulated and private) reimbursement policies which
provide certain incentives to minimize the length of in-patient hospital care.
EFCC believes that the factors above will continue to contribute to steady
growth for the home care industry.
Discussions in New York and New Jersey at the executive and
legislative branches of government, concerning a possible reduction of Medicaid
reimbursement rates have taken place and such discussions may continue. On July
9, 1996, the legislature of the State of New Jersey met to discuss the reduction
of Medicaid reimbursement rates for the year July 1, 1996 to July 1, 1997. The
meeting did not result in a material reduction in Medicaid reimbursement rates
for such period. During the quarter ended March 31, 1996, a reduction in
authorized Medicaid reimbursable hours per case was imposed by the New York
State Department of Social Services. While this reduction did not have a
material adverse effect on EFFCC's results of operations for the fiscal year
ended December 31, 1996, if a similar reduction were imposed by the State of New
Jersey, where EFCC derives a majority of its revenues, there would be a material
adverse effect on EFFCC. EFFCC cannot predict the magnitude of future
reductions, if any, in Medicaid reimbursement rates or reimbursable hours.
RESULTS OF OPERATIONS
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
Net Patient Service Revenue: Net patient service revenue increased $337,047 or
17% to $2,321,939 for the quarter ended March 31, 1997 from $1,984,892 for the
quarter ended March 31, 1996. The addition of one new satellite branch from
March 31, 1996 to March 31, 1997 and three months of full operation during the
quarter ended March 31, 1997 for a branch opened in February 1996 increased net
patient service revenue by $221,098 or 11%. The balance of the increase in net
patient service revenue was from existing branches, offset by the sale of the
Jersey City branch in December 1996.
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Cost of Services: Cost of services increased $278,794 or 22% to $1,525,058 for
the quarter ended March 31, 1997 from $1,246,264 for the quarter ended March 31,
1996. The increase in cost of services is primarily due to increases in field
staff payroll costs resulting from the increase in net patient service revenue.
EFCC's growth in the number of cases serviced increased the need for additional
field staff to service these cases.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses decreased $84,918 or 10% to $753,594 for the quarter
ended March 31, 1997 from $838,512 for the quarter ended March 31, 1996.
Selling, general and administrative expenses as a percentage of net revenues
decreased to 32% for the quarter ended March 31, 1997 from 42% for the quarter
ended March 31, 1996. This decrease is primarily attributable to an overall
reduction in overhead expenses during the quarter ended March 31, 1997,
resulting from EFCC entering into a consulting agreement with STAR on January 3,
1997 and resulting integration of certain administrative functions primarily
offset by the payment of consulting fees to STAR
Provision (Benefit) For Income Taxes: Provision for income taxes increased by
$51,500 to $13,000 for the quarter ended March 31, 1997 from a benefit of
($38,500) for the quarter ended March 31, 1996. The increase is primarily due to
a $122,882 increase in pre-tax income.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Patient Service Revenue: Net patient service revenue increased $1,561,372 or
21% to $8,929,330 for the year ended December 31, 1996 from $7,367,958 for the
year ended December 31, 1995. The addition of three new branches in 1996
increased net patient service revenue by $1,358,545 or 18%. The balance of the
net increase in net patient service revenue resulted from (a) one branch
location which opened in August 1995 and therefore generated a full year revenue
in 1996 compared to four months of revenue in 1995; partially offset by (b) an
overall decrease in pre-existing branch net patient service revenue. The
decrease in pre-existing branch net patient service revenue was mainly due to an
overall general decrease in authorized Medicaid reimbursable costs by New York
State.
Cost of Services: Cost of services increased $937,358 or 20% to $5,643,554 for
1996 from $4,706,196 for 1995. The increase in cost of services is primarily due
to increases in field staff payroll cost resulting from a 21% increase in net
patient service revenue. EFFCC's growth in the number of cases serviced
increased the need for additional field staff to service these cases.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses ("SG&A") increased $1,064,337 or 50% to $3,192,769 for
1996 from $2,128,432 for 1995. SG&A as a percentage of net revenues increased to
36% for 1996 from 29% for 1995. This increase is due to (a) higher
administrative salaries, marketing and facility expenses associated with the
additional branch locations and the increase in case volume; (b) EFCC's
investment in its corporate infrastructure; and (c) increased professional fees
due to the Company's commitment to resume filing the reports required under the
Exchange Act.
Provision For Income Taxes: Provision for income taxes decreased by $154,000 or
74% to $55,000 for the year ended December 31, 1996 from $209,000 for the year
ended December 31, 1995. The decrease is primarily due to a $403,645 or 84%
decrease in pre-tax income and partially offset by an increase in EFCC's
effective tax rate from 1995 to 1996.
LIQUIDITY AND CAPITAL RESOURCES
The nature of EFCC's business requires weekly payments of wages to
its personnel at the time they render services, while it receives payments for
services rendered over an extended period of time (30 to 90
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days). At March 31, 1997 EFCC's accounts receivable balance increased $105,366
to $1,171,643 from $1,066,277 at December 31, 1996. The increase in accounts
receivable was due to increased net patient service revenue offset by a decrease
in days sales in accounts receivable from approximately 54 to 44 days. At
December 31, 1996 and December 31, 1995, EFCC's accounts receivable balances
were $1,066,277 and $895,131, respectively. During 1996 and 1995, TPC's days
sales in accounts receivable was approximately 47 days and 49 days,
respectively.
At March 31, 1997 EFCC had working capital of $815,125. Historically,
EFCC's cash requirements have been met internally from operations. EFCC
currently has no outstanding bank debt nor does it have any agreements for a
line of credit. At December 31, 1996, EFCC had working capital of $1,527,503.
Historically, EFCC's cash requirements have been met internally from operations.
EFCC currently has no outstanding bank debt nor does it have any agreements for
a line of credit.
EFCC's working capital was reduced on January 21, 1997 as a result of
the payment of a special dividend in the amount of $750,000. EFCC's working
capital should be sufficient to fund existing operations for the next 12 months,
but will not be sufficient to fund expanded activities if the Merger is not
consummated. If the Merger is consummated, EFCC's capital requirements would be
provided by STAR.
Net cash provided by (used in) operating activities for EFCC was
$137,528 for thequarter ended March 31, 1997 and ($264,403) for the quarter
ended March 31, 1996. The change in cash provided by operating activities for
the quarter ended March 31, 1997 and cash used in operations for the quarter
ended March 31, 1996 was the result of increased gross profit, decreased
selling, general and administrative expenses as a percentage and a decrease in
the number of days sales in accounts receivable from approximately 54 days to
44days.
In 1996, EFCC used cash for operating activities of $457,092 and in
1995, EFCC generated cash from operating activities of $555,433, respectively.
The change in cash generated from operating activities in 1995 and cash used for
operations in 1996 was a result of decreased income from operations, increased
professional fees related to the anticipated Merger, increased accounts
receivable due to increased revenues and the settlement of a pre-petition
payroll tax claim by the IRS.
During 1996, EFCC invested $122,979 in property and equipment
primarily for purchases of computers, telecommunication equipment and furniture
and equipment associated with EFCC's three new branch locations, including a
regional office in Clifton, New Jersey, as well as increased purchases of
computer equipment throughout 1996. During 1995 EFCC invested $57,373 in
property and equipment primarily for purchases of computers, telecommunication
equipment, and furniture and equipment associated with EFCC's two new branch
locations.
In 1996, EFCC was provided cash through financing activities of
$1,134,701 and in 1995, EFCC used cash in financing activities of $83,687. The
change in cash used in financing activities in 1995 and cash provided by
financing activities in 1996 was primarily due to the $1,250,000 net cash
proceeds received by EFCC in 1996 from the exercise of the Arbor stock options.
In 1995, EFCC used cash to pay down $83,687 in various loan and capital lease
obligations.
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INFLATION AND SEASONALITY
Medicaid reimbursements, which represent EFCC's principal source of
revenue, have historically been adjusted to keep pace with inflation. There can
be no assurance that future Medicaid reimbursement will keep pace with
inflation.
EFCC's business is generally not subject to seasonal trends.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Effective February 19, 1996, EFCC dismissed Rose, Michlin, Karpf &
Co. ("Rose, Michlin") as its independent auditor for the audit of its financial
statements. The new independent auditor to be engaged by EFCC to audit EFCC's
financial statements, effective February 19, 1996, is Carpenter & Onorato, P.C.
Rose, Michlin did not complete the audit of EFCC's financial
statements for the two most recent fiscal years 1994 and 1995. However, during
these years there were no disagreements with Rose, Michlin on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. Further, EFCC was not advised by Rose, Michlin during this
period of the existence of any of the events described in Item 304(a)(1)(B) of
Regulation S-B.
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OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF EFCC
(a) Security Ownership of certain beneficial owners.
The following sets forth the holdings of any person known by the
issuer to be the beneficial owner of more than five percent of EFCC's Common
Stock:
EFCC
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS
Common Stock Coss Holding Corp. 12,749,658 39.84%
1 Old Country Road
Suite 335
Carle Place, NY 11514
Common Stock Arbor Home Health Care 25,749,658 (1) 80.47%
Holdings, LLC
333 Earle Ovington Blvd.
Uniondale, NY 11553
Common Stock Ivan Kaufman 25,749,658 (1)(2) 80.47%
c/o Arbor Home
HealthCare Holding, LLC
333 Earle Ovington Blvd.
Uniondale, NY 11553
- ---------------------------------------
(1) Includes 13 million shares owned directly and also includes voting power
over 12,749,658 shares owned by Coss Holding Corp. pursuant to a voting
trust. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF EFCC").
(2) Ivan Kaufman owns a 99 percent membership interest in Arbor Home Health
Care Holding, LLC and is its controlling member.
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(b) Security Ownership of Management.
The following sets forth the holdings of all of EFCC's directors,
executive officers and director nominees, as well as all directors and officers
as a group:
NAME AND AMOUNT AND
ADDRESS OF NATURE OF
TITLE BENEFICIAL BENEFICIAL PERCENT
OF CLASS OWNER OWNERSHIP OF CLASS
Common Stock Steven Gorenstein 0 0
16 Barrington Place
Dix Hills, NY 11747
Common Stock Robert Kohlmeyer (1) 0 0
86 Hilltop Drive
Smithtown, NY 11787
Common Stock Paul Elenio 0 0
c/o Extended Family
Care Corporation
1 Old Country Road
Carle Place, NY 11514
Common Stock Joseph Heller 0 0
c/o Arbor Management, LLC
333 Earle Ovington Blvd.
Uniondale, NY 11553
Common Stock All directors and 0 0
executive officers
as a group
- -------------------------------------
Coss Holding Corp. has five directors: Robert Kollmeyer, Steven
Gorenstein, Pamela Robb, Donald Lia and John Curtin. Arbor also received a
pledge of Coss' EFCC Shares and a pledge of certain shares of Coss in connection
with loans made to Coss and certain shareholders of Coss.
(c) Changes in control
Coss has placed all of its 12,749,658 shares of EFCC's Common Stock
(the "Coss Shares"), representing approximately 40 percent of the currently
outstanding Company Common Stock, in a voting trust. Arbor has the right under
this voting trust to direct the voting of all of the Coss Shares and to nominate
a majority of EFCC's Board of Directors. (See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS OF EFCC".)
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF EFCC
The directors and executive officers of EFCC are as follows:
NAME AGE POSITION
---- --- --------
CURRENT DIRECTORS AND OFFICERS
- ------------------------------
Joseph Heller 33 Vice President/Acting Chief Executive
Officer/Principal Financial
Officer/Controller and Director
Paul Elenio 30 Director and Former Vice President/
Former Controller/ Former Principal
Financial Officer
Robert Kohlmeyer 42 Secretary/Treasurer and Director
FORMER DIRECTORS AND OFFICERS
- -----------------------------
Mary Ann Page 55 Former Chief Executive Officer/Former
Vice-President and Former Director
Patricia Cantalupo 37 Former Vice-President and Former
Director
Steven Gorenstein 53 Former President/Former Chief Executive
Officer and Former Director
JOSEPH HELLER
Mr. Heller was appointed Vice President of EFCC in March, 1996,
principal financial officer and controller in January, 1997, and acting Chief
Executive Officer in April, 1997. Mr. Heller has been a director of EFCC and TPC
since September, 1996. From August 1995 to the present, Mr. Heller also has been
a Vice President of Arbor, a holding company which owns 40% of the currently
outstanding shares of EFCC. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." From June 1995 to the present, Mr. Heller also has been Vice
President of Corporate Planning for Arbor Management, LLC. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." From 1991 to May 1995, Mr. Heller has
held the positions of Vice President of Financial Analysis and Budgeting and
Director of Shareholder Relations for Arbor National Mortgage, Inc. and its
successor. From 1990 to 1991, Mr. Heller was an Acquisition Associate for
WinStar Services, Inc., a merchant and investment banking firm. From 1987 to
1990, Mr. Heller was a Senior Analyst for Morgan Stanley & Co., a leading
investment banking firm, and from 1985 to 1987, Mr. Heller was a Senior
Accountant for Ernst & Young, LLP, an international accounting and consulting
firm. Mr. Heller is a Certified Public Accountant. In 1991, he received a
Masters degree in Business Administration from Fordham University.
PAUL ELENIO
Director of EFCC and TPC since September, 1996. Mr. Elenio was Vice
President and Controller of EFCC since January 1996, but resigned from this
position in January, 1997. From 1993 to 1995 Mr. Elenio held the position of
Financial Reporting and Tax Supervisor for BankAmerica Mortgage, FSB, formally
Arbor National Mortgage, Inc., a mortgage banking company which originated, sold
and serviced residential
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and commercial mortgages. From 1991 to 1993, Mr. Elenio held the position of
Senior Accountant for Arbor National Mortgage, Inc.
ROBERT KOHLMEYER
Secretary, Treasurer and Director of EFCC since 1992, Mr. Kohlmeyer
is also Secretary/Treasurer and a Director of TPC. Mr. Kohlmeyer has been
President and Chief Operating Officer of CRK Contracting, a regional large scale
electrical contracting company, since 1987.
MARY ANN PAGE
Ms. Page was Acting Chief Executive Officer of EFCC since January
1996; Vice President and Director of EFCC since June 1994. Ms. Page was also
President and a Director of TPC. From 1991 to 1993, Ms. Page held the position
of Director of Training for Health Force, a national home health care agency,
where she was responsible for training new franchisees in all aspects of home
care personnel services. From 1988 to 1991, she held the position of Director of
Franchising for Winston Franchising Corp. Ms. Page's employment with EFCC and
TPC ended on March 31, 1997. Ms. Page resigned as a director in April, 1997.
PATRICIA CANTALUPO
Vice President and Director of EFCC since 1992. Dr. Cantalupo is also
a Vice President and Secretary of TPC. Dr. Cantalupo has been the principal
owner of Cantalupo Chiropractic Associates, a full service multi-disciplinary
Chiropractic Health Care Facility, since 1985. Dr. Cantalupo resigned from all
positions with of EFCC and TPC in August, 1996.
STEVE GORENSTEIN
President, Chief Executive Officer and Director of EFCC since 1992.
Mr. Gorenstein resigned as an officer and director of EFCC in January 1996. From
1991 to present, Mr. Gorenstein has been President of Career Placements, Inc., a
temporary employment agency.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF EFCC
Pursuant to the Option Agreement, Arbor acquired from EFCC an option
to purchase up to 13 million shares of EFCC's Common Stock as follows: (a) Arbor
had an irrevocable option (the "First Option") to purchase, by June 21, 1996
(which date was extended to August 21, 1996), 6.5 million shares of EFCC's
Common Stock at an exercise price of $.10 per share; (b) subject to Arbor's
timely exercise of the First Option and the issuance of the shares of Common
Stock pursuant to such exercise, Arbor was given the option (the "Second
Option") to purchase, by November 1, 1996, up to an additional 6.5 million
shares of EFCC's Common Stock at an exercise price of $.10 per share. The First
and Second Options were subject to adjustment in the event of stock splits and
similar events.
On August 21, 1996, Arbor exercised the First Option by delivering to
EFCC a notice of exercise of the First Option and by depositing $650,000 in
escrow, to be released to EFCC upon approval of an amendment to EFCC's
Certificate of Incorporation providing sufficient authorized capital to exercise
the First and Second Option. This approval occurred at EFCC's annual meeting on
September 25, 1996 and the amendment was filed in October, 1996. On October 31,
1996, Arbor exercised the Second Option by delivering to EFCC a notice of
exercise of the Second Option and by paying $650,000 to EFCC.
The Option Agreement also provides that Arbor's consent shall be
required before certain actions may be taken by Coss, its shareholders, EFCC and
TPC. The Option Agreement will terminate upon the completion of the STAR Merger.
Coss has placed all of its remaining 12,749,658 shares of EFCC's
Common Stock (the "Coss Shares"), representing approximately 40 percent of the
currently outstanding Company Common Stock, in a voting trust. Arbor has the
right under this voting trust to direct the voting of all of the Coss Shares.
Arbor has agreed, however, pursuant to the Option Agreement, that it will elect
only a majority of EFCC's directors, effectively giving Coss one seat on the
EFCC Board, currently consisting of three directors. In addition, under certain
circumstances, the trustee of the voting trust is required to observe certain
restrictions in the event Coss wishes to effect a sale, transfer or encumbrance
of the Coss Shares. Coss will retain all economic rights in the Coss Shares,
including, but not limited to, its right to dividends. This Voting Trust
Agreement will also terminate upon completion of the STAR Merger.
Pursuant to a Registration Rights and Conditional Put Option
Agreement (the "Registration Rights Agreement"), dated as of October 31, 1995,
between Coss and EFCC, EFCC has agreed to register the Coss Shares for resale
under the Securities Act, upon the written demand of Coss made at any time
commencing one year after the date on which EFCC's Common Stock is listed on the
Nasdaq Stock Market (whether as a SmallCap Market security or a National Market
System security, or any equivalent or successor of the foregoing). Pursuant to
the Registration Rights Agreement, EFCC will be obligated to file up to three
registration statements over a three-year period, with one-third of the Coss
Shares (subject to certain adjustments) to be registered in each year of such
three year period. Notwithstanding the foregoing, EFCC has the right to reject
the demand by Coss, following which Coss may require that EFCC redeem the Coss
Shares at a price equal to 75 percent of the average bid price in effect during
the thirty trading days prior to the demand for registration. Upon EFCC's
rejection of the demand, Coss, at its option, may sell the Coss Shares to a
party other than EFCC, subject to EFCC's right of first refusal on such sale.
Arbor has the right to purchase the Coss Shares in lieu of EFCC on the same
terms and conditions granted EFCC as described in the two preceding sentences.
In addition, Coss has been granted certain registration rights in the event EFCC
shall register any shares for sale under the Securities Act. In the event the
STAR Merger occurs, neither EFCC or Arbor will have any further obligations
under this agreement.
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On October 31, 1995, EFCC entered into a two year Financial Services
Agreement with Arbor Management, LLC ("Arbor Mgt."), in which Ivan Kaufman owns
a 99% interest. This Agreement requires Arbor Mgt. to provide consulting
services in the areas of finance, information systems, accounting and marketing.
Arbor Mgt. receives a fee of $7,500 per month for these services. This agreement
is subject to early termination upon (i) the listing of EFCC's Common Stock on
the NASDAQ Stock Market or (ii) upon the completion of the Merger.
In 1997, Arbor lent funds to Coss, which loans were secured by
certain of Coss shareholders' shares in Coss, as well as Coss' shares of EFCC.
Coss then lent these funds to certain of its shareholders, including Robert
Kohlmeyer, a director of EFCC and TPC. Ivan Kaufman and Arbor already
acknowledged beneficial ownership of Coss' EFCC shares by virtue of the voting
trust arrangement discussed above in the fourth paragraph of this section.
In 1995 and 1996, an Arbor affiliate lent certain funds directly to
certain Coss shareholders against a pledge of such shareholders' Coss shares.
All loan referred to in this paragraph were for a fixed term at a current market
rates of interest.
Pursuant to the TPC Merger, all shareholders of TPC, other than EFCC,
will receive 18.745545 shares of EFCC Common Stock in exchange for each share of
TPC stock they own. Stock certificates previously issued to TPC shareholders do
not give effect to a 1:4 reverse stock split which occurred in 1995. Thus,
shareholders of TPC actually own only one share of TPC stock for every four
shares for which they possess a share certificate for TPC Common Stock. TPC
shares owned by EFCC will be cancelled as a result of the TPC Merger and no
shares of EFCC Common Stock will be issued in respect thereof. A proxy
statement/prospectus relating to a proposed meeting of shareholders of EFCC and
TPC has been mailed to shareholders of EFCC and TPC contemporaneously with the
mailing of this Joint Proxy Statement/Prospectus. Coss and Arbor, which together
own 80.47% shares of EFCC, intend to vote for the approval of the TPC Merger. In
addition, EFCC as the owner of 83% of the outstanding shares of TPC, intends to
vote for the approval of the TPC Merger. These votes constitute a sufficient
percentage under New York law to approve and adopt the TPC Merger on behalf of
the shareholders of the Company and TPC.
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PROPOSAL TO ADOPT AMENDMENT TO STAR'S 1992 PLAN
On October 5, 1992, the Board of Directors of STAR adopted STAR's
1992 Stock Option Plan (the "1992 STAR Plan") and on November 18, 1992 the
shareholders of STAR approved the 1992 STAR Plan. An amendment to the 1992
Option Plan was adopted by the Board of Directors of STAR on September 13, 1993
and approved by STAR's shareholders on November 23, 1993 and the 1992 STAR Plan
was further amended by the Board of Directors of STAR on October 31, 1996. The
1992 STAR Plan is designed to provide an incentive to employees (including
directors and officers who are employees) and to consultants (who are neither
employees nor directors) of STAR and its present and future subsidiaries and to
offer an additional inducement in obtaining the services of such individuals.
On December 18, 1996, the Board of Directors of STAR unanimously
adopted, and recommended for submission to shareholders of STAR for their
approval a further amendment to the 1992 STAR Plan. The proposed amendment would
limit the number of shares of STAR Common Stock that may be subject to options
granted to any optionee in any fiscal year to 100,000, subject to the 1992 STAR
Plan's antidilution provisions. Currently, there is no such limit under the 1992
STAR Plan. Placing this limit is a permissible method for options which may be
granted in the future under the 1992 STAR Plan to be considered "performance
based compensation" under Section 162(m) of the Code, ensuring the deductibility
of any compensation expense that may arise from their exercise.
The following is a discussion of the 1992 STAR Plan:
TYPE OF OPTIONS
Options granted under the 1992 STAR Plan may either be incentive
stock options ("ISOs"), within the meaning of Section 422 of the Code or
nonqualified stock options ("NQSOs"), which do not meet the requirements of
Section 422 of the Code.
ADMINISTRATION
The 1992 STAR Plan is administered by the Board of Directors of STAR
which, to the extent it determines, may delegate its powers with respect to the
administration of the 1992 STAR Plan to a committee of the STAR Board of
Directors (the "STAR Committee") consisting of not less than two directors (or
such greater number as may be required by law), each of whom is a "non-employee
director" within the meaning of Rule 16b-3 (or any successor rule or regulation)
promulgated under the Exchange Act. References in this summary to determinations
or actions by the STAR Committee are deemed to include determinations and
actions by the STAR Board of Directors. A majority of the members of the STAR
Committee constitute a quorum, and the acts of a majority of the members present
at any meeting at which a quorum is present, and any acts approved in writing by
all members without a meeting, will be the acts of the STAR Committee.
ELIGIBILITY
The STAR Committee may, consistent with the purposes of the 1992 STAR
Plan, grant options from time to time, to employees (including officers and
directors who are employees) or to consultants (who are neither employees nor
directors) of STAR or any of its subsidiaries. Options granted pursuant to the
1992 STAR Plan will cover such number of shares of STAR Common Stock as the STAR
Committee may determine; provided, however, that the aggregate market value
(determined at the time the option is granted) of the shares of STAR Common
Stock for which any employee may be granted ISOs under the 1992 STAR
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Plan or any other plan of STAR, or of a parent or a subsidiary of STAR, which
are exercisable for the first time by such optionee during any calendar year
shall not exceed $100,000. Any option (or the portion thereof) granted in excess
of such amount will be treated as a NQSO.
TERMS AND CONDITIONS OF OPTIONS
Options granted under the 1992 STAR Plan are subject to, among other
things, the following terms and conditions:
(a) The exercise price of each option is determined by the
STAR Committee; provided, however, that the exercise price
may not be less than 100% of the fair market value of STAR
Common Stock subject to such option on the date of grant
(110% of such fair market value in the case of an ISO, if
the optionee owns (or is deemed to own) more than 10% of
the total voting power of STAR).
(b) Options may be granted for terms determined by the STAR
Committee; provided, however, that the term of an ISO may
not exceed 10 years (5 years if the optionee owns (or is
deemed to own) more than 10% of the total voting power of
STAR).
(c) Each option is payable in full upon exercise or, if the
applicable contract permits, in installments. Payment of
the exercise price of an option may be made in cash or by
certified check, or, with the authorization of the STAR
Committee, in shares of STAR Common Stock or any
combination thereof. With the authorization of the STAR
Committee, payment of the exercise price may be made by
delivering a properly executed exercise notice, together
with a copy of the optionee's irrevocable instructions to
a broker acceptable to the STAR Committee to deliver to
STAR the sale or loan proceeds sufficient to pay the
applicable exercise price.
(d) Options may not be transferred other than by will or by
the laws of descent and distribution, and may be exercised
during the optionee's lifetime only by him or her or his
or her legal representative.
(e) An optionee whose employment with STAR, its parent or any
of its subsidiaries, is terminated for any reason other
than the optionee's death or disability may exercise such
option, to the extent exercisable on the date of such
termination, at any time within three months after the
date of termination, but not thereafter and in no event
after the expiration of the term of the option. However,
if the optionee's employment is terminated either (a) for
cause, or (b) without the consent of STAR, the option will
terminate immediately.
(f) If an optionee dies (a) while employed by STAR, its parent
or any of its subsidiaries, (b) within three months after
the termination of his or her employment (unless such
termination was for cause or without the consent of STAR)
or (c) within one year following the termination of his or
her employment by reason of disability, the option may be
exercised, to the extent exercisable on the date of his or
her death, by his or her executor, administrator or other
person at the time entitled by law to his or her rights
under such option, at any time within one year after
death, but not thereafter and in no event after the
expiration of the term of the option. The holder of an
option granted to an employee whose employment has
terminated by reason of disability may exercise such
option, to the extent exercisable upon
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the effective date of such termination, at any time within
one year after such date, but not thereafter and in no
event after the expiration of the term of the option.
(g) An option granted to a consultant may be exercised at any
time during its term. It shall not be affected by a change
in the optionee's relationship with STAR or its
subsidiaries. The term of an option granted to a
consultant will not be affected by the death or disability
of the consultant. In such event, the option may be
exercised by the executor, administrator or other person
at the time entitled by law to the consultant's rights
under such option to the extent exercisable at the time of
the consultant's death or disability at any time during
the term of the option, but not thereafter.
(h) STAR may withhold cash and, with the authorization of the
STAR Committee, shares of STAR Common Stock having an
aggregate fair market value equal to the amount which STAR
determines is necessary to meet its obligations to
withhold any federal, state and/or local taxes or other
amounts incurred by reasons of the grant or exercise of an
option, its disposition or the disposition of shares
acquired upon the exercise of the option. Alternatively,
STAR may require the holder to pay to STAR such amount, in
cash, promptly upon demand.
ADJUSTMENT IN EVENT OF CAPITAL CHANGES
In the event of any change in the outstanding STAR Common Stock by
reason of a stock dividend, recapitalization, merger in which STAR is the
surviving corporation, split-up, combination or exchange of shares or the like,
the aggregate number and kind of shares subject to the 1992 STAR Plan, the
aggregate number and kind of shares subject to each outstanding option and the
exercise price thereof will be appropriately adjusted by the STAR Board of
Directors, whose determination will be conclusive.
In the event of (a) the liquidation or dissolution of STAR, (b) a
merger in which STAR is not the surviving corporation or a consolidation or (c)
any other capital reorganization in which more than 50% of the shares of STAR
Common Stock entitled to vote are exchanged, any outstanding options shall
terminate, unless other provision is made therefor in the transaction.
DURATION AND AMENDMENT OF THE 1992 STAR PLAN
No option may be granted pursuant to the 1992 STAR Plan after October
4, 2002. The STAR Board of Directors may at any time suspend, terminate or amend
the 1992 STAR Plan; provided, however, that, without the approval of STAR's
shareholders, no amendment may be made which would (a) increase the maximum
number of shares available for the grant of options (except as a result of the
anti-dilution adjustments described above), (b) materially increase the benefits
to participants under the 1992 STAR Plan or (c) change the eligibility
requirements for individuals who may receive options or (d) make any change for
which applicable law or regulatory authority requires shareholder approval). No
termination or amendment may adversely affect the rights of an optionee with
respect to an outstanding option without his or her consent.
FEDERAL INCOME TAX TREATMENT
The following is a general summary of the Federal income tax
consequences relating to ISOs and NQSOs under the 1992 STAR Plan under current
law (including Temporary and Proposed Regulations which may be changed when
finalized). It should be understood that this summary is not exhaustive, that
final
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regulations have not yet been issued with respect to ISOs, and that special
rules not specifically discussed herein may apply in certain situations.
ISOs Exercised With Cash
No taxable income will be recognized by an optionee upon the grant or
exercise of an ISO. The optionee's tax basis in the shares acquired upon the
exercise of an ISO with cash will be equal to the exercise price paid by him or
her for such shares.
If the shares of STAR Common Stock received upon exercise of an ISO
are disposed of more than two years from the date of grant of the option and
more than one year after the date of transfer of such shares to the optionee,
the optionee will recognize long-term capital gain or loss on such disposition
equal to the difference between the selling price and the optionee's basis in
the shares of STAR Common Stock, and STAR will not be entitled to a deduction.
Long-term capital gain is generally subject to more favorable tax treatment than
short-term capital gain or ordinary income. Proposed legislation would make such
treatment even more favorable. There is no assurance, however, that such
proposed legislation will be enacted.
If the shares of STAR Common Stock received upon the exercise of an
ISO are disposed of prior to the end of the two-years-from-grant/one-year-after-
transfer holding period (a "disqualifying disposition"), the excess, if any, of
the fair market value of the shares of STAR Common Stock on the date of transfer
of such shares to the optionee over the exercise price (but not in excess of the
gain realized on the disposition of the shares) will be taxed as ordinary income
in the year of such disposition, and STAR generally will be entitled to a
deduction in the year of disposition equal to such amount. Any additional gain
or any loss recognized by the optionee on such disposition will be short-term or
long-term capital gain or loss, as the case may be, depending upon the period
for which the shares were held.
NQSOs Exercised With Cash
No taxable income will be recognized by an optionee upon the grant of
a NQSO. Upon the exercise of a NQSO, the excess of the fair market value of the
shares received at the time of exercise over the exercise price therefor will be
taxed as ordinary income, and STAR will generally be entitled to a corresponding
deduction. The optionee's tax basis in the shares of STAR Common Stock acquired
upon the exercise of such NQSO will be equal to the exercise price paid by him
or her for such shares plus the amount of ordinary income required to be
recognized.
Any gain or loss recognized by the optionee on a subsequent
disposition of shares of STAR Common Stock purchased pursuant to a NQSO will be
short-term or long-term capital gain or loss, depending upon the period during
which such shares were held, in an amount equal to the difference between the
selling price and the optionee's tax basis in the shares.
Exercises Using Previously Acquired Shares
If previously acquired shares of STAR Common Stock are surrendered in
full or partial payment of the exercise price of an option (whether an ISO or a
NQSO), gain or loss generally will not be recognized by the optionee upon the
exercise of such option to the extent the optionee receives shares ("Replacement
Shares") which on the date of exercise have a fair market value equal to the
fair market value of the shares of STAR Common Stock surrendered in exchange
therefor. If the option exercised is an ISO or if the shares of STAR Common
Stock used were acquired pursuant to the exercise of an ISO, the Replacement
Shares are treated as having been acquired pursuant to the exercise of an ISO.
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However, if an ISO is exercised with shares of STAR Common Stock
which were previously acquired pursuant to the exercise of an ISO but which were
not held for the required two-years-from-grant/one-year-after-transfer holding
period, there is a disqualifying disposition of such previously acquired shares.
In such case, the optionee will recognize ordinary income on such disqualifying
disposition equal to the difference between the fair market value of such shares
of STAR Common Stock on the date of exercise of the prior ISO and the amount
paid for such shares of STAR Common Stock (but not in excess of the gain
realized). Special rules apply in determining which shares are considered to
have been disposed of and in allocating the basis among the shares. No capital
gain is recognized.
The optionee will have an aggregate basis in the Replacement Shares
equal to the basis of the shares of STAR Common Stock surrendered, increased by
any ordinary income required to be recognized on the disposition of the
previously acquired shares of STAR Common Stock. The optionee's holding period
for the Replacement Shares generally includes the period during which the
surrendered shares of STAR Common Stock were held.
Any shares of STAR Common Stock received by the optionee on such
exercise in addition to the Replacement Shares will be treated in the same
manner as a cash exercise of an option for no consideration.
Alternative Minimum Tax
In addition to the Federal income tax consequences described above,
an optionee who exercises an ISO may be subject to the alternative minimum tax,
which is payable only to the extent it exceeds the optionee's regular tax
liability. For this purpose, upon the exercise of an ISO, the excess of the fair
market value of the shares over the exercise price is an adjustment which
increases the optionee's alternative minimum taxable income. In addition, the
optionee's basis in such shares of STAR Common Stock is increased by such amount
for purposes of computing the gain or loss on disposition of the shares for
alternative minimum tax purposes. If the optionee is required to pay an
alternative minimum tax, the amount of such tax which is attributable to
deferral preferences (including the ISO adjustment) is allowable as a tax credit
against the optionee's regular tax liability (net of other non-refundable
credits) in subsequent years. To the extent the credit is not used, it is
carried forward.
BENEFITS GRANTED DURING LAST FISCAL YEAR UNDER 1992 STAR PLAN
Set forth under the caption "Executive Compensation-Option/SAR Grants
in Last Fiscal Year," is information concerning options granted during fiscal
1996 to the persons named in the Summary Compensation Table. The following table
sets forth the number of shares underlying options that were granted under the
1992 STAR Plan during STAR's fiscal year ended May 31, 1996 to (i) all current
executive officers as a group, (ii) all current directors who are not executive
officers and (iii) all other employees, including current officers who are not
executive officers:
PLAN NAME
----------------------------
DOLLAR NUMBER OF
VALUE SHARES
OF UNDERLYING
OPTIONS OPTIONS
CATEGORY OF OPTIONEE GRANTED GRANTED
- -------------------- ------- -------
Executive officers as a group (2 persons,
including the persons named in the Summary
Compensation Table).................... * 35,000
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Other employees as a group (18 persons).. * 36,700
- ------------------
* All such options granted are out-of-the money based upon the closing price
of STAR's Common Stock on the Nasdaq National Market on July 24, 1997, of
$5.50 per share. All options were granted at 100% of the fair market value
of the underlying shares on the date of grant. Accordingly, the foregoing
table does not include any value that may arise from a future increase in
the market value of the STAR Common Stock.
The STAR Board of Directors unanimously recommends a vote FOR
adoption of the Amendment.
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PROPOSAL TO ADOPT STAR'S 1997 NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
On March 26, 1997 the Board of Directors of STAR adopted STAR's 1997
Stock Option (the "STAR 1997 Plan") and recommended that it be submitted to the
shareholders of STAR for their approval at the STAR Meeting.
The following is a summary of the STAR 1997 Plan:
ELIGIBILITY
Options may be granted under the STAR 1997 Plan only to Non-Employee
Directors.
STOCK SUBJECT TO THE NON-EMPLOYEE DIRECTOR PLAN
STAR may issue an aggregate of 100,000 shares of STAR Common Stock
(subject to possible adjustment in the future as described below) pursuant to
the STAR 1997 Plan. Such shares may consist either in whole or in part of
authorized but unissued shares of STAR Common Stock or STAR Common Stock held by
STAR in its treasury. STAR Common Stock related to the unexercised portion of
any terminated, expired, cancelled or terminated option will be made available
for future option grants under the STAR 1997 Plan.
ADMINISTRATION
The 1997 STAR Plan is administered by the Board of Directors of STAR
which, to the extent it determines, may delegate its powers with respect to the
administration of the 1997 STAR Plan to a committee of the STAR Committee of
Directors (the "STAR Committee") consisting of not less than three directors,
each of whom is a "non-employee director" within the meaning of Rule 16b-3 (or
any successor rule or regulation) promulgated under the Exchange Act. Unless
otherwise provided in the By-Laws of STAR, a majority of the members of the STAR
Committee constitute a quorum, and the acts of a majority of the members present
at any meeting at which a quorum is present, and any acts approved in writing by
all members without a meeting, will be the acts of the STAR Committee.
ELIGIBILITY
The STAR Committee may, consistent with the purposes of the 1997 STAR
Plan, grant options from time to time, to Non-Employee Directors of STAR.
Options granted pursuant to the 1997 STAR Plan will cover such number of shares
of STAR Common Stock as the STAR Committee may determine.
TERMS AND CONDITIONS OF OPTIONS
Each option granted under the STAR 1997 Plan will be evidenced by an
appropriate contract (the "Option Contract") which will contain such terms and
conditions not inconsistent with the STAR 1997 Plan as may be determined by the
STAR Committee.
An option (or any installment thereof), to the extent then
exercisable, will be exercised by giving written notice to STAR at its principal
office, stating which option is being exercised, specifying the number of shares
of STAR Common Stock as to which such option is being exercised and accompanied
by payment in full of the aggregate exercise price therefor (or the amount due
on exercise if the Option Contract permits
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installment payments) (a) in cash and/or a certified check, (b) with the
authorization of the STAR Committee, with cash, a certified check and/or
previously acquired shares of STAR Common Stock, having an aggregate fair market
value on the date of exercise, on the date of exercise, equal to the aggregate
exercise price of all options being exercised; provided, however, that in no
case may shares be tendered if such tender would require STAR to incur a charge
against its earnings for financial accounting purposes.
An optionee will not have the rights of a shareholder with respect to
the shares of STAR Common Stock to be received upon the exercise of an option
until the date of issuance of a stock certificate to him for such shares or, in
the case of uncertified shares, until the date an entry is made on the books of
STAR's transfer agent representing such shares; provided, however, that until
such stock certificate is issued or until such book entry is made, any optionee
using previously acquired shares of STAR Common Stock in payment of an option
exercise price shall continue to have the rights of a shareholder with respect
to such previously acquired shares.
In no case may a fraction of a share of STAR Common Stock be
purchased or issued under the STAR 1997 Plan.
Nothing in the STAR 1997 Plan or in any option granted under the STAR
Plan will confer on any optionee any right to continue as a director of STAR, or
interfere in any way with any right to terminate the optionee's directorship at
any time for any reason whatsoever without liability to STAR.
Except as may otherwise be expressly provided in the applicable
Option Contract, an optionee who ceases to be a director of STAR for any reason
may exercise such option, to the extent exercisable on the date of such
termination, at any time within three months after the date of termination, but
not thereafter and in no event after the date the option would otherwise have
expired; provided, however, that if such optionee's directorship is terminated
for cause, such option shall terminate immediately.
No option granted under the STAR 1997 Plan may be assigned or
transferred except by will or by the applicable laws of descent and
distribution; and each such option may be exercised during the optionee's
lifetime only by the optionee or his legal representative. Except as otherwise
provided, options may not be assigned, transferred, pledged, hypothecated or
disposed of in any way (whether by operation of law or otherwise) and will not
be subject to execution, attachment or similar process and any attempted
assignment, transfer, pledge, hypothecation or disposition shall be null and
void AB INITIO and of no force or effect.
ADJUSTMENT UPON CHANGES IN CAPITALIZATION, AND CONVERSION OF OPTIONS
ON STOCK FOR STOCK EXCHANGE
In the event of any change in the outstanding Common Stock of STAR by
reason of a stock dividend, recapitalization, merger in which STAR is the
surviving corporation, spinoff, split-up, combination or exchange of shares or
the like, which results in a change in the number or kind of shares of STAR
Common Stock which is outstanding immediately prior to such event, the aggregate
number and kind of shares subject to the Plan, the aggregate number and kind of
shares subject to each outstanding option and the exercise price thereof shall
be appropriately adjusted by the STAR Board of Directors, whose determination
will be conclusive and binding on all parties thereto. Such adjustment may
provide for the elimination of fractional shares that might otherwise be subject
to options without payment therefor.
In the event of (a) the liquidation or dissolution of STAR, (b) a
merger in which STAR is not the surviving corporation or a consolidation, or (c)
a transaction (or series of related transactions) in which (i) more than 50% of
the outstanding Common Stock of STAR is transferred or exchanged for other
112
<PAGE>
consideration or (ii) shares of STAR Common Stock in excess of the number of
shares of STAR Common Stock outstanding immediately preceding the transaction
are issued (other than to shareholders of STAR with respect to their stock in
STAR), any outstanding options shall terminate upon the earliest such event,
unless other provision is made therefor in the transaction.
TERM OF AND AMENDMENT OF STAR 1997 PLAN
The STAR 1997 Plan will terminate on March 25, 2007, unless sooner
terminated by the Board. The Board may also amend the STAR 1997 Plan (subject,
in certain instances, to shareholder approval). The rights of optionees under
options outstanding at the time of the termination or amendment of the STAR 1997
Plan will not be adversely affected (without the written consent of the
optionee) by reason of the termination or amendment and will continue in
accordance with the terms of the option (as then in effect or thereafter
amended).
COMPLIANCE WITH SECURITIES LAWS
It is a condition to the exercise of any option granted pursuant to
the STAR 1997 Plan that either (a) a Registration Statement under the Securities
Act, with respect to the shares of STAR Common Stock to be issued upon such
exercise shall be effective and current at the time of exercise, or (b) there is
an exemption from registration under the Securities Act for the issuance of
shares of STAR Common Stock upon such exercise. Nothing in the STAR 1997 Plan
should be construed as requiring STAR to register shares subject to any option
under the Securities Act.
The STAR Committee may require the optionee to execute and deliver to
STAR representations and warranties, in form, substance and scope satisfactory
to the STAR Committee, which the STAR Committee determines is necessary or
convenient to facilitate the perfection of an exemption from the registration
requirements of the Securities Act, applicable state securities laws or other
legal requirements, including without limitation, that (a) the shares of STAR
Common Stock to be issued upon the exercise of the option are being acquired by
the optionee for the optionee's own account, for investment only and not with a
view to the resale or distribution thereof, and (b) any subsequent resale or
distribution of shares of STAR Common Stock by such optionee will be made only
pursuant to (i) a Registration Statement under the Securities Act which is
effective and current with respect to the shares of STAR Common Stock being sold
or (ii) a specific exemption from the registration requirements of the
Securities Act, but in claiming such exemption, the optionee, prior to any offer
of sale or sale of such shares of STAR Common Stock, shall provide STAR with a
favorable written opinion of counsel, satisfactory to STAR, in form, substance
and scope satisfactory to STAR, as to the applicability of such exemption to the
proposed sale or distribution.
In addition, if at any time the STAR Committee determines that the
listing or qualification of the shares of STAR Common Stock subject to such
option on any securities exchange, Nasdaq, or under any applicable law, or that
the consent or approval of any governmental agency or regulatory body, is
necessary or desirable as a condition to, or in connection with, the granting of
an option or the issuance of shares of STAR Common Stock thereunder, such option
may not be granted or exercised in whole or in part, as the case may be, unless
such listing, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the STAR Committee.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the Federal income tax
consequences under the Code as currently in effect with respect to options under
the STAR 1997 Plan. This description is based on current
113
<PAGE>
law. It should be understood that this summary is not exhaustive and that
special rules not specifically discussed herein may apply in certain situations.
Optionees should consult with their own tax advisors with respect to the tax
consequences inherent in the ownership and exercise of stock options and the
ownership and disposition of the underlying securities.
Grant of Options
The optionee will not recognize any income for Federal income tax
purposes, and STAR will not be entitled to any deduction, upon the grant of an
option.
Exercise With Cash
Generally, an optionee will recognize ordinary taxable income at the
time an option is exercised in an amount equal to the excess of the fair market
value of the shares of STAR Common Stock on the date of exercise over the
exercise price. The optionee's tax basis in the stock acquired upon the exercise
of an option will equal the exercise price of the option plus the ordinary
taxable income so recognized. STAR generally will be entitled to a compensation
deduction for Federal income tax purposes at the same time as, and in the same
amount that, the optionee recognizes such income.
Special Rules for Exercises Using Previously Owned Shares
If previously owned shares are surrendered in full or partial payment
of the exercise price of an option, gain or loss generally will not be
recognized by the optionee upon the exercise of such option to the extent the
optionee receives shares which on the date of exercise have a fair market value
equal to the fair market value of the shares surrendered in exchange therefor
("Replacement Shares").
The optionee will have an aggregate basis in the Replacement Shares
equal to the basis of the shares surrendered, increased by any ordinary income
required to be recognized on the disposition of the previously acquired shares.
The optionee's holding period for the Replacement Shares generally includes the
period during which the surrendered shares were held.
Any shares received by the optionee on such exercise in addition to
the Replacement Shares will be treated in the same manner as a cash exercise of
an option for no consideration.
Sale of Underlying Shares
When an optionee subsequently disposes of the shares of Common Stock
received upon exercise of an option, he or she will recognize long-term or
short-term capital gain or loss (depending upon the holding period) in an amount
equal to the difference between the sale price and the optionee's tax basis.
Long-term capital gain is generally subject to more favorable tax treatment than
ordinary income or short-term capital gain. Proposed legislation would treat
long-term capital gain even more favorably. There can be no assurance, however,
that such proposed legislation will be enacted.
The STAR Board of Directors unanimously recommends a vote FOR
adoption of the STAR 1997 Plan.
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<PAGE>
BENEFITS GRANTED DURING LAST FISCAL YEAR UNDER 1992 STAR PLAN
The grant of options including options to be issued pursuant to the
STAR 1997 Plan, if adopted, is within the discretion of the Stock Option
Committee of the STAR Board of Directors. Accordingly, STAR is unable to
determine future options, if any, that may be granted to the named persons or
groups in the following table. Set forth under the caption "Executive
Compensation-Option/SAR Grants in Last Fiscal Year", is information concerning
options granted during fiscal 1996 to the persons named in the Summary
Compensation Table. The following table sets forth the number of shares
underlying options that were granted under the 1992 STAR Plan during STAR's
fiscal year ended May 31, 1996 to (i) all current executive officers as a group,
(ii) all current directors who are not executive officers and (iii) all other
employees, including current officers who are not executive officers:
DOLLAR NUMBER OF
VALUE SHARES
OF UNDERLYING
OPTIONS OPTIONS
CATEGORY OF OPTIONEE GRANTED GRANTED
Executive officers as a group (2 persons, including the
persons named in the Summary Compensation Table)........ * 35,000
Other employees as a group (18 persons)................... * 36,700
- -------------
* All such options granted are out-of-the money based upon the closing price
of STAR's Common Stock on the Nasdaq National Market on July 24, 1997, of
$5.50 per share. All options were granted at 100% of the fair market value
of the underlying shares on the date of grant. Accordingly, the foregoing
table does not include any value that may arise from a future increase in
the market value of the STAR Common Stock.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
STAR by Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of the Americas, New
York, New York 10036. The federal income tax consequences in connection with the
Merger will be passed upon for STAR and EFCC by Meltzer, Lippe, Goldstein, Wolf
& Schlissel, P.C., 190 Willis Avenue, Mineola, New York 11501.
EXPERTS
The consolidated financial statements of STAR MULTI CARE SERVICES,
INC. and subsidiaries, except AMSERV HEALTHCARE INC. and subsidiaries as of May
31, 1995 and 1996 and for each of the years in the three-year period ended May
31, 1996 included in this Joint Proxy Statement/Prospectus have been audited by
Holtz Rubenstein & Co., LLP, independent auditors, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of AMSERV HEALTHCARE INC. and
subsidiaries as of May 31, 1996 and June 24, 1995 and for the period from June
25, 1995 to May 31, 1996 and the year ended June 24, 1995 (not separately
presented herein) have been audited by Ernst & Young LLP, independent
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<PAGE>
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of AMSERV HEALTHCARE INC. and
subsidiaries for the year ended June 30, 1994 (not separately presented herein)
have been audited by Deloitte & Touche LLP, independent auditors, as set forth
in their report appearing elsewhere herein, and are included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of EXTENDED FAMILY CARE
CORPORATION and subsidiaries as of December 31, 1996 and for each of the two
years in the period ended December 31, 1996 included in this Joint Proxy
Statement/Prospectus have been audited by Carpenter & Onorato, P.C., independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
SHAREHOLDER PROPOSALS
Shareholder proposals intended to be presented at the 1997 Annual
Meeting of Shareholders must be received by the Company by July 23, 1997 for
possible inclusion in the proxy material relating to such meeting.
116
<PAGE>
STAR MULTI CARE SERVICES, INC.
AND
EXTENDED FAMILY CARE CORPORATION
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial
statements give effect to the merger (the "Merger") of Star Multi Care Services,
Inc. ("STAR") and Extended Family Care Corporation ("EFCC") accounted for as a
purchase transaction. These pro forma financial statements are presented for
illustrative purposes only, and therefore are not necessarily indicative of the
operating results and financial position that might have been achieved had the
Merger occurred as of an earlier date, nor are they necessarily indicative of
operating results and the financial position which may occur in the future.
A pro forma condensed combined balance sheet is provided as of
February 28, 1997, giving effect to the Merger as though it had been consummated
on that date. The pro forma condensed combined balance sheet combines the
consolidated balance sheet of STAR as of February 28, 1997 with that of EFCC as
of March 31, 1997. Pro forma condensed combined statements of operations are
provided combining STAR for the nine month period ended February 28, 1997 and
the year ended May 31, 1996 with EFCC for the nine month period ended March 31,
1997 and the year ended June 30, 1996 giving effect to the Merger as though it
had occurred on June 1, 1995.
The pro forma financial statements are based on preliminary estimates
of values and transaction costs and preliminary appraisals. The actual recording
of the transactions will be based on final appraisals, values and transaction
costs. Accordingly, the actual recording of the transactions can be expected to
differ from these pro forma financial statements.
The historical condensed statements of operations presented for the
year ended May 31, 1996 is derived from the separate historical consolidated
financial statements of STAR and EFCC, and should be read in conjunction with
the companies' separate financial statements included elsewhere herein. The
historical condensed financial statements as of or for the nine months ended
February 28, 1997 are derived from the historical interim consolidated financial
statements of STAR and EFCC, included elsewhere herein, and have been prepared
in accordance with generally accepted accounting principles applicable to
interim financial information and, in the opinion of STAR's and EFCC's
respective managements, include all adjustments necessary for a fair
presentation of financial information for such interim periods.
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<PAGE>
STAR MULTICARE SERVICES, INC.
AND
EXTENDED FAMILY CARE CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET
FEBRUARY 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
---------------------------- ---------------------------------
STAR EXTENDED ACQUISITION OF
MULTI CARE FAMILY CARE TPC MINORITY ACQUISITION OF PRO FORMA
SERVICES, INC. CORPORATION INTEREST EFCC COMBINED
------------ ------------ ------------ ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 78,574 $ 445,021 $ -- $ (3,035,000)2a(ii)
3,035,000 2a(iii)$ 523,595
Accounts receivable, net 10,130,449 1,171,643 -- -- 11,302,092
Prepaid expenses and other current assets 769,365 440,874 (155,000) 2a(iv) (165,000)2a(ii) 890,239
Income taxes receivable 28,997 -- -- -- 28,997
Deferred income taxes 961,232 -- -- -- 961,232
------------ ------------ ------------ ------------ ------------
Total current assets 11,968,617 2,057,538 (155,000) (165,000) 13,706,155
PROPERTY AND EQUIPMENT, net 916,281 217,897 -- -- 1,134,178
NOTES RECEIVABLE FROM OFFICER 94,937 -- -- -- 94,937
INTANGIBLE ASSETS, net 5,059,300 466,233 938,796 2a(i) 5,644,046 2a(ii) 12,108,375
DEFERRED INCOME TAXES -- 191,000 -- -- 191,000
OTHER ASSETS 218,916 29,410 -- -- 248,326
------------ ------------ ------------ ------------ ------------
Total assets $ 18,258,051 $ 2,962,078 $ 783,796 $ 5,479,046 $ 27,482,971
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 1,241,205 $ 944,672 $ -- $ -- $ 2,185,877
Accounts payable and other current
liabilities 1,405,020 254,292 -- -- 1,659,312
Current maturities of long-term debt 125,000 43,449 -- -- 168,449
------------ ------------ ------------ ------------ ------------
Total current liabilities 2,771,225 1,242,413 -- -- 4,013,638
------------ ------------ ------------ ------------ ------------
LONG TERM LIABILITIES:
Revolving credit line 1,997,000 -- -- 3,035,000 2a(iii) 5,032,000
Long-term debt 156,250 97,507 -- -- 253,757
Other long-term liabilities 1,192,000 -- -- -- 1,192,000
------------ ------------ ------------ ------------ ------------
Total long-term liabilities 3,345,250 97,507 -- 3,035,000 6,477,757
------------ ------------ ------------ ------------ ------------
INTERESTS OF MINORITY HOLDERS
IN SUBSIDIARY -- 141,269 (141,269) 2a(i) -- --
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value -- -- -- -- --
Common stock, $.001 par value 4,154 320,002 56,020 2a(i) (374,944) 2a(ii) 5,232
Additional paid-in capital 14,925,603 1,013,358 1,024,045 2a(i) 2,811,519 2a(ii) 19,774,525
Subscription receivable (397,782) -- -- -- (397,782)
Deficit (2,111,477) 147,529 (155,000) 2a(iv) 7,471 2a(ii) (2,111,477)
Treasury stock, at cost (278,922) -- -- -- (278,922)
------------ ------------ ------------ ------------ ------------
Total shareholders' equity 12,141,576 1,480,889 925,065 2,444,046 16,991,576
------------ ------------ ------------ ------------ ------------
$ 18,258,051 $ 2,962,078 $ 783,796 $ 5,479,046 $ 27,482,971
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
118
<PAGE>
STAR MULTICARE SERVICES, INC.
AND
EXTENDED FAMILY CARE CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED FEBRUARY 28, 1997
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
---------------------------- -------------------------------
STAR EXTENDED ACQUISITION OF
MULTI CARE FAMILY CARE TPC MINORITY ACQUISITION OF PRO FORMA
SERVICES, INC. CORPORATION INTEREST EFCC COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES, net $ 39,163,979 $ 7,048,264 -- $ 46,212,243
OPERATING EXPENSES 36,757,660 6,911,716 -- $ 146,038 2b(iii) 43,815,414
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 2,406,319 136,548 -- (146,038) 2,396,829
OTHER INCOME (EXPENSE) (2,910,880) 11,177 -- (193,481) 2b(iv) (3,093,184)
------------ ------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME
TAXES AND MINORITY INTEREST (504,561) 147,725 -- (339,519) (696,355)
PROVISION (BENEFIT) FOR
INCOME TAXES (207,000) 88,000 -- (139,203) 2b(vi) (258,203)
------------ ------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY
INTEREST (297,561) 59,725 -- (200,316) (438,152)
MINORITY INTEREST IN INCOME -- (6,652) $ 6,652 2b(ii) -- --
------------ ------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (297,561) $ 53,073 $ 6,652 $ (200,316) $ (438,152)
============ ============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Primary:
Net (loss) income $ (0.07) $ 0.0017 $ (0.08)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING 4,278,169 32,000,226 5,355,947
============ ============ ============
EARNINGS PER COMMON SHARE:
Full dilution:
Net (loss) income $ (0.07) $ 0.0017 $ (0.08)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES 4,278,169 32,000,226 5,355,947
OF COMMON STOCK OUTSTANDING ============ ============ ============
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
119
<PAGE>
STAR MULTI CARE SERVICES, INC.
AND
EXTENDED FAMILY CARE CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma Adjustments
---------------------------- ---------------------------------
Star Extended Acquisition of
Multi Care Family Care TPC Minority Acquisition of Pro Forma
Services, Inc. Corporation Interest EPCC Combined
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES, net $ 49,162,934 $ 8,118,586 $ -- $ -- $ 57,281,520
OPERATING EXPENSES 47,330,647 8,031,976 -- 194,717 2b(iii) 55,557,340
------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,832,287 86,610 -- (194,717) 1,724,180
OTHER EXPENSE (120,184) (5,925) -- (257,975)2b(iv) (384,084)
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES AND MINORITY INTEREST 1,712,103 80,685 -- (452,692) 1,340,096
PROVISION FOR INCOME TAXES 568,844 38,499 -- (185,604)2b(vi) 421,739
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE MINORITY
INTEREST 1,143,259 42,186 -- (267,088) 918,357
MINORITY INTEREST IN NET
INCOME -- (7,835) 7,835 2b(ii) -- --
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS $ 1,143,259 $ 34,351 $ 7,835 $ (267,088) $ 918,357
============ ============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Primary:
Income from continuing
operations $ 0.29 $ 0.0011 $ 0.18
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING 3,996,993 32,240,228 5,074,771
============ ============ ============
EARNINGS PER COMMON SHARE:
Full dilution:
Income from continuing
operations $ 0.28 $ 0.0011 $ 0.18
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK 4,011,503 32,240,228 5,089,281
OUTSTANDING ============ ============ ============
</TABLE>
See accompanying notes to pro forma condensed combined financial statements
120
<PAGE>
STAR MULTI CARE SERVICES, INC.
AND
EXTENDED FAMILY CARE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only, giving effect to the merger of Star
Multi Care Services, Inc. ("STAR") and Extended Family Care Corporation ("EFCC")
accounted for as a purchase transaction. In accordance with Commission reporting
rules, the pro forma combined statements of operations, and the historical
statements from which they are derived, present only income from continuing
operations and, therefore, do not include discontinued operations, extraordinary
items, and the cumulative effects of accounting changes.
EFCC reports on a calendar year basis. For purposes of combining
EFCC's historical financial information with STAR's historical financial
information in the pro forma condensed financial statements, the financial
information of EFCC has been accumulated for the twelve month period ended June
30, 1996 and the nine month period ended March 31, 1997.
2. PRO FORMA ADJUSTMENTS:
a. PRO FORMA CONDENSED COMBINED BALANCE SHEET
(i) ACQUISITION OF MINORITY INTEREST IN TPC HOME
CARE SERVICES, INC. BY EFCC
Reflects the estimated purchase price of
$1,080,065 for the Merger of the TPC Home Care Services, Inc. Minority Interest
("TPC") with and into EFCC. The foregoing assumes the issuance of 5,601,975
shares of $.01 par value Common Stock of EFCC, at the value per EFCC share of
the consideration to be issued in the Merger, or $.193 per share, in exchange
for 298,844 shares of $.01 par value Common Stock of TPC. The actual purchase
price will vary with the market price of EFCC Common Stock. The excess of the
purchase price over the net assets acquired of $938,796 has been allocated to
goodwill (amortized over 40 years).
(ii) ACQUISITION OF EFCC BY STAR
Reflects the estimated purchase price of
$8,050,000 (including aggregate estimated related acquisition costs of $800,000
of which $165,000 has been paid as of February 28, 1997) for the Merger of EFCC
with and into STAR. Of such estimated purchase price, $4,850,000 represents the
issuance of 1,077,778 shares of STAR $.001 par value Common Stock with the
balance of $3,200,000 (including acquisition costs of $800,000) paid in cash.
The foregoing, although not necessarily indicative of future price levels,
assumes a recent average market price of STAR Common Stock of $4.50 per share.
121
<PAGE>
2. PRO FORMA ADJUSTMENTS: (Cont'd)
The preliminary allocation of the purchase price paid for the net
assets of EFCC based upon the estimated fair values of such net assets is as
follows:
Estimated acquisition cost $ 8,050,000
Less: historical book value of net assets of EFCC, which
approximate fair value, at February 28, 1997, after
pro forma adjustment for acquisition of TPC minority
interest (2,405,954)
Intangible assets acquired $ 5,644,046
===========
Allocation of the intangible assets acquired is as follows:
Goodwill (amortized over 40 years) $ 5,363,046
Trained and assembled workforce (amortized over 7 years) 193,000
Corporate manuals (amortized over 5 years) 38,000
Other (amortized over 25 years) 50,000
-----------
$ 5,644,046
===========
(iii) ACQUISITION FINANCING
Reflects additional estimated borrowing under STAR's line
of credit for the acquisition of EFCC as discussed in Note 2a(ii).
(iv) TRANSACTION COSTS OF EFCC
Reflects the write-off of $155,000 of acquisition costs
incurred by EFCC. Total acquisition costs of EFCC are estimated to be $300,000.
b. PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(i) COST SAVINGS PLAN
STAR has begun to identify cost savings resulting from a
business integration plan which is expected to be implemented following the
Merger. The business integration plan contemplates, among other things, (i)
elimination of duplicative executive and administrative functions and (ii)
closing and consolidation of certain facilities. STAR's preliminary assessment
of cost savings is estimated to be $1.0 million, however, management has not
included the impact of any special charges or cost savings in the pro forma
combined statements of operations.
(ii) MINORITY INTEREST
Reflects elimination of minority interest in connection
with the acquisition of the TPC minority interest, as more fully described in
Note 2a(i).
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<PAGE>
2. PRO FORMA ADJUSTMENTS: (Cont'd)
(iii) DEPRECIATION AND AMORTIZATION
Reflects adjustment to depreciation and amortization based
on the preliminary purchase accounting allocations related to intangible assets
acquired in connection with the acquisition of EFCC, as more fully described in
Note 2a(ii).
(iv) INTEREST EXPENSE
Reflects adjustment to interest expense on funds borrowed
in connection with acquisition of EFCC.
(v) CONSULTING FEES
STAR charged EFCC a consulting fee of $50,000 for the nine
month period ended February 28, 1997, which was eliminated in combination.
(vi) INCOME TAXES
Reflects recognition of income tax effect of pro forma
adjustments related to acquisition of EFCC.
(vii) EARNINGS (LOSS) PER COMMON SHARE
Pro forma weighted average number of common shares
outstanding for the nine months ended February 28, 1997 and the year ended May
31, 1996 are based upon STAR's and EFCC's historical weighted average shares,
after adjustment for the estimated conversion of EFCC shares to shares of STAR
common stock.
123
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
STAR's Independent Auditors' Report F-2 - F-3
STAR's Independent Auditors' Report F-4
STAR's Independent Auditors' Report F-5
STAR's Supplemental Consolidated Balance Sheets as of May
31, 1996 and 1995 F-6
STAR's Supplemental Consolidated Statements of Operations
for the three years ended May 31, 1996 F-7
STAR's Supplemental Consolidated Statement of Shareholders'
Equity for the three years ended May 31, 1996 F-8
STAR's Supplemental Consolidated Statements of Cash Flows
for the three years ended May 31, 1996 F-9 - F-10
STAR's Notes to Supplemental Consolidated Financial
Statements F-11 - F-25
STAR's Condensed Consolidated Balance Sheet as of February
28, 1997 (unaudited) F-26
STAR's Condensed Consolidated Statements of Operations for
the nine months ended February 28, 1997 and February 29,
1996 (unaudited) F-27
STAR's Condensed Consolidated Statements of Cash Flows for
the nine months ended February 28, 1997 and February 28,
1996 (unaudited) F-28
STAR's Notes to Unaudited Condensed Consolidated Financial
Statements for the nine months ended February 28, 1997 and
February 29, 1996 F-29 - F-30
EFCC's Independent Auditor's Report F-31
EFCC's Consolidated Balance Sheets as of December 31, 1996
and December 31, 1995 F-32
EFCC's Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995 F-33
EFCC'S Consolidated Statements of Shareholder's Equity for
the years ended December 31, 1996 and 1995 F-34
EFCC'S Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995 F-35
EFCC's Notes to Consolidated Financial Statements F-36 - F-43
EFCC's Condensed Consolidated Balance Sheet as of March 31,
1997 (unaudited) F-44
EFCC's Condensed Consolidated Statements of Operations for
the three months ended March 31, 1997 and 1996 (unaudited) F-45
EFCC's Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1997 and 1996 (unaudited) F-46
EFCC's Notes to Unaudited Condensed Consolidated Financial
Statements for three months ended March 31, 1997 and 1996 F-47 - F-48
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Star Multi Care Services, Inc.
Hicksville, New York
We have audited the accompanying supplemental balance sheets of Star Multi Care
Services, Inc. as of May 31, 1996 and 1995 and the related supplemental
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended May 31, 1996. The supplemental
financial statements give retroactive effect to the merger of Star Multi Care
Services, Inc. and AMSERV HEALTHCARE, INC. on August 23, 1996, which has been
accounted for as a pooling of interests as described in Notes 1a and 2a to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests methods in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation; however, they will become the
historical consolidated financial statements of Star Multi Care Services, Inc.
after financial statements covering the date of consummation of the business
combination are issued. 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 did not audit the financial
statements of AMSERV HEALTHCARE, INC., which statements reflect total assets
constituting 34% in 1996 and 39% in 1995, and total revenues constituting 26% in
1996, 30% in 1995 and 25% in 1994 of the related consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included for AMSERV
HEALTHCARE, INC., is based solely on the report of other auditors.
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.
F-2
<PAGE>
In our opinion, based upon our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Star Multi Care
Services, Inc. at May 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
May 31, 1996, after giving retroactive effect to the merger with AMSERV
HEALTHCARE, INC., in conformity with generally accepted accounting principles
applicable after financial statements are issued for a period which includes the
date of consummation of the business combination.
/s/ Holtz Rubenstein & Co., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
July 19, 1996 (except for Notes 1a, 2a and 8,
as to which the date is August 23, 1996)
F-3
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
AMSERV HEALTHCARE INC.
We have audited the accompanying consolidated balance sheets of AMSERV
HEALTHCARE INC. as of May 31, 1996 and June 24, 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the period from June 25, 1995 to May 31, 1996 and the year ended June 24, 1995.
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. The financial statements of AMSERV HEALTHCARE INC. for the year
ended June 30, 1994, were audited by other auditors whose report dated October
7, 1994, expressed an unqualified opinion on those statements.
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 May 31, 1996 and June 24, 1995 financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of AMSERV HEALTHCARE INC. at May 31, 1996 and June 24, 1995, and the
consolidated results of its operations and its cash flows for the period from
June 25, 1995 to May 31, 1996 and for the year ended June 24, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
August 8, 1996
except for Note 6 and 13, as to which the date is
August 23, 1996
F-4
<PAGE>
REPORT OF DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
AMSERV HEALTHCARE INC.:
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of AMSERV HEALTHCARE INC. and subsidiaries (the "Company") for
the year ended June 30, 1994 (none of which are presented herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations of AMSERV HEALTHCARE INC. and
subsidiaries and their cash flows for the year ended June 30, 1994 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
October 7, 1994
F-5
<PAGE>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
----------------------------
ASSETS (Note 5) 1996 1995
- ------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,881,979 $ 1,496,792
Short-term investments (Note 3) 100,000 1,392,021
Accounts receivable, net of allowance for doubtful
accounts of $808,000 and $493,264 at May 31 1996 and
1995, respectively (Note 14) 9,611,169 6,715,907
Prepaid expenses and other current assets 800,665 346,629
Deferred income taxes (Note 9) 400,015 160,000
------------ ------------
Total current assets 12,793,828 10,111,349
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$706,818 and $519,896 at May 31, 1996 and 1995, respectively 766,480 648,154
NOTES RECEIVABLE FROM OFFICER (Note 12) 100,517 109,717
INTANGIBLE ASSETS, net (Note 4) 5,197,778 5,548,763
OTHER ASSETS 510,487 380,233
------------ ------------
$ 19,369,090 $ 16,798,216
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK
- ---------------------------------------
AND SHAREHOLDERS' EQUITY
------------------------
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 1,329,826 $ 1,454,732
Accounts payable and other accrued expenses 1,530,138 1,065,637
Net liabilities of discontinued operations (Note 7) 98,081 391,770
Income taxes payable (Note 9) 295,647 300,440
Current maturities of long-term debt (Note 6) 125,000 125,000
------------ ------------
Total current liabilities 3,378,692 3,337,579
------------ ------------
LONG-TERM LIABILITIES:
Revolving credit line (Note 5) 3,280,000 1,750,000
Long-term debt (Note 6) 250,000 375,000
Deferred income taxes (Note 9) 39,909 --
Other long-term liabilities 33,970 30,859
------------ ------------
Total long-term liabilities 3,603,879 2,155,859
------------ ------------
REDEEMABLE PREFERRED STOCK: (Note 8)
Preferred stock, $.01 par value; authorized 3,000,000 shares:
Class A; issued and outstanding 341,435 shares -- 3,414
Class B; issued and outstanding 130,071 shares 1,301 --
Additional paid-in capital 340,135 679,456
------------ ------------
Total redeemable preferred stock 341,436 682,870
------------ ------------
COMMITMENTS AND CONTINGENCY (Notes 2, 15 and 16)
SHAREHOLDERS' EQUITY: (Notes 2, 10, 11, and 12)
Preferred stock, $1.00 par value, 5,000,000 shares authorized -- --
Common stock, $.001 par value, 10,000,000 shares authorized;
3,820,358 and 3,604,050 shares issued, respectively 3,820 3,604
Additional paid-in capital 13,288,607 11,882,682
Subscription receivable (397,782) (198,440)
Unrealized (loss) on short-term investments (6,000) (14,564)
Deficit (564,640) (772,452)
Treasury stock, 137,500 common shares at May 31, 1996 and 1995 (278,922) (278,922)
------------ ------------
Total shareholders' equity 12,045,083 10,621,908
------------ ------------
$ 19,369,090 $ 16,798,216
============ ============
</TABLE>
See notes to supplemental consolidated financial statements
F-6
<PAGE>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
May 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES, net (Note 14) $ 49,162,934 $ 38,430,035 $ 29,694,178
------------ ------------ ------------
OPERATING EXPENSES (Notes 12, 16 and 17)
Costs of revenues 31,943,356 24,854,524 19,333,452
Selling, general and administrative 14,634,533 11,569,405 9,057,610
Depreciation and amortization 752,758 755,449 726,978
------------ ------------ ------------
47,330,647 37,179,378 29,118,040
------------ ------------ ------------
INCOME FROM OPERATIONS 1,832,287 1,250,657 576,138
INTEREST (EXPENSE) INCOME, net (120,184) (20,583) 67,240
------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 1,712,103 1,230,074 643,378
PROVISION FOR INCOME TAXES (Note 9) 568,844 472,038 285,832
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 1,143,259 758,036 357,546
DISCONTINUED OPERATIONS: (Note 7)
Loss from discontinued operations, net of income taxes of
($ 282,401) -- -- (710,636)
Gain (loss) on disposal of discontinued operations, net
of income taxes of $168,211 in 1995 and ($77,110) in 1994 -- 30,302 (1,167,949)
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,143,259 788,338 (1,521,039)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Notes 3 and 9) -- 23,683 65,000
------------ ------------ ------------
NET INCOME (LOSS) $ 1,143,259 $ 812,021 $ (1,456,039)
============ ============ ============
NET INCOME PER COMMON SHARE:
Primary:
Income from continuing operations and before cumulative
effect of accounting change $ .29 $ .20 $ .10
Loss from discontinued operations -- -- (.20)
Gain (loss) on disposal of discontinued operations -- .01 (.33)
Cumulative effect of change in accounting principle -- .01 .02
------------ ------------ ------------
Net income (loss) $ .29 $ .22 $ (.41)
============ ============ ============
Assuming full dilution:
Income from continuing operations and before
cumulative effect of accounting change $ .28 $ .20 $ .10
Loss from discontinued operations- -- -- (.20)
Gain (loss) on disposal of discontinued operations -- .01 (.33)
Cumulative effect of change in accounting principle -- .01 .02
------------ ------------ ------------
Net income (loss) $ .28 $ .22 $ (.41)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary 3,996,993 3,772,926 3,529,377
============ ============ ============
Assuming full dilution 4,011,503 3,798,581 3,529,377
============ ============ ============
</TABLE>
See notes to supplemental consolidated financial statements
F-7
<PAGE>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Note 10)
[PART 1 OF 2]
<TABLE>
<CAPTION>
COMMON STOCK Additional Unrealized
--------------------------- Paid-in Subscription (Loss) on
SHARES PAR VALUE CAPITAL RECEIVABLE INVESTMENTS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1993, as previously reported 1,445,000 $ 1,445 $ 4,842,513 $ -- $ --
Pooling of interest with AMSERV Healthcare, Inc.
(Note 2) 1,204,311 1,204 6,107,556 -- --
------------ ------------ ------------ ------------ ------------
Balance, May 31, 1993, as adjusted 2,649,311 2,649 10,950,069 -- --
Purchase of treasury stock -- -- -- -- --
Stock split 722,500 723 (723) -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, May 31, 1994 3,371,811 3,372 10,949,346 -- --
Purchase of treasury stock -- -- -- -- --
Exercise of stock options 19,000 19 36,145 -- --
Exercise of stock options on pooled company including
income tax benefit 84,892 85 416,018 (198,440) --
Stock dividend 128,347 128 481,173 -- --
Cumulative effect of change in accounting principle -- -- -- -- (23,683)
Change in unrealized loss on short-term investments -- -- -- -- 9,119
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, May 31, 1995 3,604,050 3,604 11,882,682 (198,440) (14,564)
Adjustment to conform fiscal year of AMSERV
Healthcare, Inc. -- -- -- -- --
Exercise of stock options 17,287 17 40,611 -- --
Exercise of stock options on pooled company including
income tax benefit 62,931 63 293,741 (199,342) --
Stock dividend 136,090 136 1,071,573 -- --
Change in unrealized loss on short-term investments -- -- -- -- 8,564
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, May 31, 1996 3,820,358 $ 3,820 $ 13,288,607 $ (397,782) $ (6,000)
============ ============ ============ ============ ============
</TABLE>
[PART 2 OF 2]
<TABLE>
<CAPTION>
Retained TREASURY STOCK Total
Earnings --------------------------- Shareholders'
(DEFICIT) SHARES VALUE EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, May 31, 1993, as previously reported $ 171,738 45,000 $ (105,000) $ 4,910,696
Pooling of interest with AMSERV Healthcare, Inc.
(Note 2) 181,129 -- -- 6,289,889
------------ ------------ ------------ ------------
Balance, May 31, 1993, as adjusted 352,867 45,000 (105,000) 11,200,585
Purchase of treasury stock -- 90,000 (167,985) (167,985)
Stock split -- -- -- --
Net loss (1,456,039) -- -- (1,456,039)
------------ ------------ ------------ ------------
Balance, May 31, 1994 (1,103,172) 135,000 (272,985) 9,576,561
Purchase of treasury stock -- 2,500 (5,937) (5,937)
Exercise of stock options -- -- -- 36,164
Exercise of stock options on pooled company including
income tax benefit -- -- -- 217,663
Stock dividend (481,301) -- -- --
Cumulative effect of change in accounting principle -- -- -- (23,683)
Change in unrealized loss on short-term investments -- -- -- 9,119
Net income 812,021 -- -- 812,021
------------ ------------ ------------ ------------
Balance, May 31, 1995 (772,452) 137,500 (278,922) 10,621,908
Adjustment to conform fiscal year of AMSERV
Healthcare, Inc. 136,262 -- -- 136,262
Exercise of stock options -- -- -- 40,628
Exercise of stock options on pooled company including
income tax benefit -- -- -- 94,462
Stock dividend (1,071,709) -- -- --
Change in unrealized loss on short-term investments -- -- -- 8,564
Net income 1,143,259 -- -- 1,143,259
------------ ------------ ------------ ------------
Balance, May 31, 1996 $ (564,640) 137,500 $ (278,922) $ 12,045,083
============ ============ ============ ============
</TABLE>
See notes to supplemental consolidated financial statements
F-8
<PAGE>
STAR MULTI CARE SERVICES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
May 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,143,259 $ 812,021 $(1,456,039)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Provision for doubtful accounts 511,736 196,309 255,446
Depreciation and amortization 722,609 755,449 902,406
Deferred income taxes (200,106) (12,765) (11,000)
AMSERV fiscal year conversion 136,262 -- --
Loss on disposal of equipment -- 47,286 45,078
(Gain) loss on disposal of discontinued operations -- (30,302) 1,167,949
Cumulative effect of change in accounting -- (23,683) (65,000)
principles
Write-off of intangibles -- -- 137,616
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (3,406,998) (357,874) (1,746,575)
Prepaid expenses and other assets (584,290) 122,811 (134,455)
Valuation allowance (16,902) -- --
Increase (decrease) in liabilities:
Accounts payable and accrued payroll and 257,250 369,760 243,632
expenses
Income taxes payable (4,793) 104,903 140,653
Other liabilities (14,544) 238,812 94,122
Loss contracts and unfavorable leases -- -- (44,000)
----------- ----------- -----------
Total adjustments (2,599,776) 1,410,706 985,872
----------- ----------- -----------
Net cash (used in) provided by operating (1,456,517) 2,222,727 (470,167)
----------- ----------- -----------
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (992,999) (1,586,285) (497,125)
Proceeds from sale of short-term investments 2,310,486 880,000 268,750
Purchase of intangibles (82,403) (14,829) --
Repayment on note receivable from officer 9,200 15,506 4,777
Purchase of property and equipment (307,547) (398,332) (152,545)
Business acquisitions -- (1,215,770) (1,469,839)
Payment of costs related to discontinued operations (293,689) (508,587) --
Proceeds from sale of discontinued operations -- 813,941 --
Cash received on notes receivable -- 50,411 191,504
Proceeds from sale of property and equipment -- 31,851 4,034
Payment of earnout advance -- (500,000) --
----------- ----------- -----------
Net cash provided by (used in) investing activities 643,048 (2,432,094) (1,650,444)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit line 1,530,000 800,000 950,000
Repayment of long-term debt (125,000) (166,666) --
Proceeds from the exercise of stock options 135,090 253,827 --
Redemption of Class A preferred shares -- (170,718) --
Redemption of Class B preferred shares (341,434) -- --
Repayment of note payable -- (73,349) (57,238)
Issuance of note payable -- -- 130,587
Purchase of treasury stock -- (5,937) (167,985)
----------- ----------- -----------
</TABLE>
See notes to supplemental consolidated financial statements
F-9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net cash provided by financing activities 1,198,656 637,157 855,364
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND 385,187 427,790 (1,265,247)
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of 1,496,792 1,069,002 2,334,249
----------- ----------- -----------
year
CASH AND CASH EQUIVALENTS, end of year $ 1,881,979 $ 1,496,792 $ 1,069,002
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 858,932 $ 526,784 $ 218,294
=========== =========== ===========
Interest paid $ 280,000 $ 117,289 $ 40,421
=========== =========== ===========
</TABLE>
See notes to supplemental consolidated financial statements
F-10
<PAGE>
STAR MULTI CARE SERVICES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED MAY 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. BASIS OF PRESENTATION
The supplemental consolidated financial statements of Star Multi
Care Services, Inc. have been prepared to give retroactive effect to the merger
with AMSERV HEALTHCARE, INC. ("AMSERV") on August 23, 1996, which has been
accounted for as a pooling of interests as described in Note 2. Generally
accepted accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests methods in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Star Multi Care
Services, Inc. after financial statements covering the date of consummation of
the business combination are issued.
b. DESCRIPTION OF BUSINESS
The Company is principally engaged in providing temporary health
care personnel, including registered nurses, licensed practical nurses, nurses'
aides and respiratory therapists to hospitals, nursing homes, extended care
facilities and in-home patients in Florida, Ohio and the New York City
metropolitan area.
c. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Star Multi Care Services, Inc. and its subsidiaries (the "Company"), all of
which are wholly-owned. All significant intercompany transactions and accounts
have been eliminated.
d. REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Net revenue is recorded at the estimated net realizable amount
from patients, third-party payors and others for services rendered. A provision
for doubtful accounts is made for revenue estimated to be uncollectible and is
adjusted periodically based upon management's evaluation of current industry
conditions, historical collection experience and other relevant factors which,
in the opinion of management, deserve recognition in estimating the allowance
for doubtful accounts.
e. INVESTMENTS IN DEBT AND EQUITY SECURITIES
In July 1994, the Company has adopted Statement of Financial
Accounting Standard ("SFAS") No. 115, Accounting for Certain Investments in Debt
and Equity Securities. The Company has classified its investment securities as
available-for-sale and has recorded unrealized holding gains and losses as a
separate component of stockholders' equity. The cumulative effect of the change
in accounting principle resulted in an after-tax increase to income for
unrealized losses of $23,683 at June 1, 1994.
F-11
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
f. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The carrying amount
of assets and related accumulated depreciation and amortization are removed from
the accounts when such assets are disposed of, and the resulting gain or loss is
included in operations. Depreciation is computed by the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of the remaining life of the lease or the life of the
improvements.
g. INTANGIBLE ASSETS
Intangible assets are stated at acquisition cost and are being
amortized on a straight-line basis over their estimated useful lives.
h. CONTRACTUAL ADJUSTMENTS
Under Medicare, Medicaid and other cost-based reimbursement
programs, the Company is reimbursed for services rendered to covered program
patients as determined by reimbursement formulas. The differences between
established billing rates and the amounts reimbursable by the programs and
patient payments are recorded as contractual adjustments and deducted from
revenues.
Retroactively calculated third-party contractual adjustments are
accrued on an estimated basis in the period the related services are rendered.
Revisions to estimated contractual adjustments are recorded based upon audits by
third-party payors, as well as other communications with third-party payors such
as desk reviews, regulation charges and policy statements. These revisions are
made in the year such amounts are determined.
i. CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents.
j. INCOME TAXES
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Temporary differences and
carryforwards giving rise to deferred taxes primarily relate to the allowance
for doubtful accounts, depreciation and subsidiary net operating loss
carryforwards.
k. NET INCOME PER SHARE
Net income per share has been computed by dividing net income by
the weighted average number of common stock and common stock equivalents
outstanding during each period. Common stock equivalents represents the dilutive
effect of the assumed exercise of certain outstanding options and warrants.
F-12
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Cont'd)
l. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are utilized by the Company in
order to reduce the impact of changes in interest rates. The Company does not
hold or issue derivative financial instruments for trading purposes. Income and
expenses are recorded in the same category as that arising from the related
asset or liability being hedged. Gains realized on termination of interest rate
swap contracts are deferred and amortized over the remaining terms of the
original swap agreement. Costs of interest rate cap contracts are amortized over
the lives of the contracts.
m. 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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the period. Actual results may differ from those estimates.
n. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's
financial statements to conform with the classifications used in 1996.
2. MERGERS AND ACQUISITIONS:
a. MERGER
In February 1996, the Company entered into an Agreement and Plan
of Merger (the "Agreement") with AMSERV. On August 23, 1996 AMSERV was merged
with and into the Company. Under terms of the Agreement, each share of AMSERV
common stock was exchanged for .4090 shares of the Company's common stock. The
Company also assumed all outstanding options and other rights to acquire AMSERV
stock. Approximately 1,360,000 shares of the Company's common stock were
exchanged for all of the outstanding stock of AMSERV. The merger qualified as a
tax-free reorganization and was accounted for as a pooling of interests, and
accordingly, the accompanying supplemental financial statements have been
restated to include the accounts and operations of AMSERV for all periods prior
to the merger.
AMSERV changed its year end to May 31 for fiscal 1996, utilized
a 52/53 week fiscal year end for fiscal 1995 and a June 30 year end for fiscal
1994. AMSERV's statements of operations for the years ended June 24, 1995 and
June 30, 1994 have been combined with Star's statements of operations for the
fiscal years ended May 31, 1995 and 1994, respectively. In order to conform
AMSERV's year end to Star's fiscal year end, the supplemental consolidated
statement of operation for fiscal year ended May 31, 1996 includes four weeks
(June 1, 1995 to June 24, 1995) for AMSERV which are also included in the
supplemental consolidated statement of operation for fiscal year ended May 31,
1995. Accordingly, an adjustment has been made in fiscal 1996 to retained
earnings for the duplication of net loss of ($136,262) for such four week
period. Other results of operations for such four week period of AMSERV include
net revenues of $1,113,322, depreciation and amortization of $30,149, loss
before taxes of ($199,624) and income tax benefit of $63,362.
F-13
<PAGE>
2. MERGERS AND ACQUISITIONS: (Cont'd)
Separate approximated net revenues and net income/(loss) amounts
of the merged entities for the period prior to the merger are as follows:
Year Ended
MAY 31, 1996
------------
Net revenues:
Star Multi Care Services, Inc. $36,339,000
AMSERV HEALTHCARE, INC 12,823,000
$49,162,000
Net income:
Star Multi Care Services, Inc. $ 1,046,000
AMSERV HEALTHCARE, INC 97,000
-----------
$ 1,143,000
===========
b. ACQUISITIONS
In May 1995, the Company acquired certain assets of Long Island
Nursing Registry, Inc. ("LINR") for approximately $1,716,000, including
acquisition costs of approximately $100,000. The assets purchased consisted of
customers and patient lists of $1,156,000, nurses lists of $250,000, covenant
not-to-compete of $150,000, furniture and office equipment of $25,000 and
goodwill of $35,000.
In June 1994, the Company acquired substantially all the assets
and property of North Central Personnel, Inc. ("North Central"). The acquisition
had an initial purchase price of $1,553,835. The Company paid $553,835 of the
purchase price with cash, and the balance of $1,000,000 was financed by a
promissory note payable to the seller. The final purchase price is contingent on
an earnout, of which $500,000 was earned in 1995 and $100,000 was earned as of
May 31, 1996. The remaining earnout will not exceed $400,000. The excess of the
purchase price over the valuation of tangible assets was assigned to goodwill
($1,047,000) and a non-competition agreement ($25,000). The earnout advance and
all future earnout payments will be accounted for as additional purchase price
of North Central.
In November 1993, the Company acquired certain assets of DSI
Home Care Services, Inc. for approximately $725,000, including acquisition costs
of $175,000. The assets purchased consisted of customer and patient lists of
$400,000, nurses lists of $120,000, furniture and office equipment of $30,000
and goodwill of $175,000.
The above acquisitions have been accounted for utilizing
purchase accounting principles. Accordingly, the results of operations have been
included in the accompanying consolidated financial statements since the date of
acquisition.
F-14
<PAGE>
3. SHORT-TERM INVESTMENTS:
Short-term investments are recorded at estimated fair market values at
May 31, 1996 and 1995. The Company has classified all of its investments as
available-for-sale securities according to Statement of Financial Accounting
Standards ("SFAS") No. 115. The following table summarizes available-for-sale
securities:
May 31, 1996
--------------------------------------
Gross
Unrealized Estimated
Cost Losses Fair Value
---------- ---------- ----------
Common stock $ 110,000 $ 10,000 $ 100,000
========== ========== ==========
May 31, 1995
--------------------------------------
Gross
Unrealized Estimated
Cost Losses Fair Value
---------- ---------- ----------
Money market/non-gov't securities $ 453,903 $ 2,494 $ 451,409
Tax exempt government bonds 605,020 158 604,862
Common stock 110,000 23,000 87,000
Preferred stock 250,000 1,250 248,750
---------- ---------- ----------
Total $1,418,923 $ 26,902 $1,392,021
========== ========== ==========
As a result of the adoption of SFAS No. 115 during the year ended May
31, 1995, the Company records net unrealized holding gains and losses, net of
income tax effects, as a separate component of shareholders' equity. Previously,
unrealized losses had been charged to operations. The cumulative effect of this
change in accounting principle resulted in an after-tax adjustment to earnings
of $23,683 at June 1, 1994.
A net realized loss on sales of available-for-sale securities of $10,098
was recognized in the year ended May 31, 1996. A net realized gain of $2,413 was
recognized in the year ended May 31, 1995 and a net realized loss of $11,250 was
recognized in the year ended May 31, 1994.
F-15
<PAGE>
4. INTANGIBLE ASSETS:
Intangible assets are as follows:
MAY 31,
AMORTIZATION ------------------------
PERIOD 1996 1995
---------- ---------- ----------
Goodwill 25 - 37 $2,989,000 $2,895,000
Customer contracts 11 - 15 2,225,000 2,225,000
Covenants not-to-compete 2 -8 1,100,000 1,125,000
Nurses' list 9 - 15 703,000 703,000
Accreditation and training programs 5 503,000 503,000
Assembled workforce 5 497,000 497,000
Other 2 - 10 127,000 49,000
---------- ----------
8,144,000 7,997,000
Less accumulated amortization 2,946,000 2,448,000
---------- ----------
$5,198,000 $5,549,000
========== ==========
5. REVOLVING CREDIT LINE:
The Company has a $6.0 million line of credit with a bank which bears
interest at 1/4% above the bank's prime lending rate (8 1/4% at May 31, 1996)
and matures on October 31, 1997, at which time it may be converted into a three
year term loan which will bear interest at 1/2% above the bank's prime lending
rate. The facility is renewable at the sole discretion of the bank. All loans
under the line of credit are collateralized by all assets of the Company. The
Company can borrow against the line to the extent of 80% of eligible accounts
receivable (120 days and under, net of contractual allowances).
Under the line of credit agreement, the Company can from time to time
borrow at a rate based on the bank's money market rate (5.31% at May 31, 1996)
plus 2 3/4% for a period no less than three months. At May 31, 1996, $2,900,000
was at the money market rate and the remainder of the outstanding credit line of
$380,000 was at prime plus 1/4%.
6. LONG-TERM DEBT:
Long-term debt consists of a note payable in monthly installments of
$10,417 through May 1999. Interest is payable monthly at 8.5%. The note was
issued in connection with the acquisition discussed in Note 8.
F-16
<PAGE>
6. LONG-TERM DEBT: (Cont'd)
Long-term debt matures as follows:
Years Ending
May 31,
------------
1997 $125,000
1998 125,000
1999 125,000
--------
$375,000
========
7. DISCONTINUED OPERATIONS:
On September 20, 1994, the Company signed a Letter of Intent to sell its
temporary nursing services business. As a result, the Company recorded a fiscal
1994 charge of $1,167,949 (after income tax benefit of $77,110) to provide for a
loss on the disposal of this discontinued operations and the after-tax estimated
operating losses of $149,627 until the estimated date of disposal. On November
9, 1994, the Company completed this transaction, and sold substantially all of
the fixed and intangible assets of its temporary nursing services business for
$814,000. The related net liabilities for this discontinued operation are
included in the balance sheet under the caption, "Net liabilities of
discontinued operations." The balance remaining unpaid at May 31, 1996 and 1995,
relates to various state and local tax and payroll liabilities that have not
been finalized and a remaining severance obligation. The consolidated statements
of operations for the years ended May 31, 1996, 1995 and 1994, exclude sales and
expenses for its temporary nursing services business from captions applicable to
continuing operations. Revenues from the discontinued operation during fiscal
1995 were $3,988,696. Operating results of the discounted operation for fiscal
1994 is summarized below:
May 31,
1994
------------
Net sales $ 12,022,618
Loss before income taxes $ (993,037)
Income tax benefit $ (282,401)
Loss from discontinued operations $ (710,636)
8. REDEEMABLE PREFERRED STOCK:
In April 1995, the Company issued 426,794 shares of its voting Class A
Redeemable Preferred Stock, which had a redemption value of $2.00 per share, in
exchange for a promissory note payable in connection with the purchase of North
Central and related accrued interest which totalled $853,588 on the date of the
exchange. The preferred shares paid no dividends and could be redeemed at the
option of the holder, in specified installments for cash. On May 29, 1995,
85,359 shares were redeemed for $170,718. On July 6, 1995, the remaining 341,435
Class A Redeemable Preferred Shares were exchanged for 260,141 Class B
Redeemable preferred Shares, with a redemption price of $2.625 per share and an
aggregate redemption value of $682,870. During the current fiscal period,
130,070 shares have been redeemed for $341,434. As of May 31, 1996, the
remaining 130,071 shares with an aggregate redemption value of $341,436 may be
redeemed in installments of approximately 65,000 shares on or after November 29,
1996 and May 29, 1997, at the option of the holder. All outstanding Class B
shares become redeemable in the event of default or change of control. As a
result of the
F-17
<PAGE>
8. REDEEMABLE PREFERRED STOCK: (Cont'd)
merger with AMSERV (Note 2), the holder of the preferred shares called for
redemption, which was paid in full on August 23, 1996. Holders of all classes of
Redeemable Preferred Stock have the same voting rights as common stock.
9. INCOME TAXES:
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires
a liability approach to financial accounting and reporting for income taxes. The
effect of adopting SFAS No. 109 on net income for the year ended May 31, 1994
was an increase of $76,000, which includes an increase in net income of $65,000
for the cumulative effect on years prior to June 1, 1993. As permitted under the
standard, the financial statements for the prior year have not been restated.
The provision for income taxes from continuing operations consists of
the following:
YEARS ENDED MAY 31,
-------------------------------------------
1996 1995 1994
--------- --------- ---------
Current:
Federal $ 551,758 $ 314,781 $ 215,832
State and local 217,192 170,022 81,000
--------- --------- ---------
768,950 484,803 296,832
--------- --------- ---------
Deferred:
Federal (197,498) (8,765) (8,000)
State (2,608) (4,000) (3,000)
--------- --------- ---------
(200,106) (12,765) (11,000)
--------- --------- ---------
$ 568,844 $ 472,038 $ 285,832
========= ========= =========
The components of the net deferred tax asset are as follows:
MAY 31,
-----------------------
1996 1995
-------- --------
Deferred tax assets:
Allowance for doubtful accounts $296,772 $201,448
Reserve for discontinued operations 35,099 157,249
Accrued expenses 111,811 102,190
Tax credits 71,973 92,696
Net operating loss carryfoward 11,440 9,060
Other 19,313 26,064
-------- --------
546,408 588,707
-------- --------
F-18
<PAGE>
9. INCOME TAXES: (Cont'd)
MAY 31,
---------------------------
1996 1995
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (143,322) (54,069)
Prepaid expenses (42,908) (38,874)
--------- ---------
(186,302) (92,943)
Valuation allowance -- (335,764)
--------- ---------
(186,302) (428,707)
--------- ---------
Net deferred tax asset $ 360,106 $ 160,000
========= =========
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory federal income tax rate to income before
taxes is as follows:
Years Ended May 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
Computed federal income tax at
statutory rates $ 582,115 $ 419,035 $ 218,025
State taxes, net of federal benefits 158,200 108,015 53,000
Items without tax benefit 103,856 51,552 32,000
Valuation allowance (335,764) (77,687) 4,922
Other, net 60,437 (28,877) (22,115)
--------- --------- ---------
$ 568,844 $ 472,038 $ 285,832
========= ========= =========
F-19
<PAGE>
10. SHAREHOLDER'S EQUITY:
a. WARRANTS
Pursuant to the Company's common stock offering in May 1991, the
Company issued to the underwriter warrants to purchase 112,922 shares of the
Company's common stock. The warrants, which contain certain anti-dilution
provisions have an exercise price of $4.98 per share. Warrants totalling 11,292
were cancelled in May 1996, the remaining 101,630 warrants were extended until
May 1999.
b. PREFERRED STOCK
On November 23, 1993, shareholders voted to amend the Company's
Certificate of Incorporation to create five million shares of preferred stock,
$1.00 par value, which the Board of Directors has authority to issue from time
to time in series. The Board of Directors also has the authority to fix, before
the issuance of each series, the number of shares in each series and the
designation, preferences, rights and limitations of each series. To date, no
shares of preferred stock have been issued.
c. STOCK DIVIDEND
On December 5, 1995, the Company's Board of Directors approved a
stock dividend on January 12, 1996 for shareholders of record as of December 22,
1995. A total of 136,090 shares of common stock were issued in connection with
the dividend. Common stock has been adjusted for the par value of the shares
issued. Additional paid in capital and retained earnings have been adjusted for
the difference between the fair market value and the par value of the shares.
On April 24, 1995, the Company's Board of Directors approved a
stock dividend payable on May 30, 1995 for shareholders of record as of May 15,
1995. A total of 128,347 shares of common stock were issued in connection with
the dividend. Common stock has been adjusted for the par value of the shares
issued. Additional paid-in capital and retained earnings have been adjusted for
the difference between the fair market value and the par value of the shares.
On April 12, 1994, the Company's Board of Directors approved a
stock split of the Company's common stock for shareholders of record as of April
29, 1994. A total of 722,500 shares of common stock were issued in connection
with the split. Common stock and additional paid-in capital have been adjusted
for the par value of the additional shares issued.
All references in the accompanying financial statements to the
number of common shares and per share amounts for all periods presented have
been restated to reflect the stock dividends.
11. STOCK OPTION PLANS:
The Company has three stock option plans (the "Plans") as adopted and as
adjusted for stock dividends. Participants may be granted either Incentive Stock
Options or Non-Qualified Stock Options to purchase an aggregate of 1,234,685
shares of common stock. The purpose of the Plans are to promote the overall
financial objectives of the Company and its shareholders by motivating those
persons selected to participate in the Plans to achieve long-term growth in
shareholder equity in the Company and by retaining the association of those
individuals who are instrumental in achieving this growth. Such options become
exercisable at various intervals based upon vesting schedules as determined by
the Compensation Committee. The options expire between November 1997 and May
2005.
F-20
<PAGE>
11. STOCK OPTION PLANS: (Cont'd)
The incentive stock options may be granted to employees and consultants
of the Company at a price not less than the fair market value on the date of
grant. All such options are authorized and approved by the Board of Directors,
based on recommendations of the Compensation Committee.
Information as to options granted is summarized as follows:
Exercise
Shares Price
---------- --------------
Outstanding, June 1, 1993 597,376 $1.44 - $15.60
Granted 254,256
Canceled and expired (46,153)
----------
Outstanding, May 31, 1994 805,379 $1.44 - $15.60
Granted 33,671
Exercised (105,033)
Canceled and expired (46,115)
----------
Outstanding, May 31, 1995 687,902 $1.44 - $15.60
Granted 98,302
Canceled and expired (17,963)
Exercised (80,218)
----------
Outstanding, May 31, 1996 688,023 $1.44 - $7.64
==========
Exercisable 621,297 $1.44 - $7.64
==========
Shares reserved for future issuance at May 31, 1996 are comprised of the
following:
Shares issuable upon exercise of
stock option under the plans 1,222,000
Shares issuable upon exercise of
warrants by underwriter 102,000
Shares issuable under the Company's
employee stock purchase plan 318,000
---------
1,642,000
=========
In November 1995, the Company adopted an Employee Stock Purchase Plan
whereby certain employees can purchase shares of common stock at the lesser of
85% of fair market value of the stock at the beginning or end of the calendar
year.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, which requires companies to measure employee stock compensation
based on the fair value method of accounting, or to use the intrinsic value
method prescribed in Accounting Principles Board Option No. 25 and to provide
pro forma footnote disclosures under the fair value
F-21
<PAGE>
11. STOCK OPTION PLANS: (Cont'd)
method in SFAS No. 123. The Company will adopt the new standard in fiscal 1997
and expects to elect the continued use of APB Opinion No. 25.
12. RELATED PARTY TRANSACTIONS:
a. NOTES RECEIVABLE FROM OFFICER
Notes receivable from officer of $100,517 represents amounts
loaned by the Company and/or subsidiaries of the Company to the Company's
President. These notes bear interest at 6% and mature August 1, 1998. All
interest has been paid through May 31, 1996.
b. STOCK SUBSCRIPTION RECEIVABLE
On April 20, 1995, the Company accepted a non-recourse
promissory note from the former Chief Executive Officer of AMSERV, Eugene J.
Mora, in the original principal amount of $198,440, bearing interest at a rate
of 10% per annum and maturing in April 2000, and $1,100 in cash for the exercise
of options for 44,990 shares of the Company's common stock. The promissory note
is secured by 72,623 shares of the Company's common stock owned by Mr. Mora. On
January 16, 1996, the promissory note was amended to become a recourse
promissory note, secured by 44,990 shares of common stock owned by Mr. Mora,
with interest at a rate of 5.73% per annum. Also on January 16, 1996, the
Company accepted an additional recourse promissory note from Mr. Mora in the
original principal amount of $199,342, bearing interest at a rate of 5.73% per
annum and maturing in January 2001, and $1,105 in cash for the exercise of
options for 45,194 shares of the Company's common stock..
c. SERVICES
A director provides accounting services to the Company for which
he was compensated approximately $100,000 in each of the years 1996, 1995 and
1994.
A former director of AMSERV, provided certain legal services to
the Company. The Company incurred legal fees with such firm of $7,027, $114,208
and $39,272 for fiscal years 1996, 1995 and 1994, respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1995, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 107, Disclosure about Fair Value of Financial Instruments, which
requires disclosures about the fair value of the Company's financial
instruments. The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables and payables and certain other short-term financial
instruments approximate their fair value.
Long-Term Debt: The fair value of the Company's long-term debt,
including the current portions, was estimated using a discounted cash
flow analysis, based on the Company's assumed incremental borrowing
rates for similar types of borrowing arrangements. The carrying amount
of variable and fixed rate debt at May 31, 1996 approximates its fair
value.
F-22
<PAGE>
14. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS:
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of trade accounts receivable
and temporary cash investments.
The Company provides temporary health care personnel to hospitals,
nursing homes, extended care facilities and in-home patients in Florida, New
Jersey and the New York City metropolitan area. At May 31, 1996, approximately
30% of accounts receivable was due from Medicaid and approximately 8% of
accounts receivable was due from Medicare. Credit losses relating to customers
historically have not been significant and within management's expectations.
The Company places it temporary cash investments with high credit
quality financial institutions.
15. CONTINGENCIES:
The Company in the past treated certain of its nurses and certain others
as independent contractors. The Internal Revenue Service ("IRS") and the New
York State Department of Labor ("DOL") have, in certain cases, determined that
per diem health care workers were employees, and not independent contractors, of
the firm placing them. Two of the Company's subsidiaries have been selected for
an employment tax audit by DOL and another of the Company's subsidiaries has
been selected for an employment tax audit by the IRS.
In October 1994, the subsidiary subjected to the IRS audit received from
the IRS a formal report proposing an adjustment in taxes of $1,222,220 for years
1989-1993. On October 12, 1995, that subsidiary signed a closing agreement with
the IRS providing for zero tax liability for the years 1989-1995. The subsidiary
has agreed to treat all skilled nurses providing hospital staffing services as
employees for federal employment tax purposes commencing January 1, 1996. As
skilled hospital staffing services currently represents only 3% of revenues this
change is not expected to have a significant impact on earnings.
In May 1993, one of the Company's subsidiaries received from the DOL a
formal report proposing an adjustment in the amount of $73,000. In January 1994,
the other of the Company's subsidiaries received from the DOL a formal report
proposing an adjustment in the amount of $33,000. The Company prevailed before
the hearing examiner in the latter of these cases, which decision is presently
being appealed by the DOL, and the Company is vigorously defending its position.
The Company did not prevail in the former case and is currently appealing that
decision. Management believes that the possibility of an unfavorable outcome
which would materially affect the financial position and results of operations
of the Company is remote.
16. COMMITMENTS:
a. EMPLOYMENT AGREEMENT
The Company has an employment agreement, as amended, with an
officer which expires in December 2000. The aggregate commitment for
future salary, excluding bonuses, under the agreement is $1,125,000. The
agreement also provides for certain bonuses based upon annual pretax
income. The Company has an employment agreement with a former LINR
shareholder which expires May 1997. The aggregate commitment for future
salary under the agreement is $100,000. The aggregate minimum commitment
for future salaries under both agreements are as follows:
F-23
<PAGE>
16. COMMITMENTS: (Cont'd)
Years Ending
May 31,
------------
1997 $ 350,000
1998 250,000
1999 250,000
2000 250,000
2001 125,000
----------
$1,225,000
==========
Under the Merger Agreement with AMSERV, Star has agreed to honor the
provisions of certain agreements with AMSERV's chief executive officer. Pursuant
to these agreements, if AMSERV's chief executive officer is terminated without
cause, AMSERV is obligated to pay the chief executive officer the compensation
he earned in the final year of his employment in each of the immediately
following five years and transfer certain life insurance policies owned by the
Company. In 1996, compensation earned by the chief executive officer was
approximately $300,000.
b. LEASES
The Company conducts its operations from leased office space
under various operating leases which expire at various dates through 2002.
Management expects that in the normal course of business these leases will be
renewed or replaced by other leases.
As of May 31, 1996 future net minimum rental payments (net of
sublease income) under operating leases having initial or remaining
noncancellable terms in excess of one year are as follows:
1997 $ 718,000
1998 643,000
1999 587,000
2000 230,000
2001 144,000
2002 75,000
----------
$2,397,000
==========
Rental expenses for operating leases for fiscal years ended
1996, 1995 and 1994 were approximately $731,000, $519,000 and $470,000,
respectively.
c. GUARANTY
In connection with the sale of a business in 1992, the Company
has guaranteed certain lease payments. The amount of future lease payments
guaranteed by the Company totalled $290,836 at May 31, 1996 and are payable
through September 1998.
F-24
<PAGE>
17. RETIREMENT PLANS:
The Company adopted a 401(k) savings plan in January 1995 covering all
eligible employees. Employees may defer up to 15% of their compensation. The
Company will match 10% of employees' contributions up to 8%. Contributions for
the year ended May 31, 1996 approximated $17,000.
A division of the Company has a deferred fringe benefits welfare
compensation plan covering substantially all of its employees. Contributions to
the plan are discretionary and are based on employee compensation. The plan was
amended in November 1995 to increase the vesting period of new entrants. New
entrants vest fully after 10 years of service, and participants prior to the
amendment vest fully after three years of service. Contributions to the plan for
1996, 1995 and 1994 approximated $233,000, $264,000 and $222,000, respectively.
18. SUPPLEMENTARY INFORMATION - STATEMENT OF CASH FLOWS:
During the years ended May 31, 1996 and 1995, the Company issued stock
dividends which amounted to $1,071,709 and $481,301, respectively. During the
years ended May 31, 1996 and 1995, the Company issued common stock upon the
exercise of stock options in exchange for notes receivable in the amount of
$199,342 and $198,440, respectively. During the year ended May 31, 1995, the
Company issued a note payable of $500,000 to finance a portion of the
acquisitions mentioned in Note 2. During the year ended May 31, 1995, the
Company issued $853,588 of Class A redeemable preferred stock in exchange for a
note payable and related accrued interest. During the year ended May 31, 1994.
the Company transferred $80,307 from accounts receivable to notes receivable.
19. FINANCIAL INSTRUMENTS:
On March 20, 1996, the Company entered into a two year notional amount
$1,500,000 interest rate swap with a bank, whereby the Company pays interest at
a fixed rate of 6.16% and receives interest at the three-month London Interbank
Offered Rate ("LIBOR"). The Company is exposed to credit loss in the event of
non-performance by the bank, however the Company does not anticipate a loss
resulting from this credit risk. The fair value of this financial instrument at
May 31, 1996 approximates $10,000.
F-25
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1997
(UNAUDITED)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 78,574
Accounts receivable, net of allowance for doubtful
accounts of $566,000 10,130,449
Prepaid expenses and other current assets 769,365
Income taxes receivable 28,997
Deferred income taxes 961,232
------------
Total current assets 11,968,617
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $871,610 916,281
NOTES RECEIVABLE FROM OFFICER 94,937
INTANGIBLE ASSETS, net 5,059,300
OTHER ASSETS 218,916
------------
$ 18,258,051
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accrued payroll and related expenses $ 1,241,205
Accounts payable and other accrued expenses 1,405,020
Current maturities of long-term debt 125,000
------------
Total current liabilities 2,771,225
LONG-TERM LIABILITIES:
Revolving credit line 1,997,000
Long-term debt 156,250
Other long-term liabilities 1,192,000
------------
Total long-term liabilities 3,345,250
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 5,000,000 shares
authorized --
Common stock, $.001 par value, 10,000,000 shares
authorized; 4,154,318 shares issued 4,154
Additional paid-in capital 14,925,603
Subscription receivable (397,782)
Deficit (2,111,477)
Treasury stock, 137,500 common shares at May 31, 1996 (278,922)
------------
Total shareholders' equity 12,141,576
$ 18,258,051
============
See accompanying notes to unaudited condensed consolidated financial statements
F-26
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
-----------------------------
February 28, February 29,
1997 1996
------------ ------------
REVENUES, net $ 39,163,979 $ 35,463,592
------------ ------------
OPERATING EXPENSES:
Costs of revenues 25,624,871 23,004,659
Selling, general and administrative 10,652,192 10,410,591
Depreciation and amortization 480,597 598,722
------------ ------------
36,757,660 34,013,972
------------ ------------
INCOME FROM OPERATIONS 2,406,319 1,449,620
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (164,518) (216,668)
Interest income 61,861 142,345
Merger transaction costs (2,808,223) --
------------ ------------
(2,910,880) (74,323)
------------ ------------
(LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES (504,561) 1,375,297
INCOME TAX BENEFIT (PROVISION) 207,000 (608,955)
------------ ------------
NET (LOSS) INCOME $ (297,561) $ 766,342
============ ============
NET (LOSS) INCOME PER COMMON SHARES $ (0.07) $ 0.18
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 4,278,169 4,257,046
============ ============
See accompanying notes to unaudited condensed consolidated financial statements
F-27
<PAGE>
STAR MULTI CARE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
February 28, February 29,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $ (297,561) $ 766,342
----------- -----------
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Provision for doubtful accounts 148,556 230,000
Depreciation and amortization 480,597 598,722
Deferred income taxes (601,126) --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (667,836) (2,918,989)
Prepaid expenses and other current assets 31,300 (225,216)
Income taxes receivable (28,997) --
Other assets 291,571 (60,108)
Increase (decrease) in liabilities:
Accounts payable and related expenses (88,621) 334,535
Accounts payable and other accrued expenses (125,118) 157,605
Income taxes payable (295,647) (53,127)
Other liabilities 1,158,030 17,386
----------- -----------
Total adjustments 302,709 (1,919,192)
----------- -----------
Net cash provided by (used in) operating activities 5,148 (1,152,850)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from short-term investments 106,000 1,089,179
Purchase of intangibles (177,327) (83,254)
Repayment on note receivable from officer 5,580 27,629
Purchase of property and equipment (314,593) (186,932)
Payment of costs related to discontinued operations (98,081) (306,747)
----------- -----------
Net cash (used in) provided by investing activities (478,421) 539,875
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) proceeds from revolving credit line (1,283,000) 1,500,000
Repayment of long-term debt (93,750) (93,750)
Proceeds from the exercise of stock options 388,054 296,130
Redemption of Class B preferred shares (341,436) (170,717)
----------- -----------
Net cash (used in) provided by financing activities (1,330,132) 1,531,663
----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,803,405) 918,688
CASH AND CASH EQUIVALENTS, beginning of period 1,881,979 1,496,792
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 78,574 $ 2,415,480
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Income taxes paid $ 600,000 $ 669,000
=========== ===========
Interest paid $ 173,000 $ 204,000
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
F-28
<PAGE>
STAR MULTI CARE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
1. ADJUSTMENTS:
In the opinion of management of Star Multi Care Services, Inc. ("Star"),
the accompanying unaudited condensed consolidated financial statements reflect
all adjustments necessary (which are of a normal recurring nature) to present
fairly Star's financial position as of February 28, 1997, and the results of
operations and cash flows for the nine month periods ended February 28, 1997 and
February 29, 1996. The unaudited condensed consolidated financial statements
contained herein should be read in conjunction with Star's audited consolidated
financial statements for the fiscal years ended May 31, 1996, included elsewhere
herein.
The results of operations for the nine month period ended February 28,
1997 are not necessarily indicative of the results to be expected for the full
year.
2. NET INCOME (LOSS) PER SHARE:
Net income (loss) per share for the periods are based on the weighted
average number of common and common stock equivalent shares outstanding. Certain
stock options were not included in the computation of net loss per share because
their effect would be antidilutive. Net income (loss) per share assuming full
dilution is the same as primary income (loss) per share)
3. MERGER:
On August 23, 1996, Star completed a merger (the "Amserv Merger"),
accounted for as a pooling of interest, to acquire AMSERV HEALTHCARE INC.
("Amserv"), a health care service company which provides home care services in
New Jersey and Ohio. In accordance with the Amserv Merger Agreement, each share
of common stock of Amserv outstanding immediately prior to consummation of the
Amserv Merger was converted into .4090 shares of common stock of Star The total
shares issued amounted to 1,410,731. Star also assumed all outstanding options
and other rights to acquire Amserv stock. Costs related to the Amserv Merger
amounted to $2,808,223. Unpaid amounts at February 28, 1997 have been included
in "accounts payable and other accrued expenses" and "other long-term
liabilities". See Note 7.
4. STOCK DIVIDEND:
Star declared a 5% stock dividend which was distributed on November 4,
1996 to shareholders of record as of October 11, 1996. A total of 188,570 shares
of common stock of Star were issued in connection with the dividend. Common
stock has been adjusted for the par value of the shares issued. Additional
paid-in capital and deficit have been adjusted for the difference between the
fair market value and the par value of the shares.
F-29
<PAGE>
5. SUBSEQUENT EVENT:
On January 3, 1997, Star entered into an agreement and plan of merger
(the "Merger Agreement") to acquire (the "Merger") Extended Family Care
Corporation ("EFCC"), a health care service company which provides home care
services in New Jersey, New York and Pennsylvania. In accordance with the Merger
Agreement, Star will pay $2,400,000 in cash (plus cash payments to dissenting
shareholders, if any) and $4,850,000 in stock (less the amount that would have
been paid to dissenting shareholders, if any) or cash at Star's option.
In connection with the Merger, Star and EFCC have entered into a
consulting agreement pursuant to which Star will render to EFCC Consulting and
Advisory Services in connection with the management, operation and supervision
of EFCC. The term of the consulting agreement shall end on the earlier of (i)
one year from signing of the Merger Agreement, (ii) the effective time of the
Merger or (iii) the termination of the Merger. In consideration for the
consulting services rendered by Star, EFCC will pay $25,000 per month payable
(a) $15,000 in arrears on the last day of each month and (b) the remaining
$10,000 on the earlier of the closing date or termination of the Merger
Agreement. As of February 28, 1997 $35,000 due from EFCC is included in prepaid
and other current assets. The Merger is subject to approval by the shareholders
of both companies and certain other conditions and is expected to be consummated
on or before September 15, 1997.
6. SUPPLEMENTARY INFORMATION - STATEMENT OF CASH FLOWS:
During the period ended February 28, 1997, Star issued a 5% stock
dividend which amounted to $1,249,276.
7. LITIGATION:
STAR is a defendant in a lawsuit filed on November 14, 1996 in San Diego
Superior Court, by Eugene J. Mora the former President and Chief Executive
Officer of Amserv for alleged breach of contract. The suit asks for damages
totaling approximately $2,300,000. STAR has accrued approximately $1,790,000,
included in "Accounts Payable and Other Accrued Expenses" and "Other Long-Term
Liabilities," in connection with this matter. The amount accrued is based upon
information which has been learned to date. As this case is in the early stages,
additional information may be learned in the future, which would require STAR to
modify this amount. Management does not believe that this matter will have a
material adverse impact on STAR.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Extended Family Care Corporation
We have audited the accompanying balance sheets of Extended Family Care
Corporation and subsidiary, as of December 31, 1996 and 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Extended Family Care Corporation, at December 31, 1996 and 1995 and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Carpenter & Onorato, P.C.
Carpenter & Onorato, P.C.
Certified Public Accountants
Garden City, NY 11530
February 18, 1997
F-31
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash $1,066,193 $ 511,563
Accounts receivable, net of allowance for doubtful accounts
of $100,000 for 1996 and 1995 (note 2) 1,066,277 895,131
Prepaid expenses and other current assets (note 9) 496,185 146,809
---------- ----------
Total current assets 2,628,655 1,553,503
Property and equipment, net (note 5) 233,644 118,591
Other assets:
Deferred tax asset (note 6) 204,000 259,000
License, net (notes 3) 476,153 515,832
Other 29,410 11,197
---------- ----------
Total assets $3,571,862 $2,458,123
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 223,362 $ 222,677
Accrued expenses (note 8) 586,396 543,974
Customer deposits 73,374 59,146
Notes payable (note 4) 43,449 148,449
Payroll taxes payable (note 8) 151,721 280,584
Current portion of obligations under capital leases 22,850 12,845
---------- ----------
Total current liabilities 1,101,152 1,267,675
Non-current liabilities
Long-term debt (note 4) 36,500 54,500
Obligations under capital leases 69,717 40,010
---------- ----------
Total non-current liabilities 106,217 94,510
---------- ----------
Total liabilities 1,207,369 1,362,185
Commitments and contingencies (notes 7, 8, 10 and 12)
Minority interest in subsidiary 139,649 140,008
---------- ----------
Shareholders' equity
Preferred stock, $.01 par value, 10,000,000 shares authorized in 1996
Common stock, $.01 par value, 50,000,000 shares authorized, 30,000,000
in 1996; 32,000,226 and 19,300,229 shares issued and outstanding,
respectively 320,002 194,506
Additional paid-in-capital 1,763,348 638,844
Retained earnings 141,494 122,580
---------- ----------
Total shareholders' equity 2,224,844 955,930
---------- ----------
Total liabilities and shareholders' equity $3,571,862 $2,458,123
========== ==========
</TABLE>
See accompanying notes to consolidated
financial statements.
F-32
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
Years Ended December 31,
1996 1995
------------ ------------
Net patient service revenue (note 2) $ 8,929,330 $ 7,367,958
------------ ------------
Cost of services:
Salaries 4,806,668 4,058,749
Payroll taxes and other 836,886 647,447
------------ ------------
Total cost of services 5,643,554 4,706,196
------------ ------------
Gross profit 3,285,776 2,661,762
Selling, general and administrative expenses 3,192,769 2,128,432
Provision for doubtful accounts 25,000 51,810
------------ ------------
Income from operations 68,007 481,520
Interest (income) expense, net (5,548) 4,320
------------ ------------
Income before provision for income
taxes and minority interest 73,555 477,200
Provision for income
taxes (note 6 ) 55,000 209,000
------------ ------------
Net income before minority interest 18,555 268,200
Minority interest in subsidiary net income (359) 46,398
------------ ------------
Net income $ 18,914 $ 221,802
============ ============
Primary earnings per share $ 0.0009 $ 0.0107
============ ============
Fully diluted earnings per share $ 0.0009 $ 0.0105
============ ============
Weighted average number of shares outstanding:
Primary 21,808,560 20,823,555
============ ============
Fully diluted 21,808,560 21,033,562
============ ============
See accompanying notes to
consolidated financial statements.
F-33
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Years Ended December 31, 1996 and 1995
Common Stock Total
-------------------------- Additional Retained Shareholders'
Shares Amount Paid-in Earnings Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1994 19,300,229 194,506 638,844 (99,222) 734,128
Net income -- -- -- 221,802 221,802
----------- ----------- ----------- ----------- -----------
December 31, 1995 19,300,229 194,506 638,844 122,580 955,930
Retired shares (300,003) (4,504) 4,504 -- --
Exercise of stock
options 13,000,000 130,000 1,120,000 -- 1,250,000
Net income -- -- -- 18,914 18,914
----------- ----------- ----------- ----------- -----------
December 31, 1996 32,000,226 $ 320,002 $ 1,763,348 $ 141,494 $ 2,224,844
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Statements of Cash Flows
Years Ended December 31,
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 18,914 $ 221,802
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Allowance for doubtful accounts -- 51,810
Depreciation and amortization 62,107 36,273
Amortization of intangible assets 39,680 39,679
Provision for income taxes 55,000 209,000
Minority interest in subsidiary net income (359) 46,398
Change in operating assets and liabilities:
(Increase) in assets:
Accounts receivable (171,146) (143,276)
Prepaid expenses (349,376) (74,053)
Security deposits (18,213) (4,074)
Increase (decrease) in liabilities:
Accounts payable (21,486) 17,982
Accrued expenses 42,422 218,290
Customer deposits 14,228 (12,124)
Payroll taxes payable (128,863) (52,274)
----------- -----------
Net cash (used in) provided by operating activities (457,092) 555,433
----------- -----------
CASH FLOW FROM INVESTING ACTIVITY:
Purchase of property and equipment (122,979) (57,373)
----------- -----------
Net cash (used in) investing activity (122,979) (57,373)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,250,000 --
Payment of obligations under capital leases (14,471) (6,187)
Repayment of loans (100,828) (77,500)
----------- -----------
Net cash provided by (used in) by financing activities 1,134,701 (83,687)
----------- -----------
Increase in cash 554,630 414,373
Cash balance at beginning of year 511,563 97,190
----------- -----------
Cash balance at end of year $ 1,066,193 $ 511,563
=========== ===========
Supplemental disclosures:
Equipment acquired under capital lease obligation $ 54,183 $ 59,042
=========== ===========
Cash paid during the year for:
Interest $ 7,080 $ 5,825
=========== ===========
Income taxes $ 14,638 $ 654
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Extended Family Care Corporation (EFCC) or (the Company), is
primarily engaged in the business of providing health care
services in the home through its 83% majority owned subsidiary,
T.P.C. Home Care Services, Inc. (TPC). EFCC is the holding
company for TPC.
TPC is a licensed home care provider servicing patients since
1980. TPC has offices in New York and New Jersey, providing
twenty four hour home care services. On August 5, 1986, TPC and
its parent, EFCC, filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code. On March
23, 1992, this plan of reorganization was confirmed by the
United States Bankruptcy Court. On January 13, 1995, the
bankruptcy court issued a final decree.
As part of the plan of reorganization, on October 8, 1993, per
an agreement between C.O.S.S. Holding Corp. (C.O.S.S.), an
investor group, and EFCC dated March 23, 1992, EFCC issued
12,749,658 shares of stock to C.O.S.S. for $250,000 in cash
which resulted in C.O.S.S. owning a 66% interest in EFCC. Also,
unsecured creditors were given the option to receive a pro rata
share of EFCC's common stock or 12% of the allowed amount of
their respective claims. Creditors exercising this option
resulted in EFCC issuing 1,388,959 shares of common stock to the
unsecured creditors.
On October 31, 1995, EFCC entered into an agreement with Arbor
Home Health Care Holdings, LLC (Arbor) (in which Ivan Kaufman
owns a 99% interest), by which EFCC granted Arbor an irrevocable
option exercisable in two installments for EFCC to issue in
total 13,000,000 shares of EFCC common stock to Arbor at $.10
per share. The first and second installments of the option were
exercised by Arbor on August 21, 1996 and October 31, 1996,
respectively. Shares were not issued with respect to the first
installment until October, 1996, when the Company's certificate
of incorporation was amended to provide sufficient authorized
capital to issue such shares. Arbor owns approximately a 40%
interest in EFCC. In addition, per the option agreement,
C.O.S.S. placed all of its 12,749,658 shares of EFCC common
stock in a voting trust. Arbor has the right to direct the
voting of all of the C.O.S.S. shares and to nominate a majority
of the EFCC Board of Directors.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
EFCC and its majority owned subsidiary. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(c) REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Net patient service revenue is recorded at the Company's
reimbursement rates or contracted rates. Such revenue is
received from patients, third party payors and others for
services rendered. A
F-36
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
significant portion of the Company's revenue is received from
third-party payors (i.e. Medicaid) and is subject to audit and
adjustment by those payors.
A provision for doubtful accounts is made for accounts
receivable estimated to be uncollectible; which is based upon
management's evaluation of relevant facts that effect the
collectibility of accounts receivable.
(d) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The carrying amount
of the assets and related accumulated depreciation and
amortization are removed from the accounts when such assets are
disposed of and the resulting gain or loss is included in
operations. Depreciation and amortization of equipment and
leasehold improvements are computed using the declining balance
method for the following useful lives of the assets:
Furniture and fixtures 5 - 7 years
Equipment 5 years
Leasehold improvements lesser of the useful life of the
asset or the remaining lease period.
For assets acquired in 1996, the straight line method was used.
Management believes that the difference is immaterial.
(e) POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company does not provide post-retirement benefits for its
employees.
(f) INCOME TAXES
The Company is a C corporation for the taxable years ended
December 31, 1996 and 1995, respectively.
(g) NET INCOME PER COMMON SHARE
Net income per common share is computed by dividing net income
by the weighted average number of common stock and common stock
equivalents outstanding during each period. Common stock
equivalents represent the dilutive effect of the assumed
exercise of certain outstanding stock options.
(h) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
F-37
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(i) RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to
the current year presentation.
(2) CONCENTRATION OF SEGMENT RISK
TPC provides temporary health care personnel to in-home patients in New
York and New Jersey. TPC grants credit to its patients who are insured
under third-party payor agreements. Deposits are required for all
private business. The mix of accounts receivable from private and
third-party payors at December 31 were as follows:
1996 1995
--------- ---------
Medicaid 54 % 62 %
Insurance 3 2
Other third-party payors 34 29
Private 8 7
Medicare 1 --
--------- ---------
100 % 100 %
========= =========
Historically, credit losses relating to customers have not been
significant and have been within management's expectations.
(3) INTANGIBLE ASSETS
Intangible assets at December 31 are as follows:
1996 1995
-------- --------
License $595,190 $595,190
less accumulated amortization 119,037 79,358
$476,153 $515,832
======== ========
(4) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following at December
31:
1996 1995
---- ----
Note payable, non-interest
bearing, payable in monthly
installments of $1,500 with a
final balloon payment of $26,000
due in August, 1998. Interest on
this note was not imputed, as
the Company considers the amount
to be immaterial. $ 54,500 $ 72,500
F-38
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Notes payable, non-interest bearing and
payable on demand -- 80,000
Due to Affiliated Parties (see note 7) 25,449 50,449
-------- --------
Notes payable and long-term debt 79,949 202,949
Less current portion 43,449 148,449
-------- --------
Long-term debt $ 36,500 $ 54,500
======== ========
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1996 1995
-------- --------
Furniture and fixtures $ 64,095 $ 18,751
Machinery and equipment 229,872 167,108
Leasehold improvements 15,539 7,039
Equipment held under capital leases 113,225 59,042
-------- --------
422,731 251,940
less accumulated depreciation and
amortization 189,087 133,349
-------- --------
$233,644 $118,591
======== ========
(6) INCOME TAXES
The provision for income taxes consists of the following:
1996 1995
---- ----
Current
Federal $ -- $ --
State -- --
$ -- $ --
----------- -----------
Deferred
Federal $ 42,000 $ 160,500
State 13,000 48,500
----------- -----------
55,000 209,000
$ 55,000 $ 209,000
=========== ===========
F-39
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Deferred tax assets consist of the following:
Pre-reorganization net operating loss carryforward $ 100,000 $ 221,000
Allowance for doubtful accounts 38,000 38,000
Other 66,000 --
---------- ----------
Total deferred tax assets $ 204,000 $ 259,000
========== ==========
The following is a reconciliation of the effective income tax rate to
the Federal statutory rate:
Computed income tax (benefit) expense at 34% $ 25,000 $ 162,000
Increase in taxes resulting from:
Nondeductible expenses 22,000 15,000
State income taxes, net of federal tax benefit 8,000 32,000
Other - effect of graduated tax rates -- --
$ 55,000 $ 209,000
========== ==========
At December 31, 1996, the Company has a net operating loss carryforward
(NOL) of approximately $575,000 for tax purposes, expiring beginning with
the year 2000 through 2008.
(7) RELATED PARTY TRANSACTIONS
Notes payable consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
C.O.S.S. holds a note which is non-interest bearing, and
payable upon demand. $ 25,449 $ 25,449
An officer of the Company holds a note which bears an
interest rate of 11% and is payable upon demand. Annual
interest expense amounted to $1,840 and $3,238,
respectively. -- 25,000
$ 25,449 $ 50,449
========= =========
</TABLE>
The landlord for the Company's corporate office is an entity owned by
C.O.S.S. The annual rental is $43,837 per year, and shall be increased
by 12% over the prior year's fixed minimum annual rent. The lease
expires November 30, 2000.
On October 31, 1995, EFCC entered into an agreement with Arbor
Management, LLC (in which Ivan Kaufman owns a 99% interest), for two
years by which EFCC will pay $7,500 a month to Arbor Management, LLC for
management services, including accounting, finance, human resources and
marketing, rendered to the Company.
F-40
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8) PAYROLL TAXES PAYABLE/ACCRUED EXPENSES
Federal pre-petition payroll tax liabilities were settled with the
Internal Revenue Service for $175,000 in cash on September 16, 1996,
which approximated the amounts recorded as payroll taxes payable and
accrued interest and penalties for this claim. As of December 31, 1996,
payroll taxes payable and accrued expenses included tax liabilities to
various state government agencies in the amounts of $52,437 and $5,775,
respectively.
(9) SALE OF BRANCH OPERATIONS
On December 5, 1996, TPC sold certain assets and liabilities; and its
operations of its Jersey City branch to Public Services, Inc (P.S.I.)
for a $175,000, six month, 9% promissory note, plus an amount equal to
12% of the gross revenues of P.S.I. in excess of $90,000 per month for a
24 month period commencing on October 6, 1997. The Company recognized a
gain of $24,617 on the sale of these assets. The assets from this
branch, remaining in the company, included cash and substantially all of
its security deposits.
(10) COMMITMENTS AND CONTINGENCIES
TPC conducts its operations from leased office spaces in New York, New
Jersey and Pennsylvania. These leases expire at various dates through
the year 2000. Management expects that in the normal course of business,
these leases will be renewed or replaced by other leases. Rent expense
for the years ended December 31 amounted to $208,973 and $104,965,
respectively.
The Company is also the lessee of machinery and equipment under capital
leases expiring in various years through 2001.
As of December 31, future net minimum lease payments under capital and
operating leases are as follows:
CAPITAL OPERATING
------- ---------
1997 $ 22,850 $ 203,482
1998 22,850 208,567
1999 21,984 201,093
2000 18,769 149,371
2001 6,116 66,150
Thereafter -- 260,313
$ 92,569 $ 1,088,976
============= =============
The gross amount of assets recorded under capital lease obligations was
$113,225 at December 31, 1996. Interest on the capital lease obligations
was imputed and the Company considers the amount to be immaterial.
F-41
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties. The carrying value of the Company's
financial instruments in the accompanying balance sheets approximates
their fair value.
(12) SUBSEQUENT EVENTS
An "Agreement and Plan of Merger" (Merger), was entered into on January
3, 1997 between the Company and Star Multi Care Services, Inc. (Star),
pursuant to which Star will acquire 100% of the outstanding common
shares of the Company. Under the terms of the merger agreement EFCC
shareholders will receive $2,400,000 in cash or approximately $.064 per
share and $4,850,000 in Star common stock or approximately $.129 per
share for total consideration of $7,250,000 or approximately $.193 per
share, after giving effect to the merger of TPC with and into EFCC (see
below). As part of the merger agreement, EFCC paid a $.0234 per share
cash dividend on January 21, 1997 to all its common shareholders of
record on January 13, 1997.
It is anticipated that the Merger will be treated as a tax free
reorganization for Federal income tax purposes to the extent of Star's
common stock received by EFCC's shareholders. This merger is expected to
be completed by August 1997, subject to approval of EFCC and Star
shareholders, certain state regulatory boards and other conditions.
In connection with the Merger, EFCC and Star have entered into a
Consulting Agreement pursuant to which Star will render to EFCC
consulting and advisory services in connection with the management,
operation and supervision of EFCC. The term of the Consulting Agreement
shall end on the earlier of (i) one year from the signing of the Merger,
(ii) the closing of the merger or (iii) the termination of the Merger.
In consideration for the consulting services to be rendered by Star,
EFCC will pay Star $25,000 per month, payable (a) $15,000 in arrears on
the last day of each month and (b) the remaining $10,000 on the earlier
to occur of the closing date or the termination of the Merger Agreement.
On January 3, 1997, Star and EFCC also entered into a management
agreement (the "Management Agreement") pursuant to which Star agreed to
act as manager of EFCC. The Management Agreement will become effective
upon approval of the Commissioner of the New York State Department of
Health (the "Commissioner"). Pursuant to the Management Agreement Star
will have the authority and responsibility to conduct , supervise and
effectively manage the day-to-day operation of EFCC. Star will be
expected to exercise the reasonable judgment of a management company in
its management activities.
The Management Agreement may be terminated by the Commissioner, without
financial penalty to the Board, not more than sixty (60) days after
notification to the parties of a determination that the management of
EFCC is so deficient that the health and safety of patients would be
threatened by continuation of the Management Agreement. The Management
Agreement may be terminated by the Company for cause on 14 business
days' notice or without cause on 60 days' notice. Unless sooner
terminated in accordance with terms of the Management Agreement, or
extended or renewed by mutual agreement of the parties thereto, the
Management Agreement will remain in effect until the closing of the Star
Merger or December 31, 1998, whichever is sooner.
F-42
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
On March 18, 1997 the company entered into a merger agreement with its
83% owned subsidiary, TPC, where EFCC will be the surviving entity. It
is anticipated that the minority shareholders of TPC will receive
5,601,975 common shares of EFCC or 18.745545 common shares of EFCC for
each common share of TPC upon the completion of the merger. TPC common
stock owned by EFCC will be cancelled as a result of the merger and no
EFCC common stock shall be issued to EFCC. This anticipated merger will
not be conditioned upon the completion of the merger of EFCC and Star.
This merger is expected to close prior to the merger of EFCC and Star.
F-43
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current Assets:
Cash $ 445,021
Accounts receivable, net of allowance for doubtful accounts of $125,000 1,171,643
Prepaid expenses and other current assets 440,874
----------
Total current assets 2,057,538
Property and equipment, net 217,897
Other assets:
Deferred taxes 191,000
License, net 466,233
Other 29,410
----------
Total assets $2,962,078
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and other accrued expenses $ 944,672
Payroll taxes payable 156,882
Notes payable 43,449
Other current liabilities 97,410
----------
Total current liabilities 1,242,413
----------
Non-current liabilities:
Long-term debt 33,500
Obligations under capital leases 64,007
----------
Total non-current liabilities 97,507
----------
Total liabilities 1,339,920
----------
Commitments and contingencies
Minority interest in subsidiary 141,269
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized in 1996 --
Common stock, $.01 par value, 50,000,000 shares authorized, 30,000,000 in 1996;
32,000,226 issued and outstanding 320,002
Additional paid-in capital 1,013,358
Retained earnings 147,529
----------
Total shareholders' equity 1,480,889
----------
Total liabilities and shareholders' equity $2,962,078
==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-44
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
March 31, March 31,
1997 1996
------------ ------------
<S> <C> <C>
Net patient service revenue $ 2,321,939 $ 1,984,892
------------ ------------
Cost of services 1,525,058 1,246,264
------------ ------------
Gross profit 796,881 738,628
Selling, general and administrative expenses 753,594 838,512
Provision for doubtful accounts 25,000 --
------------ ------------
Income (loss) from operations 18,287 (99,884)
Interest income (expense) 2,368 (2,343)
------------ ------------
Income (loss) before provision (benefit) for income taxes and
minority interest 20,655 (102,227)
Provision (benefit) for income taxes 13,000 (38,500)
------------ ------------
Net income (loss) before minority interest 7,655 (63,727)
Minority interest in subsidiary net income (loss) 1,620 (10,681)
------------ ------------
Net income (loss) $ 6,035 $ (53,046)
============ ============
Net income (loss) per share:
Primary $ 0.0002 $ (0.0027)
============ ============
Fully Diluted $ 0.0002 $ (0.0027)
============ ============
Weighted average number of shares outstanding:
Primary 32,000,226 19,300,229
============ ============
Fully Diluted 32,000,226 19,300,229
============ ============
</TABLE>
See accompanying notes to unaudited condensed
consolidated financial statements.
F-45
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,035 $ (53,046)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Allowance for doubtful accounts 25,000 --
Depreciation and amortization 15,747 14,195
Amortization of intangible assets 9,920 9,920
Provision (benefit) for income taxes 13,000 (38,500)
Minority interest in subsidiary net income (loss) 1,620 (10,681)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (130,366) (199,226)
Prepaid expenses and other current assets 55,311 12,038
Other assets -- (16,332)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 134,914 (9,502)
Payroll taxes payable 5,161 47,653
Other liabilities 1,186 (2,922)
----------- -----------
Net cash provided by (used in) operating activities 137,528 (246,403)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (56,541)
----------- -----------
Net cash used in investing activities -- (56,541)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Payment of dividends (749,990) --
Payment of obligations under capital leases (5,710) --
Repayment of loans (3,000) (4,500)
----------- -----------
Net cash used in financing activities (758,700) (4,500)
----------- -----------
Decrease in cash (621,172) (307,444)
Cash at beginning of period 1,066,193 511,563
----------- -----------
Cash at end of period $ 445,021 $ 204,119
=========== ===========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 25 $ 690
=========== ===========
Income taxes $ 2,525 $ 1,333
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed
consolidated financial statements.
F-46
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
1. ADJUSTMENTS:
The accompanying unaudited condensed consolidated financial statements of
Extended Family Care Corporation ("EFCC") and its 83% owned subsidiary, TPC
Home Care Services, Inc. ("TPC") (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, these financial statements do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments necessary for a fair presentation (consisting of normal
recurring accruals) have been included. The results of operations for the
three-months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the full year ended December 31, 1997. For
further information, refer to the Company's audited consolidated statements
for the fiscal year ended December 31, 1996.
2. NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during
each period.
3. SUBSEQUENT EVENTS:
An Agreement and Plan of Merger (the "STAR Merger Agreement"), was entered
into on January 3, 1997 between the Company and Star Multi Care Services,
Inc. ("STAR"), pursuant to which STAR will acquire 100% of the outstanding
common shares of the Company (the "STAR Merger"). Under the terms of the
STAR Merger Agreement the Company's shareholders will receive $2,400,000 in
cash or approximately $.064 per share and $4,850,000 in STAR common stock
or approximately $.129 per share for total consideration of $7,250,000 or
approximately $.193 per share. As part of the STAR Merger Agreement, the
Company paid a $.0234 per share cash dividend on January 21, 1997 to all
its common shareholders of record on January 13, 1997.
It is anticipated that the Merger will be treated as a tax-free
reorganization for Federal income tax purposes to the extent of STAR's
common stock received by the Company's shareholders. The Merger is expected
to be completed by August 1997, subject to approval of the Company's and
STAR's shareholders, certain state regulatory boards and other conditions.
In connection with the Merger, the Company and STAR have entered into a
consulting agreement (the "Consulting Agreement") pursuant to which STAR
will render to the Company consulting and advisory services in connection
with the management, operation and supervision of the Company. The term of
the Consulting Agreement shall end on the earlier of (I) one year from the
signing of the Merger, (ii) the closing of the Merger or (iii) the
termination of the STAR Merger Agreement. In consideration for the
consulting services to be rendered by STAR, the Company will pay STAR
$25,000 per month, payable (a) $15,000 in
F-47
<PAGE>
EXTENDED FAMILY CARE CORPORATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1996
arrears on the last day of each month and (b) the remaining $10,000 on the
earlier to occur of the closing date or the termination of the STAR Merger
Agreement.
On January 3, 1997, the Company and STAR also entered into a management
agreement (the "Management Agreement") pursuant to which STAR agreed to act
as manager of the Company. The Management Agreement will become effective
upon approval of the Commissioner of the New York State Department of
Health (the "Commissioner"). Pursuant to the Management Agreement STAR will
have the authority and responsibility to conduct, supervise and effectively
manage the day-to-day operation of the Company. STAR will be expected to
exercise the reasonable judgment of a management company in its management
activities.
The Management Agreement may be terminated by the Commissioner, without
financial penalty to the Company's Board, not more than sixty (60) days
after notification to the parties of a determination that the management of
the Company is so deficient that the health and safety of patients would be
threatened by continuation of the Management Agreement. The Management
Agreement may be terminated by EFCC for cause on 14 business days notice on
without cause or 60 days notice. Unless sooner terminated in accordance
with terms of the Management Agreement, or extended or renewed by mutual
agreement of the parties thereto, the Management Agreement will remain in
effect until the effective time of the STAR Merger or December 31, 1998,
whichever is sooner.
On March 18, 1997 EFCC entered into a merger agreement with its 83% owned
subsidiary, TPC Home Care Services, Inc. ("TPC"), pursuant to which EFCC
will be the surviving entity (the "TPC Merger). It is anticipated that the
minority shareholders of TPC will received 5,601,975 common shares of EFCC
or 18.74555 common shares of EFCC for each common share of TPC upon
completion of the TPC Merger. TPC common stock owned by EFCC will be
canceled as a result of the TPC Merger and no EFCC stock shall be issued to
EFCC in connection therewith. This anticipated TPC Merger will not be
conditioned upon the completion of the Merger of EFCC and STAR. The TPC
Merger is expected to close prior to the Merger of EFCC and STAR.
F-48
<PAGE>
Annex A
AGREEMENT AND PLAN OF MERGER
AMONG
STAR MULTI CARE SERVICES, INC.
EFCC ACQUISITION CORP.
AND
EXTENDED FAMILY CARE CORPORATION
DATED AS OF JANUARY 3, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I THE MERGER........................................................2
1.1 The Merger........................................................2
1.2 Closing...........................................................2
1.3 Effective Time....................................................2
1.4 Effect of Merger..................................................3
1.5 Certificate of Incorporation and Bylaws...........................3
1.6 Directors and Officers............................................3
1.7 Tax Consequences..................................................3
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES................3
2.1 Share Consideration; Conversion or Cancellation of
Shares in the Merger..............................................3
2.2 Cash Consideration................................................4
2.3 Conversion Number.................................................5
2.4 Dissenters' Rights................................................5
2.5 Exchange of Certificates..........................................5
2.6 Taking Necessary Action; Further Action...........................8
ARTICLE III REPRESENTATIONS AND WARRANTIES
OF STAR AND MERGER SUB............................................8
3.1 Corporate Organization............................................8
3.2 Capital Stock.....................................................8
3.3 Options or Other Rights...........................................9
3.4 Authority Relative to this and Other Agreements...................9
3.5 Star Common Stock.................................................9
3.6 No Violation......................................................9
3.7 Financial Statements and Reports.................................10
3.8 Absence of Certain Changes or Events.............................11
3.9 Representations Complete.........................................11
3.10 No Default.......................................................12
3.11 Brokers..........................................................12
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF EFCC...........................12
4.1 Corporate Organization...........................................12
4.2 Capital Stock....................................................12
4.3 Options or Other Rights..........................................13
4.4 Authority Relative to this and Other Agreements..................13
4.5 No Violation.....................................................14
4.6 Compliance with Laws.............................................15
A-i
<PAGE>
TABLE OF CONTENTS (cont'd)
PAGE
4.7 Litigation.......................................................15
4.8 Financial Statements and Reports.................................16
4.9 Absence of Certain Changes or Events.............................16
4.10 Employee Benefit Plans and Employment Matters....................17
4.11 Labor Matters....................................................19
4.12 Insurance........................................................19
4.13 Environmental Matters............................................19
4.14 Tax Matters......................................................19
4.15 Intellectual Property............................................21
4.16 Related Party Transactions.......................................21
4.17 No Undisclosed Material Liabilities..............................21
4.18 No Default.......................................................21
4.19 Title to Properties; Encumbrances................................22
4.20 Contracts........................................................23
4.21 Medicare/Medicaid Participation; Accreditation...................24
4.22 Rate Tables and Reimbursement....................................24
4.23 Relationships....................................................24
4.24 Employees........................................................25
4.25 Questionable Payments............................................25
4.26 Representations Complete.........................................25
4.27 Brokers..........................................................25
4.28 Minimum Net Worth, Working Capital and Cash......................25
ARTICLE V COVENANTS AND AGREEMENTS.........................................26
5.1 Proxy Statement/Prospectus; Registration Statement;
Shareholders' Meeting............................................26
5.2 Conduct of the Business of EFCC Prior to the Effective Time......28
5.3 Access to Properties and Records.................................30
5.4 No Solicitation, Etc.............................................30
5.5 Employee Benefit Plans...........................................31
5.6 Existing Agreements..............................................31
5.7 Confidentiality..................................................31
5.8 Reasonable Best Efforts..........................................32
5.9 Certification of Shareholder Vote................................32
5.10 Affiliate Letters................................................33
5.11 Listing Application..............................................33
5.12 Supplemental Disclosure Schedules................................33
5.13 No Action........................................................33
A-ii
<PAGE>
TABLE OF CONTENTS (cont'd)
PAGE
5.14 Conduct of Business of Merger Sub................................33
5.15 Notification of Certain Matters; Delivery of
Financial Information............................................34
5.16 Tax-free Nature..................................................34
5.17 Financial Covenants. ...........................................34
5.18 Director of Star.................................................35
5.19 EFCC Shareholders Agreement, Consulting Agreement,
Management Agreement and Escrow Agreement.......................35
5.20 Sternbach Proxy..................................................36
5.21 EFCC Dividend....................................................36
ARTICLE VI CONDITIONS PRECEDENT.............................................36
6.1 Conditions to Each Party's Obligation to Effect the Merger.......36
6.2 Conditions to the Obligation of EFCC to Effect the Merger........37
6.3 Conditions to the Obligations of Star and Merger Sub to
Effect the Merger................................................38
ARTICLE VII TERMINATION......................................................40
7.1 Termination by Mutual Consent....................................40
7.2 Termination by Either Star or EFCC...............................40
7.3 Termination by EFCC..............................................40
7.4 Termination by Star..............................................41
7.5 Effect of Termination and Abandonment............................41
ARTICLE VIII MISCELLANEOUS....................................................42
8.1 Amendment........................................................42
8.2 Waiver...........................................................42
8.3 Survival.........................................................42
8.4 Expenses and Fees................................................42
8.5 Notices..........................................................42
8.6 Headings.........................................................43
8.7 Publicity........................................................43
8.8 Entire Agreement.................................................44
8.9 Assignment.......................................................44
8.10 Counterparts.....................................................44
8.11 Invalidity; Severability.........................................44
8.12 Governing Law....................................................44
8.13 Legal Proceedings................................................44
A-iii
<PAGE>
TABLE OF CONTENTS (cont'd)
PAGE
8.14 Purchase Price Adjustment........................................44
EXHIBITS
Exhibit A Form of Affiliate Letters
Exhibit B Opinion of Parker Chapin Flattau & Klimpl, LLP
Exhibit C Opinion of Meltzer, Lippe, Goldstein, Wolf & Schlissel, P.C.
Exhibit D Form of EFCC Shareholders Agreement
Exhibit E Form of Escrow Agreement Exhibit F Opinion of Meltzer, Lippe,
Goldstein, Wolf & Schlissel, P.C. regarding tax matters
Exhibit G Consulting Agreement
Exhibit H Management Agreement
Exhibit I Form of Sternbach Proxy
A-iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of January 3,
1997 among STAR MULTI CARE SERVICES, INC., a New York corporation ("Star"), EFCC
ACQUISITION CORP., a New York corporation and a wholly-owned subsidiary of Star
("Merger Sub"), and EXTENDED FAMILY CARE CORPORATION, a New York corporation
("EFCC").
WHEREAS, the Boards of Directors of Star, Merger Sub and EFCC have
deemed it advisable and in the best interests of their respective shareholders
that EFCC be merged with and into Merger Sub (the "Merger") upon the terms and
conditions set forth herein and in accordance with the Business Corporation Law
of the State of New York (the "BCL") and that, alternatively, in the event that
the All Cash Option (as hereinafter defined) is exercised (the "Exercise"),
Merger Sub be merged with and into EFCC (in either case, the surviving
corporation following the effectiveness of the Merger being hereinafter
sometimes referred to as the "Surviving Corporation");
WHEREAS, the Boards of Directors of Star, Merger Sub and EFCC have
approved the Merger pursuant to this Agreement, upon the terms and subject to
the conditions set forth herein;
WHEREAS, prior to the date hereof, Arbor Home Healthcare Holdings,
LLC ("Arbor"), pursuant to the Amended and Restated Option Agreement dated
October 31, 1995 between Arbor and EFCC, as amended to date, irrevocably has
exercised in full all of its options (the "Options") to purchase shares of
common stock, $.01 par value, of EFCC and has paid in full the exercise price
therefor;
WHEREAS, prior to or following the date hereof, but in any event
prior to the Closing Date (as hereinafter defined), EFCC shall, subject to
applicable law, declare and pay a cash dividend (the "EFCC Dividend") on shares
of its common stock in an aggregate amount of $750,000, which amount has been
reserved, will be held in reserve by and will be available to, EFCC for the
payment of the EFCC Dividend;
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"), provided that the
All Cash Option is not exercised;
WHEREAS, in order to induce Star and Merger Sub to enter into this
Agreement, certain shareholders of EFCC, as of the date hereof and Mr. Ivan
Kaufman, and the Voting Trustee (as hereinafter defined), are entering into (i)
a shareholders agreement in the form of Exhibit D attached hereto (the "EFCC
Shareholders Agreement," and such shareholder parties thereto, collectively, the
"Shareholders") pursuant to which the Shareholders and Voting Trustee are
agreeing to vote in favor of the Merger and this Agreement and in respect of
other matters,
A-1
<PAGE>
the Shareholders are providing certain representations, warranties and other
covenants to Star and Merger Sub and are agreeing to certain "lock-up"
arrangements, (ii) a consulting agreement in the form of Exhibit G attached
hereto (the "Consulting Agreement") (iii) subject to approval by the
Commissioner of the New York State Department of Health, a management agreement
in the form of Exhibit H attached hereto (the "Management Agreement") and, on
the closing date of the Merger, will enter into an escrow agreement in the form
of Exhibit E attached hereto (the "Escrow Agreement") in connection with this
Agreement and the Shareholders Agreement; and
WHEREAS, in order to induce EFCC to enter into this Agreement,
Stephen Sternbach ("Sternbach"), an individual who is the direct beneficial
owner of 863,262 shares of Star Common Stock (as hereinafter defined) as of the
date hereof, is entering into an irrevocable proxy in the form of Exhibit I
attached hereto (the "Sternbach Proxy") pursuant to which Sternbach is agreeing
to vote in favor of the Merger and this Agreement and in respect of other
related matters.
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 conditions hereinafter set forth
and in accordance with the BCL, at the Effective Time (as defined in Section
1.3), EFCC shall be merged with and into Merger Sub and thereupon the separate
existence of EFCC shall cease and Merger Sub, as the Surviving Corporation,
shall continue to exist under and be governed by the BCL; provided that, in the
event of the Exercise, Merger Sub shall be merged with and into EFCC and
thereupon the separate existence of Merger Sub shall cease and EFCC, as the
Surviving Corporation, shall continue to exist under and be governed by the BCL.
In the event of the Exercise, notwithstanding anything else contained herein,
all references to the Surviving Corporation shall mean EFCC.
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
Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of the Americas, New York, New
York 10036 as promptly as practicable after satisfaction or waiver 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 waived in accordance herewith and this
Agreement shall not have been
A-2
<PAGE>
terminated as provided in Article VII, the parties hereto shall cause a
Certificate of Merger meeting the requirements of Section 904 of the BCL to be
properly executed and filed in accordance with such Section on the Closing Date.
The Merger shall become effective at the time of filing of the Certificate of
Merger with the Secretary of State of the State of New York in accordance with
the BCL 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. After the Effective Time, pursuant to the BCL,
the separate existence of EFCC (or, in the event of the Exercise, Merger Sub)
will cease and the Surviving Corporation shall succeed, without other transfer,
to all the rights and property of EFCC (or, in the event of the Exercise, Merger
Sub) and shall be subject to all the debts and liabilities of EFCC (or, in the
event of the Exercise, Merger Sub) in the same manner as if the Surviving
Corporation had itself incurred them.
1.5 Certificate of Incorporation and Bylaws. At the Effective Time,
the Certificate of Incorporation of Merger Sub shall be the Certificate of
Incorporation of the Surviving Corporation and the Bylaws of Merger Sub as in
effect on the date hereof shall be the Bylaws of the Surviving Corporation;
provided, however, that, at the Effective Time, Article I of such Certificate of
Incorporation of the Surviving Corporation shall be amended to read in full as
follows: "The name of this corporation is Extended Family Care Corporation"
1.6 Directors and Officers. The persons who are directors of Merger
Sub immediately prior to the Effective Time 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
Certificate of Incorporation and Bylaws of the Surviving Corporation. The
persons who are officers of Merger Sub immediately prior to the Effective Time
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.
1.7 Tax Consequences. It is intended that the Merger shall constitute
a reorganization described in Section 368(a) of the Code and that this Agreement
shall constitute a "plan of reorganization" for the purposes of Section 368 of
the Code; provided that the All Cash Option is not exercised. The parties shall
treat the transactions contemplated hereby consistently with such intention.
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 the holders thereof:
A-3
<PAGE>
(a) Each share of the common stock, $.01 par value, of
Merger Sub (the "Merger Sub Common Stock") which is issued and outstanding
immediately prior to the Effective Time shall continue to be outstanding;
provided that, in the event of the Exercise, the Merger Sub Common Stock shall
be converted into one hundred (100) shares of fully paid and non-assessable
shares of common stock, $.01 par value, of the Surviving Corporation.
(b) Each share of the common stock, $.01 par value, of
EFCC (the "EFCC Common Stock"), which is issued and outstanding immediately
prior to the Effective Time, except those held by shareholders who validly and
properly demand and perfect dissenters' rights under the BCL, shall be converted
into the right to receive the following consideration (the "Merger
Consideration"): (x) the Cash Consideration (as defined in Section 2.2 below),
without interest; and (y) the number (the "Conversion Number") of duly
authorized, validly issued, full paid and non-assessable shares of common stock
$.001 par value, of Star (the "Star Common Stock"), computed in accordance with
Section 2.3 below. Anything contained in this Agreement to the contrary
notwithstanding, solely at Star's option, in lieu of the consideration described
in clauses (x) and (y) of the immediately preceding sentence, the "Merger
Consideration" shall be an amount in cash equal to (A) $7,250,000 divided by (B)
the EFCC Share Number (as defined in Section 2.2 below) (the "All Cash Option").
The All Cash Option shall be exercised, if at all, by notice being given by Star
to EFCC prior to the mailing of the joint proxy statement referred to in Section
5.1 below. All shares of EFCC Common Stock, and each holder of a certificate
representing such shares of EFCC Common Stock, shall cease to have any rights
with respect thereto, except the right to receive the Merger Consideration to be
issued or paid in consideration therefor upon surrender of such certificate in
accordance with Section 2.5 without interest.
(c) All shares of EFCC Common Stock that are owned by EFCC
as treasury stock and any shares of EFCC Common Stock owned by EFCC or any
wholly-owned Subsidiary of EFCC shall be cancelled. As used in this Agreement, a
"Subsidiary" of any party means any corporation or other organization, whether
incorporated or unincorporated, of which (i) such party or any other Subsidiary
of such party is a general partner (excluding partnerships, the general
partnership interests of which are held by such party or any Subsidiary of such
party and which do not have a majority of the voting interests in such
partnership) or (ii) 50% or more of the securities or other interests having by
their terms ordinary voting power to elect a majority of the Board of Directors
or others performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or by
any one or more of its Subsidiaries, or by such party and one or more of its
Subsidiaries.
2.2 Cash Consideration. As used herein, the "Cash Consideration"
means the amount equal to: (a) $2,400,000 divided by (b) the EFCC Share Number
(as hereinafter defined). As used herein the "EFCC Share Number" means the
number of shares of EFCC Common Stock issued and outstanding immediately prior
to the Effective Time increased by that number of additional shares of EFCC
Common Stock that would have been issued and outstanding immediately prior to
the Effective Time assuming that no shareholders of TPC (as hereinafter defined)
validly and properly demanded and perfected, pursuant to the BCL, dissenters'
rights in
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the TPC Merger (as hereinafter defined), which EFCC Share Number shall not be
less then 37,600,000.
2.3 Conversion Number. As used herein, the Conversion Number means
the amount equal to: (a) such number of shares of Star Common Stock (the "Star
Share Number") as has an aggregate Market Price on the third business day prior
to the Effective Time (the "Trigger Date") equal to $4,850,000; divided by (b)
the EFCC Share Number. As used herein, the "Market Price" of each share of Star
Common Stock on any day means the average of the closing sale prices of a share
of Star Common Stock as reported on the NASDAQ National Market during the one
hundred and twenty (120) trading days immediately preceding the date of the
determination, calculated by adding all such one hundred and twenty (120)
closing sale prices and dividing the sum by one hundred and twenty (120).
2.4 Dissenters' Rights. Shares of EFCC Common Stock that have not
been voted for the adoption of the Merger and with respect to which dissenters'
rights shall have been validly and properly demanded and perfected in accordance
with the BCL ("Dissenting Shares") shall not be converted into the right to
receive the Merger Consideration as provided in Section 2.1 on or after the
Effective Time unless and until the holder of such shares withdraws his demand
for such appraisal in accordance with applicable law or becomes ineligible for
such appraisal, at which time such shares shall be converted into and represent
the right to receive the Merger Consideration, without interest, as set forth in
Section 2.1. EFCC shall give Star: (i) prompt notice of any written demand for
appraisal, withdrawals of demands for appraisal and any other instrument in
respect thereof received by EFCC; and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal. EFCC will
not voluntarily make any payment with respect to any demands for appraisal and
will not, except with the prior written consent of Star, settle or offer to
settle any such demand.
2.5 Exchange of Certificates.
(a) As of the Effective Time, Star shall deposit, or shall
cause to be deposited, with Continental Stock Transfer and Trust Company, or
such other bank or trust company which shall be mutually acceptable to the
parties hereto (the "Exchange Agent"), for the benefit of holders of shares of
EFCC Common Stock, for exchange in accordance with this Section 2.5, through the
Exchange Agent: (i) certificates representing the Star Share Number of shares of
Star Common Stock (if the All Cash Option is not exercised); (ii) the estimated
amount of cash to be paid pursuant to Section 2.5(e); and (iii) all funds
necessary to pay the Cash Consideration for shares of EFCC Common Stock
converted by reason of the Merger (or the Merger Consideration, in cash, if the
All Cash Option is exercised) (in each case other than Merger Consideration with
respect to Dissenting Shares) (together, all such certificates and cash being
hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall
deliver, pursuant to irrevocable instructions, the Cash Consideration (or the
Merger Consideration, in cash, if the All Cash Option is exercised), the shares
of Star Common Stock (if the All Cash Option is not exercised) contemplated to
be issued pursuant to Section 2.1 and the cash to be
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issued pursuant to Section 2.5(e) 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, the Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of EFCC Common Stock (the "Certificates") whose shares were
converted into the right to receive the Merger Consideration pursuant to Section
2.1: (i) 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
delivery of the Certificates to the Exchange Agent and shall be in such form and
have such other provisions as Star and EFCC may reasonably specify); and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for the Cash Consideration and certificates representing shares of Star Common
Stock (or, in the event the All Cash Option is exercised, the Merger
Consideration in cash). Upon surrender of a Certificate for cancellation to the
Exchange Agent, or to such other agent or agents as may be appointed by Star,
together with such letter of transmittal, duly executed, and such other
documents as may be reasonably required by the Exchange Agent, the holder of
such Certificate shall be entitled to receive in exchange therefor the Merger
Consideration which such holder has the right to receive pursuant to this
Section 2.5, and the Certificate so surrendered shall forthwith be canceled. In
the event of a transfer of ownership of EFCC Common Stock which is not
registered on the transfer records of EFCC, the Cash Consideration may be paid
to and certificates representing the proper number of shares of Star Common
Stock (or, in the event the All Cash Option is exercised, the Merger
Consideration in cash) may be issued to a transferee if the Certificate
representing such EFCC Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.5, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration. The Exchange Agent shall
not be entitled to vote or exercise any rights of ownership with respect to the
Star Common Stock held by it from time to time hereunder.
(c) Distributions with Respect to Unexchanged Shares. No
dividends or other distributions with respect to Star Common Stock with a record
date after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Star Common Stock represented thereby
and no cash payment (including, without limitation, cash payment in lieu of
fractional shares) shall be paid to any such holder pursuant to this Section 2.5
until the surrender of such Certificate in accordance with this Section 2.5.
Subject to the effect of applicable laws, following surrender of any such
Certificate, there shall be paid to the holder of the Certificates representing
whole shares of Star Common Stock issued in exchange therefor, without interest:
(i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of Star Common Stock; 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
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payment date subsequent to such surrender payable with respect to such whole
shares of Star Common Stock.
(d) No Further Ownership Rights in Common Stock. All
shares of Star Common Stock issued, together with the Cash Consideration paid
(or the Merger Consideration, paid in cash, in the event the All Cash Option is
exercised), upon the surrender for exchange of Certificates in accordance with
the terms hereof (including any cash paid pursuant to Section 2.5(e)) shall be
deemed to have been issued (and/or paid) in full satisfaction of all rights
pertaining to such shares of EFCC Common Stock and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of EFCC Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the Exchange Agent
for any reason, they shall be canceled and exchanged as provided in this Section
2.5.
(e) No Fractional Shares. No certificates or scrip
representing fractional shares of Star Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional share interests will
not entitle the owner thereof to vote or to any rights of a shareholder of Star.
Notwithstanding any other provision of this Agreement, each holder of shares of
EFCC Common Stock exchanged pursuant to the Merger who would otherwise have been
entitled to receive a fraction of a share of Star Common Stock (after taking
into account all Certificates delivered by such holder) shall receive, in lieu
thereof, cash (without interest) in an amount equal to such fractional part of a
share of Star Common Stock multiplied by the Market Price of a share of Star
Common Stock on the Effective Date.
(f) Termination of Exchange Fund. Any portion of the
Exchange Fund which remains undistributed for 180 days after the Effective Time
shall be delivered to Star, upon demand, and any holders of the Certificates who
have not theretofore complied with this Section 2.5 shall thereafter look only
to Star for delivery of the Merger Consideration.
(g) No Liability. None of Star, Merger Sub, EFCC nor the
Exchange Agent shall be liable to any holder of shares of EFCC Common Stock or
Star Common Stock, as the case may be, for such shares (or dividends or
distributions with respect thereto) or cash from the Exchange Fund (or by Star
after the Exchange Fund has terminated) delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law. At such time as
any amounts remaining unclaimed by holders of any such shares would otherwise
escheat to or become property of any governmental entity, such amounts shall, to
the extent permitted by applicable law, become the property of Star free and
clear of any claims or interest of any such holders or their successors, assigns
or personal representatives previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall
invest any cash included in the Exchange Fund, as directed by Star, on a daily
basis. Any interest and other income resulting from such investments shall be
paid to Star.
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2.6 Taking Necessary Action; Further Action. Star, Merger Sub and
EFCC, respectively, shall take all such action as may be necessary or
appropriate in order to effectuate the Merger as promptly as possible. If, at
any time after the Effective Time, any further action is necessary or desirable
to carry out the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets, property,
rights, privileges, powers and franchises of either Merger Sub or EFCC, the
officers and directors of such corporations are fully authorized in the name of
their corporation or otherwise to take, and shall take, all such action.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF STAR AND MERGER SUB
Star and Merger Sub, jointly and severally, represent and warrant to
EFCC as follows; provided that Sections 3.2, 3.3, 3.5, 3.7 and 3.8 shall be of
no force or effect in the event that the All Cash Option is exercised and
executed:
3.1 Corporate Organization. Each of Star and its Subsidiaries (the
"Star Subsidiaries") is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, with all
requisite corporate 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 failure to be so qualified or licensed, individually or in the aggregate,
would have a material adverse effect on the condition (financial or otherwise),
results of operations, business, working capital, assets, liabilities or
prospects of Star and the Star Subsidiaries taken as a whole (a "Material
Adverse Effect on Star"). Section 3.1 of the Star disclosure schedule delivered
by Star herewith (the "Star Disclosure Schedule") contains a complete and
accurate list of all of the Star Subsidiaries. Neither Star nor any Star
Subsidiary is in violation of any provision of its Certificate of Incorporation
or Bylaws which could have a Material Adverse Effect on Star. Merger Sub has not
engaged in any business nor has it incurred any liabilities or obligations since
it was incorporated other than relating to this Agreement and the transactions
contemplated hereby.
3.2 Capital Stock. As of the date hereof, the authorized capital
stock of Star consists in its entirety of (i) 10,000,000 shares of Star Common
Stock, $.001 par value, and (ii) 5,000,000 shares of Preferred Stock, $1.00 par
value. As of January 2, 1997, 4,045,889 shares of Star Common Stock and no
shares of Preferred Stock were issued and outstanding, (ii) options to acquire
626,136 shares of Star Common Stock were outstanding under all stock option
plans of Star, (iii) 333,900 shares were reserved for issuance pursuant to all
employee benefit plans of Star and (iv) warrants (the "Star Warrants") to
purchase 106,712 shares of Star Common Stock were outstanding. As of the date
hereof, the authorized capital stock of Merger Sub consists in its entirety of
1,000 shares of common stock, $.01 par value, of which 100 shares are issued and
outstanding. All of the outstanding shares of capital stock of each of the Star
Subsidiaries are owned beneficially and of record by Star or a Star Subsidiary
free and clear of all liens, charges
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and encumbrances of any nature. All of the outstanding shares of capital stock
of Star, Merger Sub and each of the Star Subsidiaries have been validly issued
and are fully paid and nonassessable. The holders of the Star Warrants have
exercised rights thereunder to have the shares of Star Common Stock issuable
thereunder registered under the Securities Act of 1933 (the "Securities Act").
3.3 Options or Other Rights. Except as disclosed in Section 3.2
hereof, 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 Star or any Star Subsidiary any of the
outstanding authorized but unissued, unauthorized or treasury shares of the
capital stock or any other security of Star or any Star Subsidiary, and there is
no outstanding security of any kind convertible into or exchangeable for such
capital stock. No options or rights to acquire equity securities granted by Star
have provisions which accelerate the vesting or right to exercise such options
or rights or terminate any repurchase rights of Star upon the consummation of
the Merger.
3.4 Authority Relative to this and Other Agreements. Each of Star and
Merger Sub, as applicable, has full corporate power and authority to execute and
deliver this Agreement, the Consulting Agreement, the Management Agreement, the
EFCC Shareholders Agreement and the Escrow Agreement and to consummate the
transactions contemplated on their part hereby or thereby. The execution and
delivery of such agreements by each of Star and Merger Sub and the consummation
of the transactions contemplated on their respective parts hereby or thereby
have been duly authorized by their respective Board of Directors and, other than
the approval of Star's shareholders as provided in Section 5.1 hereof, no other
corporate proceedings on the part of Star or Merger Sub, as applicable, are
necessary to the consummation of the transactions contemplated on their
respective parts hereby or thereby. Such agreements have been (or, in the case
of the Escrow Agreement, will be) duly executed and delivered by each of Star
and Merger Sub, as applicable, and constitute (or, in the case of the Escrow
Agreement, will constitute) a legal, valid and binding obligation of each of
Star and Merger Sub, enforceable against each of them 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.
3.5 Star Common Stock. The shares of Star 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 nonassessable, and not subject to any preemptive rights.
3.6 No Violation. The execution, delivery and performance of this
Agreement, the Consulting Agreement, the Management Agreement, the EFCC
Shareholders Agreement and the Escrow Agreement by each of Star and Merger Sub
and the consummation by each of them of the transactions contemplated hereby or
thereby will not (i) violate or conflict with any provision of any law
applicable to Star or any Star Subsidiary or by which any of their property or
assets are
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bound, (ii) except for the Management Agreement, which is subject to the
approval of the Commissioner of the New York State Department of Health, require
the consent, waiver, approval, license or authorization of or any filing by Star
or any Star Subsidiary with any public authority (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) 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
BCL, the Bylaws of the National Association of Securities Dealers, Inc. or the
"takeover" or "blue sky" laws of various states, (C) the approval by the New
York State Public Health Counsel required pursuant to Section 3611-a of the New
York State Public Health Law and the rules and regulations thereunder and any
similar approvals required by New Jersey State law, rules or regulations, and
(D) any other filings and approvals expressly contemplated by this Agreement) or
(iii) violate, conflict with, 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 result in the
creation of a lien or other encumbrance on any property or asset of Star or any
Star Subsidiary pursuant to or under any provision of any charter or bylaw,
indenture, mortgage, lien, lease, license, agreement, contract, instrument,
order, judgment, ordinance, Star Permit (as defined below), law, regulation or
decree to which Star or any Star Subsidiary is subject or by which Star or any
Star Subsidiary or any of their property or assets are bound, except where the
failure to give such notice, make such filings, or obtain such authorizations,
consents, waivers, licenses or approvals, or where such violations, conflicts,
breaches, defaults, terminations, amendments, accelerations, cancellations, loss
of rights, liens or encumbrances, individually or in the aggregate, would not
have a Material Adverse Effect on Star or on Star's or Merger Sub's ability to
consummate the transactions contemplated hereby.
3.7 Financial Statements and Reports. Star has made available to EFCC
true and complete copies of (i) its Annual Report on Form 10-KSB as filed with
the Securities and Exchange Commission (the "Commission"), for the year ended
May 31, 1996 (the "Star Form 10- KSB"), (ii) all registration statements filed
by Star and declared effective under the Securities Act since January 1, 1994
through the date hereof, and (iii) all other reports, statements and
registration statements (including Current Reports on Form 8-K) filed by it with
the Commission since January 1, 1994 through the date hereof. 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 "Star SEC Filings." As of the respective
times such documents were filed or, as applicable, became effective, the Star
SEC Filings complied as to form and content, in all material respects, with the
requirements of the Securities Act and the Exchange Act, as the case may be, and
the rules and regulations promulgated thereunder, 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 Star included in the Star SEC
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Filings were prepared in accordance with generally accepted accounting
principles (as in effect from time to time) applied on a consistent basis and
(except as may be indicated therein or in the notes thereto) present fairly the
consolidated financial position, consolidated results of operations and
consolidated cash flows of Star and the Star Subsidiaries as of the dates and
for the periods indicated subject, in the case of unaudited interim consolidated
financial statements, to normal recurring year-end adjustments and any other
adjustments described therein.
3.8 Absence of Certain Changes or Events. Since May 31, 1996 and
except as disclosed in the Star SEC Filings made through the date hereof, the
business of Star and of each of the Star Subsidiaries has been conducted in the
ordinary course, and there has not been (i) any material adverse change in the
condition (financial or otherwise), results of operations, business, working
capital, assets, liabilities or prospects of Star and the Star Subsidiaries,
taken as a whole; (ii) any indebtedness incurred by Star or any Star Subsidiary
for money borrowed; (iii) any material transaction or commitment, except in the
ordinary course of business or as contemplated by this Agreement, entered into
by Star or any of the Star 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 Star; (v) any declaration, setting aside
or payment of any dividend (whether in cash, securities or property) with
respect to the Star Common Stock; (vi) any material agreement to acquire any
assets or stock or other interests of any third party; (vii) any increase in the
compensation payable or to become payable by Star or any Star 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 in existence as of the date hereof, and except for increases consistent
with past practice); (viii) any material revaluation by Star or any Star
Subsidiary of any asset (including, without limitation, any writing down of the
value of inventory or writing off of notes or accounts receivable); (ix) any
material change by Star in accounting principles or methods except insofar as
may be required by a change in generally accepted accounting principles; (x) any
mortgage or pledge of any of the assets or properties of Star or any Star
Subsidiary or the subjection of any of the assets or properties of Star or any
Star Subsidiary to any material liens, charges, encumbrances, imperfections of
title, security interest, options or rights or claims of other with respect
thereto; or (xi) any assumption or guarantee by Star or a Star Subsidiary of the
indebtedness of any person or entity.
3.9 Representations Complete. None of the representations or
warranties made by Star or Merger Sub herein or in any Schedule hereto,
including the Star Disclosure Schedule, or certificate furnished by Star or
Merger Sub pursuant to this Agreement, or the Star SEC Filings, when all such
documents are read together in their entirety, contains or will contain at the
Effective Time any untrue statement of a material fact, or omits or will omit at
the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.
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3.10 No Default. Neither Star nor any of the Star 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 (i) its charter or Bylaws, (ii) any note, bond, mortgage,
indenture, license, agreement, contract, lease, commitment or other obligation
to which Star or any of the Star Subsidiaries is a party or by which they or any
of their properties or assets may be bound, or (iii) any order, writ injunction,
decree, statute, rule or regulation applicable to Star or any of the Star
Subsidiaries, except in the case of clauses (ii) and (iii) above for defaults or
violations which would not have a Material Adverse Effect on Star.
3.11 Brokers. Neither Star nor Merger Sub has paid or is obligated to
pay any fee or commission to any broker, finder, investment banker or other
intermediary in connection with this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF EFCC
EFCC represents and warrants to Star and Merger Sub as follows:
4.1 Corporate Organization. Each of EFCC and its Subsidiaries (the
"EFCC Subsidiaries") is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, with all
requisite corporate 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 failure to be so qualified or licensed, individually or in the aggregate,
would have a material adverse effect on the condition (financial or otherwise),
results of operations, business, working capital, assets, liabilities or
prospects of EFCC and the EFCC Subsidiaries taken as a whole (a "Material
Adverse Effect on EFCC"). The EFCC disclosure schedule delivered by EFCC
herewith (the "EFCC Disclosure Schedule") contains a complete and accurate list
of all of the EFCC Subsidiaries. Neither EFCC nor any EFCC Subsidiary is in
violation of any provision of its charter or Bylaws which could have a Material
Adverse Effect on EFCC. EFCC, at the Effective Time, will own 100% of TPC Home
Care Services, Inc. ("TPC") and all rights and properties of TPC (other than
with respect to shares held by dissenters, subject to the limitations set out in
Section 6.3(k) hereof, in a contemplated stock for stock merger (the "TPC
Merger") of TPC with and into EFCC).
4.2 Capital Stock. As of the date hereof, the authorized capital
stock of EFCC consists in its entirety of 60,000,000 shares, consisting of
50,000,000 shares of common stock, $.01 par value, and 10,000,000 shares of
preferred stock, $.01 par value, ("EFCC Preferred Stock"). As of January 2,
1997, 32,000,226 shares of EFCC Common Stock and no shares of EFCC Preferred
Stock were issued and outstanding and (ii) no options to acquire EFCC Common
Stock were outstanding. All of the outstanding shares of capital stock of each
of the EFCC Subsidiaries are owned beneficially and of record by EFCC or a EFCC
Subsidiary free and clear
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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 EFCC and each of the EFCC Subsidiaries
have been validly issued and are fully paid and nonassessable.
4.3 Options or Other Rights. Except as disclosed in Section 4.2
hereto, or as otherwise contemplated by Section 4.1 hereof, 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 EFCC or any EFCC Subsidiary any of the outstanding, authorized but
unissued, unauthorized or treasury shares of the common stock or any other
security of EFCC or any EFCC Subsidiary and there is no outstanding security of
any kind convertible into or exchangeable for such capital stock. Except as
disclosed in Section 4.3 of the EFCC Disclosure Schedule, no options or rights
to acquire equity securities granted by EFCC have provisions which accelerate
the vesting or right to exercise such options or rights or terminate any rights
upon the consummation of the Merger.
4.4 Authority Relative to this and Other Agreements. EFCC has full
corporate power and authority to execute and deliver this Agreement, the
Consulting Agreement and the Management Agreement and to consummate the
transactions contemplated on its part hereby and thereby. The execution and
delivery of such agreements by EFCC and the consummation of the transactions
contemplated on its part hereby or thereby have been duly authorized by its
Board of Directors, and, other than the approval of EFCC's shareholders as
provided in Section 5.1 hereof or as otherwise disclosed in Section 4.3, no
other corporate proceedings on the part of EFCC are necessary to authorize the
execution and delivery of such agreements by EFCC or the consummation of the
transactions contemplated on its part hereby or thereby. Such agreements have
been duly executed and delivered by EFCC, and constitute legal, valid and
binding obligations of EFCC, enforceable against EFCC in accordance with their
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. Each
of Arbor and Coss and Gary Melius, as voting trustee, as to the shares of EFCC
owned by Coss, (the "Voting Trustee") under that certain Voting Trust Agreement
dated as of June 20, 1996 by and between Cosmetic Sciences, Inc., Coss and Arbor
and the Voting Trustee (the "Voting Trust") has full power and authority to
execute and deliver the EFCC Shareholders Agreement, the irrevocable proxies
contemplated thereby and the Escrow Agreement and to consummate the transactions
contemplated on their part thereby. The execution and delivery of such
agreements by Arbor, Coss and the Voting Trustee and the consummation of the
transactions contemplated on their part thereby have been duly authorized, and
no other proceedings on their part are necessary to authorize the execution and
delivery of such agreements by them or the consummation of transactions
contemplated on their part thereby. Such agreements have been (or, in the case
of the Escrow Agreement, will be) duly executed and delivered by each of Arbor,
Coss and the Voting Trustee (and Mr. Ivan Kaufman with respect to the EFCC
Shareholders Agreement), and constitute (or, in the case of the Escrow
Agreement, will constitute) a legal, valid and binding obligation of each of
Arbor, Coss and the Voting Trustee (and Mr. Ivan Kaufman with respect to the
EFCC Shareholders Agreement), enforceable
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against each of them (and him, as the case may be) in accordance with their
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.
4.5 No Violation. Except as disclosed in Section 4.5 of the EFCC
Disclosure Schedule, the execution, delivery and performance of this Agreement,
the Consulting Agreement and the Management Agreement by EFCC and the execution,
delivery and performance of the EFCC Shareholders Agreement, the irrevocable
proxies contemplated thereby and the Escrow Agreement by Arbor and Coss and the
consummation by each of them of the transactions contemplated hereby and thereby
will not (i) violate or conflict with any provision of any law applicable to
EFCC, any EFCC Subsidiary, Arbor or Coss or by which any of their respective
properties or assets are bound, (ii) except for the Management Agreement, which
is subject to the approval of the Commissioner of the New York State Department
of Health, require the consent, waiver, approval, license or authorization of or
any filing by EFCC, any EFCC Subsidiary, Arbor or Coss with any public authority
(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) in connection with or in compliance with the
provisions of the Exchange Act, the Securities Act, the BCL, the Bylaws of the
National Association of Securities Dealers, Inc. or the "takeover" or "blue sky"
laws of various states, (C) the approval by the New York State Public Health
Counsel required pursuant to Section 3611-a of the New York State Public Health
Law and the rules and regulations thereunder and any similar approvals required
by New Jersey State law, rules or regulations, and (D) any other filings and
approvals expressly contemplated by this Agreement) or, (iii) 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 gives 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 result in the creation of a
lien or other encumbrance on any property or asset of EFCC, any EFCC Subsidiary,
Arbor or Coss pursuant to or under any provision of any charter or bylaw, or the
express terms of any written indenture, mortgage, lien, lease, license,
agreement, contract, instrument, order, judgment, ordinance, EFCC Permit (as
defined below), law, regulation or decree to which EFCC, any EFCC Subsidiary,
Arbor or Coss is subject or by which EFCC, any EFCC Subsidiary, Arbor or Coss or
any of their respective properties or assets are bound, except where the failure
to give such notice, make such filings, or obtain such authorizations, consents,
waivers, licenses or approvals, or where such violations, conflicts, breaches,
defaults, terminations, amendments, accelerations, cancellations, loss of
rights, liens or encumbrances, individually or in the aggregate, would not have
a Material Adverse Effect on EFCC or on EFCC's ability to consummate the
transactions contemplated hereby.
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4.6 Compliance with Laws.
(a) EFCC and each EFCC Subsidiary hold all licenses,
permits and other authorizations necessary to conduct its business
(collectively, "EFCC Permits"), 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 EFCC Permits and all federal, state and other laws,
rules, regulations, ordinances and orders governing its business, including,
without limitation, the requirements, guidelines, rules and regulations of
Medicare, Medicaid and other third-party reimbursement programs, except where
the failure to hold such licenses, permits and other authorizations or to so
comply would not be material to the financial condition, results of operations,
business or properties of EFCC and the EFCC Subsidiaries taken as a whole. The
EFCC Permits are in full force and effect.
(b) All health care personnel employed by EFCC or any EFCC
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 would not be material to the financial
condition, results of operations, business or properties of EFCC and the EFCC
Subsidiaries taken as a whole.
(c) No action or proceeding is pending or, to EFCC's
knowledge, threatened that may result in suspension, revocation or termination
of any EFCC Permit, the issuance of any cease-and-desist order, or the
imposition of any administrative or judicial sanction, and neither EFCC nor any
EFCC Subsidiary has received any notice from any governmental authority in
respect of the suspension, revocation or termination of any EFCC 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 be material to the financial
condition, results of operations, business or properties of EFCC and the EFCC
Subsidiaries taken as a whole.
(d) Neither EFCC nor any EFCC Subsidiary has received
notice that Medicare, Medicaid or any other third-party reimbursement program
has any claims for disallowance of costs against any of them which could result
in material offsets against future reimbursement or recovery of prior payments,
which offsets or recoveries have not been reserved for in EFCC's financial
statements.
4.7 Litigation. Except as set forth in Section 4.7 of the EFCC
Disclosure Schedule or in the EFCC SEC Filings (as defined below) made as of the
date hereof, there are no suits, arbitrations, mediations, actions, proceedings,
unfair labor practice complaints or grievances pending or, to EFCC's knowledge,
threatened against EFCC or any EFCC Subsidiary or with respect to any property
or asset of any of them before any court, arbitrator, administrator or
governmental or regulatory authority or body which, individually or in the
aggregate, would have a Material Adverse Effect on EFCC. Neither EFCC nor any
EFCC Subsidiary nor any property
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or asset of any of them is subject to any order, judgment, injunction or decree
which, individually or in the aggregate, would have a Material Adverse Effect on
EFCC.
4.8 Financial Statements and Reports. EFCC has made available to Star
true and complete copies of (i) its Annual Report on Form 10-KSB for the year
ended December 31, 1995 (the "EFCC 10-KSB"), as filed with the Commission, (ii)
its proxy statement relating to its most recent annual meeting of its
shareholders, (iii) all registration statements filed by EFCC and declared
effective under the Securities Act since January 1, 1994 through the date hereof
and (iv) all other reports, statements and registration statements (including
Current Reports on Form 8-K) filed by it with the Commission subsequent to
January 1, 1994 through the date hereof. 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 "EFCC SEC Filings." As of the respective times such
documents were filed or, as applicable, became effective, the EFCC SEC Filings
complied as to form and content, in all material respects, with the requirements
of the Securities Act and the Exchange Act, as the case may be, and the rules
and regulations promulgated thereunder, 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 EFCC included in the EFCC SEC Filings were prepared in accordance
with generally accepted accounting principles (as in effect from time to time)
applied on a consistent basis and (except as may be indicated therein or in the
notes thereto) present fairly the consolidated financial position, consolidated
results of operations and consolidated cash flows of EFCC and the EFCC
Subsidiaries as of the dates and for the periods indicated subject, in the case
of unaudited interim consolidated financial statements, to normal recurring
year-end adjustment and any other adjustment described therein. Since December
31, 1995, there has been no change in accounting principles applicable to, or
methods of accounting utilized by, EFCC. The books and records of EFCC and the
EFCC Subsidiaries have been and are being maintained in accordance with good
business practice, reflect only valid transactions, are complete and correct in
all material respects, and present fairly in all material respects the basis for
the financial position and results of operations of EFCC and the EFCC
Subsidiaries set forth in the financial statements of EFCC included in the EFCC
SEC Filings.
4.9 Absence of Certain Changes or Events. Since December 31, 1995,
except as expressly disclosed in the EFCC SEC Filings made through the date
hereof and except with respect to the sale by TPC prior to the date hereof of
certain assets to Public Services, Inc. (the "Asset Sale"), (the full
description and terms of which are set forth in Section 4.9 of the EFCC
Disclosure Schedule), the business of EFCC and of each of the EFCC Subsidiaries
has been conducted in the ordinary course, and there has not been (i) any
material adverse change in the condition (financial or otherwise), results of
operations, business, working capital, assets, liabilities, or prospects of EFCC
and the EFCC Subsidiaries, taken as a whole; (ii) any indebtedness incurred by
EFCC or any EFCC Subsidiary for money borrowed; (iii) any material transaction
or commitment, except in the ordinary course of business or as contemplated by
this
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Agreement or as set forth in Section 4.9 of the EFCC Disclosure Schedule or in
the EFCC SEC Filings, entered into by EFCC or any of the EFCC 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 EFCC;
(v) except for the EFCC Dividend and except as set forth in Section 4.9 of the
EFCC Disclosure Schedule, any declaration, setting aside or payment of any
dividend (whether in cash, securities or property) with respect to the EFCC
Common Stock; (vi) any material agreement to acquire any assets or stock or
other interests of any third-party; (vii) any increase in the compensation
payable since the filing of EEFC's Form 10-QSB for the period ended September
30, 1996 or to become payable by EFCC or any EFCC Subsidiary to any employees,
officers, consultants, or directors 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 EFCC Disclosure Schedule or any increase in the cash compensation
payable to non-officer employees to the extent consistent with past practice if
the rate of total annual compensation for any individual would not increase such
individual's rate of total annual compensation by more than five percent (5%)
over such individual's rate of total compensation); (viii) any material
revaluation by EFCC or any EFCC Subsidiary of any asset (including, without
limitation, any writing down of the value of inventory or writing off of notes
or accounts receivable); (ix) any material change by EFCC in accounting
principles or methods except insofar as may be required by a change in generally
accepted accounting principles; (x) any mortgage or pledge of any of the assets
or properties of EFCC or any EFCC Subsidiary or the subjection of any of the
assets or properties of EFCC or any EFCC 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 EFCC or a EFCC Subsidiary of the indebtedness of any person or
entity.
4.10 Employee Benefit Plans and Employment Matters.
(a) Section 4.10 of the EFCC Disclosure Schedule lists all
employee benefit plans, collective bargaining agreements, labor contracts and
employment agreements not otherwise disclosed in the EFCC SEC Filings, which
provide for the annual payment of more than $25,000 in which EFCC participates,
or by which it is 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 its 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) that is
not exempted from the coverage of ERISA by reason of the Department of Labor
regulations. EFCC is 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. EFCC has 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 EFCC, threatened legal action, proceeding or
investigation
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against or involving any EFCC employee benefit plan which could result in a
material amount of liability to such employee benefit plan or to EFCC.
(b) EFCC does not sponsor or participate 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 EFCC
under Title IV of ERISA.
(c) EFCC does not sponsor or participate in, and has not
sponsored or participated in, any employee benefit pension plan that is a
"multiemployer plan" (within the meaning of Section 3(37) of ERISA) that would
subject EFCC to any material amount of liability with respect to any such plan.
(d) All group health plans of EFCC 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 EFCC that have
given rise to or may give rise to a material amount of fines, penalties, taxes,
or related charges under Sections 502(c) 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 EFCC.
(g) Section 4.9 of the EFCC Disclosure Schedule sets forth
the name of each director, officer or employee of EFCC entitled to receive any
material amount of 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) EFCC has made available to Star true and correct
copies of all plan documents and employment agreements referred to on Section
4.10 of the EFCC 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
"EFCC" shall be deemed to include a reference to any entity that is aggregated
with EFCC under the provisions of Section 414 of the Code, to the extent that
those aggregation rules apply.
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(j) At all times during the pendency of the employee
benefit plans referenced in the EFCC SEC Filings or in Section 4.10 of the EFCC
Disclosure Schedule, EFCC has had fewer than 100 employees enrolled in each of
such plans.
4.11 Labor Matters. Neither EFCC nor any EFCC Subsidiary has executed
any collective bargaining agreement with respect to any of their employees. None
of the employees of EFCC or any EFCC Subsidiary is represented by any labor
union. To the knowledge of EFCC, there is no activity involving any employees of
EFCC or the EFCC Subsidiaries seeking to certify a collective bargaining unit or
engaging in any other organizational activity.
4.12 Insurance. EFCC and the EFCC Subsidiaries maintain insurance
against such risks and in such amounts as EFCC reasonably believes are necessary
to conduct its business. All policies of fire, liability, workers' compensation
and other forms of insurance maintained by EFCC or the EFCC Subsidiaries are set
forth in Section 4.12 of the EFCC Disclosure Schedule. All such policies are in
full force and effect and all premiums required to be paid with respect thereto
have been paid for all periods up to and including the date hereof. EFCC and the
EFCC 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 EFCC. Neither EFCC nor any EFCC Subsidiary has received any
notice of cancellation or termination in respect of any of its insurance
policies.
4.13 Environmental Matters. EFCC and the EFCC 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
EFCC. Neither EFCC nor any EFCC Subsidiary has received any 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 EFCC, threatened, in any case, which would lead to a Material
Adverse Effect on EFCC.
4.14 Tax Matters. (a) EFCC and each EFCC Subsidiary (for purposes of
this Section 4.14, EFCC Subsidiary shall also include all corporations that
were, at any time prior to the Effective Time, subsidiaries of EFCC, including
but not limited to TPC): (i) has duly and timely filed with the appropriate
authorities all Tax Returns (as defined below) required to be filed by or on
behalf of (or which includes) EFCC or any EFCC Subsidiary on or before the date
hereof, which Tax Returns are true, correct and complete, (ii) has duly and
timely paid or caused to be timely paid all Taxes (as defined below) due and
payable in respect of all periods up to and including the date hereof, and (iii)
has properly accrued on the Financial Statements all Taxes not
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yet payable in respect of all periods up to and including the date hereof.
Section 4.14 of the EFCC Disclosure Schedule sets forth a list of each
jurisdiction in which EFCC or any EFCC Subsidiary has filed or is required to
file a Tax Return, the type of Tax and the type of Tax Return filed or required.
EFCC has provided Star with a copy of each Tax Return filed by or on behalf of
EFCC or any EFCC Subsidiary (or which includes EFCC or any EFCC Subsidiary)
within the last three years. EFCC and each EFCC Subsidiary has duly and timely
withheld or collected, paid over and reported all Taxes required to be withheld
or collected by it on or before the date hereof. Except as set forth in Section
4.14 of the EFCC Disclosure Schedule: (A) no taxing authority has claimed,
proposed or asserted any adjustment that could result in the creation of, or an
increase in, any deficiency in any Tax for which EFCC or any EFCC Subsidiary is
or may be liable or which relates to the income, assets or operations of EFCC or
any EFCC Subsidiary; (B) to the knowledge of EFCC or any EFCC Subsidiary, there
is no pending or threatened audit, investigation, proceeding or claim respecting
any Tax for which EFCC or any EFCC Subsidiary is or may be liable or which
relates to the income, assets or operations of EFCC or any EFCC Subsidiary; (C)
no statute of limitations relating to the assessment or collection of any Tax
for which EFCC or any EFCC Subsidiary is or may become liable or subject has
been waived or extended; (D) neither EFCC nor any EFCC Subsidiary is a party to
any agreement, contract or arrangement that would result, individually or in the
aggregate, in the payment of any amount that would not be deductible by reason
of Section 162 (unless required to be capitalized under Section 263 or 263A of
the Code), Section 280G or Section 404 of the Code, and the regulations
promulgated thereunder; (E) neither EFCC nor any EFCC Subsidiary is a party to
any Tax sharing or Tax allocation agreement; (F) there are no liens for Taxes
upon the assets of EFCC or any EFCC Subsidiary except for liens for Taxes not
yet due and payable; and (G) neither EFCC nor any EFCC Subsidiary is a foreign
person (within the meaning of Section 7701 of the Code). EFCC and each EFCC
Subsidiary have adequately disclosed on its federal income Tax Returns all
positions taken therein that could give rise to a substantial understatement of
federal income tax within the meaning of Section 6662 of the Code. Neither EFCC
nor any EFCC Subsidiary is a "consenting corporation" within the meaning of
Section 341(f) of the Code. No Tax is required to be withheld pursuant to
Section 1445 of the Code as a result of the transactions contemplated by this
Agreement. Neither EFCC nor any EFCC Subsidiary has ever made or been required
to make an election under Section 338 of the Code (or any comparable state,
local or foreign Tax provision). None of the assets of EFCC or any EFCC
Subsidiary is required to be treated as being owned by any other person pursuant
to the "safe harbor" leasing provisions of Section 168(f)(8) of the Internal
Revenue Code of 1954, as in effect prior to the repeal of said provision (or any
comparable state, local or foreign Tax provision). Any Tax Sharing or Tax
Allocation Agreement listed in Section 4.14 of the EFCC Disclosure Schedule has
been terminated on or before the date hereof without obligation of EFCC or any
EFCC Subsidiary.
For purposes of this Agreement, "Tax" means any tax, fee, levy, duty,
assessment or other governmental charge imposed by any governmental authority
(including without limitation any income, franchise, gross receipts, property,
sales, use, excise, services, value added, ad valorem, withholding, social
security, estimated, accumulated earnings, transfer, license, privilege,
payroll, profits, capital stock, employment, unemployment, severance, stamp,
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minimum, environmental, occupancy, customs or occupation tax), including without
limitation any liability therefor as a result of Treasury Regulation ss.1.1502-6
(or any comparable state, local or foreign Tax provision), as a transferee
(including under Section 6901 of the Code or any comparable state, local or
foreign Tax provision) or as a result of any Tax sharing or similar agreement,
and any interest, additions to tax and penalties in connection therewith. "Tax
Return" means any return, declaration, report, estimate, claim, information
return or statement and any amendment thereto, together with any supporting
information or schedules, which is filed or required to be filed under
applicable law in connection with the determination, assessment, collection,
payment, refund or administration of any Tax, whether on a consolidated,
combined, unitary or separate basis or otherwise.
4.15 Intellectual Property. EFCC and the EFCC Subsidiaries own,
possess or have the right to use all franchises, patents, trademarks, service
marks, tradenames, licenses and authorizations (collectively, "EFCC Intellectual
Property Rights") set forth in Section 4.15 of the EFCC Disclosure Schedule,
which are necessary to the conduct of their respective businesses. Except as
disclosed in the EFCC SEC Filings, to the knowledge of EFCC, neither EFCC nor
any EFCC Subsidiary is infringing or otherwise violating the intellectual
property rights of any person which infringement or violation would subject EFCC
or any EFCC Subsidiary to liabilities which, individual or in the aggregate,
would have a Material Adverse Effect on EFCC or which would prevent EFCC or any
EFCC Subsidiary from conducting their respective businesses substantially in the
manner in which they are now being conducted. Except as disclosed in the EFCC
SEC Filings, no claim has been made or, to EFCC's knowledge, threatened against
EFCC or any EFCC Subsidiary alleging any such violation.
4.16 Related Party Transactions. Except as disclosed in Section 4.16
of the EFCC Disclosure Schedule or in the EFCC SEC Filings, there have been no
material transactions between EFCC or any EFCC Subsidiary on the one hand, and
any (i) officer or director of EFCC or any EFCC Subsidiary or (ii) record or
beneficial owner of five percent or more of the voting securities of EFCC.
4.17 No Undisclosed Material Liabilities. Other than professional
fees related to the transactions contemplated by this Agreement hereby and
except as disclosed in the EFCC SEC Filings or in Section 4.17 of the EFCC
Disclosure Schedule, neither EFCC nor any of the EFCC 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 EFCC other than liabilities under or
contemplated by this Agreement.
4.18 No Default. Neither EFCC nor any of the EFCC 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 (i) its charter or Bylaws, (ii) any note, bond, mortgage,
indenture, license, agreement, contract, lease, commitment or other obligation
to which EFCC or any of the EFCC Subsidiaries is a party or by which they or
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any of their properties or assets may be bound, or (iii) any order, writ
injunction, decree, statute, rule or regulation applicable to EFCC or any of the
EFCC Subsidiaries, except in the case of clauses (ii) and (iii) above for
defaults or violations which would not have a Material Adverse Effect on EFCC.
4.19 Title to Properties; Encumbrances.
(a) EFCC and the EFCC Subsidiaries have good and
marketable title to all of the Assets (as hereinafter defined) reflected as
owned by EFCC on the September 30, 1996 Balance Sheet and all Assets thereafter
acquired by it (except for Assets disposed of by it in the ordinary course of
business or pursuant to the Asset Sale). The Assets are not subject to any
mortgage, security interest, pledge, lien, claim, encumbrance or charge, or
restraint or transfer whatsoever and no currently effective financing statement
with respect to any of its Assets has been filed under the Uniform Commercial
Code in any jurisdiction. Neither EFCC nor any EFCC Subsidiary is a party to any
financing statement or any security agreement authorizing any secured party
thereunder to file any financing statement. No person other than EFCC has any
right to the use or possession of any of the Assets. All Assets which are real
property or tangible personal property, whether owned or leased, are in good
operating condition and repair, excepting normal wear and tear, and are
sufficient to enable EFCC to operate its business in a manner consistent with
its operation during the immediately preceding twelve (12) months.
(b) Set forth on Section 4.19(b) of the EFCC Disclosure
Schedule is a true and correct list of leases, conditional sales, licenses or
similar arrangements to which EFCC or any EFCC Subsidiary is a party or to which
EFCC or any EFCC Subsidiary or any Asset is subject. EFCC has delivered to Star
a complete and correct copy of each lease, conditional sale, license and other
arrangement listed in Section 4.19(b) of the EFCC Disclosure Schedule. All of
said arrangements are valid, binding and enforceable in accordance with their
respective terms and are in full force and effect. Neither EFCC nor any EFCC
Subsidiary is in default under one or more of such arrangements, except to the
extent such defaults would not have a Material Adverse Effect on EFCC and has
not received any written notice alleging any default, set-off, or claim of
default. To the knowledge of EFCC, the parties to such arrangements are not in
default of their respective obligations under any of such arrangements, and
there has not occurred any event which, with the passage of time or giving of
notice (or both), would constitute such a default or breach under any of such
arrangements, except to the extent such default or breach would not have a
Material Adverse Effect on EFCC.
(c) As used herein, the term "Assets" means all of the
tangible and intangible assets of EFCC and the EFCC Subsidiaries including,
without limitation, all real property, tangible personal property (including,
without limitation, fixed and moveable equipment, trucks, cars and other
vehicles, furnishings, inventory and supplies), contract rights, leasehold
interests, goodwill, tradenames, trademarks, patient records and files, patient
films, Medicare and Medicaid provider agreements and numbers, telephone numbers
and, to the extent permitted by law, all permits, licenses and other
governmental approvals.
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4.20 Contracts. Section 4.20 of the EFCC Disclosure Schedule contains
a complete and correct list of all of the following categories of agreements,
contracts, arrangements and commitments ("Contracts"), including summaries of
oral contracts (except immaterial oral contracts terminable at will), to which
EFCC or any EFCC Subsidiary or any of the Assets are bound, including, without
limitation:
(a) each contract or agreement for the employment or
retention of, or collective bargaining, severance or termination agreement with,
any director, officer, employee, consultant, agent, employee or group of
employees;
(b) each profit sharing, thrift, bonus, incentive,
deferred compensation, stock option, stock purchase, severance pay, pension,
retirement, hospitalization, insurance or other similar plan, agreement or
arrangement;
(c) each agreement or arrangement (including letter of
intent) for the purchase or sale of any assets, properties or rights outside the
ordinary course of business (by purchase or sale of assets, purchase or sale of
capital stock, merger or otherwise) which is currently in effect;
(d) each contract which contains any provisions requiring
EFCC or any EFCC Subsidiary to indemnify or act for, or guarantee the obligation
of, any other person or entity;
(e) each agreement restricting EFCC or any EFCC Subsidiary
from conducting business of any nature anywhere in the world;
(f) each partnership or joint venture contract or similar
arrangement or agreement which is likely to involve a sharing of profits or
future payments with respect to the business (or any portion thereof) of EFCC or
any EFCC Subsidiary;
(g) each agreement under which EFCC or any EFCC Subsidiary
is to acquire or contract to receive the services of any health care
professionals;
(h) each agreement to perform or provide services for any
nursing home, health care facility or any other facility or individual;
(i) each agreement with a laboratory;
(j) each lease, license, conditional sales contract or
similar arrangement for real or personal property or any corporate name, trade
or service mark, copyright, patent, process, operational manual, technique and
similar property;
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(k) each other agreement not made in the ordinary and
normal course of business which involves consideration of more than $25,000; and
(l) each letter of intent or agreement in principle to
enter into any Contract (whether or not binding, in whole or in part).
True, correct and complete copies of each Contract have been provided
or made available to Star and each remains in full force and effect in
accordance with the copies provided to Star. Each of the Contracts was entered
into and requires performance only in the ordinary course of business. EFCC is
not in material default under any Contract and no default or right of set-off
has been asserted, either by or against EFCC under any Contract, except such
defaults or breaches which, individually or in the aggregate would not have a
Material Adverse Effect on EFCC. To the knowledge of EFCC, the parties to the
Contracts, other than EFCC, are not in material default of any of their
respective obligations under the Contracts, and there has not occurred any
event, which with the passage of time or the giving of notice (or both), would
constitute a material default or breach under any Contract, except such defaults
or breaches which, individually or in the aggregate would not have a Material
Adverse Effect on EFCC. All amounts payable by EFCC under the Contracts are on a
current basis. Except as set forth in Section 4.5 or 4.20 of the EFCC Disclosure
Schedule, no Contract is terminable nor requires a payment in the event of the
Merger or a change in control of EFCC.
4.21 Medicare/Medicaid Participation; Accreditation. All services
provided by EFCC and the EFCC Subsidiaries which are reimbursable by Medicaid or
Medicare are certified for full participation in such programs, have a current
and valid provider contract with the Medicare and Medicaid programs or other
third party reimbursement source (inclusive of managed care organizations), are
in substantial compliance with the conditions of participation of such programs,
and have received all approvals or qualifications necessary for capital
reimbursement (if applicable). Neither EFCC nor any EFCC Subsidiary has received
any notice of recoupment from nor has any material liability for reimbursements
of any excess payments made by the Medicare or Medicaid programs or any other
third party reimbursement source (inclusive of managed care organizations).
4.22 Rate Tables and Reimbursement. EFCC has provided to Star rate
tables that set forth a complete and correct list of the rates charged by EFCC
and the EFCC Subsidiaries to their various customers. Neither EFCC nor any EFCC
Subsidiary is required to pay any Medicare or Medicaid refunds, and neither EFCC
nor any EFCC Subsidiary has paid any Medicare or Medicaid refunds since January
1, 1994.
4.23 Relationships. Except as disclosed in the EFCC SEC Filings, no
controlling shareholder, partner or affiliate of EFCC has, or at any time within
the last two (2) years has had, an ownership interest in any business, corporate
or otherwise, that is a party to, or in any property that is the subject of, any
business relationship or arrangement of any kind relating
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to the operation or business of, or which may be binding upon, EFCC, any EFCC
Subsidiary or their Assets.
4.24 Employees. Section 4.24 of the EFCC Disclosure Schedule sets
forth a complete and correct list of the name, position and current rate of
compensation and all other compensation arrangements or fringe benefits of each
officer of EFCC and each EFCC Subsidiary.
4.25 Questionable Payments. Neither EFCC, any EFCC Subsidiary nor any
of its former subsidiaries, nor, to the knowledge of EFCC, any director,
officer, Affiliate or employee of EFCC or any of its former subsidiaries: (i)
has used any corporate funds of EFCC, any EFCC Subsidiary or any of EFCC's
former subsidiaries to make any payment to any officer or employee of any
government, or to any political party or official thereof, where such payment
either (A) is unlawful under laws applicable thereto or (B) would be unlawful
under the Foreign Corrupt Practices Act of 1977, as amended; nor (ii) has used
any corporate funds of EFCC, any EFCC Subsidiary or any of its former
subsidiaries for making payments to any person if such payment constituted an
illegal payment, bribe, kickback, political contribution or other similar
questionable payment.
4.26 Representations Complete. As of the execution of this Agreement,
none of the representations or warranties made by EFCC herein or in any Schedule
hereto, including the EFCC Disclosure Schedule, or certificate furnished by EFCC
pursuant to this Agreement, or the EFCC SEC Filings, when all such documents are
read together in their entirety, contains any untrue statement of a material
fact, or omits to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.
4.27 Brokers. Neither EFCC nor any EFCC Subsidiary has paid or is
obligated to pay any fee or commission to any broker, finder, investment banker
or other intermediary in connection with this Agreement.
4.28 Minimum Net Worth, Working Capital and Cash. As of the date
hereof, the Adjusted Net Worth (as hereinafter defined) exceeds $1,500,000; the
Adjusted Working Capital (as hereinafter defined) exceeds $1,050,000; and the
Adjusted Cash (as hereinafter defined) exceeds $800,000.
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ARTICLE V
COVENANTS AND AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Shareholders'
Meeting.
(a) Star and EFCC agree that this Agreement shall be
submitted to their respective shareholders 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 Star and EFCC shall take
all action, to the extent necessary in accordance with applicable law and their
respective Certificates of Incorporation and Bylaws, to convene the Meetings
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,
EFCC and Star shall jointly prepare and file with (i) the Commission, subject to
the prior approval of the other party, which approval shall not be unreasonably
withheld, preliminary joint proxy materials relating to the Meetings 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 Star Common Stock issuable to the holders of
the EFCC Common Stock, and (ii) 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 Star Common Stock issuable to
the holders of the EFCC Common Stock (the "Blue Sky Filings"). EFCC, Merger Sub
and Star shall use their reasonable best efforts to cause the Registration
Statement to become effective as soon as practicable. Promptly after the
Registration Statement has become effective and all applicable blue sky laws
have been complied with, Star and EFCC shall mail the joint proxy statement to
their respective shareholders. Such joint proxy statement at the time it
initially is mailed to the shareholders of Star and the shareholders of EFCC and
all duly filed amendments or revisions made thereto, if any, similarly mailed
are hereinafter referred to as the "Proxy Statement." Notice of the Star Meeting
shall be mailed to the shareholders of Star and notice of the EFCC Meeting shall
be mailed to the shareholders of EFCC, along with the Proxy Statement. In
addition, in connection with the TPC Merger, EFCC shall take such similar
actions as are required in furtherance of the TPC Merger, including those set
forth in this paragraph in connection with the Merger.
(b) Each party represents and warrants that the
information supplied or to be supplied by it for and included or incorporated by
reference in the Registration Statement, the Blue Sky Filings, the Proxy
Statement and any other documents to be filed with the Commission or any
regulatory agency in connection with the transactions contemplated hereby will,
at the respective times such documents are filed or, as applicable, declared
effective and, as of the Effective Time, and, with respect to the Proxy
Statement, when first published, sent or given to the shareholders of Star and
to the shareholders of EFCC and at the time of the
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Meetings, not be false or misleading with respect to a material fact, or omit to
state any material fact necessary in order to make the statements therein 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 shareholders
of Star and EFCC, 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 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) EFCC hereby represents that its Board of Directors has
(i) determined that the Merger is fair to and in the best interests of EFCC's
shareholders, (ii) approved the Merger and (iii) resolved to and will recommend
in the Proxy Statement adoption of this Agreement and authorization of the
Merger by the shareholders of EFCC; provided, however, that such determination,
approval or recommendation may be amended, modified or withdrawn to the extent
required by the fiduciary obligations of EFCC's Board of Directors under
applicable law, in the written opinion of outside counsel addressed to EFCC and
Star. Star hereby represents that its Board of Directors has (i) determined that
the Merger is fair to and in the best interests of Star's shareholders, (ii)
approved the Merger and (iii) resolved to and will recommend in the Proxy
Statement adoption of this Agreement and authorization of the Merger by the
shareholders of Star.
(e) EFCC shall use all reasonable efforts to cause to be
delivered to Star a letter of Carpenter & Onorato, P.C., EFCC's independent
accountants, dated a date within five (5) business days before the date on which
the Registration Statement shall become effective and addressed to Star, 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 Star and customary in scope and substance for letters delivered
by independent public accountants in connection with registration statements
similar to the Registration Statement. Star shall use all reasonable efforts to
cause to be delivered to EFCC a letter of Holtz Rubinstein & Co., LLP, Star's
independent accountants, dated a date within five (5) business days before the
date on which the Registration Statement shall become effective and addressed to
EFCC, of the kind contemplated by the AICPA Statement, in form and substance
reasonably satisfactory to EFCC
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and customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement.
5.2 Conduct of the Business of EFCC Prior to the Effective Time.
Prior to the Effective Time, except as (i) otherwise expressly consented to or
approved by Star, (ii) expressly advised by Star pursuant to the Consulting
Agreement or as expressly directed by Star pursuant to the Management Agreement
or required in order to consummate the transactions contemplated by, this
Agreement:
(a) EFCC and the EFCC Subsidiaries shall conduct their
respective businesses in the ordinary course and consistent in all material
respects with past practice and shall use all reasonable efforts to preserve
substantially intact their respective business organizations, to keep available
the services of their 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;
(b) Neither EFCC nor any EFCC Subsidiary shall (i) amend
its charter or Bylaws, (ii) other than the EFCC Dividend, declare, set aside or
pay any dividend or other distribution or payment in cash, securities or
property in respect of shares of the EFCC Common Stock, (iii) make any direct or
indirect redemption, retirement, purchase or other acquisition of any of its
capital stock or (iv) split, combine or reclassify its outstanding shares of
capital stock;
(c) Neither EFCC nor any EFCC Subsidiary shall, directly
or indirectly, (i) 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 EFCC or such EFCC Subsidiary except
that EFCC may issue shares of EFCC Common Stock upon the exercise of stock
options outstanding on the date hereof pursuant to the terms thereof existing as
of the date hereof, (ii) other than in the ordinary course of business and
consistent with past practice, incur any material indebtedness for borrowed
money, (iii) waive, release, grant or transfer any rights of material value,
(iv) except as provided in clause (v) below, merge or consolidate with any
person or adopt a plan of liquidation or dissolution, (v) acquire, propose to
acquire or enter into an agreement to acquire any assets, stock or other
interests of a third party, (vi) transfer, lease, license, sell or dispose of a
material portion of assets or any material assets, (vii) permit any material
revaluation of any asset (including, without limitation, any writing down of the
value of inventory or writing off of notes or accounts receivable), (viii)
change any accounting principles or methods except insofar as may be required by
changes in generally accepted accounting principles or (ix) 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;
(d) Neither EFCC nor any EFCC Subsidiary will, directly or
indirectly, (i) increase the cash compensation payable or to become payable by
it to any of its employees, officers, consultants or directors; provided that
EFCC or any EFCC Subsidiary may increase the
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cash compensation payable to non-officer employees to the extent consistent with
past practice and in no event to a rate of total annual compensation for any
individual that would increase such individual's rate of total annual
compensation by more than five percent (5%) over such individual's current such
rate, (ii) 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 EFCC or any EFCC Subsidiary, (iii) enter into or
amend any employment or consulting agreement, 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 EFCC or any EFCC Subsidiary;
(e) Neither EFCC nor any EFCC 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 EFCC nor any EFCC Subsidiary shall authorize
or enter into any agreement to do any of the things described in clauses (a)
through (e) of this Section 5.2;
(g) EFCC and each EFCC Subsidiary: (i) shall duly and
timely file with the appropriate authorities all Tax Returns required to be
filed by or on behalf of (or which includes) EFCC or any EFCC Subsidiary, which
Tax Returns shall be true, correct and complete; (ii) shall duly and timely pay
or cause to be timely paid all Taxes due and payable; (iii) shall duly and
timely withhold or collect, and pay over to the appropriate authorities all
Taxes required to have been withheld or collected; (iv) shall prepare such Tax
Returns in a manner consistent with Tax Returns of the same type filed by such
corporation prior to the date hereof (unless otherwise required by applicable
law); (v) shall not make, amend, modify or terminate any election with respect
to any Tax or Tax Return, without the prior written consent of Star; (vi) shall
furnish Star with a draft of each Tax Return with sufficient time to review such
Tax Return and comment thereon, and have corrections made, prior to the timely
filing of such Tax Return; (vii) immediately notify Star if any taxing authority
claims, proposes or asserts any adjustment that could result in the creation of,
or an increase in, any deficiency in any Tax for which EFCC or any EFCC
Subsidiary is or may be liable or which relates to the income, assets or
operations of EFCC or any EFCC Subsidiary; (viii) shall not waive or extend any
statute of limitations relating to the assessment or collection of any Tax for
which EFCC or any EFCC Subsidiary is or may become liable or subject; (ix) shall
not enter into or become a party to any agreement, contract or arrangement that
would result, individually or in the aggregate, in the payment of any amount
that would not be deductible by reason of Section 162 (unless required to be
capitalized under Section 2603 or 263A of the Code), Section 280G or Section 404
of the Code, and the regulations promulgated thereunder; (x) shall not enter
into or become a party to any Tax sharing or Tax allocation agreement; (xi)
shall not become or acquire a foreign person (within the meaning of Section 7701
of the Code); (xii) shall adequately disclose on its federal income Tax Returns
all positions taken therein that could give rise to a substantial understatement
of federal income tax
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within the meaning of Section 6662 of the Code; (xiii) shall not become a
"consenting corporation" within the meaning of Section 341(f) of the Code; (xiv)
shall not make or become required to make an election under Section 338 of the
Code (or any comparable state, local or foreign Tax provision); and (xv) shall
not acquire any assets required to be treated as being owned by any other person
pursuant to the "safe harbor" leasing provisions of Section 168(f)(8) of the
Internal Revenue Code of 1954, as in effect prior to the repeal of said
provision (or any comparable state, local or foreign Tax provision).
5.3 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 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 their respective officers and
employees to answer fully and promptly questions put to them thereby; provided,
however, that no investigation pursuant to this Section 5.3 shall alter any
representation or warrant of any party hereto or the conditions to the
obligations of the parties hereto.
5.4 No Solicitation, Etc.
(a) Prior to the Effective Time, EFCC agrees that it shall
not, and shall cause each of its officers, directors, employees, agents, legal
and financial advisors and affiliates not to, directly or indirectly, make,
solicit, encourage, initiate or unless permitted by Section 5.4(b) enter into
any agreement or agreement in principle, or announce any intention to do any of
the foregoing, with respect to any offer or proposal to acquire all or a
substantial part of EFCC's business and properties or a substantial amount of
EFCC's equity securities or debt securities whether by purchase, merger,
purchase or assets, tender offer, exchange offer, business combination or
otherwise (any such proposal or offer being hereinafter referred to as a "Third
Party Transaction").
(b) Prior to the Effective Time, EFCC and its Subsidiaries
shall not, and shall cause each of their officers, directors, legal and
financial advisors, agents and affiliates not to, directly or indirectly,
participate in any negotiations or discussions regarding, or furnish any
information with respect to, or otherwise cooperate in any way in connection
with, or assist or participate in, facilitate or encourage, any effort or
attempt to effect or seek to effect, a Third Party Transaction with or involving
any other person unless EFCC shall have received an unsolicited written offer to
effect a Third Party Transaction and the Board of Directors of EFCC determines
in good faith upon the written opinion of its outside legal counsel addressed to
Star and EFCC that, in the exercise of the fiduciary obligations of the Board of
Directors under applicable law, such information is required to be provided to
or such discussions or negotiations are required to be undertaken with the
person submitting such Third Party Transaction. EFCC represents that it is not
currently involved in any negotiations with any person other than Star with
respect to any Third Party Transaction.
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(c) Prior to the Effective Time, EFCC will promptly
communicate to Star the terms of any Third Party Transaction which it may
receive and will keep Star informed as to the status of any actions, including
negotiations or discussions, taken in connection therewith.
5.5 Employee Benefit Plans. Except as otherwise provided in this
Agreement, the EFCC employee benefit plans listed on the EFCC Disclosure
Schedule which are in effect at the date of this Agreement shall remain in
effect immediately following the Effective Time. Star and EFCC shall cooperate
in coordinating their respective benefit plans, and any EFCC employee benefit
plan may be terminated after the Effective Time, to the extent reasonably
comparable benefits (including credit for past service), considered in the
aggregate, are made available to employees of EFCC under one or more employee
benefits plans of Star or any Star Subsidiary.
5.6 Existing Agreements. Star and the Surviving Corporation shall
insure and guaranty that the provisions with respect to indemnification by EFCC
and the EFCC Subsidiaries now existing in favor of any present or former
director, officer, employee or agent (and their respective heirs and assigns) of
EFCC or any EFCC Subsidiary, respectively (the "Indemnified Parties"), as set
forth in their respective charters or Bylaws or pursuant to other agreements
(including any insurance policies), shall survive the Merger, shall not be
amended, repealed or modified in any manner as to adversely affect the rights of
such Indemnified Parties and shall continue in full force and effect for a
period of at least six years from the Effective Time; provided, however, that
Star and the Surviving Corporation shall be required to maintain or obtain such
insurance coverage only (i) if it is available for an annual premium not in
excess of 125% of the last annual premium paid by EFCC or the EFCC Subsidiaries
prior to the date of this Agreement (but in such case shall purchase as much
coverage as possible for an amount which shall not exceed 125% of the last
annual premium paid by EFCC or the EFCC Subsidiaries prior to the date of the
Agreement), and (ii) for six years after the Effective Time. This Section 5.6
shall survive the closing of any of the transactions contemplated hereby, is
intended to benefit the officers and employees of EFCC and of the EFCC
Subsidiaries at the Effective Time and each of the Indemnified Parties (each of
which shall be entitled to enforce this Section 5.6 against Star 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 the Surviving
Corporation.
5.7 Confidentiality. The confidentiality agreement (the
"Confidentiality Agreement") dated June 4, 1996 between EFCC and Star is hereby
affirmed by Star and EFCC 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. Each of Star and EFCC
agrees that it will not, and will cause its respective Representatives (as such
term is defined in the Confidentiality Agreement) not to, use any information
obtained pursuant to Section 5.3 for any purpose unrelated to the consummation
of the transactions contemplated by this Agreement.
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Subject to the requirements of law, each party hereto will keep confidential,
and will cause its respective Representatives to keep confidential, all
information and documents obtained pursuant to Section 5.3 except as otherwise
consented to by the other party; provided, however, that neither Star nor EFCC
shall be precluded from making any disclosure which it deems required by law in
connection with the Merger. In the event that any party is required to disclose
any information or documents pursuant to the immediately preceding sentence,
such party shall promptly give written notice of such disclosure that is
proposed to be made to the other party so that the parties can work together to
limit the disclosure to the greatest extent possible and, in the event that
either party is legally compelled to disclose any information, to seek a
protective order or other appropriate remedy or both. Upon any termination of
this Agreement, each of Star and EFCC will collect and deliver to the other
party all documents obtained pursuant to Section 5.3 or otherwise from such
party or its respective Representatives by it or any of its respective
Representatives then in their possession and any copies thereof.
5.8 Reasonable Best Efforts. Subject to the terms and conditions
herein provided, the parties hereto shall: (i) if required by law, promptly make
their respective filings and thereafter make any other required submissions
under the HSR Act with respect to the Merger; (ii) use all reasonable best
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 or regulatory
authorities of the United States and the several states and from private parties
in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, including those Third
Party Consents required by TPC, and (B) timely making all such filings and
timely seeking all such Third Party Consents, including those Third Party
Consents required by TPC; and (iii) use all reasonable best 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, including the TPC Merger. 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. No party hereto shall
take any action for the purpose of delaying, impairing or impeding the receipt
of any Third Party Consent including those Third Party Consents required by TPC,
or the making of any required filing or registration or the mailing of the Proxy
Statement. EFCC shall use its reasonable best efforts to obtain the opinions
referred to in Sections 6.1(f) and 6.1(g).
5.9 Certification of Shareholder Vote. At or prior to the closing of
the transactions contemplated by this Agreement, EFCC and Star shall deliver to
each other a certificate of their respective Secretaries setting forth the
number of shares of EFCC Common Stock or Star 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 EFCC Common Stock or Star Common Stock voted against
adoption of this Agreement and consummation of the Merger.
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5.10 Affiliate Letters. At least 30 days prior to the Closing Date,
EFCC shall deliver to Star a list of names and addresses of those persons who
were, in the reasonable judgment of EFCC at the record date for its
shareholders' meeting to approve the Merger, "affiliates" (each such person a
"Rule 145 Affiliate") of EFCC within the meaning of Rule 145 of the rules and
regulations promulgated under the Securities Act. EFCC shall provide to Star
such information and documents as Star may reasonably request for purposes of
reviewing such list. EFCC shall use all reasonable efforts to deliver or cause
to be delivered to Star, prior to the Closing Date, from each of its Rule 145
Affiliates identified in the foregoing list, an Affiliate Letter in the form
attached hereto as Exhibit A. Star shall be entitled to place legends as
specified in such Affiliate Letters on the certificates evidencing any Star
Common Stock to be received by Rule 145 Affiliates pursuant to the terms of this
Agreement, and to issue appropriate stop transfer instructions to the transfer
agent for such Star Common Stock, consistent with the terms of such Affiliate
Letters. Following reasonable request therefor, Star shall, upon advice of its
counsel, cooperate with each Rule 145 Affiliate to eliminate such legends and
stop transfer instructions in connection with proposed sales under Rule 145.
After two years from the Effective Time, Star shall promptly notify its transfer
agent to eliminate such legends and stop transfer instructions unless Star
receives advice from its counsel that a Rule 145 Affiliate is as of that date an
"affiliate" of Star.
5.11 Listing Application. Star will use its reasonable best efforts
to cause the Star Common Stock to be issued pursuant to this Agreement in the
Merger, to be listed for trading on the NASDAQ National Market.
5.12 Supplemental Disclosure Schedules. Each of Star and EFCC 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 Star and
EFCC 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.
5.13 No Action. Except as expressly advised by Star pursuant to the
Consulting Agreement or as expressly directed by Star pursuant to the Management
Agreement or except as contemplated by this Agreement, no party hereto will, nor
will either 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 (to the
extent so limited).
5.14 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.
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5.15 Notification of Certain Matters; Delivery of Financial
Information.
(a) Star and Merger Sub agree that they shall give prompt
notice to EFCC, and EFCC agrees that it shall give prompt notice to Star and
Merger Sub, of (i) any known breach of any representations or warranties
contained in this Agreement at any time from the date hereof to the Effective
Time and (ii) any material failure of Star, Merger Sub or EFCC, as the case may
be, or any officer, director, employee or agent thereof, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that failure to give such notice shall not
constitute a waiver of any defense that may be validly asserted.
(b) Each of Star and EFCC shall furnish the other with all
financial, operating and other information and data as Star or EFCC, as the case
may be, through its officers, employees or agents, may reasonably request and
shall promptly furnish to the other party a copy of (i) each report, schedule
and other document filed or received by it during such period pursuant to the
requirements of the federal securities laws and (ii) monthly operating and
financial reports as such party shall reasonably request from time to time, when
such reports become available.
5.16 Tax-free Nature. None of Star, Merger Sub and EFCC, nor any of
their respective Subsidiaries or other affiliates shall take, or fail to take,
any action that would jeopardize qualification of the Merger (or the TPC Merger)
as a reorganization described in Section 368(a) of the Code; provided in the
case of the Merger that the All Cash Option is not exercised. For purposes of
ensuring that the Merger (or the TPC Merger) will be treated as a tax-free
reorganization under Section 368(a) of the Code, each of Star and Merger Sub on
the one hand and EFCC on the other agrees to deliver to Meltzer, Lippe,
Goldstein, Wolf & Schlissel, P.C., counsel to EFCC and TPC, a certificate of an
authorized officer containing all representations and warranties by such
corporation necessary to enable such firm to deliver its opinion referred to in
Section 6.1(f).
5.17 Financial Covenants.
(a) The Adjusted Net Worth of EFCC at the date hereof
(determined in accordance with subsection (b) below) shall exceed $1,500,000;
the Adjusted Working Capital of EFCC at the date hereof (determined in
accordance with subsection (b) below) shall exceed $1,050,000; and the Adjusted
Cash owned by EFCC at the date hereof determined in accordance with subsection
(b) below) shall exceed $800,000.
(b) Immediately after the execution and delivery of this
Agreement, EFCC will deliver to Star the balance sheet of EFCC as of December
31, 1996 (the "Year End Balance Sheet"), audited by a firm of independent
certified public accountants acceptable to both Star and EFCC (it being hereby
agreed that Carpenter & Onorato, P.C. is such an acceptable
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firm) and prepared in accordance with generally accepted accounting principles
consistently applied and which EFCC shall use its best efforts in causing to be
prepared. "Adjusted Net Worth" shall mean the shareholders' equity of EFCC as
shown on the Year End Balance Sheet, giving effect to all accrued and unpaid
legal and accounting expenses of EFCC as of the date hereof, and reduced by the
sum of (x) $300,000, less any Deal Costs (as defined below) expensed through
December 31, 1996. Deal Costs shall be defined as the aggregate amount of all
legal, accounting and other expenses to be incurred by EFCC in connection with
the transactions contemplated hereby, (y) the estimated aggregate amount of any
unpaid tax liability incurred or to be incurred in connection with the Asset
Sale and (z) the aggregate of all taxes due and payable by EFCC as of the date
hereof, to the extent not reflected in full on the Year End Balance Sheet plus
any claims by taxing authorities not yet paid or accrued for (the sum of (x),
(y) and (z) being hereinafter referred to as the "Year End Balance Sheet
Adjustments"). "Adjusted Working Capital" shall mean the current assets of EFCC
minus the current liabilities of EFCC as shown on the Year End Balance Sheet,
giving effect to all accrued and unpaid legal and accounting expenses of EFCC as
of the date hereof and reduced by the Year End Balance Sheet Adjustments.
"Adjusted Cash" shall mean the cash as shown on the Year End Balance Sheet net
of the sum of any amount described in clause (z) above.
(c) Other than with respect to the satisfaction of the
Financial Covenants set out in subsection (a) of this Section 5.17, as a
condition to closing pursuant to Section 6.3(b), or as a basis for termination
pursuant to Section 7.4(b), EFCC shall have no liability for violation of this
Section 5.17 or a breach of Section 4.28, provided EFCC as of the date hereof
was not aware of the basis in fact of such violation or breach.
5.18 Director of Star. Star agrees that, after the Effective Time,
Star shall take such reasonable action as may be appropriate to cause Mr. Ivan
Kaufman to be appointed to the Board of Directors of Star and to be nominated
for election by the shareholders of Star to such Board at each of the next two
annual meetings of such shareholders following the Effective Time; provided that
this Section 5.18 shall terminate and be of no force or effect in the event that
on the date 30 days preceding the date of mailing of the proxy statement
relating to either such meeting the aggregate number of shares of Star Common
Stock deemed to be beneficially owned (in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934) by Coss Holding Corp. ("Coss") and Arbor
represents less than five percent of all outstanding Star Common Stock,
determined in the reasonable judgment of Star.
5.19 EFCC Shareholders Agreement, Consulting Agreement, Management
Agreement and Escrow Agreement. Each of Star, Arbor, Coss, the Voting Trustee
and Mr. Ivan Kaufman simultaneously herewith shall enter into the EFCC
Shareholders Agreement in the form attached hereto as Exhibit D; each of Star
and EFCC simultaneously herewith shall enter into the Consulting Agreement in
the form attached hereto as Exhibit G; each of Star, and EFCC simultaneously
herewith shall enter into the Management Agreement in the form attached hereto
as Exhibit H; each of Star, Arbor and Coss shall on the Closing Date enter into
the Escrow Agreement in the form attached hereto as Exhibit E; and each of
Arbor, Coss and
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Mr. Ivan Kaufman shall enter into each of the proxies contemplated by the EFCC
Shareholders Agreement.
5.20 Sternbach Proxy. Sternbach, simultaneously herewith shall enter
into the Sternbach Proxy in the form attached hereto as Exhibit I.
5.21 EFCC Dividend. Each of Star and EFCC agree that, subject to
applicable law, the amount of the EFCC Dividend shall be $750,000, which amount
EFCC has caused to be reserved for payment prior to the date hereof, is held in
reserve, will be available to be paid and shall be paid in full prior to the
Closing Date.
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 shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) The Registration Statement shall have been declared
effective, and no stop order suspending the effectiveness of the Registration
Statement shall have been issued by the Commission or shall be continuing to be
in effect, and no proceedings for that purpose shall have been initiated or
threatened by the Commission. Star shall have received all state securities laws
or "blue sky" permits and authorizations necessary to issue the shares of Star
Common Stock, if any, constituting Merger Consideration pursuant to the Merger
and the transactions contemplated hereby.
(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 EFCC Common Stock entitled to vote thereon at the
EFCC Meeting and (ii) the holders of the outstanding shares of the Star Common
Stock entitled to vote thereon at the Star Meeting.
(c) 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
(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; provided, however, that, prior to
invoking this condition, each party hereto shall use all reasonable efforts to
have such statute, rule, regulation, injunction or order vacated.
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(d) Any waiting period applicable to the Merger 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 Star Common Stock issuable to EFCC's
shareholders in the Merger or thereafter shall have been authorized for listing
on the NASDAQ National Market, upon official notice of issuance.
(f) Each of EFCC and Star shall have received the opinion,
in the form attached hereto as Exhibit F, addressed to each of them, of Meltzer,
Lippe, Goldstein, Wolf & Schlissel, P.C., counsel to EFCC, dated as of the
Effective Time. In rendering such opinion, Meltzer, Lippe, Goldstein, Wolf &
Schlissel, P.C. may require and rely upon representations contained in the
certificates of officers of Star, Merger Sub and EFCC (or in the case of the TPC
Merger, TPC) referred to in Section 5.16.
6.2 Conditions to the Obligation of EFCC to Effect the Merger. The
obligation of EFCC to effect the Merger shall be subject to the fulfillment or
waiver by EFCC at or prior to the Effective Time of the following additional
conditions:
(a) Each of Star 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,
unless EFCC shall have intentionally prevented such performance.
(b) All representations or warranties of Star and Merger
Sub in this Agreement shall be true and correct, in each case only as of the
execution of this Agreement except for the representations and warranties in
Sections 3.1, 3.2 (except (ii) and (iii) thereof) and 3.4 which shall be true
and correct as of the execution of this Agreement and of the Effective Time;
provided, however, that, with respect to representations and warranties relating
to the financial condition or results of operations of Star, no breach of this
condition shall be deemed to have occurred unless a breach of any such
representations or warranties, individually or in the aggregate, represents a
Material Adverse Effect on Star based on the financial condition or results of
operations of Star as represented on the most recent balance sheet of Star
contained in the Star SEC Filings.
(c) Each of Star and Merger Sub shall have delivered a
certificate of its President or Vice President and its Chief Financial Officer
to the effect set forth in clauses (a) and (b) of this Section 6.2.
(d) EFCC shall have received from Parker Chapin Flattau &
Klimpl, LLP, counsel to Star, an opinion or opinions dated as of the Effective
Time covering the matters set forth in Exhibit B hereto; provided that
paragraphs numbered 1,2,3 and 5 thereof need not be included in such opinion in
the event that the All Cash Option is exercised.
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(e) Meltzer, Lippe, Goldstein, Wolf & Schlissel, P.C.,
counsel to EFCC, shall have received the letters from Star and Merger Sub
referred to in Section 5.16.
(f) Sternbach, simultaneously herewith, shall have
executed and delivered to EFCC the Sternbach Proxy in the form attached hereto
as Exhibit I.
(g) Star shall have obtained all Third Party Consents,
including those Third Party Consents required by TPC, contemplated by subsection
(ii) of Section 5.8 and applicable to Star unless the failure to obtain any such
Third Party Consent would not, individually, or in the aggregate, have a
Material Adverse Effect on Star.
6.3 Conditions to the Obligations of Star and Merger Sub to Effect
the Merger. The obligations of Star and Merger Sub to effect the Merger shall be
subject to the fulfillment or waiver by Star at or prior to the Effective Time
of the following additional conditions:
(a) EFCC shall have performed in all material respects
each of its obligations under this Agreement, the Consulting Agreement and the
Management Agreement required to be performed by it on or prior to the Effective
Time pursuant to the terms hereof unless Star shall have prevented such
performance.
(b) All representations or warranties of EFCC in this
Agreement shall be true and correct, in each case only as of the execution of
this Agreement, except for the representations and warranties in Sections 4.1,
4.2, 4.3, 4.4 and 4.16 which shall be true and correct at the execution of this
Agreement and at the Effective Time; provided, however, that, with respect to
representations and warranties relating to the financial condition or results of
operations of EFCC, no breach of this condition shall be deemed to have occurred
unless (i) any breach of any such representations or warranties, individually or
in the aggregate, represents a material adverse effect on the financial
conditions or results of operations of EFCC based on the financial condition or
results of operations of EFCC as represented on the most recent balance sheet of
EFCC contained in the EFCC SEC Filings, or (ii) there has been any breach of any
representation or warranty contained in Section 4.28 or 5.17, provided that the
conditions set forth in this clause (ii) shall expire after ten business days
following the delivery to Star of the Year End Balance Sheet.
(c) There shall have been no adverse development or change
or prospective adverse development or change regarding the ability of EFCC to
conduct its Medicaid-related operations in the nature or to the extent conducted
prior to the date hereof.
(d) All material federal, state, local and foreign
governmental consents, approvals and filings required to permit the Merger and
the consummation of the transactions contemplated by this Agreement shall have
been received or made and any applicable waiting period shall have expired or
been terminated without the imposition of conditions that are or
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would become applicable to EFCC or the EFCC Subsidiaries or Star or the Star
Subsidiaries and which would have a Material Adverse Effect on EFCC or a
Material Adverse Effect on Star.
(e) EFCC shall have obtained all Third Party Consents
(applicable to EFCC or any EFCC Subsidiary) contemplated by subsection (ii) of
Section 5.8, except for such Third Party Consents which, if not obtained, would
not, individually or in aggregate, have a Material Adverse Effect on EFCC.
(f) EFCC shall have delivered a certificate of its
President or Vice President and its Chief Financial Officer to the effect set
forth in paragraphs (a), (b), (c) and (d) to this Section 6.3.
(g) Star shall have received from Meltzer, Lippe,
Goldstein, Wolf & Schlissel, P.C., counsel to EFCC, an opinion or opinions dated
as of the Effective Time covering the matters set forth in Exhibit C hereto.
(h) Merger Sub shall have received letters of resignation
addressed to EFCC from the members of EFCC's Board of Directors, which
resignations shall be effective as of the Effective Time.
(i) Each of Star and EFCC shall have received the
Affiliate Letters from each of the Rule 145 Affiliates, as provided in Section
5.10.
(j) Each of Coss and Arbor (and Mr. Ivan Kaufman and the
Voting Trustee with respect to items (w), (x) and (y)) simultaneously herewith
shall have executed and delivered to Star (w) the EFCC Shareholders Agreement in
the form attached hereto as Exhibit D, (x) an Irrevocable Proxy in the form
attached to Exhibit D as Annex B, (y) an Irrevocable Proxy in the form attached
to Exhibit D as Annex C, and (z) the Consulting Agreement in the form attached
hereto as Exhibit G, and on the Closing Date shall have executed and delivered
to Star the Escrow Agreement in the form attached hereto as Exhibit E.
(k) The number of shares of the EFCC Share Number, as to
which dissenters' rights shall have been validly and properly demanded and
perfected, shall not exceed 5% of the EFCC Share Number.
(l) The TPC Merger shall have been completed in compliance
with all applicable law.
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ARTICLE VII
TERMINATION
7.1 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 shareholders of EFCC or Star, by
the mutual consent of Star and EFCC.
7.2 Termination by Either Star or EFCC. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Star or EFCC if:
(a) The Merger shall not have been consummated by August
15, 1997, unless such failure of consummation is due to the failure of the
terminating party to perform or observe any covenant, agreement or condition
hereof to be performed or observed by it at or before the Closing Date;
(b) The approval of the shareholders of each of Star and
EFCC required by Section 6.1(b) shall not have been obtained at the meetings
duly convened therefor or at any adjournments or postponements thereof; or
(c) A United States federal or state court of competent
jurisdiction or United States federal or state governmental regulatory or
administrative agency or commission 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 and such order,
decree, ruling or other action shall have become final and non-appealable;
provided, that the party seeking to terminate this Agreement pursuant to this
clause (c) shall have used all reasonable efforts to remove such injunction,
order or decree; provided, in the case of a termination pursuant to clauses (a)
or (b) above, the terminating party shall not have breached in any material
respect its obligations under this Agreement in any manner that shall have
proximately contributed to the failure to consummate the Merger by August 15,
1997 and; provided further, that if any condition to this Agreement shall fail
to be satisfied by reason of the existence of an injunction or order of any
court or governmental or regulatory body resulting from an action or proceeding
commenced by any party which is not a government or governmental authority, then
at the request of either party the deadline date referred to above shall be
extended for a reasonable period of time, not in excess of 90 days, to permit
the parties to have such injunction vacated or order reversed.
7.3 Termination by EFCC. 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 shareholders of EFCC referred to in Section
6.1(b), by action of the Board of Directors of EFCC, if:
(a) The Board of Directors of EFCC determines in good
faith with the advice of outside legal counsel that, in the exercise of the
fiduciary obligations of the Board of
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Directors under applicable law, such termination is required by reason of a
Third Party Transaction;
(b) Any of the conditions specified in Section 6.2(b) have
not been satisfied; or
(c) There has been a breach in any material respect of any
of the covenants or agreements set forth in this Agreement on the part of Star,
which breach is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by EFCC to Star, unless EFCC shall have
intentionally caused such breach and prevented such cure.
7.4 Termination by Star. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time (but only within
ten business days following the delivery to Star of the Year End Balance Sheet
with respect to subsection (b)(ii) of Section 6.3(b) as referred to in Section
7.4(b) below), by action of the Board of Directors of Star, if:
(a) The Board of Directors of EFCC shall have withdrawn or
modified its determination that the Merger is fair to and in the best interests
of EFCC's shareholders or its approval or recommendation of this Agreement or
the Merger;
(b) Any of the conditions specified in Section 6.3(b) have
not been satisfied; or
(c) There has been a breach in any material respect of any
of the covenants or agreements set forth in this Agreement on the part of EFCC,
which breach is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by Star to EFCC, unless Star shall have
intentionally caused such breach and prevented such cure.
7.5 Effect of Termination and Abandonment.
(a) In the event that this Agreement is terminated by EFCC
pursuant to Section 7.3(a) or by Star pursuant to Section 7.4(a), then EFCC
shall promptly, but in no event later than ten days after the date of such
request, pay Star a fee of $350,000, which amount shall be payable by wire
transfer of same day funds. EFCC acknowledges that the agreements contained in
this Section 7.5(a) are an integral part of the transactions contemplated in
this Agreement, and that, without these agreements, Star and Merger Sub would
not enter into this Agreement.
(b) In the event of termination of this Agreement and the
abandonment of the Merger pursuant to this Article VII, all obligations of the
parties hereto shall terminate, except the obligations of the parties pursuant
to this Section 7.5 and except as provided in Section 8.3. Moreover, in the
event of termination of this Agreement pursuant to Section 7.3 or 7.4, and
subject to Section 5.17(c) nothing herein shall prejudice the ability of the
non-breaching party
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from seeking damages from any other party for any breach of this Agreement,
including without limitation, attorneys' fees and the right to pursue any remedy
at law or in equity.
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. 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.
37
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 Article VII, as the
case may be, except that the agreements set forth in Article I, Article II and
in Sections 5.4, 5.6, 5.7, 5.19, 8.4 and 8.7 will survive the Effective Time
indefinitely and those set forth in Sections 7.5 and 8.7 will survive the
termination of this Agreement indefinitely, and other than any covenant the
breach of which has resulted in the termination of this Agreement.
8.4 Expenses and Fees. 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, if any, (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 Star and EFCC.
8.5 Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been given or
made if in writing and
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delivered personally or sent by registered or certified mail (postage prepaid,
return receipt requested) or by telecopier to the parties at the following
addresses:
if to Merger Sub or Star: Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, New York 11746
Attn: Chief Executive Officer
Telecopier: 516-423-3924
with copies to: Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attn: James Alterbaum, Esq.
Telecopier: (212) 704-6288
if to EFCC: Extended Family Care Corporation
c/o Arbor Home Healthcare Holdings, LLC
333 Earl Ovington Boulevard
Uniondale, New York 11553
Attn: Chief Executive Officer
Telecopier: 212-832-8045
with copies to: Meltzer, Lippe, Goldstein, Wolf
& Schlissel, P.C.
190 Willis Avenue
Mineola, New York 11501
Attn: Richard A. Lippe, Esq.
Telecopier: (516) 747-0653
or at such other addresses as shall be furnished by the parties by like notice,
and such notice or communication shall be deemed to have been given or made as
of the date so delivered or mailed.
8.6 Headings. The headings contained in this Agreement are inserted
for convenience only and do not constitute a part of this Agreement.
8.7 Publicity. The parties hereto shall not, and shall cause their
affiliates not to, issue or cause the publication of any press release or other
announcement with respect to the Merger or this Agreement without consulting
with all other parties and their respective counsel; provided, however, that to
the extent either party believes on the advice of counsel that it is obligated
under federal or state law to issue or cause the publication of any press
release or other announcement, such party shall only be obligated to so consult
if it is possible to do so without violating any such legal obligation.
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8.8 Entire Agreement. This Agreement and the other agreements
referred to herein 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.
8.9 Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefits 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 without the prior written consent of the other parties. This Agreement is
not intended to confer upon any other person any rights or remedies hereunder.
8.10 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.
8.11 Invalidity; Severability. In the event that any provision of
this Agreement shall be deemed contrary to law 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.
8.12 Governing Law. The validity and interpretation of this Agreement
shall be governed by the laws of the State of New York, without reference to the
conflict of law principles thereof.
8.13 Legal Proceedings. Legal proceedings commenced by Star or EFCC
or arising out of any of the transactions or obligations contemplated by this
Agreement shall be brought exclusively in the federal courts or, in the absence
of federal jurisdiction, state courts, in either case in Nassau County, New
York. Star and EFCC irrevocably and unconditionally submit to the jurisdiction
of such courts and agree to take any and all future action necessary to submit
to the jurisdiction of such courts. Each of Star and EFCC irrevocably waives any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding brought in any federal or state court in Nassau County, New
York, and further irrevocably waives any claims that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum.
8.14 Purchase Price Adjustment. The Merger Consideration shall be
reduced by an amount equal to any damages or losses incurred by Star due to any
liens not disclosed to Star on any EFCC Disclosure Schedule.
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IN WITNESS WHEREOF, Star, Merger Sub and EFCC have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
EXTENDED FAMILY CARE STAR MULTI CARE SERVICES, INC.
CORPORATION
By: /S/ JOSEPH HELLER By: /S/ STEPHEN STERNBACH
------------------------- -------------------------
Joseph Heller, Vice-President Stephen Sternbach, Chairman
and Chief Executive Officer
EFCC ACQUISITION CORP.
By: /S/ STEPHEN STERNBACH
-------------------------
Stephen Sternbach, Chairman
and Chief Executive Officer
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EXHIBIT A
---------
, 1997
Star Multi Care Services, Inc.
99 Railroad Station Plaza
Hicksville, New York 11801
Gentlemen:
Reference is made to the provisions of the Agreement and Plan of
Merger, dated as of January __, 1997 (together with any amendments thereto, the
"Merger Agreement") among Star Multi Care Services, Inc., a New York corporation
("Star"), EFCC Acquisition Corp., a New York corporation and a wholly-owned
subsidiary of Star (the "Merger Sub") and Extended Family Care Corporation, a
New York corporation ("EFCC"), pursuant to which EFCC will be merged with and
into Merger Sub (the "Merger"), with Merger Sub continuing as the surviving
corporation (the "Surviving Corporation"). This letter consists of the
undertakings contemplated by Section 5.10 of the Merger Agreement and is
designed to assure compliance with Rule 145 ("Rule 145").
I represent, warrant and covenant as follows:
(a) I understand that I may be deemed to be an "affiliate"
of EFCC, as such term is defined for purposes of Rule 145, and that the
transferability of the shares of common stock, par value $.001 per share, of
Star (the "Star Common Stock"), if any, which I will receive upon the
consummation of the Merger in exchange for my shares of common stock, par value
$.01 per share, of EFCC (the "EFCC Common Stock"), is therefore subject to the
provisions of Rule 145. Nothing herein shall be construed as an admission that I
am an affiliate.
(b) Appendix A attached hereto sets forth all shares of
EFCC Common Stock and Star Common Stock owned by me, including all EFCC Common
Stock as to which I have sole or shared voting or investment power and all
rights, options and warrants to acquire EFCC Common Stock owned or held by me.
(c) I will not sell, pledge, transfer or otherwise dispose
of any shares of Star Common Stock issued to me pursuant to the Merger, except
pursuant to an effective registration statement or in compliance with Rule 145
or another exemption from the registration requirements of the Securities Act.
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(d) Except for those rights specifically granted by Star
to certain shareholders of EFCC pursuant to that certain EFCC Shareholders
Agreement between Star and certain shareholders of EFCC listed on Annex A
thereto and Mr. Ivan Kaufman, an individual having voting control of the shares
of EFCC owned by each of the Shareholders, I understand that Star is under no
obligation to register the sale, transfer, pledge or other disposition of the
Star Common Stock to be received by me upon consummation of the Merger or to
take any other action necessary for the purpose of making an exemption from the
registration requirements of the Act available for the resale of the Star Common
Stock to be received by me upon consummation of the Merger.
(e) I understand that Star will impose stop transfer
instructions with respect to the Common Stock to be received by me upon
consummation of the Merger and that a restrictive legend will be placed on
certificates delivered to me evidencing such Star Common Stock in substantially
the following form:
"This certificate and the shares represented
hereby have been issued pursuant to a transaction governed
by Rule 145 ("Rule 145") promulgated under the Securities
Act of 1933, as amended (the "Act"), and may not be sold
or otherwise disposed of unless registered under the Act
pursuant to a Registration Statement in effect at the time
or unless the proposed sale or disposition can be made in
compliance with Rule 145 or without registration in
reliance on another exemption therefrom."
(f) I have full power and authority to execute this
Agreement, to make the representations, warranties and covenants herein
contained and to perform my obligations hereunder.
(g) I understand the requirements of this letter and the
limitations imposed upon the sale, pledge, transfer or other disposition of the
Star Common Stock.
(h) The receipt of this letter by Star is an inducement to
Star's obligation to consummate the Merger under the Merger Agreement.
(i) All of the above representations are true, correct and
complete on the date hereof and will continue to be true, correct and complete
through and including the time of the transaction. If any of the representations
in this letter cease to be true at any time prior to the time of the
transaction, I will so notify you immediately in writing (and in all events
before the time of the transactions).
Very truly yours,
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EXHIBIT B
---------
OPINION OF PARKER CHAPIN FLATTAU & KLIMPL, LLP
1. Each of Star and the Star Subsidiaries is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of incorporation, with all requisite corporate 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 failure to be so qualified or
licensed, individually or in the aggregate, would have a Material Adverse Effect
on Star. Section 3.1 of the Star Disclosure Schedule contains a complete and
accurate list of all of the Star Subsidiaries. Neither Star nor any Star
Subsidiary is in violation of any provision of its Certificate of Incorporation
or Bylaws which could have a Material Adverse Effect on Star. To our knowledge,
Merger Sub has not engaged in any business nor has it incurred any liabilities
or obligations since it was incorporated other than relating to this Agreement
and the transactions contemplated hereby.
2. The Star Common Stock to be issued pursuant to the
Merger, when issued in accordance with the terms and conditions of the Merger
Agreement, will be duly authorized, validly issued, fully paid and
nonassessable.
3. As of the date hereof, the authorized capital stock of
Star consists in its entirety of (i) 10,000,000 shares of Star Common Stock,
$.001 par value, and (ii) 5,000,000 shares of Preferred Stock, $1.00 par value.
As of January 2, 1997, 4,045,889 shares of Star Common Stock and no shares of
Preferred Stock were issued and outstanding, (ii) options to acquire 626,136
shares of Star Common Stock were outstanding under all stock option plans of
Star, (iii) 333,900 shares were reserved for issuance pursuant to all employee
benefit plans of Star and (iv) warrants to purchase 106,712 shares of Star
Common Stock were outstanding. As of the date hereof, the authorized capital
stock of Merger Sub consists in its entirety of 1,000 shares of common stock,
$.01 par value, of which 100 shares are issued and outstanding. All of the
outstanding shares of capital stock of each of the Star Subsidiaries are owned
beneficially and of record by Star or a Star Subsidiary free and clear of all
liens, charges and encumbrances of any nature. All of the outstanding shares of
capital stock of Star, Merger Sub and each of the Star Subsidiaries have been
validly issued and are fully paid and nonassessable.
4. Each of Star and Merger Sub has full corporate power
and authority to execute and deliver the Merger Agreement and to consummate the
transactions contemplated on its part thereby. The execution and delivery of the
Merger Agreement by each of Star and Merger Sub and the consummation of the
transactions contemplated on its part thereby have been duly authorized by their
respective Boards of Directors and duly approved by Star's shareholders and no
other corporate proceedings on the part of Star or Merger Sub are necessary to
authorize the execution and delivery of the Merger Agreement by Star and Merger
Sub or the consummation of
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the transactions contemplated on its part thereby. The Merger Agreement has been
duly executed and delivered by each of Star and Merger Sub and constitutes the
legal, valid and binding obligation of each of Star and Merger Sub, as the case
may be, enforceable against each of them 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.
5. The Registration Statement has become effective under
the Securities Act and, to the best of our knowledge, no order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending.
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EXHIBIT C
January __, 1997
Star Multicare Services, Inc.
33 Walt Whitman Road
Huntington Station, NY 11746
Gentlemen:
We have acted as counsel to Extended Family Care Corporation, a New
York corporation ("EFCC"), and TPC Home Care Services, Inc., a New York
corporation ("TPC"), in connection with the preparation, execution and delivery
of the Agreement and Plan of Merger (the "Merger Agreement"), dated January ___,
1997 among Star Multicare Services, Inc., EFCC and EFCC Acquisition Corp.
This opinion is delivered to you pursuant to Section 6.3 of the
Merger Agreement. Capitalized terms used herein and not defined shall have the
meanings ascribed thereto in the Merger Agreement.
In connection with the preparation of this Opinion Letter, we have,
with your consent, examined and relied upon the Merger Agreement including
exhibits and schedules thereto. In addition, we have examined such certificates
of public officials and of corporate officers of EFCC and other documents and
records as we have deemed necessary as a basis for the opinions set forth below.
In making such examination, we have assumed the genuineness of all signatures,
the legal capacity
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Star Multicare Services, Inc. 2 January __, 1997
of natural persons, the authenticity of all documents submitted to us as
originals and the conformity to the originals of all documents submitted to us
as copies. As to various facts material to the opinions set forth herein, we
have relied upon the representations made in the Merger Agreement, upon
certificates of public officials and upon a certificate of Joseph Heller, Vice
President of EFCC, which facts we have not independently verified.
In rendering the opinions expressed below, we have assumed, with your
permission and without any independent investigation or verification of any
kind, that (i) each party to the Merger Agreement, the Consulting Agreement, the
Shareholders Agreement and the Escrow Agreement (the "Merger Documents") other
than EFCC, TPC, and Arbor Home Healthcare Holdings, LLC ("Arbor") (collectively,
the "Other Parties") has been duly organized and is validly existing and in good
standing under the laws of its jurisdiction of incorporation and of each other
jurisdiction in which the conduct of its business or the ownership of its
property makes such qualification necessary, (ii) each of the Other Parties has
full power and authority to execute, deliver and perform the Merger Documents;
(iii) the execution, delivery and performance of the Merger Documents by each of
the Other Parties has been duly authorized by all requisite corporate action on
the part of each Other Party; (iv) each of the Merger Documents has been duly
executed and delivered by each of the Other Parties; and (v) the execution,
delivery and performance of each of the Merger Documents by each of the Other
Parties does not and will not violate the charter, by-laws or other
organizational documents of any of the Other Parties. We have further assumed,
with your permission and without any independent investigation or verification
of any kind, that the Merger Documents constitutes the valid and legally binding
obligations of the Other Parties.
As used in this opinion, the phrase "to our knowledge" means the
actual present knowledge or belief of those attorneys in our firm who are
currently representing EFCC without independent investigation. We have not
undertaken any independent investigation to determine the existence or
nonexistence of those facts with respect to which we are expressing an opinion
or whether there are other facts which may affect our opinion, and no inference
as to our knowledge of the existence or nonexistence of those facts should be
drawn from the fact of this firm's delivery of an opinion with respect to EFCC
in connection with the subject transaction.
Based on and subject to the foregoing, and subject to the
qualifications and exceptions set forth herein, we are of the opinion that:
1. To our knowledge, the EFCC Disclosure Schedule contains a
complete and accurate list of all of the EFCC Subsidiaries. Each of EFCC and TPC
is a corporation duly incorporated, validly existing and in good standing under
the laws of the State of New York, with all requisite corporate 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 failure to be so qualified or
licensed, individually or in the
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Star Multicare Services, Inc. 3 January __, 1997
aggregate, would have a Material Adverse Effect on EFCC. To our knowledge,
neither EFCC nor TPC is in violation of any provision of its charter or bylaws.
2. The authorized capital stock of EFCC consists in its
entirety of 10,000,000 shares of Preferred Stock, $.01 par value and 50,000,000
shares of common stock, $.01 par value. Based solely upon a certificate of
American Stock Transfer & Trust Co., as of January ___, 1997, as well as stock
transfer records and corporate minutes to the extent available, 32,000,226
shares of EFCC Common Stock were issued and outstanding. The authorized capital
stock of TPC consists in its entirety of 20,000,000 shares of Common Stock, $.01
par value. Based solely upon a certificate of American Stock Transfer & Trust
Co. and our review of the Certificate of Incorporation of TPC, as well as stock
transfer records and corporate minutes to the extent available, as of January
___, 1997, 1,750,000 shares of TPC Common Stock were issued and outstanding, of
which 1,451,157 shares were owned of record by EFCC. To our knowledge, all
outstanding shares of EFCC and TPC have been duly authorized and validly issued
and are fully-paid and non-assessable.
3. To our knowledge, other than as contemplated in the Merger
Agreement, 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 EFCC or TPC any of the
outstanding, authorized but unissued, unauthorized or treasury shares of the
common stock or any other security of EFCC or TPC, and there is no outstanding
security of any kind convertible into or exchangeable for such capital stock.
4. EFCC has full corporate power and authority to execute and
deliver the Merger Agreement and the Consulting Agreement and to consummate the
transactions contemplated on its part thereby. The execution and delivery of the
Merger Agreement and the Consulting Agreement by EFCC and the consummation of
the transactions contemplated on its part thereby have been duly authorized by
its Board of Directors and, in the case of the Merger Agreement, duly approved
by EFCC's shareholders, and, other than as contemplated in the Merger Agreement,
no other corporate proceedings on the part of EFCC are necessary to authorize
the execution and delivery of the Merger Agreement or the Consulting Agreement
by EFCC or the consummation of the transactions contemplated on its part
thereby. Each of the Merger Agreement and the Consulting Agreement has been duly
executed and delivered by EFCC, and constitutes the legal, valid and binding
obligation of EFCC, enforceable against EFCC in accordance with its terms,
subject to the General Qualifications contained in ss.11-14 of the Third-Party
Legal Opinion Report of the Section of Business Law, American Bar Association
(1991) (the "General Qualifications") and Paragraph 10 below.
5. Each of Coss Holding Corp. ("Coss") and Arbor has full
power and authority to execute and deliver the EFCC Shareholders Agreement and
each of the irrevocable proxies contemplated thereby (the "Proxies") and to
consummate the transactions contemplated thereby. The
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Star Multicare Services, Inc. 4 January __, 1997
execution and delivery of the EFCC Shareholders Agreement and the Proxies by
each of Coss and Arbor and the consummation of the transactions contemplated
thereby have been duly authorized, and no other proceeding on the part of Coss
or Arbor is necessary to authorize the execution and delivery of the EFCC
Shareholders Agreement and the Proxies by Coss or Arbor or the consummation of
the transactions contemplated thereby. The EFCC Shareholders Agreement and the
Proxies have been duly executed and delivered by Coss, Arbor and Mr. Ivan
Kaufman, and constitute the legal, valid and binding obligation of Coss, Arbor
and Mr. Ivan Kaufman, enforceable against Coss, Arbor and Mr. Ivan Kaufman in
accordance with their terms, subject to the General Qualifications and Paragraph
10 below.
6. Each of Coss and Arbor has full corporate power and
authority to execute and deliver the Escrow Agreement and to consummate the
transactions contemplated on its part thereby. The execution and delivery of the
Escrow Agreement by each of Coss and Arbor and the consummation of the
transactions contemplated on their part thereby have been duly authorized by its
Board of Directors, and no other corporate proceedings on the part of Coss or
Arbor is necessary to authorize the execution and delivery of the Escrow
Agreement by Coss or Arbor or the consummation of the transactions contemplated
on their part thereby. The Escrow Agreement has been duly executed and delivered
by each of Coss and Arbor, and constitutes the legal, valid and binding
obligation of each of Coss and Arbor, enforceable against Coss and Arbor in
accordance with its terms, subject to the General Qualifications.
7. Except as disclosed in Section 4.5 of the Merger Agreement
or the EFCC Disclosure Schedule, the execution, delivery and performance of the
Merger Agreement by EFCC and the consummation by it of the transactions
contemplated thereby do not (i) violate or conflict with any provision of any
law applicable to EFCC or TPC or by which any of their property or assets are
bound, (ii) require the consent, waiver, approval, license or authorization of,
or any filing by EFCC or TPC with, any public authority, or (iii) 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 result in the creation
of a lien or other encumbrance on any property or asset of EFCC or TPC pursuant
to or under any provision of any charter or bylaw, or, to the best of our
knowledge, any indenture, mortgage, lien, lease, license, agreement, contract,
or instrument identified the EFCC Disclosure Schedules or, to our knowledge, any
order, judgment, ordinance, EFCC Permit, law, regulation or decree to which EFCC
or TPC is subject or by which EFCC or TPC or any of their property or assets are
bound, except where the failure to give such notice, make such filings, or
obtain such authorizations, consents, waivers, licenses or approvals, or where
such violations, conflicts, breaches, defaults, terminations, amendments,
accelerations, cancellations, loss of rights, liens or encumbrances,
individually or in the aggregate, would not have a Material Adverse Effect on
EFCC or on EFCC's ability to consummate the transactions contemplated by the
Merger Agreement.
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Star Multicare Services, Inc. 5 January __, 1997
8. Upon filing of the Certificate of Merger with the
Secretary of State of the State of New York, the Merger will be effective in
accordance with the terms of the Certificate of Merger and the BCL.
9. To our knowledge, except as set forth in Section 4.7 of
the EFCC Disclosure Schedule or in the EFCC SEC Filings, there are no suits,
arbitrations, mediations, actions, proceedings, unfair labor practice complaints
or grievances pending or threatened against EFCC or TPC.
10. We express no opinion as to the enforceability of (i) the
indemnification obligation contained in the Shareholders Agreement, to the
extent it purports to relate to any liability under any Federal or state
securities law, or (ii) any provision of the Consulting Agreement that purports
to require EFCC to act in accordance with directions received from Star
Multicare Services, Inc.
11. Our opinions set forth in Paragraphs "5" and "6" above,
insofar as they relate to Coss, are rendered in reliance upon the opinion of
________________________, Esqs., counsel to Coss, a copy of which is annexed
hereto. Our opinions contained in clauses (i) and (ii) of Paragraph "7" above
insofar as they relate to laws, rules, regulations or requirements governing the
provision of healthcare services, is rendered in reliance upon the opinion of
___________________, Esqs., special healthcare services counsel to EFCC and TPC,
a copy of which is also annexed hereto.
12. The Registration Statement relating to the shares of Star
Multi Care Services, Inc. to be issued pursuant to the Merger Agreement has
become effective under the Securities Act and, to our knowledge, no order
suspending the effectiveness of the Registration Statement has been issued and
no proceeding for that purpose has been instituted or is pending.
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Star Multicare Services, Inc. 6 January __, 1997
We are members of the Bar of the State of New York, and we do not
express any opinion herein concerning any law other than the laws of the State
of New York and the Federal laws of the United States.
This opinion letter is rendered to you in connection with the
above-described transaction. This opinion letter may not be relied upon by you
for any other purpose, or relied upon by, or furnished to, any other person,
firm or corporation, without our prior written consent.
Very truly yours,
MELTZER, LIPPE, GOLDSTEIN,
WOLF & SCHLISSEL, P.C.
By:_______________________
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EXHIBIT D
---------
EFCC SHAREHOLDERS AGREEMENT
This EFCC Shareholders Agreement (the "Agreement") is made and
entered into as of January 3, 1997 among Star Multi Care Services, Inc., a New
York corporation ("Star"), Coss Holding Corp., a New York corporation ("Coss")
and Arbor Home Healthcare Holdings, LLC, a limited liability company formed
under the laws of the state of New York ("Arbor" and collectively with Coss, the
"Shareholders"), shareholders of Extended Family Care Corporation, a New York
corporation ("EFCC") listed on Annex A hereto, and Mr. Ivan Kaufman, an
individual having voting control of the shares of EFCC owned by each of the
Shareholders ("Kaufman") and Melius, as Voting Trustee under the Voting Trust.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed thereto in the Merger Agreement (as defined below).
RECITALS
A. Concurrently with delivery of this Agreement, Star, EFCC and EFCC
Acquisition Corp., a New York corporation and a wholly owned subsidiary of Star
("Merger Sub"), are entering into an Agreement and Plan of Merger (the "Merger
Agreement") which provides for the merger (the "Merger") of EFCC with and into
Merger Sub or, in the event of the exercise of the All Cash Option, as defined
in the Merger Agreement, Merger Sub with and into EFCC. Pursuant to the Merger,
shares EFCC Common Stock will be converted into the right to receive cash and
shares of Star Common Stock on the basis described in the Merger Agreement.
B. Each of Arbor and the Voting Trustee is the record holder and each
of Arbor and Coss is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such number
of issued and outstanding shares of EFCC Common Stock as is indicated on Annex A
of this Agreement (the "Shares").
C. As an inducement to Star to enter into the Merger Agreement, each
Shareholder, the Voting Trustee and Kaufman is willing to enter into and be
bound by this Agreement pursuant to which each agrees (i) not to transfer or
otherwise dispose of any of their respective Shares, or any other securities of
EFCC acquired hereafter and prior to the Expiration Date (as defined in Section
1.1 below, except as otherwise permitted hereby), (ii) not to transfer or
otherwise dispose of any of their respective shares of Star Common Stock
received as Merger Consideration, except as otherwise expressly permitted
hereby, (iii) to vote their respective Shares and any other such securities of
EFCC held thereby so as to facilitate consummation of the Merger, and (iv) to
accept certain liabilities in respect of the obligations of the Company pursuant
to the Merger Agreement, and (v) following the Merger, to vote any and all
shares of Star as to which it has voting power in accordance with the
determinations of the Board of Directors of Star, all as specified herein below.
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D. Each Shareholder and Mr. Ivan Kaufman does not have a binding
commitments or preconceived plans or arrangements to dispose of the shares of
Star Common Stock to be received pursuant to the terms of the Merger Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, the parties agree as follows:
1. Agreement to Retain Shares.
1.1 Transfer and Encumbrance. Each Shareholder and Kaufman
severally agrees not to transfer (except as may be specifically required by
court order), sell, exchange, pledge or otherwise dispose of or encumber any of
the Shares or any New Shares (as defined in Section 1.2 below), or to make any
offer or agreement relating thereto, at any time prior to the Expiration Date.
As used herein, the term "Expiration Date" shall mean the earlier to occur of
(i) such date and time as the Merger shall become effective in accordance with
the terms and provisions of the Merger Agreement and (ii) such date and time as
the Merger Agreement shall be terminated pursuant to Article VII thereof.
1.2 Additional Purchases. Each Shareholder and Kaufman
agrees that any shares of capital stock of EFCC that it or he purchases or with
respect to which it or he otherwise acquires beneficial ownership after the
execution of this Agreement and prior to the Expiration Date ("New Shares")
shall be subject to the terms and conditions of this Agreement to the same
extent as if they constituted Shares.
2. Agreement to Vote Shares and Irrevocable Proxy.
(a) At every meeting of the shareholders of EFCC called
with respect to any of the following, and at every adjournment or postponement
thereof, and on every action or approval by written consent of the shareholders
of EFCC with respect to any of the following, each Shareholder and the Voting
Trustee and Kaufman severally agrees to vote their respective Shares and any New
Shares: (i) in favor of approval of the Merger Agreement and the Merger and any
matter that could reasonably be expected to facilitate the Merger; and (ii)
against approval of any proposal made in opposition to or competition with
consummation of the Merger and against any merger, consolidation, sale of
assets, reorganization or recapitalization, with any party other than with Star
and its affiliates and against any liquidation or winding up of EFCC (each of
the foregoing is hereinafter referred to as an "Opposing Proposal"). Each
Shareholder and the Voting Trustee and Kaufman severally agrees not to take any
actions contrary to its or his obligations under this Agreement.
(b) Concurrently with the execution of this Agreement,
each Shareholder and the Voting Trustee and Kaufman shall deliver to Star a
proxy in each of the forms attached hereto as Annex B and Annex C (the
"Proxies"), which shall be irrevocable to the extent
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provided in the New York Business Corporation Law, with respect to the total
number of shares of capital stock of EFCC or Star, as the case may be,
beneficially owned (as such term is defined in Rule 13d-3 under the Exchange
Act) by it or him set forth therein.
3. Agreement Not to Sell. Each Shareholder and Kaufman,
severally agrees that, from the Effective Time through and until the second
anniversary thereof (such period being hereinafter referred to as the
"Restrictive Period"), none of them shall sell, or in any other way directly or
indirectly transfer, convey, assign, distribute, encumber or otherwise dispose
of, any Star Common Stock received as Merger Consideration; provided, however,
that during the Restrictive Period Arbor, Coss and Kaufman may, (i) pursuant to
the Registration Rights granted by Section 4 hereby, sell such shares of Star
Common Stock pursuant to a registration effected under the Securities Act in
accordance with said Registration Rights or (ii) following ten days' prior
written notice to Star of its intent to do so and disclosing the broker/dealer
executing such sale (and including a copy of the Form 144 relating thereto, if
applicable), sell such shares of Star Common Stock in a transaction or
transactions made in accordance with Rules 144 and/or 145 under the Securities
Act. Other than as set forth in clauses (i) and (ii) above, however, nothing
contained herein shall preclude, Arbor, Coss or Kaufman during the Restrictive
Period, from selling any Star Common Stock received as Merger Consideration
provided that prior thereto each transferee or subsequent transferee enter into
an agreement with Star in writing to be bound by and indeed becomes bound by the
provisions of this Agreement and to enter into and deliver to Star an
enforceable proxy, irrevocable to the extent provided above, on behalf of Star
in the form of Annex C attached hereto, provided that such proxy shall
terminate, and be of no further effect as to any shares of Star Common Stock
sold pursuant to Sections 3(i) or 3(ii) hereof.
4. Registration Rights
Upon their receipt of the shares of Star Common Stock
received as Merger Consideration (the "Registerable Securities") each of the
Shareholders will be entitled to the following Registration Rights.
(a) PIGGY-BACK RIGHTS. If Star proposes to register for
itself or anyone else pursuant to the Securities Act the sale of shares of any
class of its common stock then, on any such occasion, during the 18-month period
commencing at the Effective Time (the "Piggy-back Period"), Star will furnish
the Shareholders with prompt written notice thereof (other than the receipt of
notice of any exercise of demand registration rights as to fewer than 50,000
such shares and with respect to which Star does not sell any such shares on its
own behalf). To the extent permitted by applicable securities laws and this
Agreement, Star will cause to be registered in such registration statement, if
any, all of the Shareholders' Registrable Securities that the Shareholders have
properly requested be included in such registration. The Shareholders shall
exercise the "Piggy-back rights" under this Section 4(a) by giving written
notice to Star to such effect within seven (7) days after being given notice of
any registration by Star as aforesaid. The provisions of this Section shall not
apply to a registration (i) on Form S-8 or other comparable form relating
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solely to employee stock benefit plans or (ii) on Form S-4 or other comparable
form relating solely to business combination transactions.
(b) DEMAND REGISTRATION. For one year commencing upon the
expiration of the Piggy-back Period, upon written demand by either Shareholder
that it desires to have any or all of the Registerable Securities owned by it
registered (the "Shareholder Demand"), Star shall, as expeditiously as possible,
use its best efforts to effect (at the earliest possible date and if possible
within ninety (90) days after the giving of such written notice to Star) the
registration and/or qualification of such Registerable Securities under the
Securities Act and any applicable state securities laws then in force and to
file such amendments and supplements as may be necessary to keep such
registration effective for ninety (90) days (such period to be tolled for any
period that Star is not in compliance with its obligation hereunder). Star will
give notice to the other Shareholder(s) of the Shareholder Demand, of its
intention to effect such registration and otherwise comply with the provisions
of this Section 4(b) with respect to such registration. Star shall not be
obligated to cause to become effective more than one registration statement
pursuant to which Registerable Securities are sold under this Section 4(b).
(c) REGISTRATION EXPENSES. All expenses, disbursements and
fees arising out of or related to the preparation, filing, amendment and
supplementing of a registration statement, including without limitation all
legal and accounting fees (other than fees of counsel, if any, engaged by any
Shareholders in connection with any registration of Registerable Securities),
filing fees, printing costs, registration or qualification fees and expenses
necessary to comply with blue sky or other state securities laws and any other
expenses in connection with any action to be taken under Section 4(a) shall be
borne by Star. All expenses, disbursements and fees arising out of or related to
the preparation, filing, amendment and supplementing of a registration statement
including, without limitation, all legal and accounting fees, filing fees,
printing costs, registration or qualification fees and expenses necessary to
comply with blue sky or other state securities laws and any other expenses in
connection with any action to be taken under Section 4(b) shall be borne,
jointly and severely, by the Shareholders, proportional to the shares of such
Shareholder included in a registration under Section 4(b).
5. Representations, Warranties and Covenants of the
Shareholders. Each Shareholder hereby severally represents, warrants and
covenants to Star as follows:
5.1 Ownership of Shares. Such Shareholder (i) is the
beneficial owner of the respective number of Shares set forth opposite its name
on Annex A, which at the date hereof and at all times up until the Expiration
Date will be free and clear of any liens, claims, options, charges or other
encumbrances; (ii) does not beneficially own any shares of capital stock of Star
other than such Shares; and (iii) has full power and authority to make, enter
into and carry out the terms of this Agreement and the Proxy.
5.2 No Proxy Solicitations. Such Shareholder, the Voting
Trustee and Kaufman will not, and will not permit any entity under Shareholder's
control to: (i) solicit
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proxies or become a "participant" in a "solicitation" (as such terms are defined
in Regulation 14A under the Exchange Act) with respect to an Opposing Proposal
or otherwise encourage or assist any party in taking or planning any action that
would compete with, restrain or otherwise serve to interfere with or inhibit the
timely consummation of the Merger in accordance with the terms of the Merger
Agreement; (ii) initiate a shareholders vote or action by consent of EFCC
shareholders with respect to an Opposing Proposal; or (iii) become a member of a
"group" (as such term is used in Section 13(d) of the Exchange Act) with respect
to any voting securities of EFCC with respect to an Opposing Proposal.
5.3 Authority; Enforceability. Such Shareholder and the
Voting Trustee have the legal right and power, and all authorization and
approval required by law, to enter into this Agreement and the Affiliate Letter
to be delivered by such Shareholder pursuant to Section 5.10 of the Merger
Agreement. This Agreement and the Affiliate Letter have each been duly
authorized, executed and delivered by or on behalf of such Shareholder and the
Voting Trustee and constitutes a valid and binding obligation of such
Shareholder and the Voting Trustee enforceable in accordance with its respective
terms, except, with respect to Section 2 hereof, as such enforceability may be
limited by principles of public policy and subject to the laws of general
application relating to bankruptcy, insolvency and the relief of debtors and the
rules of law governing specific performance, injunctive relief or other
equitable remedies.
5.4 No Conflict. The execution and delivery by such
Shareholder and the Voting Trustee of, and the performance by such Shareholder
and the Voting Trustee of, its obligations under this Agreement and the
Affiliate Letter will not contravene any provision of applicable law, or the
certificate of incorporation or Bylaws, partnership agreement, trust agreement
or other charter documents of such Shareholder, any agreement or other
instrument binding upon such Shareholder or the Voting Trustee, or any judgment,
order or decree of any governmental body, agency or court having jurisdiction
over such Shareholder or the Voting Trustee, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by such Shareholder or the Voting Trustee
of its obligations under this Agreement and the Affiliate Letter to be delivered
by such Shareholder pursuant to Section 5.10 of the Merger Agreement, except (i)
such consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable state and federal securities
laws and the laws of any foreign country, (ii) filings under the HSR Act (iii)
such other consents, authorizations, filings, approvals and registrations which
if not obtained or made would not have a Material Adverse Effect on the ability
of such Shareholder or the Voting Trustee to consummate the transactions
contemplated by this Agreement, the Affiliate Letter and the Merger Agreement or
(iv) any consents specified in Section 4.5(ii)(C) or (ii)(D) of the Merger
Agreement.
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5.5 Representations and Warranties of EFCC.
(a) The representations of EFCC set forth in Section 4.6
of the Merger Agreement are true and correct as of the date of the Merger
Agreement and will be true as of the Effective Time and each of the Shareholders
further shall represent and warrant in writing to Star immediately prior to the
Effective Time that, from the date hereof through the Effective Time, there has
not been any adverse development or change or prospective adverse development or
change regarding the ability of EFCC to conduct its Medicaid-related operations
in the nature or to the extent conducted prior to the date hereof.
(b) Except as relate to certified class action lawsuits
relating to the Merger, the representations of EFCC set forth in Sections 4.7,
4.10 and 4.11 of the Merger Agreement are true and correct as of the date of the
Merger Agreement and will be true as of the Effective Time.
6. Survival; Limitation; Indemnification.
6.1 Survival of Representations and Warranties. The
representations and warranties of the Shareholders set forth in Section 5.5(a)
hereof shall survive for a period of twenty-four (24) months following the
Effective Time and the representations and warranties of the Shareholders set
forth in Section 5.5(b) shall survive for a period of twelve (12) months
following the Effective Time.
6.2 Limitation of Damages. The liability of each
Shareholder for monetary damages with respect to the foregoing representations
and warranties shall be limited exclusively to the Escrow Fund, as that term is
defined in the form of Escrow Agreement attached to the Merger Agreement as
Exhibit E.
6.3 Indemnification by the Sellers.
(a) Subject to Sections 6.1 and 6.2 above and 6.3(b)
below, the Shareholders shall, jointly and severally, indemnify, defend and hold
Star and EFCC and any director, officer, employee, agent, advisor, parent,
shareholder, subsidiary or affiliate of Star (each a "Star Indemnitee") harmless
from, against and with respect to any and all demands, claims, actions or causes
of action, assessments, liabilities, losses, costs, damages, penalties, charge
or expense, including, without limitation, interest, penalties and reasonable
counsel and accountants' fees, disbursements and expenses (collectively,
"Indemnifiable Losses") arising out of, or related to, (i) any breach by any
Shareholder of any representation or warranty made by any Shareholder in this
agreement or any other document delivered by any Shareholder in connection
herewith, and (ii) the failure on the part of any Shareholder to fully,
faithfully and timely perform all covenants to be performed by it under this
agreement or any such document (collectively, the "Claims").
(b) The Shareholders shall only be obligated to indemnify,
defend and hold Star harmless for Indemnifiable Losses incurred as a result of a
breach or breaches of Section
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5.5(b) hereof in the event and to the extent that all such Indemnifiable Losses
shall exceed $100,000.
6.4 Procedure for Indemnification.
(a) If Star receives notice of the assertion by a third
party of any claim or of the commencement by any such person of any action or
proceeding (a "Third Party Claim") with respect to which the Shareholders are
obligated to provide indemnification, Star shall give the Shareholders prompt
notice thereof after becoming aware of such Third Party Claim in reasonable
detail and shall indicate the amount (estimated if necessary) of the
Indemnifiable Loss that has been or may be sustained by Star. If the
Shareholders elect, at their expense, to compromise or defend such Third Party
Claim, they shall promptly notify Star of their intent to do so, and Star shall
cooperate, at the expense of the Shareholders, in the compromise of, or defense
against, such Third Party Claim. If the Shareholders elect not to compromise or
defend against the Third Party Claim as aforesaid, or fail to notify Star of
their election to do so as herein provided, Star may pay (without prejudice to
any of its rights against the Shareholders), compromise or defend such Third
Party Claim. Notwithstanding the foregoing, neither the Shareholders nor Star
may settle or compromise any claim (unless the sole relief payable to a Third
Party in respect of such Third Party Claim is monetary damages that are paid in
full by the party settling or compromising such claim) over the objection of the
other; provided, however, that consent to settlement or compromise shall not be
unreasonably withheld. In any event, Star and the Shareholders may each
participate in the defense of such Third Party Claim. Such participation shall
be at the expense of each party except if Star, in its reasonable discretion,
believes that because of its relationship with the Third Party it must
participate therein, then in such event the participation of Star shall be at
the expense of the Shareholders. Star shall make available to the Shareholders
during normal business hours and for reasonable periods, any books, records or
other documents within its control that are necessary or appropriate for such
defense.
(b) Any claim by Star on account of an Indemnifiable Loss
which does not result from a Third Party Claim shall be asserted by written
notice given to the Shareholders. The Shareholders shall have a period of ten
(10) days within which to respond thereto. If the Shareholders do not respond
within such 10-day period, the Shareholders shall be deemed to have accepted
responsibility to make payment, and shall have no further right to contest the
validity of such claim. If the Shareholders do respond within such 10-day period
and reject such claim in whole or in part, Star shall be free to pursue such
remedies as may be available to it under applicable law.
6.5 Remedies Cumulative. The remedies provided herein
shall be cumulative and shall not preclude assertion by any party hereto of any
other rights or the seeking of any other remedies against any other party
hereto, except as provided in Section 6.2.
7. Additional Documents. Each Shareholder and the Voting
Trustee hereby severally covenants and agrees to execute and deliver any
additional documents necessary or
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desirable, in the reasonable opinion of Star or Shareholder, as the case may be,
to carry out the intent of this Agreement.
8. Consent and Waiver. Each Shareholder and the Voting
Trustee hereby gives any consents or waivers that are reasonably required for
the consummation of the Merger under the terms of any agreements to which such
Shareholder is a party or pursuant to any rights such Shareholder or the Voting
Trustee may have.
9. Termination. Except as provided is Sections 3, 4, 5.5 and
6 hereof, this Agreement and the Proxy delivered in connection herewith shall
terminate and shall have no further force or effect as of the Expiration Date.
10. Miscellaneous.
10.1 Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
10.2 Binding Effect and Assignment. This Agreement and all
of the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement nor any
of the rights, interests or obligations of any Shareholder or the Voting Trustee
may be assigned by the Shareholder or the Voting Trustee without the prior
written consent of Star.
10.3 Amendments and Modification. This Agreement may not
be modified, amended, altered or supplemented except upon the execution and
delivery of a written agreement executed by the party against whom enforcement
is sought.
10.4 Specific Performance; Injunctive Relief. The parties
hereto acknowledge that Star will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or agreement
of any Shareholder set forth herein, other than Section 5.5 (a) or (b).
Therefore, it is agreed that, in addition to any other remedies that may be
available to Star upon any such violation, Star shall have the right to enforce
such covenants and agreements by specific performance, injunctive relief or by
any other means available to Star at law or in equity.
10.5 Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and sufficient if delivered
in person, by cable, telegram or telex, or sent by mail (registered or certified
mail, postage prepaid, return receipt requested) or overnight courier (prepaid)
to the respective parties as follows:
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if to Star: Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, New York 11746
Attn: Chief Executive Officer
Telecopier: 516-423-3924
with copies to: Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attn: James Alterbaum, Esq.
Telecopier: (212) 704-6288
if to a Shareholder
or Kaufman: To the address for notice set forth on Annex A
hereto.
with copies to: Meltzer, Lippe, Goldstein, Wolf,
& Schlissel, P.C.
190 Willis Avenue
Mineola, New York 11501
Attn: Richard A. Lippe, Esq.
Telecopier: (516) 747-0653
If to EFCC: Extended Family Care Corporation
c/o Arbor Home Healthcare Holdings, LLC
333 Earl Ovington Boulevard
Uniondale, New York 11553
Attn: Chief Executive Officer
Telecopier: (516) 832-8050
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall only be
effective upon receipt.
10.6 Governing Law. This Agreement shall be governed by,
and construed and enforced in accordance with, the laws of the State of New
York, without regard to principles of conflicts of law.
10.7 Legal Proceedings. Legal proceedings commenced by
Star, the Shareholders, the Voting Trustee or Mr. Ivan Kaufman or arising out of
any of the transactions or obligations contemplated by this Agreement shall be
brought exclusively in the federal courts or, in the absence of federal
jurisdiction, state courts, in either case in Nassau County, New York. Star, the
Voting Trustee and the Shareholders and Mr. Ivan Kaufman irrevocably and
unconditionally submit to the jurisdiction of such courts and agree to take any
and all future
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action necessary to submit to the jurisdiction of such courts. Each of Star, the
Shareholders, the Voting Trustee and Mr. Ivan Kaufman irrevocably waives any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding brought in any federal or state court in Nassau County, New
York, and further irrevocably waives any claims that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum.
10.8 Entire Agreement. This Agreement contains the entire
understanding of the parties in respect of the subject matter hereof, and
supersedes all prior negotiations and understandings between the parties with
respect to such subject matter.
10.9 Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original, but all of which
together shall constitute one and the same agreement.
10.10 Effect of Headings. The section headings herein are
for convenience only and shall not affect the construction or interpretation of
this Agreement.
10.11 Effective Time. This Agreement and the Proxy
delivered in connection herewith shall become effective only upon execution of
the Merger Agreement by each of EFCC, Star and Sub.
10.12 Termination of Voting Trust. Upon the Effective
Time, the Voting Trust shall terminate and be of no further force and effect.
IN WITNESS WHEREOF, the parties have caused this EFCC Shareholders
Agreement to be duly executed on the date and year first above written.
STAR MULTI CARE SERVICES, INC.
By: /S/ STEPHEN STERNBACH
--------------------------
Name: Stephen Sternbach
Title: Chief Executive Officer
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SHAREHOLDERS:
COSS HOLDING CORP.
By: /S/ JOHN CURTIN
--------------------------
Name: John Curtin
Title: Vice President
/S/ GARY MELIUS
--------------------------
Gary Melius, As Voting Trustee
ARBOR HOME HEALTHCARE
HOLDINGS, LLC
By: /S/ IVAN KAUFMAN
--------------------------
Name: Ivan Kaufman
Title: President and Member
/S/ IVAN KAUFMAN
--------------------------
IVAN KAUFMAN
Acknowledged and Accepted by:
EXTENDED FAMILY CARE CORPORATION
By: /S/ JOSEPH HELLER
--------------------------
Name: Joseph Heller
Title: Vice President
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<PAGE>
ANNEX A TO EFCC SHAREHOLDERS AGREEMENT
LIST OF PERSONS WHO ENTERED INTO EFCC SHAREHOLDERS AGREEMENT
NUMBER OF SHARES
NAME AND ADDRESS COMMON STOCK
Coss Holding Corp. 12,749,658
c/o Arbor Home Healthcare Holdings, LLC
333 Earl Ovington Boulevard
Uniondale, New York 11553
Attention: Chief Executive Officer
Arbor Home Healthcare Holdings, LLC 13,000,000
c/o Arbor Home Healthcare Holdings, LLC
333 Earl Ovington Boulevard
Uniondale, New York 11553
Attention: Chief Executive Officer
Mr. Ivan Kaufman 0
c/o Arbor Home Healthcare Holdings, LLC
333 Earl Ovington Boulevard
Uniondale, New York 11553
Attention: Chief Executive Officer
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<PAGE>
ANNEX B
IRREVOCABLE PROXY
The undersigned shareholder or affiliate of Extended Family Care
Corporation, a New York corporation ("EFCC"), hereby irrevocably (to the extent
provided for in the New York Business Corporation Law) appoints the directors on
the Board of Directors of Star Multi Care Services, Inc., a New York corporation
("Star"), and each of them, as the sole and exclusive attorneys and proxies of
the undersigned, with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to the shares of capital stock
of EFCC beneficially owned by the undersigned, which shares are listed on the
final page of this Proxy (the "Shares"), and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof,
until such time as that certain Agreement and Plan of Merger dated as of January
3 , 1997 (the "Merger Agreement"), among Star, EFCC Acquisition Corp., a New
York corporation and a wholly-owned subsidiary of Star ("Merger Sub"), and EFCC,
shall be terminated in accordance with its terms or the Merger (as defined in
the Merger Agreement) is effective. Upon the execution hereof, all prior proxies
given by the undersigned with respect to the Shares and any and all other shares
or securities issued or issuable in respect thereof on or after the date hereof
are hereby revoked and no subsequent proxies will be given.
This proxy is irrevocable (to the extent provided for in the New York
Business Corporation Law), is granted pursuant to the EFCC Shareholders
Agreement dated as of January 3 , 1997 (the "EFCC Shareholders Agreement"),
among Star, the undersigned and certain other shareholders of EFCC, and is
granted in consideration of Star entering into the Merger Agreement. The
attorneys and proxies named above will be empowered at any time prior to
termination of the Merger Agreement to exercise all voting and other rights
(including, without limitation, the power to execute and deliver written
consents with respect to the Shares) of the undersigned at every annual, special
or adjourned meeting of EFCC's shareholders, and in every written consent in
lieu of such a meeting, or otherwise, in favor of approval of the Merger and the
Merger Agreement and any matter that could reasonably be expected to facilitate
the Merger, and against any proposal made in opposition to or competition with
the consummation of the Merger and against any merger, consolidation, sale of
assets, reorganization or recapitalization of EFCC with any party other than
Star and its affiliates and against any liquidation or winding up of EFCC.
The attorneys and proxies named above may only exercise this proxy to
vote the Shares subject hereto at any time prior to termination of the Merger
Agreement, at every annual, special or adjourned meeting of the shareholders of
EFCC and in every written consent in lieu of such meeting, in favor of approval
of the Merger and the Merger Agreement and any matter that could reasonably be
expected to facilitate the Merger, and against any merger, consolidation, sale
of assets, reorganization or recapitalization of EFCC with any party other than
Star and its affiliates, and against any liquidation or winding up of EFCC, and
may not exercise this proxy on any other matter. The undersigned shareholder may
vote the Shares on all other matters, subject only to the
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terms of that certain Voting Trust Agreement, entered into as of June ___, 1996
between Cosmetic Sciences, Inc. and the Shareholders.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: January 3, 1997
COSS HOLDING CORP.
By: /S/ JOHN CURTIN
--------------------------
Name: John Curtin
Title: Vice President
/S/ GARY MELIUS
- --------------------------
Gary Melius, As Voting Trustee
ARBOR HOME HEALTHCARE HOLDINGS,
LLC
By: /S/ IVAN KAUFMAN
--------------------------
Name: Ivan Kaufman
Title: President and Member
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<PAGE>
ANNEX C
IRREVOCABLE PROXY
Upon the receipt by the undersigned of any and all shares (the
"Shares") of capital stock of Star Multi Care Services, Inc., a New York
corporation ("Star"), to be issued pursuant to and in accordance with the terms
of that certain Agreement and Plan of Merger dated as of January __, 1997 (the
"Merger Agreement"), among Star, EFCC Acquisition Corp., a New York corporation
and a wholly-owned subsidiary of Star, and Extended Family Care Services, a New
York corporation, or otherwise owned thereby, the undersigned hereby irrevocably
(to the extent provided for in the New York Business Corporation Law) appoints
the Board of Directors of Star as the sole and exclusive attorney and proxy of
the undersigned, with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to the Shares, and any and all
other shares or securities issued or issuable in respect thereof on or after the
date hereof and prior to the termination of this proxy.
Upon the execution hereof, all prior proxies given by the undersigned
with respect to the Shares and any and all other shares or securities issued or
issuable in respect thereof are hereby revoked and no subsequent proxies will be
given.
This proxy is irrevocable (to the extent provided for in the New York
Business Corporation Law) is granted by the undersigned in consideration of Star
entering into the Merger Agreement and shall terminate five (5) years from the
date that the undersigned shall become entitled to the Shares pursuant to the
terms of the Merger Agreement. The attorney and proxy named above will be
empowered during the term of this proxy to exercise all voting and other rights
(including, without limitation, the power to execute and deliver written
consents with respect to the Shares) of the undersigned at every annual, special
or adjourned meeting of Star's shareholders, and in every written consent in
lieu of such a meeting, or otherwise.
This proxy shall terminate and be of no further effect as to the
shares of Star Common Stock sold in the manner contemplated by Sections 3(i) or
3(ii) of the EFCC Shareholders Agreement to which this Irrevocable Proxy is
annexed as Annex C.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
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<PAGE>
Dated: January __, 1997
COSS HOLDING CORP.
By:/S/ JOHN CURTIN
--------------------------
Name: John Curtin
Title: Vice President
/S/ GARY MELIUS
- --------------------------
Gary Melius, As Voting Trustee
ARBOR HOME HEALTHCARE HOLDINGS,
LLC
By:/S/ IVAN KAUFMAN
--------------------------
Name: Ivan Kaufman
Title: President and Member
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<PAGE>
EXHIBIT E
---------
ESCROW AGREEMENT
, 1997
The parties to this agreement are Coss Holding Corp., a New York
corporation ("Coss"), Arbor Home Healthcare Holdings, LLC, a New York limited
liability corporation ("Arbor"), Star Multi Care Services, Inc., a New York
corporation ("Star"), and Parker Chapin Flattau & Klimpl, LLP, a New York
limited liability partnership, as escrow agent (the "Escrow Agent").
Star, EFCC Acquisition Corp. and Extended Family Care Corporation
("EFCC") have entered into an Agreement and Plan of Merger dated as of January
__, 1997 (the "Merger Agreement") pursuant to which, among other things, EFCC is
merging with EFCC Acquisition Corp. (the "Merger").
As contemplated by the Merger Agreement, Star, Coss and Arbor desire
to have a portion of the purchase price delivered now to the Escrow Agent to
hold, and the Escrow Agent has agreed to receive, hold and re-deliver said
funds, on the terms set forth below. Capitalized terms used and not otherwise
defined herein shall have the meanings respectively assigned to them in the
Merger Agreement.
The parties therefore agree as follows:
1. ESCROW. Each of Coss and Arbor contemporaneously herewith
has delivered to the Escrow Agent a check in good funds, a wire transfer or
other readily available funds in the amount of $125,000 for a total amount of
$250,000(the "Escrow Amount") and the Escrow Agent hereby acknowledges receipt
thereof.
2. INVESTMENTS. The Escrow Agent may invest the Escrow Amount
in securities issued or guarantied by the United States of America or deposit
the funds with, or invest the funds in certificates of deposit, commercial paper
or similar products of, domestic commercial banks that have, or are members of a
group of domestic commercial banks that has, consolidated total assets of at
least $1,000,000,000, or such other banks or other financial institutions to
which Coss and Star have consented in writing (hereinafter collectively the
"Investments"). The Escrow Amount and income paid or credited on Investments is
hereinafter referred to as the "Escrow Fund."
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<PAGE>
3. RELEASE OF ESCROW FUND.
(a) The Escrow Agent shall release the Escrow Fund only as
permitted by this Section 3.
(b) In the event that Star determines that there exists a
claim for which it is entitled to be reimbursed or indemnified pursuant to
Section 6.3 of the EFCC Shareholders Agreement among Star, Coss and Arbor or any
other document or agreement delivered in connection therewith, Star shall be
entitled to assert a claim in writing (an "Asserted Claim") against the Escrow
Amount in respect of each such claim and amount, as the case may be, by
notifying Coss and Arbor (with a copy of the notification to the Escrow Agent)
in reasonable detail of the basis and amount of such Asserted Claim. If, within
ten (10) days after the sending of such notice by Star, the Escrow Agent shall
not have received from Coss and Arbor a written statement disputing all or any
part of such Asserted Claim, then the Escrow Agent shall deliver to Star so much
of the Escrow Amount as may be available and as may be necessary to pay the
amount of such Asserted Claim in full, and the Escrow Agent shall promptly
follow such instructions. If, within ten (10) days after the sending of such
notice by Star, Star and the Escrow Agent shall have received from Coss and
Arbor a written statement disputing all or a portion of such Asserted Claim,
then Star may order the Escrow Agent to deliver to Star so much of the Escrow
Amount as may be available and as may be necessary to pay any portion of such
Asserted Claim that is not disputed, and the Escrow Agent shall promptly follow
such instructions. Star shall have the right to notify Coss and Arbor of
Asserted Claims at any time and from time to time, but only prior to the
Termination Date (as hereinafter defined).
(c) In the event that Coss and Arbor shall dispute all or
a portion of any Asserted Claim within the time and in the manner prescribed in
Section 3(b) hereof, the Escrow Agent shall have the right to act in accordance
with Section 5 hereof and shall not release any disputed amounts of the Escrow
Amount until (i) receipt by the Escrow Agent of joint written instructions from
Star, Coss and Arbor directing the manner in which payment of such amounts is to
be made, or (ii) as directed by final order of a court of competent jurisdiction
which is not subject to further appeal or other appellate review, together with
an opinion of counsel to the party which successfully sought such order (or, if
no party sought such order, of counsel reasonably acceptable to the Escrow
Agent) to the effect that such order is not appealable.
(d) Subject to the foregoing and all of the other
provisions hereof, on the second anniversary of the date hereof the Escrow Agent
shall release (the date of such release, the "Termination Date") as much of the
Escrow Fund that is not disputed to Coss and Arbor, 50% each.
4. FURTHER ASSURANCES. The parties agree to do such further
acts and things and to execute and deliver such statements, assignments,
agreements, instruments and other documents as the Escrow Agent from time to
time reasonably may request in connection with the administration,
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maintenance, enforcement or adjudication of this agreement in order (a) to give
the Escrow Agent confirmation and assurance of the Escrow Agent's rights,
powers, privileges, remedies and interests under this agreement and applicable
law, (b) to better enable the Escrow Agent to exercise any such right, power,
privilege or remedy, or (c) to otherwise effectuate the purpose and the terms
and provisions of this agreement, each in such form and substance as may be
acceptable to the Escrow Agent.
5. CONFLICTING DEMANDS.
(a) The Escrow Agent shall not be or become liable for
damages, losses, expenses or interest to Coss, Arbor or any other person for its
failure to comply with conflicting or adverse demands. The Escrow Agent shall be
entitled to continue to refrain and refuse to act until: (i) the rights of the
adverse claimants have been finally adjudicated in a court assuming and having
jurisdiction and venue over the parties and/or the documents, instruments or
funds involved herein or affected hereby; and/or (ii) the Escrow Agent shall
have received an executed copy of a dispositive settlement agreement to which
the parties and all other adverse claimants, if any, are parties and
signatories.
(b) In the event conflicting claims are made or notices
are received the Escrow Agent may elect to commence an interpleader or other
action for declaratory judgment for the purpose of having the respective rights
of the claimants adjudicated, and may deposit with the court all funds held
pursuant to this agreement; and if it so commences and deposits, the Escrow
Agent shall be relieved and discharged from any further duties and obligations
under this agreement.
6. CONSENT TO JURISDICTION, ETC. The parties hereby covenant
and agree that the federal and/or state courts located in New York County, New
York shall have personal jurisdiction and proper venue over any dispute with the
Escrow Agent. In any action or proceeding involving the Escrow Agent in any
jurisdiction, each of the parties waives trial by jury.
7. RELIANCE ON DOCUMENTS AND EXPERTS. The Escrow Agent shall
be entitled to rely upon any notice, consent, certificate, affidavit, statement,
paper, document, writing or communication (which to the extent permitted
hereunder may be by telegram, cable, telex, facsimile transmission, or
telephone) reasonably believed by it to be genuine and to have been signed, sent
or made by the proper person or persons, and upon opinions and advice of legal
counsel (including itself or counsel for any party hereto), independent public
accountants and other experts selected by the Escrow Agent.
8. STATUS OF THE ESCROW AGENT, ETC. The Escrow Agent is
acting under this agreement as a stakeholder only and shall be considered an
independent contractor. No term or provision of this agreement is intended to
create, nor shall any such term or provision be deemed to
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have created, any principal-agent, trust, joint venture, partnership,
debtor-creditor or attorney-client relationship between or among the Escrow
Agent and the parties. This agreement shall not be deemed to prohibit or in any
way restrict the Escrow Agent's representation of Star, which may be advised by
the Escrow Agent on any and all matters pertaining to this agreement and the
escrowed funds and documents. To the extent Star is or has been represented by
the Escrow Agent, Coss and Arbor hereby waive any conflict of interest and
authorizes and directs the Escrow Agent to carry out the terms and provisions of
this agreement fairly as to all parties, without regard to any such
representation. The Escrow Agent's only duties are those expressly set forth in
this agreement, and the parties authorize the Escrow Agent to perform those
duties in accordance with its usual practices in holding funds and documents of
its own or those of other escrows. The Escrow Agent may exercise or otherwise
enforce any of its rights, powers, privileges, remedies and interests under this
agreement and applicable law or perform any of its duties under this agreement
by or through its partners, employees, attorneys, agents or designees.
9. EXCULPATION. The Escrow Agent and its designees, and their
respective directors, officers, partners, employees, attorneys and agents, shall
not incur any liability (other than for a person's own acts or omissions
breaching a duty owed to the claimant and amounting to gross negligence or
willful misconduct) whatsoever for the investment or disposition of funds, the
holding or delivery of documents or the taking of any other action in accordance
with the terms and provisions of this agreement, for any mistake or error in
judgment, for compliance with any applicable law or any attachment, order or
other directive of any court or other authority (irrespective of any conflicting
term or provision of this agreement), or for any act or omission of any other
person engaged by the Escrow Agent in connection with this agreement; and each
of Coss, Arbor and Star hereby waives any and all claims and actions whatsoever
against the Escrow Agent and its designees, and their respective directors,
officers, partners, employees, attorneys and agents, arising out of or related
directly or indirectly to any and all of the foregoing acts, omissions and
circumstances. Furthermore, the Escrow Agent and its designees, and their
respective directors, officers, partners, employees, attorneys and agents, shall
not incur any liability (other than for a person's own acts or omissions
breaching a duty owed to the claimant and amounting to gross negligence or
willful misconduct) for other acts and omissions arising out of or related
directly or indirectly to this agreement or the escrowed funds or documents; and
each of Coss, Arbor and Star hereby expressly waives any and all claims and
actions (other than those attributable to a person's own acts or omissions
breaching a duty owed to the claimant and amounting to gross negligence or
willful misconduct) against the Escrow Agent and its designees, and their
respective directors, officers, partners, employees, attorneys and agents,
arising out of or related directly or indirectly to any and all of the foregoing
acts, omissions and circumstances.
10. INDEMNIFICATION. The Escrow Agent and its designees, and
their respective directors, officers, partners, employees, attorneys and agents,
shall be indemnified, reimbursed, held harmless and, at the request of the
Escrow Agent, defended by the parties, from and against any and
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all claims, liabilities, losses and expenses (including, without limitation, the
reasonable disbursements, expenses and fees of their respective attorneys) that
may be imposed upon, incurred by, or asserted against any of them, or any of
their respective directors, officers, partners, employees, attorneys or agents,
arising out of or related directly or indirectly to this agreement or any
escrowed funds or documents, except such as are occasioned by the indemnified
person's own acts and omissions breaching a duty owed to the claimant and
amounting to gross negligence or willful misconduct.
11. NOTICES. All notices and other communications under this
agreement shall be in writing and shall be deemed given when delivered
personally or mailed by registered mail, return receipt requested, to the
parties at the following addresses (or to such other address as a party may have
specified by notice given to the other party pursuant to this provision):
if to Coss:
Coss Holding Corp.
c/o Arbor Home Healthcare Holdings, LLC
333 Earl Ovington Boulevard
Uniondale, New York 11553
Attention: Chief Executive Officer
Telecopier: (516) 741-8040
if to Arbor:
Arbor Home Healthcare Holdings, LLC
333 Earl Ovington Boulevard
Uniondale, New York 11553
Attn: Chief Executive Officer
Telecopier: (516) 832-8050
in the case of Coss and Arbor, with a copy to:
Meltzer, Lippe, Goldstein, Wolf & Schlissel, P.C.
190 Willis Avenue
Mineola, New York 11501
Attn: Richard A. Lippe, Esq.
Telecopier: (516) 747-0653
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if to Escrow Agent:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Telecopier: (212) 704-6288
if to Star:
Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, New York 11746
Attn: Chief Executive Officer
Telecopier: (516) 423-3924
with a copy to:
James Alterbaum, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
12. SECTION AND OTHER HEADINGS. The section and other headings
contained in this agreement are for reference purposes only and shall not affect
the meaning or interpretation of this agreement.
13. GOVERNING LAW. This agreement has been executed and
delivered, and shall be governed by and construed in accordance with the
applicable laws pertaining, in the state of New York, without regard to
principles of conflicts of law.
14. SEVERABILITY. In the event that any term or provision of
this agreement shall be finally determined to be superseded, invalid, illegal or
otherwise unenforceable pursuant to applicable law by a governmental authority
having jurisdiction and venue, that determination shall not impair or otherwise
affect the validity, legality or enforceability (a) by or before that authority
of the remaining terms and provisions of this agreement, which shall be enforced
as if the unenforceable term or provision were deleted, or (b) by or before any
other authority of any of the terms and provisions of this agreement.
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15. COUNTERPARTS. This agreement may be executed in two or
more counterparts, each of which may be executed by one or more of the parties
hereto, but all of which, when taken together, shall constitute but one
agreement binding upon all of the parties hereto.
16. SUCCESSORS AND ASSIGNS; ASSIGNMENT. Whenever in this
agreement reference is made to any party, such reference shall be deemed to
include the successors, assigns, heirs and legal representatives of such party,
and, without limiting the generality of the foregoing, all representations,
warranties, covenants and other agreements made by or on behalf of each parties
in this agreement shall inure to the benefit of the successors and assigns of
the Escrow Agent; PROVIDED, HOWEVER, THAT nothing herein shall be deemed to
authorize or permit the parties to assign any of their rights or obligations
hereunder to any other person.
17. NO THIRD PARTY RIGHTS. The representations, warranties and
other terms and provisions of this agreement are for the exclusive benefit of
the parties hereto, and no other person, shall have any right or claim against
any party by reason of any of those terms and provisions or be entitled to
enforce any of those terms and provisions against any party.
18. NO WAIVER BY ACTION, ETC. Any waiver or consent respecting
any representation, warranty, covenant or other term or provision of this
agreement shall be effective only in the specific instance and for the specific
purpose for which given and shall not be deemed, regardless of frequency given,
to be a further or continuing waiver or consent. The failure or delay of a party
at any time or times to require performance of, or to exercise its rights with
respect to, any representation, warranty, covenant or other term or provision of
this agreement in no manner (except as otherwise expressly provided herein)
shall affect its right at a later time to enforce any such term or provision. No
notice to or demand on any party in any case shall entitle such party to any
other or further notice or demand in the same, similar or other circumstances.
All rights, powers, privileges, remedies and interests of the Escrow Agent under
this agreement are cumulative and not alternatives, and they are in addition to
and shall not limit (except as otherwise expressly provided herein) any other
right, power, privilege, remedy or interest of the Escrow Agent under this
agreement or applicable law.
19. MODIFICATION, AMENDMENT, ETC. Each and every modification
and amendment of this agreement shall be in writing and signed by all of the
parties hereto, and each and every waiver of, or consent to any departure from,
any covenant, representation, warranty or other provision of this agreement
shall be in writing and signed by each party affected thereby.
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20. ENTIRE AGREEMENT. This agreement contains the entire
agreement of the parties and supersedes all other representations, agreements
and understandings, oral or otherwise, among the parties with respect to the
matters contained herein.
Coss Holding Corp.
By:_____________________________
Name:
Title:
Arbor Home Healthcare Holdings, LLC
By:_____________________________
Name:
Title:
Star Multi Care Services. Inc.
By:_____________________________
Name:
Title:
THE ESCROW AGENT:
Parker Chapin Flattau & Klimpl, LLP
By:_____________________________
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EXHIBIT G
---------
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT, dated January 3, 1997 is between Extended
Family Care Corporation, a New York corporation (the "Company"), and Star Multi
Care Services, Inc., a New York corporation (the "Consultant").
W I T N E S S E T H :
WHEREAS, the Company has entered into an Agreement and Plan of Merger
(the "Merger Agreement") dated as of January 3, 1997 among the Consultant, EFCC
Acquisition Corp., a New York corporation and a wholly-owned subsidiary of the
Consultant ("Merger Sub") and the Company which provides for the merger (the
"Merger") of the Company with Merger Sub; and
WHEREAS, the Consultant, by and through its officers and other
employees, has developed, in connection with the conduct of its business and
affairs, various areas of expertise in the management and operation of a home
care services business; and
WHEREAS, the Company desires to obtain the advice and assistance of
the Consultant in such areas of expertise;
NOW, THEREFORE, in consideration of the foregoing, and other good and
valuable consideration hereinafter stated, the parties hereby agree as follows:
1. APPOINTMENT. The Company hereby appoints the Consultant to
render to the Company during the Term (as defined below) the services provide
for in Section 3 hereof.
2. TERM. The Consultant shall render the services provided
for in Section 3 hereof for a period (the "Term") commencing on the date hereof
and ending on the earlier of (i) the date on which the Merger Agreement shall
have been terminated pursuant to the terms thereof other than by reason of the
default of the Company thereunder, (ii) the Effective Date of the Management
Agreement (as defined in the Merger Agreement) or (iii) the Effective Time (as
defined in the Merger Agreement) PROVIDED, that the Consultant shall have the
right to terminate its obligation to render services hereunder at any time upon
forty-five (45) days prior notice to the Company.
3. SERVICES. During the Term, upon the Company's request, the
Consultant shall render to the Company, by and through such of its officers,
employees and agents as the Consultant, in its sole discretion, shall designate
from time to time, consulting services with respect to the management and
operation of the Company. The consulting services to be rendered by the
Consultant hereunder shall consist of those consulting services relating to the
management and operation of the Company's healthcare business reasonably
requested by the Company. The Company
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and the Consultant agree that the Consultant's role is that of a consultant and
advisor to, and not that of a manager of, the Company. The Consultant shall have
no duty or responsibility to manage the affairs of the Company which duty and
responsibility shall remain at all times with the Board of Directors and
management of the Company. In particular, without limiting the generality of the
foregoing provisions of this Section, the powers and responsibilities of the
Consultant hereunder shall be subject to the limitations and conditions imposed
on the Manager (as defined in the Management Agreement) under the Management
Agreement.
4. CONSULTING COMPENSATION. For the consulting services to be
rendered by the Consultant under Section 3 hereof, the Company agrees to pay the
Consultant fees in the amount of Twenty-five Thousand Dollars ($25,000) per
month, payable (a) $15,000 in arrears on the last day of each month, pro rated
for any partial month, and (b) the remaining $10,000 on the earlier to occur of
(x) the Effective Time, as defined in the Merger Agreement, and (y) the
termination of the Merger Agreement in accordance with Article VII thereof.
5. PERMISSIBLE ACTIVITIES. Nothing herein shall be deemed to
restrict the Consultant from engaging in any business or performing any services
for its own account or the account of others during the Term. The Company
acknowledges that the Consultant is engaged in substantially the same line of
business as the Company.
6. APPLICABLE LAW. This Agreement shall be construed and
enforced in accordance with the laws of the State of New York, without giving
effect to conflicts of law principles.
7. LEGAL PROCEEDINGS. Legal proceedings commenced by the
Company or the Consultant arising out of any of the transactions or obligations
contemplated by this Agreement shall be brought exclusively in the federal
courts or, in the absence of federal jurisdiction, state courts, in either case
in Nassau County, New York. The Company and the Consultant irrevocably and
unconditionally submit to the jurisdiction of such courts and agree to take any
and all future action necessary to submit to the jurisdiction of such courts.
Each of the Company and the Consultant irrevocably waives any objection which it
may now or hereafter have to the laying of venue of any suit, action or
proceeding brought in any federal or state court in Nassau County, New York, and
further irrevocably waives any claims that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum.
8. NO CONTINUING WAIVER. The waiver of any party of any
breach of this Agreement shall not operate as, or be construed to be, a waiver
of any subsequent breach.
9. INDEMNIFICATION. If, in connection with the Consultant's
rendering of services hereunder, the Consultant is named as a party to any
action or legal proceeding, the Company agrees to indemnify the Consultant, its
affiliates and their respective directors, officers, employees, agents and
controlling persons (each, an "Indemnified Party") against all losses, claims,
damages or liabilities, joint or several, including reasonable attorneys' fees
and expenses, to which such Indemnified Party may become subject in connection
with the Consultant's rendering of services hereunder; PROVIDED,
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that the Company shall not be liable under the foregoing indemnity provision in
respect of any loss, claim, damage or liability to the extent that such loss,
claim, damage or liability results from the willful misfeasance or gross
negligence of such Indemnified Party. The Company further agrees to consult in
advance with the Consultant with respect to the terms of any proposed waiver,
release or settlement of any claim, action or proceeding to which an Indemnified
Party may be subject as a result of the Consultant's engagement hereunder and
agrees not to enter into any such waiver, release or settlement without the
prior written consent of such Indemnified Party, unless such waiver, release or
settlement includes an unconditional release of such Indemnified Party from all
liability arising out of such claim, action or proceeding.
If any legal proceeding shall be instituted, or any claim or demand
made, against an Indemnified Party such Indemnified Party shall give prompt
written notice of the claim to the party obliged or alleged to be so obliged so
to indemnify such Indemnified Party (the "Indemnitor"). The omission so to
notify such Indemnitor, however, shall not relieve such Indemnitor from any duty
to indemnify which otherwise might exist with regard to such claim unless (and
only to the extent that) the omission to notify materially prejudices the
ability of the Indemnitor to assume the defense of such claim.
After any Indemnitor has received notice from an Indemnified Party
that a claim has been asserted against such Indemnified Party, the Indemnitor
shall promptly pay to the Indemnified Party the amount of such damages in
accordance with and subject to the provisions of this Section; PROVIDED,
HOWEVER, that no such payment shall be due during any period in which the
Indemnitor is contesting in good faith either its obligation to make such
indemnification or the amount of damages payable or both. After any Indemnitor
has received notice from an Indemnified Party that a claim has been asserted
against it by a third party, the Indemnitor shall have the right, upon giving
written notice to the Indemnified Party, to participate in the defense of such
claim and to elect to assume the defense against the claim, at its own expense,
through the Indemnified Party's attorney or an attorney selected by the
Indemnitor and approved by the Indemnified Party, which approval shall not be
unreasonably withheld; PROVIDED, HOWEVER, that it shall be a condition to such
election to assume such defense that (i) the Indemnitor shall provide the
Indemnified Party with evidence reasonably acceptable to the Indemnified Party
that the Indemnitor will have the financial resources to defend against the
claim and to fulfill its indemnification obligations hereunder and (ii) the
Indemnitor conducts the defense of the claim actively and diligently. If the
Indemnitor fails to give notice of such election within thirty days (30) after
notice, then the Indemnitor shall be deemed to have elected not to assume the
defense of such claim and the Indemnified Party may defend against the claim
with its own attorney.
If the Indemnitor so elects to participate in the defense of such
claim or to assume the defense against a claim within thirty (30) days after
notice and the conditions set forth above are satisfied, then the Indemnified
Party will cooperate and make available to the Indemnitor (and its
representatives) all employees, information, books and records in its possession
or under its control which are reasonably necessary or useful in connection with
such defense; and if the Indemnitor shall have elected to assume the defense of
a claim, then the Indemnitor shall have the right to compromise and settle in
good faith any such claim with the consent of the Indemnified Party (such
consent not
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to be unreasonably withheld) provided that the conditions set forth above are
satisfied. If the Indemnitor shall elect to defend or to agree in writing to
compromise or to settle any such claim, then it shall be bound by any ultimate
judgment or settlement as to the existence and amount of the claim, and the
amount of said judgment or settlement shall be conclusively deemed for all
purposes of this Agreement to be a liability on account of which the Indemnified
Party is entitled to be indemnified hereunder. If the Indemnitor is conducting
the defense of a claim, the Indemnified Party may retain separate co-counsel at
its cost and expense and participate in such defense.
If the Indemnitor does not elect to assume or is deemed to have
elected not to assume the defense of a claim or in the event any of the
conditions set forth above becomes unsatisfied then: (i) the Indemnified Party
alone shall have the right to conduct such defense but shall use its best
efforts to inform the Indemnitor as to the status of any proceedings; (ii) the
Indemnified Party shall have the right to compromise and to settle, in good
faith, the claim without the prior consent of the Indemnitor; (iii) the
Indemnitor will periodically reimburse the Indemnified Party for costs
(including reasonable legal fees); and (iv) if it is ultimately determined the
claim of loss which shall form the basis of such judgment or settlement is one
that is validly an obligation of the Indemnitor that elected not to assume the
defense, then such Indemnitor shall be bound by any ultimate judgment or
settlement as to the existence and the amount of the claim and the amount of
said judgment or settlement (including the costs and expenses of defending such
claims) shall be conclusively deemed for all purposes of this Agreement to be a
liability on account of which the Indemnified Party is entitled to be
indemnified hereunder.
A claim for indemnification for any matter not involving a third
party claim may be asserted by notice to the party for whom indemnification is
sought. After receipt of such notice, the Indemnitor shall pay the Indemnified
Party the amount of such damages within thirty (30) days; PROVIDED, HOWEVER,
that no such payments shall be due during any period in which the Indemnitor is
contesting in good faith either its obligation to make such indemnification or
the amount of damages payable or both.
10. BURDEN AND BENEFIT; LIABILITY OF CONSULTANT. This
Agreement shall inure to the benefit of, and be binding upon, the Consultant and
the Company and their respective successors and assigns. In the event of a
default by the Consultant of any of its obligations (other than for willful
misfeasance or gross negligence), the sole and exclusive recourse and remedy of
the Company shall be against the Consultant and its assets and under no
circumstances shall any officer, director, stockholder or affiliate of the
Consultant be liable in law or equity for any obligations to the Company. The
remedy of the Company for such default shall be limited to the recovery of the
consulting fees actually paid to the Consultant.
11. NOTICES.. All notices, requests and other communications
pursuant to this Agreement shall be in writing and shall be deemed to have been
duly given, if delivered in person or by courier, telegraphed, telexed or by
facsimile transmission or sent by express, registered or certified mail, postage
prepaid, addressed as follows:
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If to the Company:
Extended Family Care Corporation
c/o Arbor Home Healthcare Holdings, LLC
333 Earl Ovington Boulevard
Uniondale, New York 11553
Attention: Chief Executive Officer
with a copy to:
Meltzer, Lippe, Goldstein, Wolf & Schlissel, P.C.
190 Willis Avenue
Mineola, New York
Attention: Richard A. Lippe, Esq.
If to the Consultant:
Stephen Sternbach
c/o Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, New York 11746
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attention: James Alterbaum, Esq.
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Any party may, by written notice to the other, change the address to which
notices to such party are to be delivered or mailed.
IN WITNESS WHEREOF, the parties have caused this Consulting Agreement
to be executed and delivered by their respective duly authorized officers as set
forth below as of the date first above written.
STAR MULTI CARE SERVICES, INC.
By: /S/ STEPHEN STERNBACH
----------------------------------
Name: Stephen Sternbach, President
Title:President
EXTENDED FAMILY CARE CORPORATION
By: /S/ JOSEPH HELLER
----------------------------------
Name: Joseph Heller
Title:Vice President
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EXHIBIT H
---------
MANAGEMENT AGREEMENT
THIS AGREEMENT entered into this 3rd day of January, 1997 by and
between Star Multi Care Services, Inc., a New York corporation (hereinafter
referred to as the "Manager"), and Extended Family Care Corporation, a New York
corporation (hereinafter referred to as the "Agency").
WHEREAS, the Agency desires to employ Manager, under the terms of
this Agreement, to provide its experience, skills and supervision and to make
available certain personnel in the operations of a licensed home care services
agency with the full authority and ultimate control of the Agency remaining with
its Board of Directors (hereinafter the "Board"); and
WHEREAS, Manager has entered into an Agreement and Plan of Merger
(the "Merger Agreement") dated as of January 3, 1997 among the Manager, EFCC
Acquisition Corp., a New York corporation and a wholly-owned subsidiary of the
Manager ("Merger Sub") and the Agency which provides for the merger (the
"Merger") of the Agency with Merger Sub.
NOW, THEREFORE, in consideration of the premises and the obligations
undertaken by the parties pursuant hereto, the parties hereby agree as follows:
1. EMPLOYMENT, SERVICES AND DUTIES.
1.1 EMPLOYMENT. Agency hereby retains Manager, and Manager
hereby agrees to act as manager of the Agency, subject to all the provisions
hereof; PROVIDED that Manager shall not render any services or receive any
compensation hereunder until the Effective Date (as hereinafter defined).
1.2 AUTHORITY AND RESPONSIBILITIES OF MANAGER. Manager
shall have the authority and responsibility to conduct, supervise and
effectively manage the day-to-day operation of the Agency. In the absence of
oral or written direction or written policies of the Board of Directors of the
Agency (the "Board"), Manager shall be expected to exercise the reasonable
judgment of a management company in its management activities. Manager shall
specifically have responsibility and commensurate authority, subject to the
direction of the Board to act on its behalf under this Agreement, in accordance
with the written policies of the Board, and the budgets approved by the Board as
hereinafter provided, for the following activities:
(a) CHARGES. The establishment, maintenance, revision and
administration of the overall charge structure of the Agency pursuant to
pertinent regulations, including, but not limited to, patient charges, charges
for ancillary services, charges for supplies and special services.
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(b) PERSONNEL ADMINISTRATION. The hiring, discharge,
supervision and management of all employees of the Agency, including the
determination, from time to time, of the numbers and qualifications of employees
needed in the various departments and services of the Agency. The establishment,
revision and administration of wage scales, rates of compensation, employee
benefits, rates and conditions of employment, in-service training, attendance at
seminars or conferences, staffing schedules, and job and position descriptions
with respect to all employees of the Agency. Manager shall hire and discharge
the staff of the Agency, including professional employees pursuant to misconduct
of such employees or the staffing requirements of the Agency necessary for
quality patient care.
(c) COLLECTION OF ACCOUNTS. The issuance of bills for
services and materials furnished by the Agency, and the collection of accounts
and monies owed to the Agency, including the responsibility to enforce the
rights of the Agency as creditor under any contract or in connection with the
rendering of any service.
(d) PAYMENT OF ACCOUNTS AND INDEBTEDNESS. The payment of
payroll, trade accounts, amounts due on short and long-term indebtedness, taxes
and all other obligations of the Agency; PROVIDED, HOWEVER, that the
responsibility under this paragraph shall be limited to the exercise of
reasonable diligence and care to apply the funds collected in the operation of
the Agency to its obligations in a timely and prudent manner, and Manager shall
not become personally liable or act in a guarantor capacity with respect to any
obligation of the Agency.
(e) ACCOUNTING AND FINANCIAL RECORDS. The establishment
and administration of accounting procedures and controls, in accordance with
generally accepted accounting principles and the establishment and
administration of systems for the development, preparation and safekeeping of
records and books of account relating to the business and financial affairs of
the Agency (the originals to remain at the Agency).
(f) DEPOSITORIES FOR FUNDS. The maintenance of accounts in
such banks, savings and loan associations, and other financial institutions as
the Board may, from time to time, select (including certificates of deposit)
with such balances therein (which may be interest bearing or non-interest
bearing) as Manager shall, from time to time, deem appropriate, taking into
account the operating needs of the Agency and the disbursements from such
accounts of such amounts of the Agency's funds as Manager shall, from time to
time, determine is appropriate in the discharge of its responsibilities under
this Agreement; PROVIDED, HOWEVER, that Manager shall not, in any case, have any
obligation to supply, out of its own funds, working capital for the Agency.
(g) PURCHASES AND LEASES. The management of all purchases
and leases of real property, equipment, supplies and all materials and services
which Manager shall deem to be necessary in the operation of the Agency. Any
purchase agreement which will obligate the Agency beyond the term of this
Agreement, and any purchase or lease of real property or capital equipment,
shall be subject to approval of the Board.
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(h) QUALITY CONTROL. The evaluation of all quality control
aspects of the Agency operation, and the implementation, with Board approval, of
quality control programs designed to meet standards imposed by appropriate
certifying agencies and to bring about a high standard of health care in
accordance with Board policies and resources available to the Agency.
1.3 CONTRACTS FOR SERVICES. Manager, shall be empowered to
negotiate, enter into, terminate and administer on behalf of the Agency
contracts for services by medical, paramedical and other persons and
organizations.
1.4 PROHIBITED ACTS AND RETENTION OF POWERS AGENCY.
Notwithstanding any other provision of this Agreement the Board retains and the
Manager is prohibited from exercising:
(a) direct independent authority to hire or fire
the Manager or the Agency's Administrator;
(b) independent control of the Agency's books and
records;
(c) authority over the disposition of assets and
the authority to incur on behalf of the Agency
liabilities not normally associated with the
day- to-day operation of the Agency; and
(d) authority for the independent adoption and
enforcement of policies affecting the delivery
of health care services.
1.5 COMMISSIONER'S APPROVAL. This Agreement, when approved
by the Commissioner (the "Commissioner") of the New York State Department of
Health (the "Department"), is the sole agreement between Manager and the Agency
for the purpose of managing the day-to-day activities of the Agency, or any
portion thereof, and any amendments or revisions to this Agreement which
increase the amount or extent of authority delegated to Manager shall be
effective only with the prior written consent of the Commissioner.
2. ADMINISTRATOR AND OTHER PERSONNEL.
2.1 ADMINISTRATOR. Manager may, during the term hereof,
provide the services of a qualified agency administrator (the "Administrator") ,
whose initial and continuing appointment and term of appointment shall be
subject to the approval of the Board and who will act as the chief
administrative officer of the Agency. The Administrator will be and remain the
employee of Manager for the term of this Agreement. His duties shall be, to the
extent the Manager is authorized hereunder, to effect or deal with any of the
following, to:
(a) Equip the Agency with all necessary and needed
facilities for the care and treatment of patients and for the use of officers
and employees thereof, and purchase all necessary supplies.
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(b) Have general supervision and control of the records
and accounts of the Agency and all its internal affairs; maintain discipline
therein, and enforce compliance with and obedience to all rules, bylaws, and
regulations adopted by the Board for the discipline and management of said
Agency, and the employees thereof, and make and enforce such further rules,
regulations and orders as it may deem necessary, not inconsistent with law, or
with the rules, regulations and directions of the Board.
(c) Appoint such employees as it may reasonably think
proper and necessary for the efficient performance of the business of the
Agency, prescribe their duties and discharge any such employee pursuant to the
provisions of law.
(d) Cause proper accounts and records of the business and
operations of the Agency to be kept regularly from day to day, in books and on
forms provided for that purpose; see that such accounts and records are
correctly made up for the annual report to the Board; and present the same to
the Board on request, who shall incorporate them in their annual report.
(e) Cause a careful examination to be made of the physical
condition of all persons treated by the Agency; and shall cause a record to be
kept of the condition of each patient when treated, and from time to time
thereafter.
(f) Collect and receive all money due the Agency, keep an
accurate account of the same, and report the same at the ensuing monthly meeting
of the Board.
2.2 CONTROLLER. Manager may provide, during the term
hereof, a qualified agency controller (the "Controller"), whose initial and
continuing appointment and the term of appointment shall be subject to the
approval of the Board, who shall act as the chief accounting and financial
officer of the Agency. The Controller will be and remain an employee of Manager
for the term of this Agreement.
3. DIVISION OF AUTHORITY AND RESPONSIBILITY.
3.1 THE BOARD. The Board shall retain full legal authority
over the operation of the Agency and ongoing responsibility for compliance with
all statutory and regulatory requirements. Any powers not delegated specifically
to Manager through the provisions of this Agreement shall remain with the Board.
The Board shall represent the Agency in matters pertaining to the interpretation
of this Agreement; PROVIDED that in any situation in which, pursuant to the
terms of this Agreement, the Board shall be required or permitted to take any
action, to give any approval or to receive any report, Manager shall be entitled
to rely upon the written statement of the Chairman of the Board of the Agency to
the effect that any such action or approval has been taken or given.
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4. COMMUNICATIONS AND REPORTS.
Manager shall be available to report to and consult with
the Board on such matters and at such times as the Board shall reasonably
request.
5. LICENSING; ACCREDITATION.
Both Manager and Agency agree to abide by all laws,
ordinances, rules and regulations of state, local or Federal governments
pertaining to operation of the Agency and to the operation of this Agreement.
Notwithstanding any other provision in this Agreement, the Agency remains
responsible for insuring that any service provided pursuant to this Agreement
complies with all pertinent provisions of Federal, State and local statutes,
rules and regulations.
6. COMPENSATION.
As compensation for the management services to be rendered
hereunder, the Agency shall pay to Manager a management fee in the amount of
Twenty-five Thousand Dollars ($25,000) per month, payable (a) $15,000 in arrears
on the last day of each month, pro rated for any partial month, and (b) the
remaining $10,000 on the earlier to occur of (x) the Closing Date, as defined in
the Merger Agreement, and (y) the termination of the Merger Agreement for any
reason, including in accordance with Article VII thereof.
7. TERM OF AGREEMENT.
7.1 This Agreement shall become effective upon the date it
is approved by the Commissioner (the "Effective Date").
7.2 This Agreement may be terminated by the Commissioner,
without financial penalty to the Board, not more than sixty (60) days after
notification to the parties by the Department of a determination that the
management of the Agency is so deficient that the health and safety of patients
would be threatened by continuation of this Agreement.
7.3 Unless sooner terminated as elsewhere provided in this
Agreement, or extended or renewed by mutual agreement of the parties hereto,
this Agreement shall remain in effect until the Effective Time of the Merger or
December 31, 1998, whichever is sooner.
7.4 The Board may terminate this Agreement and discharge
Manager and any employee appointed by the Manager from their positions at the
Agency without Cause (as hereinafter defined) upon 60 days prior notice to
Manager or with Cause upon 14 business days prior notice to Manager. For this
purpose "Cause" means intentional misconduct or violation of this Agreement by
Manager that causes material loss or injury to the Agency or materially
interferes with its performing health care services if such conduct or violation
is not cured within 10 business days after notice, specifying such conduct or
violation in reasonable detail, is given to Manager by the Board.
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7.5 This Agreement may be terminated by Manager upon the
occurrence of an Event of Default (as hereinafter defined).
8. DEFAULT.
8.1 EVENTS OF DEFAULT. It shall be an event of default
("Event of Default") hereunder if the Agency shall fail to make or cause to be
made any payment to Manager required to be made hereunder, and such failure
shall continue for five (5) days after notice thereof shall have been given to
the Board.
9. MISCELLANEOUS.
9.1 INSURANCE. The Agency shall secure and maintain, or
cause to be secured and maintained, with respect to the Agency, during the term
of this Agreement, Worker's Compensation Disability and Employer's Liability,
and Comprehensive General and Professional Liability (including Personal Injury,
Products and Completed Operations Liability, and Blanket Automobile Liability)
Insurance providing-reasonable limits of liability. It is further agreed that
all such policies of insurance, except Worker's Compensation insurance policies,
are to be written or amended to include Manager, its agents, servants,
employees, officers and directors as Additional Named Insureds if possible.
Notwithstanding the foregoing, the Agency shall indemnify and hold Manager
harmless from any and all liability, including reasonable attorney's fees,
caused by or resulting from the negligent or intentional acts or omissions of
any member of the Board or any employee of the Agency, unless such liability is
primarily caused by the intentional misconduct of Manager.
If any legal proceeding shall be instituted, or any claim
or demand made, against a Manager such Manager shall give prompt written notice
of the claim to the Agency. The omission so to notify the Agency, however, shall
not relieve the Agency from any duty to indemnify which otherwise might exist
with regard to such claim unless (and only to the extent that) the omission to
notify materially prejudices the ability of the Agency to assume the defense of
such claim.
After the Agency has received notice from the Manager that
a claim has been asserted against the Manager, the Agency shall promptly pay to
the Manager the amount of such damages in accordance with and subject to the
provisions of this Section; PROVIDED, HOWEVER, that no such payment shall be due
during any period in which the Agency is contesting in good faith either its
obligation to make such indemnification or the amount of damages payable or
both. After the Agency has received notice from the Manager that a claim has
been asserted against it by a third party, the Agency shall have the right, upon
giving written notice to the Manager, to participate in the defense of such
claim and to elect to assume the defense against the claim, at its own expense,
through the Manager's attorney or an attorney selected by the Agency and
approved by the Manager, which approval shall not be unreasonably withheld;
PROVIDED, HOWEVER, that it shall be a condition to such election to assume such
defense that (i) the Agency shall provide the Manager with evidence reasonably
acceptable to the Manager that the Agency will have the financial resources to
defend against the claim and to fulfill its indemnification obligations
hereunder and (ii) the Agency conducts the defense of the claim actively and
diligently. If the Agency fails to give notice of such election
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within thirty days (30) after notice, then the Agency shall be deemed to have
elected not to assume the defense of such claim and the Manager may defend
against the claim with its own attorney.
If the Agency so elects to participate in the defense of
such claim or to assume the defense against a claim within thirty (30) days
after notice and the conditions set forth above are satisfied, then the Manager
will cooperate and make available to the Agency (and its representatives) all
employees, information, books and records in its possession or under its control
which are reasonably necessary or useful in connection with such defense; and if
the Agency shall have elected to assume the defense of a claim, then the Agency
shall have the right to compromise and settle in good faith any such claim with
the consent of the Manager (such consent not to be unreasonably withheld)
provided that the conditions set forth above are satisfied. If the Agency shall
elect to defend or to agree in writing to compromise or to settle any such
claim, then it shall be bound by any ultimate judgment or settlement as to the
existence and amount of the claim, and the amount of said judgment or settlement
shall be conclusively deemed for all purposes of this Agreement to be a
liability on account of which the Manager is entitled to be indemnified
hereunder. If the Agency is conducting the defense of a claim, the Manager may
retain separate co-counsel at its cost and expense and participate in such
defense.
If the Agency does not elect to assume or is deemed to
have elected not to assume the defense of a claim or in the event any of the
conditions set forth above becomes unsatisfied then: (i) the Manager alone shall
have the right to conduct such defense but shall use its best efforts to inform
the Agency as to the status of any proceedings; (ii) the Manager shall have the
right to compromise and to settle, in good faith, the claim without the prior
consent of the Agency; (iii) the Agency will periodically reimburse the Manager
for costs (including reasonable legal fees); and (iv) if it is ultimately
determined the claim of loss which shall form the basis of such judgment or
settlement is one that is validly an obligation of the Agency that elected not
to assume the defense, then the Agency shall be bound by any ultimate judgment
or settlement as to the existence and the amount of the claim and the amount of
said judgment or settlement (including the costs and expenses of defending such
claims) shall be conclusively deemed for all purposes of this Agreement to be a
liability on account of which the Manager is entitled to be indemnified
hereunder.
A claim for indemnification for any matter not involving a
third party claim may be asserted by notice to the party for whom
indemnification is sought. After receipt of such notice, the Agency shall pay
the Manager the amount of such damages within thirty (30) days; PROVIDED,
HOWEVER, that no such payments shall be due during any period in which the
Agency is contesting in good faith either its obligation to make such
indemnification or the amount of damages payable or both. 9.2 DISCLAIMER OF
EMPLOYMENT OF AGENCY EMPLOYEES. No person employed by the Agency shall be an
employee of Manager, and Manager shall have no liability for payment of their
wages, payroll taxes, and other expenses of employment. All such persons shall
be employees of the Agency, or, pursuant to Section 1.3 hereof, independent
contractors or the employees of independent contractors.
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9.3 NON-ASSUMPTION OF LIABILITIES. Manager shall not, by
entering into and performing this Agreement, become liable for, and the Agency
shall indemnify Manager against, any of the existing or future obligations,
liabilities or debts of the Agency, unless such liability is primarily caused by
the intentional misconduct or gross negligence of Manager, and Manager shall in
its role as manager have only an obligation to exercise reasonable care in the
management and handling of the funds generated from the operation of the Agency.
9.4 ACCESS TO THE AGENCY; CONFIDENTIALITY OF RECORDS.
Manager shall, during the term hereof, be given complete access to the Agency,
its records, offices and facilities in order that it may carry out its
obligations hereunder, subject to confidential requirements of patient medical
records as established by the Board. Manager shall use its best efforts to
maintain the confidentiality of all files and records, including patient
records, of the Agency, disclosing the same only as directed by law or by the
Board in any particular instance.
9.5 DISCLAIMER OF INTENT TO BECOME PARTNERS. Manager and
the Agency shall not, by virtue of this Agreement, be deemed partners or joint
venturers in the operation of the Agency or any related facility. It is
expressly understood that Manager is hereby retained by Agency to manage the
Agency on behalf of the Agency, and that Manager is constituted the agent of the
Agency only for the purpose of carrying out its obligations under this
Agreement.
9.6 RESTRICTION ON ASSIGNMENT. Neither party hereto may
assign its interest in nor delegate the performance of its obligations under
this Agreement to any other person without obtaining the prior written consent
of the other party and, if required, prior approval pursuant to law, except that
Manager may assign its interest or delegate the performance of its obligations
to a wholly-owned subsidiary of Manager, which is qualified to manage agencies
in the State of New York and approved by the Commissioner.
9.7 HEADINGS. The headings to the various sections of this
Agreement have been inserted for convenient reference only and shall not modify,
define, limit or expand the expressed provisions of this Agreement.
9.8 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original, and all such
counterparts shall together constitute but one and the same agreement.
9.9 APPLICABLE LAW. This Agreement shall be construed and
enforced in accordance with the laws of the State of New York, without giving
effect to conflicts of law principles.
9.10 LEGAL PROCEEDINGS. Legal proceedings commenced by the
Agency or the Manager arising out of any of the transactions or obligations
contemplated by this Agreement shall be brought exclusively in the federal
courts or, in the absence of federal jurisdiction, state courts, in either case
in Nassau County, New York. The Agency and the Manager irrevocably and
unconditionally submit to the jurisdiction of such courts and agree to take any
and all future action
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necessary to submit to the jurisdiction of such courts. Each of the Agency and
the Manager irrevocably waives any objection which it may now or hereafter have
to the laying of venue of any suit, action or proceeding brought in any federal
or state court in Nassau County, New York, and further irrevocably waives any
claims that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.
9.11 NO CONTINUING WAIVER. The waiver of any party of any
breach of this Agreement shall not operate as, or be construed to be, a waiver
of any subsequent breach.
9.12 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given, if mailed by certified or registered mail, postage prepaid:
If to the Agency:
Extended Family Care Corporation
c/o Arbor Home Healthcare Holdings, LLC
333 Earl Ovington Boulevard
Uniondale, New York 11553
Attention: Chief Executive Officer
with a copy to:
Meltzer, Lippe, Goldstein, Wolf & Schlissel, P.C.
190 Willis Avenue
Mineola, New York
Attention: Richard A. Lippe, Esq.
If to the Manager:
Stephen Sternbach
c/o Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, New York 11746
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attention: James Alterbaum, Esq.
or to such other person and address as either party may designate in writing.
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9.13 EFFECT OF INVALIDITY. Should any part of this
Agreement, for any reason, be declared invalid, such decision shall not affect
the validity of any remaining portion, which remaining portion shall remain in
force and effect as if this Agreement had been executed with the invalid portion
thereof eliminated.
9.14 AMENDMENTS.. Any amendments to this Agreement, which
shall be provided to and approved by the Commissioner, shall be in writing and
signed by the parties and the Board.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
STAR MULTI CARE SERVICES, INC.
By: /S/ STEPHEN STERNBACH
----------------------------
Stephen Sternbach, President
EXTENDED FAMILY CARE CORPORATION
By: /S/ JOSEPH HELLER
----------------------------
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EXHIBIT I
---------
STERNBACH PROXY
The undersigned shareholder of Star MultiCare Services, Inc., a New
York corporation ("Star"), hereby irrevocably (to the extent provided for in the
New York Business Corporation Law) appoints the directors on the Board of
Directors of Extended Family Care Corporation, a New York corporation ("EFCC"),
and each of them, as the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to the shares of capital stock
of Star beneficially owned by the undersigned, which shares are listed on the
final page of this Proxy (the "Shares"), and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof,
until such time as that certain Agreement and Plan of Merger dated as of January
3, 1997 (the "Merger Agreement"), among Star, EFCC Acquisition Corp., a New York
corporation and a wholly-owned subsidiary of Star ("Merger Sub"), and EFCC,
shall be terminated in accordance with its terms or the Merger (as defined in
the Merger Agreement) is effective. Upon the execution hereof, all prior proxies
given by the undersigned with respect to the Shares and any and all other shares
or securities issued or issuable in respect thereof on or after the date hereof
are hereby revoked and no subsequent proxies will be given.
This proxy is irrevocable (to the extent provided for in the New York
Business Corporation Law), is granted pursuant to the Merger Agreement, and is
granted in consideration of Star entering into the Merger Agreement. The
attorneys and proxies named above will be empowered at any time prior to
termination of the Merger Agreement to exercise all voting and other rights
(including, without limitation, the power to execute and deliver written
consents with respect to the Shares) of the undersigned at every annual, special
or adjourned meeting of Star's shareholders, and in every written consent in
lieu of such a meeting, or otherwise, in favor of approval of the Merger and the
Merger Agreement and any matter that could reasonably be expected to facilitate
the Merger, and against any proposal made in opposition to or competition with
the consummation of the Merger.
The attorneys and proxies named above may only exercise this proxy to
vote the Shares subject hereto at any time prior to termination of the Merger
Agreement, at every annual, special or adjourned meeting of the shareholders of
Star and in every written consent in lieu of such meeting, in favor of approval
of the Merger and the Merger Agreement reasonably be expected to facilitate the
Merger. The undersigned shareholder may vote the Shares on all other matters.
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Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: January 3, 1997
/S/ STEPHEN STERNBACH
---------------------
Stephen Sternbach
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SHARES SUBJECT TO THE STERNBACH PROXY
STEPHEN STERNBACH 863,262*
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* Mr. Sternbach also has currently exercisable options to purchase
162,574 shares of Star Common Stock, par value $.001 per share. Upon
exercise of such options, which exercise shall be in the sole
discretion of Mr. Sternbach, the shares of Star Common Stock issuable
thereunder will also be covered by this Sternbach Proxy.
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PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) Section 722 of the New York Business Corporation Law
("BCL") permits, in general, a New York corporation to indemnify any person
made, or threatened to be made, a party to an action or proceeding by reason of
the fact that he or she was a director or officer of the corporation, or served
another entity in any capacity at the request of the corporation, against any
judgment, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein, if such person acted in good faith, for a
purpose he or she reasonably believed to be in, or, in the case of service for
another entity, not opposed to, the best interests of the corporation and, in
criminal actions or proceedings, in addition had no reasonable cause to believe
that his or her conduct was unlawful. Section 723 of the BCL permits the
corporation to pay in advance of a final disposition of such action or
proceeding the expenses incurred in defending such action or proceeding upon
receipt of an undertaking by or on behalf of the director or officer to repay
such amount as, and to the extent, required by statute. Section 721 of the BCL
provides that indemnification and advancement of expense provisions contained in
the BCL shall not be deemed exclusive of any rights to which a director or
officer seeking indemnification or advancement of expenses may be entitled,
whether contained in the certificate of incorporation or the by-laws of the
corporation or, when authorized by such certificate of incorporation or by-laws,
(i) a resolution of shareholders, (ii) a resolution of directors or (iii) an
agreement, provided no indemnification may be made on behalf of any director or
officer if a judgment or other final adjudication adverse to the director or
officer establishes that his or her acts were committed in bad faith or were the
result of active or deliberate dishonesty and were material to the cause of
action so adjudicated, or that he or she personally gained in fact a financial
profit or other advantage to which he or she was not legally entitled.
(b) STAR's Certificate of Incorporation provides in Article
Twelfth as follows: TWELFTH: To the fullest extent now or hereafter provided for
or permitted by law, no director of the Company shall be personally liable to
the Company or its shareholders for damages for any breach of duty in such
capacity. Neither the amendment or repeal of this Article Twelfth, nor the
adoption of any provision of the Certificate of Incorporation inconsistent with
this Article Twelfth, shall eliminate or reduce the protection by this Article
Twelfth to a director of the Company in respect to any matter which occurred, or
any cause of action, suit or claim which but for this Article Twelfth would have
accrued or arisen prior to such amendment, repeal or adoption.
(c) Article X of STAR's By-Laws provides, in general, that
STAR shall indemnify any officer or director (including officers and directors
serving another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise in any capacity at STAR's request) made, or threatened
to be made, a party to an action or proceeding (whether civil, criminal,
administrative or investigative) by reason of the fact that he or she was
serving in any of those capacities against judgments, fines, amounts paid in
settlement and reasonable expenses (including attorneys' fees) actually and
necessarily incurred in connection with the defense of or as a result of such
action or proceeding or in connection with any appeal thereof. Indemnification
is not available under Article X if a judgment or other final adjudication
adverse to such director or officer establishes that (i) his or her acts were
committed in bad faith or were the result of active and deliberate dishonesty
and, in either case, were material to the cause of action so adjudicated, or
(ii) he or she personally gained in fact a financial profit or other advantage
to which he or she was not legally entitled.
(d) Pursuant to By-law Article X, STAR has entered into
indemnification agreements with certain of its directors and officers providing
for the indemnification of such directors and officers in derivative actions, as
well as with respect to third party actions. The BCL mandates indemnification in
derivative actions if the officer or director has been successful, on the merits
or otherwise, in the defense of the action. The indemnification agreements, as
well as Section 722 of the BCL, do not permit indemnification in derivative
actions for (a) proceedings which are settled or otherwise disposed of or (b)
claims to which a person has been adjudged to be liable, unless court approved.
However, in reliance on Section 721 of the BCL, which provides that the
statutory indemnification provisions are not exclusive of other rights which may
be provided to an officer or director seeking indemnification, By-law Article X
also extends the right of indemnification to settlements and unsuccessful
defenses of derivative actions without the necessity of a court determination
provided the person seeking indemnification meets the standard described in the
preceding paragraph. STAR is not aware of any judicial determination as to
whether indemnification provisions such as those related to derivative actions
in By-Law Article X (which, by their terms, exceed the scope of BCL Section 722
but where the standard of conduct set forth in BCL Section 721 has been met) are
enforceable pursuant to such nonexclusivity provision.
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(e) By-law Article X, like the indemnification agreements,
provides that the expenses incurred in defending any action to which a director
or officer may be entitled to indemnification shall be advanced by STAR prior to
the final disposition of the action as long as the indemnitee undertakes to
repay such advances if required by law. STAR has been advised that the BCL
currently requires that an officer or director undertake to repay such advances
to the extent they exceed the amount to which the officer or director ultimately
is entitled. The period of time within which STAR is to advance expenses is
fifteen days after request; the time period within which STAR is to provide
indemnification after request is thirty days.
(f) By-law Article X, which by its terms is not the exclusive
basis for granting rights to indemnification or advancement of expenses,
establishes procedures for processing indemnification requests, confirms the
authority of STAR to maintain indemnification insurance and prohibits the repeal
of By-law Article X retroactively. By-law Article X also provides that it
applies, to the fullest extent permitted by law, to acts or omissions occurring
prior to its adoption. By-law Article X further stipulates that the rights
granted therein are contractual in nature, which is meant to prevent any
retroactive denial or reduction of indemnification if By-law Article X is later
amended.
(g) Under By-law Article X, the Board of Directors is
permitted, to the fullest extent permitted by law, to establish an appropriate
scope of and procedure for the indemnification of, and advancement of expenses
to, employees and other persons to whom STAR is permitted to provide
indemnification or advancement of expenses.
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ITEM 21. EXHIBITS
Exhibit No. Exhibit
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2. (a) Agreement and Plan of Merger among STAR, EFCC
Acquisition Corp. and Extended Family Care Corporation
dated as of January 3, 1997. (Filed as Appendix A to the
Joint Proxy Statement/Prospectus).
(b) ** First Amendment to Agreement and Plan of Merger among
STAR, EFCC Acquisition Corp. and Extended Family Care
Corporation, dated April 6, 1997.
3. (a) * STAR's Certificate of Incorporation filed April 25,
1961.
(b) * STAR's Certificate of Amendment to Certificate of
Incorporation filed February 22, 1989.
(c) * STAR's Certificate of Amendment to Certificate of
Incorporation filed December 4, 1990.
(d) STAR's Certificate of Amendment to Certificate of
Incorporation filed February 3, 1994. (Incorporated by
reference to Exhibit 3 (d) to STAR's Annual Report on
Form 10-KSB for the fiscal year ended May 31, 1994.)
(e) STAR's Certificate of Change filed March 2, 1995.
(Incorporated by reference to Exhibit 3(e) to STAR's
Annual Report on Form 10-KSB for the fiscal year ended
May 31, 1995.)
(f) STAR's By-Laws, as amended on November 18, 1992 and
September 13, 1993. (Incorporated by reference to
Exhibit 3 (e) to STAR's Annual Report on Form 10-KSB for
the fiscal year ended May 31, 1994.)
5. (a) ** Opinion of Parker Chapin Flattau & Klimpl, LLP.
8. (a) ** Opinion of Meltzer, Lippe, Goldstein, Wolf & Schlissel,
P.C.
10. (a) * Form of Indemnification Agreement between STAR and
Stephen Sternbach.
(b) Employment Agreement, dated as of December 3, 1995
between STAR and Stephen Sternbach. (Incorporated by
reference to Exhibit 10.(x) to STAR's Quarterly Report
on Form 10-QSB for the quarterly period ended February
29, 1996.)
(c) * STAR's 1991 Incentive Stock Option Plan
(d) STAR's 1992 Incentive Stock Option Plan (as amended and
restated September 13, 1993). (Incorporated by reference
to Exhibit 10 (h) to STAR's Annual Report on Form 10-KSB
for the fiscal year ended May 31, 1994.)
(e) Amendment No. 1 to STAR's 1992 Stock Option Plan.
(Incorporated by reference to Exhibit 10.(z) to STAR's
Quarterly Report on Form 10-QSB for the quarterly period
ended February 29, 1996.)
(f) STAR's Employee Stock Purchase Plan, as amended on
December 15, 1995. (Incorporated by reference to Exhibit
10.(y) to STAR's Quarterly Report on Form 10-QSB for the
quarterly period ended February 26, 1996.)
(g) Form of Incentive Stock Option Contract (Incorporated by
reference to Exhibit 10(j) to STAR's Annual Report on
Form 10-K for the fiscal year ended May 31, 1993.)
(h) * Agreement relating to purchase of STAR among Stephen
Sternbach, Renee Starr and Leonard Taubenblatt dated
December 31, 1986.
(i) * New York State Department of Consumer Affairs
Employment Agency License.
(j) * New York State Health Department Home Care License.
(k) * New Jersey Employment Agency License.
(l) Form of Indemnification Agreement between STAR and
directors and officers. (Incorporated by reference to
Exhibit 10(k) to STAR's Annual Report on Form 10-K for
the fiscal year ended May 31, 1992.)
(m) Asset Purchase Agreement dated as of November 1, 1991 by
and among Unity Care Services, Inc., Unity Healthcare
Holding Company, Inc. and STAR. (Incorporated by
reference to Exhibit 10 (l) to STAR's Annual Report on
Form 10-K for the fiscal year ended May 31, 1992.)
(n) Asset Purchase Agreement dated January 30, 1992 by and
among Unity Healthcare Holding Company, Inc., Unity Care
Services, Inc. and STAR. (Incorporated by reference to
Exhibit 10.1 to STAR's Current Report on Form 8-K dated
May 26, 1992.)
(o) Asset Purchase Agreement dated January 30, 1992 by and
between Unity Home Care of Florida, Inc. and STAR.
(Incorporated by reference to Exhibit 10.2 to STAR's
Current Report on Form 8-K dated May 26, 1992.)
<PAGE>
(p) Employment Agreement dated February 15, 1990, between
Alan Spector and STAR, as assignee of Unity Home Care of
Florida, Inc. (Incorporated by reference to Exhibit
10(o) to STAR's Annual Report on Form 10-K for the
fiscal year ended May 31, 1992.)
(q) Asset Purchase Agreement dated November 8, 1993 by and
between DSI Health Care Services, Inc. and Star Multi
Care Services of Long Island, Inc., a wholly owned
subsidiary of STAR. (Incorporated by reference to
Exhibit 10.1 to STAR's Current Report on Form 8-K dated
November 22, 1993.)
(r) Asset Purchase Agreement dated as of January 6, 1995, as
amended, by and between Long Island Nursing Registry,
Inc. and STAR. (Incorporated by reference to Exhibit 21
to STAR's Current Report on Form 8-K dated May 19,
1995.)
(s) Employment Agreement dated May 19, 1995 by and between
STAR and Gregory Turchan. (Incorporated by reference to
Exhibit 99.1 to STAR's Current Report on Form 8-K dated
May 19, 1995.)
(t) Loan Agreement dated November 1, 1995 by and between
STAR and Chase Manhattan Bank, N.A. (Incorporated by
reference to Exhibit 10.(w) to STAR's Quarterly Report
on Form 10-QSB for the quarterly period ended November
30, 1995.)
16. (a) Letter dated April 25, 1995, as amended, from Deloitte &
Touche LLP to the Securities and Exchange Commission.
(Incorporated by reference to EFCC's Current Report on
Form 8-K/A dated March 21, 1995.)
23. (a) ** Consent of Holtz Rubenstein & Co., LLP
(b) ** Consent of Ernst & Young LLP
(c) ** Consent of Deloitte & Touche LLP
(d) ** Consent of Carpenter & Onorato, P.C.
(e) Consent of Parker Chapin Flattau & Klimpl, LLP (included
in their opinion filed as Exhibit 5(a) to this
Registration Statement).
(f) Consent of Meltzer, Lippe, Goldstein, Wolf & Schlissel,
P.C. (included in their opinion filed as Exhibit 8(a) to
this Registration Statement).
(g) ** Consent of Telesis Mergers & Acquisitions, Inc.
(h) ** Consent of Broad & Cassel
24. (a) ** Power of attorney of certain officers and directors of
STAR. (Included on Signature Page).
99. (a) ** Form of STAR Proxy Card.
(b) ** Form of EFCC Proxy Card.
- -------------------
* Incorporated by reference to STAR's Registration Statement on Form S-18
dated May 14, 1991. (Registration No. 33-39697-NY)
** Filed herewith.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS.
(a)(1) The undersigned registrant hereby undertakes:
(A) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events which, individually or together, represent a fundamental change in the
information set forth in the registration statement.
(iii) To include any material information with respect
to the plan of distribution.
(B) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(C) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(2) 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 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 for 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 had been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of 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.
(b) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 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.
(c) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning the transaction,
and the company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Hicksville,
State of New York on the 28th day of July 1997.
STAR MULTI CARE SERVICES, INC.
By: /s/ Stephen Sternbach
-----------------------------
Stephen Sternbach
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated, each of whom also constitutes and
appoints Stephen Sternbach and William Fellerman, acting singly or together, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him in any and all capacities, to sign any and all amendments
and post-effective amendments to this Registration Statement, and to file the
same, with exhibits thereto and any other documents in connection therewith with
the Securities and Exchange Commission, granting unto each attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary in connection with such matters, and hereby ratifying
and confirming all that each attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
/s/ Stephen Sternbach Chairman of the Board of July 28, 1997
- ---------------------- Directors, President and Chief
Stephen Sternbach Executive Officer (Principal
Executive Officer)
/s/William Fellerman Chief Financial Officer, July 28, 1997
- ---------------------- Secretary, Treasurer and
William Fellerman Director (Principal Financial
and Accounting Officer)
/s/ John P. Innes II Director July 28, 1997
- ----------------------
John P. Innes II
/s/Matthew Solof Director July 28, 1997
- ----------------------
Matthew Solof
/s/ Charles Berdan Director July 28, 1997
- ----------------------
Charles Berdan
/s/Gary L. Weinberger Director July 28, 1997
- ----------------------
Gary L. Weinberger
/s/ Melvin L. Katten Director July 28, 1997
- ----------------------
Melvin L. Katten
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
- ----------- -------
2. (a) Agreement and Plan of Merger among STAR, EFCC
Acquisition Corp. and Extended Family Care Corporation
dated as of January 3, 1997. (Filed as Appendix A to the
Joint Proxy Statement/Prospectus).
(b) ** First Amendment to Agreement and Plan of Merger among
STAR, EFCC Acquisition Corp. and Extended Family Care
Corporation, dated April 6, 1997.
3. (a) * STAR's Certificate of Incorporation filed April 25,
1961.
(b) * STAR's Certificate of Amendment to Certificate of
Incorporation filed February 22, 1989.
(c) * STAR's Certificate of Amendment to Certificate of
Incorporation filed December 4, 1990.
(d) STAR's Certificate of Amendment to Certificate of
Incorporation filed February 3, 1994. (Incorporated by
reference to Exhibit 3 (d) to STAR's Annual Report on
Form 10-KSB for the fiscal year ended May 31, 1994.)
(e) STAR's Certificate of Change filed March 2, 1995.
(Incorporated by reference to Exhibit 3(e) to STAR's
Annual Report on Form 10-KSB for the fiscal year ended
May 31, 1995.)
(f) STAR's By-Laws, as amended on November 18, 1992 and
September 13, 1993. (Incorporated by reference to
Exhibit 3 (e) to STAR's Annual Report on Form 10-KSB for
the fiscal year ended May 31, 1994.)
5. (a) ** Opinion of Parker Chapin Flattau & Klimpl, LLP.
8. (a) ** Opinion of Meltzer, Lippe, Goldstein, Wolf & Schlissel,
P.C.
10. (a) * Form of Indemnification Agreement between STAR and
Stephen Sternbach.
(b) Employment Agreement, dated as of December 3, 1995
between STAR and Stephen Sternbach. (Incorporated by
reference to Exhibit 10.(x) to STAR's Quarterly Report
on Form 10-QSB for the quarterly period ended February
29, 1996.)
(c) * STAR's 1991 Incentive Stock Option Plan
(d) STAR's 1992 Incentive Stock Option Plan (as amended and
restated September 13, 1993). (Incorporated by reference
to Exhibit 10 (h) to STAR's Annual Report on Form 10-KSB
for the fiscal year ended May 31, 1994.)
(e) Amendment No. 1 to STAR's 1992 Stock Option Plan.
(Incorporated by reference to Exhibit 10.(z) to STAR's
Quarterly Report on Form 10-QSB for the quarterly period
ended February 29, 1996.)
(f) STAR's Employee Stock Purchase Plan, as amended on
December 15, 1995. (Incorporated by reference to Exhibit
10.(y) to STAR's Quarterly Report on Form 10-QSB for the
quarterly period ended February 26, 1996.)
(g) Form of Incentive Stock Option Contract (Incorporated by
reference to Exhibit 10(j) to STAR's Annual Report on
Form 10-K for the fiscal year ended May 31, 1993.)
(h) * Agreement relating to purchase of STAR among Stephen
Sternbach, Renee Starr and Leonard Taubenblatt dated
December 31, 1986.
(i) * New York State Department of Consumer Affairs
Employment Agency License.
(j) * New York State Health Department Home Care License.
(k) * New Jersey Employment Agency License.
(l) Form of Indemnification Agreement between STAR and
directors and officers. (Incorporated by reference to
Exhibit 10(k) to STAR's Annual Report on Form 10-K for
the fiscal year ended May 31, 1992.)
(m) Asset Purchase Agreement dated as of November 1, 1991 by
and among Unity Care Services, Inc., Unity Healthcare
Holding Company, Inc. and STAR. (Incorporated by
reference to Exhibit 10 (l) to STAR's Annual Report on
Form 10-K for the fiscal year ended May 31, 1992.)
(n) Asset Purchase Agreement dated January 30, 1992 by and
among Unity Healthcare Holding Company, Inc., Unity Care
Services, Inc. and STAR. (Incorporated by reference to
Exhibit 10.1 to STAR's Current Report on Form 8-K dated
May 26, 1992.)
(o) Asset Purchase Agreement dated January 30, 1992 by and
between Unity Home Care of Florida, Inc. and STAR.
(Incorporated by reference to Exhibit 10.2 to STAR's
Current Report on Form 8-K dated May 26, 1992.)
<PAGE>
(p) Employment Agreement dated February 15, 1990, between
Alan Spector and STAR, as assignee of Unity Home Care of
Florida, Inc. (Incorporated by reference to Exhibit
10(o) to STAR's Annual Report on Form 10-K for the
fiscal year ended May 31, 1992.)
(q) Asset Purchase Agreement dated November 8, 1993 by and
between DSI Health Care Services, Inc. and Star Multi
Care Services of Long Island, Inc., a wholly owned
subsidiary of STAR. (Incorporated by reference to
Exhibit 10.1 to STAR's Current Report on Form 8-K dated
November 22, 1993.)
(r) Asset Purchase Agreement dated as of January 6, 1995, as
amended, by and between Long Island Nursing Registry,
Inc. and STAR. (Incorporated by reference to Exhibit 21
to STAR's Current Report on Form 8-K dated May 19,
1995.)
(s) Employment Agreement dated May 19, 1995 by and between
STAR and Gregory Turchan. (Incorporated by reference to
Exhibit 99.1 to STAR's Current Report on Form 8-K dated
May 19, 1995.)
(t) Loan Agreement dated November 1, 1995 by and between
STAR and Chase Manhattan Bank, N.A. (Incorporated by
reference to Exhibit 10.(w) to STAR's Quarterly Report
on Form 10-QSB for the quarterly period ended November
30, 1995.)
16. (a) Letter dated April 25, 1995, as amended, from Deloitte &
Touche LLP to the Securities and Exchange Commission.
(Incorporated by reference to EFCC's Current Report on
Form 8-K/A dated March 21, 1995.)
23. (a) ** Consent of Holtz Rubenstein & Co., LLP
(b) ** Consent of Ernst & Young LLP
(c) ** Consent of Deloitte & Touche LLP
(d) ** Consent of Carpenter & Onorato, P.C.
(e) Consent of Parker Chapin Flattau & Klimpl, LLP (included
in their opinion filed as Exhibit 5(a) to this
Registration Statement).
(f) Consent of Meltzer, Lippe, Goldstein, Wolf & Schlissel,
P.C. (included in their opinion filed as Exhibit 8(a) to
this Registration Statement).
(g) ** Consent of Telesis Mergers & Acquisitions, Inc.
(h) ** Consent of Broad & Cassel
24. (a) ** Power of attorney of certain officers and directors of
STAR. (Included on Signature Page).
99. (a) ** Form of STAR Proxy Card.
(b) ** Form of EFCC Proxy Card.
- -------------------
* Incorporated by reference to STAR's Registration Statement on Form S-18
dated May 14, 1991. (Registration No. 33- 39697-NY)
** Filed herewith.
<PAGE>
STAR MULTI CARE SERVICES, INC.
CROSS-REFERENCE SHEET BETWEEN ITEMS IN FORM S-4 AND
JOINT PROXY STATEMENT/PROSPECTUS PURSUANT TO
ITEM 501(b) OF REGULATION S-K.
ITEM CAPTION IN JOINT PROXY
NO. FORM S-4 CAPTION STATEMENT/PROSPECTUS
- ---- ----------------- ----------------------
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus......Facing Page of Registration
Statement; Outside Front Cover Page
2. Inside Front and Outside
Back Cover Pages of
Prospectus....................Inside Front Cover Page; Available
Information; Table of Contents
3. Risk Factors, Ratio of
Earnings to Fixed Charges and
Other Information.............Summary; Summary Historical
Consolidated Financial Data;
Comparative Per Share Data; Risk
Factors; The EFCC Meeting; The STAR
Meeting; The Merger
4. Terms of the Transaction......Summary; The Merger; The Merger
Agreement; Comparison of Rights of
Holders of EFCC Common Stock and
STAR Common Stock
5. Pro Forma Financial
Information...................Summary; Summary Unaudited Pro
Forma Condensed Combined Financial
Data; Unaudited Pro Forma Condensed
Combined Financial Statements
6. Material Contracts with the
Company Being Acquired........ *
7. Additional Information
Required for Reoffering by
Persons and Parties Deemed
to Be Underwriters............ *
8. Interests of Named Experts
and Counsel...................The Merger; Legal Matters; Experts
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... *
10. Information With Respect to S-3
Registrants................... *
11. Incorporation of Certain
Information by Reference...... *
<PAGE>
ITEM CAPTION IN JOINT PROXY
NO. FORM S-4 CAPTION STATEMENT/PROSPECTUS
- ---- ----------------- ----------------------
12. Information With Respect
to S-2 or S-3 Registrants..... *
13. Incorporation of Certain
Information by Reference...... *
14. Information With Respect to
Registrants Other Than S-3
or S-2 Registrants............Summary; STAR Summary Historical
Consolidated Financial Data;
Comparative Per Share Data;
Comparative Market Data; Business
of STAR; STAR's Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Ownership of Certain
Beneficial Owners and Management of
STAR; Management of STAR; Executive
Compensation of STAR; Certain
Relationships and Related
Transactions of STAR; Unaudited Pro
Forma Condensed Combined Financial
Statements; STAR Financial
Statements
15. Information With Respect to
S-3 Companies................. *
16. Information With Respect to
S-2 or S-3 Companies.......... *
17. Information With Respect to
Companies Other Than S-2 or
S-3 Companies ................Summary; EFCC Summary Historical
Consolidated Financial Data;
Comparative Per Share Data;
Comparative Market Data; Business
of EFCC; EFCC's Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Ownership of Certain
Beneficial Owners and Management of
EFCC; Executive Officers of EFCC;
Significant Employees of EFCC;
Certain Relationships and Related
Transactions of EFCC; Unaudited Pro
Forma Condensed Combined Financial
Statements; EFCC Financial
Statements
18. Information if Proxies,
Consents or Authorizations
are to be Solicited...........Outside Front Cover Page; Summary;
The Meetings; The Merger
<PAGE>
ITEM CAPTION IN JOINT PROXY
NO. FORM S-4 CAPTION STATEMENT/PROSPECTUS
- ---- ----------------- ----------------------
19. Information if Proxies,
Consents, or Authorizations
are not to be Solicited or
in an Exchange Offer.......... *
__________________
* Indicates that Item is not applicable or answer is in the negative.
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
FIRST AMENDMENT (the "First Amendment") to Agreement and Plan of
Merger (the "Original Agreement") dated as of January 3, 1997 among STAR MULTI
CARE SERVICES, INC., a New York corporation ("Star"), EFCC ACQUISITION CORP., a
New York corporation and a wholly-owned subsidiary of Star ("Merger Sub"), and
EXTENDED FAMILY CARE CORPORATION, a New York corporation ("EFCC").
WHEREAS, each of Star, Merger Sub and EFCC has entered into the
Original Agreement and now desires to make certain changes to said Original
Agreement;
WHEREAS, the Boards of Directors of Star, Merger Sub and EFCC have
approved the changes to the Original Agreement set forth in this First
Amendment.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, agreements and conditions herein, the parties hereby
agree as follows:
1. Section 7.2(a) is hereby deleted in its entirety and
replaced by the following:
"(a) The Merger shall not have been consummated by
September 15, 1997, unless such failure of consummation is
due to the failure of the terminating party to perform or
observe any covenant, agreement or condition hereof to be
performed or observed by it at or before the Closing
Date;"
2. Except as expressly amended by this First Amendment, the
Original Agreement and all of its terms, covenants, conditions and provisions
are hereby ratified and confirmed in all respects and shall continue in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be signed by their respective officers thereunto duly authorized,
as of the 6th day of April, 1997.
EXTENDED FAMILY CARE CORPORATION STAR MULTI CARE SERVICES, INC.
By: /s/ Joseph Heller By: /s/ Stephen Sternbach
--------------------------- ---------------------------
Joseph Heller, Vice President Stephen Sternbach, Chairman
and Chief Executive Officer
EFCC ACQUISITION CORP.
By:/s/ Stephen Sternbach
---------------------------
Stephen Sternbach, Chairman
and Chief Executive Officer
[PARKER CHAPIN FLATTAU & KLIMPL, LLP]
[Letterhead]
July 28, 1997
Star Multi Care Services, Inc.
99 Railroad Station Plaza
Hicksville, New York 11801
Gentlemen:
This opinion is rendered to you in connection with the filing by Star
Multi Care Services, Inc. ("Star"), a New York corporation, of a Registration
Statement on Form S-4 (the "Registration Statement") with the Securities and
Exchange Commission relating to the registration under the Securities Act of
1933, as amended, of an aggregate of up to 1,021,052 shares (the "Shares") of
Star's common stock, par value $.001 per share, in connection with the proposed
merger (the "Merger") of EFCC Acquisition Corp. ("Merger Sub"), a Delaware
corporation and wholly-owned subsidiary of Star, into Extended Family Care
Corporation ("EFCC"), a New York corporation, pursuant to the Agreement and Plan
of Merger among Star, Merger Sub and EFCC, dated as of January 3, 1997, as
amended on April 6, 1997 (the "Merger Agreement"), and the transactions related
thereto.
In rendering this opinion we have examined, among other things, the
Merger Agreement, the Certificate of Incorporation and By-laws of Star and such
other corporate documents and records as we have deemed necessary or
appropriate. We have also made such examination of law as we have deemed
necessary or appropriate. As to any facts material to such opinion, we have, to
the extent that relevant facts were not established by use, relied upon
certificates and statements of public officials and officers and other
representatives of Star. In all such examinations we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the accuracy and conformity with original documents of
documents submitted to us as copies.
Based upon and subject to the foregoing, it is our opinion that the
Shares, when issued in accordance with the terms of the Merger Agreement, will
be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and the use of our name under the caption "Legal Matters"
in the Proxy Statement/Prospectus constituting a part of the Registration
Statement.
Very truly yours,
/s/ PARKER CHAPIN FLATTAU & KLIMPL, LLP
July 25, 1997
Extended Family Care Corporation, Inc.
One Old Country Road
Suite 335
Carle Place, NY 11514
Star Multi Care Services, Inc.
33 Walt Whitman Road
Huntington Station, NY 11746
Re: AGREEMENT AND PLAN OF MERGER AMONG STAR MULTI CARE
SERVICES, INC., EFCC ACQUISITION CORP. AND EXTENDED FAMILY
CARE CORPORATION, INC. DATED AS OF JANUARY 3, 1997
-----------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to the shareholders of Extended Family Care
Corporation, Inc., a New York corporation ("EFCC"), in connection with the
proposed merger (the "Star Merger") of EFCC with and into EFCC Acquisition
Corp., a New York corporation ("Merger Sub") and wholly-owned subsidiary of Star
Multi Care Services, Inc., a New York corporation ("Star"), pursuant to the
Agreement and Plan of Merger Dated as of January 3, 1997 (the "Merger
Agreement"), among Star, Merger Sub and EFCC.
In so acting, we have participated in the preparation of the Merger
Agreement and the preparation and filing with the Securities and Exchange
Commission of a Joint Proxy Statement of EFCC and Star and Prospectus of Star
relating to the proposed Star Merger and to the shares of common stock, par
value $.001 per share, of Star to be issued to EFCC shareholders in the Star
Merger pursuant to the Merger Agreement (the "Proxy Statement").
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 2
As required by Section 6.1(f) of the Merger Agreement, you have
requested that we render the opinion set forth below. In rendering such opinion,
we have made inquiry as to the underlying facts which we consider to be relevant
to the conclusions set forth in this opinion. We have also examined and relied
upon the accuracy as of the date hereof and as of the date of the closing of the
Star Merger of the representations and warranties as to factual matters set
forth in the documents referred to above and the letters of representation,
dated as of the date hereof, that EFCC and Star have provided to us, copies of
which are attached hereto (the "Letters of Representation"). Our opinion is
expressly predicated on the continuing validity of the Letters of
Representation. We have no reason to believe that these representations and
facts are not true, but have not attempted to verify them independently and
expressly disclaim an opinion as to their validity and accuracy.
For purposes of this opinion, we have also reviewed such documents
and materials as in our judgment are necessary or appropriate to enable us to
render the opinions set forth below. We have not, however, undertaken any
independent investigation of any factual matter set forth in any of the
foregoing. In our examination, we have assumed the genuineness of all
signatures, the capacity of each party executing a document to execute such
document, the authenticity of all documents submitted to us as originals and the
conformity to original documents of all documents submitted to us as certified
or photostatic copies. Capitalized terms used but not specifically defined
herein shall have the meanings as defined in the Merger Agreement.
This discussion is based on the provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), final, temporary and proposed Treasury
regulations promulgated thereunder (the "Regulations") and administrative and
judicial interpretations thereof, all as in effect as of the date hereof and all
of which are subject to change (possibly on a retroactive basis). Moreover, it
is not possible to know whether any such changes will be made or court decisions
or interpretations will be issued, or the effect, if any, that such changes or
court decisions will have on our opinion. Any such change may adversely affect
our conclusions. No ruling from the Internal Revenue Service (the "IRS") has
been or will be sought on any of the issues discussed below, and there can be no
assurance that the IRS will not take a contrary view as to the federal income
tax consequences discussed below.
This opinion does not address all of the federal income tax
consequences that may be applicable to any particular holder subject to special
treatment under United States federal income tax
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 3
law or to any particular holder in light of such holder's particular facts and
circumstances. Certain holders may be subject to special and/or different rules
not discussed below. In addition, this opinion does not address any aspect of
state, local or foreign taxation.
This opinion is limited solely to the federal law of the United
States as in effect on the date hereof and the relevant facts that exist as of
the date hereof. No assurance can be given that the law or facts will not
change, and we have not undertaken to advise you or any other person with
respect to any event subsequent to the date hereof.
We are delivering this opinion to you, the Board of Directors and
shareholders and, without our prior written consent, no other persons are
entitled to rely on this opinion. We hereby consent to the filing of this
opinion as an exhibit to the Joint Proxy Statement and to the use of our name
under the captions "The Merger-Certain Federal Income Tax Consequences" and
"Legal Matters" in the Joint Proxy Statement. In giving such consent, we do not
thereby concede that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the Rules and
Regulations of the Securities and Exchange Commission thereunder.
FACTS
EFCC is a New York public holding corporation with 32,000,225 shares
of common stock issued and outstanding. Coss Holding Corp. ("Coss") owns
12,749,658 (39.84%) of such shares, Arbor Home Healthcare Holdings, LLC
("Arbor") owns 13,000,000 (40.63%) of such shares and public shareholders own
6,250,568 (19.53%). Arbor acquired its shares for $1,300,000 on August 21, 1996
and October 31, 1996 through the exercise of options granted on October 31,
1995.
Star is a New York corporation with 4,212,387 shares of common stock
issued and outstanding.
On January 21, 1997, when EFCC had minimal current earnings and
profits, EFCC distributed to all of its shareholders with respect to their
shares $750,000 of cash in the aggregate (the "EFCC Dividend"). Such
distribution reduced the EFCC shareholders' basis in their EFCC shares, but not
below zero. EFCC's only remaining assets are approximately $160,000 in cash,
$150,000 in other current assets, 83% of the stock of TPC Home Care Services,
Inc., a New York corporation ("TPC") and $610,000 in intercompany debt from TPC.
The other 17% of TPC is owned by many different shareholders.
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 4
On December 6, 1996, TPC sold the assets, subject to liabilities, of
its Jersey City, New Jersey division in a fully taxable transaction to Public
Services, Inc. ("Buyer") for $175,000, evidenced by a promissory note, plus an
amount equal to 12% of the gross revenues of Buyer in excess of $90,000 per
month for a 24 month period. Buyer is owned l00% by Gary Melius, who is the
husband of a shareholder of Coss, the voting trustee of Coss' shares in EFCC and
owner of 25,000 shares of EFCC, but does not otherwise own any direct or
indirect interest in TPC and is unrelated to all of the other shareholders of
TPC and EFCC.
In order to effect desired operating efficiencies in the corporate
structure of EFCC by simplifying the current two-tiered structure, which no
longer serves any business purpose and entails a substantial cost to maintain
due to dual financial reporting, disclosure and administrative burdens, and to
make it more attractive to Star or any other potential purchaser if the Star
Merger does not occur, subsequent to the sale of TPC's Jersey City division,
subsequent to the EFCC Dividend and prior to the Star Merger, TPC will merge
into EFCC pursuant to the Business Corporation Law of the State of New York,
with EFCC as the surviving entity (the "TPC Merger"). The shareholders of TPC
(other than EFCC) will receive solely 6,554,264 EFCC shares in the TPC Merger,
which represents 17% of all outstanding EFCC shares after such issuance.
Merger Sub is a New York corporation formed on December 31, 1996 for
the sole purpose of effecting the Star Merger. Merger Sub is a wholly owned
subsidiary of Star.
Star and EFCC believe that a combination of their respective
businesses will enable both companies to grow and operate more efficiently. Star
has in place a management infrastructure and can merge the former TPC business
operations with minimal incremental cost. By eliminating the operating and
overhead costs of EFCC, profitability can be greatly enhanced. Such enhanced
profitability will be shared by Star's shareholders, including the former EFCC
shareholders. To achieve this purpose, Star has agreed to acquire all of the
outstanding capital stock of EFCC as more fully described below.
Following the TPC Merger, EFCC will merge with and into Merger Sub
(i.e., the Star Merger). Pursuant to the Star Merger, EFCC's shareholders
(including the former TPC minority shareholders) will receive $2,400,000 in cash
(plus cash payments to dissenting shareholders, if any) and $4,850,000 in Star
common stock (less the amount that would have been paid to dissenting
shareholders, if any), as determined on the third business clay prior to the
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 5
Effective Time, using the average of the closing sales price of a share of Star
common stock as reported on the NASDAQ National Market during the 120 trading
days immediately preceding the date of determination (such amounts to be
adjusted in the event of payments to dissenting shareholders in the TPC Merger).
Other than cash payments to dissenting shareholders, such proceeds will be
allocated among the non-dissenting shareholders pro rata in proportion to their
relative stock ownership.
In connection with the Star Merger, EFCC and Star will enter into a
Consulting Agreement pursuant to which Star will render to EFCC consulting and
advisory services in connection with the management, operation and supervision
of EFCC. The term of the consulting Agreement shall end on the earlier of (i)
one year from the signing of the Star Merger Agreement, (ii) the Effective Time
or (iii) the termination of the Star Merger Agreement. In consideration for the
consulting services to be rendered by Star, EFCC will pay Star $25,000 per
month, payable (a) $15,000 in arrears on the last day of each month and (b) the
remaining $10,000 on the earlier to occur of (x) the Closing Date and (y) the
termination of the Star Merger Agreement.
Alternatively, solely at Star's option, Merger Sub will be merged
with and into EFCC and EFCC's shareholders will receive solely cash in the
amount of $7,250,000 in exchange for their EFCC stock (the "All Cash Option")
(such amount to be adjusted in the event of payments to dissenting shareholders
in the TPC Merger).
REPRESENTATIONS
In connection with the proposed transaction, the following
representations are being made by EFCC, Coss and/or Star to us, as set forth in
the Letters of Representation:
Provided that the All Cash Option is not exercised:
(a) The Star Merger will be effected in accordance with the
Merger Agreement and pursuant to New York State law.
(b) No stock of the Merger Sub will be issued to any
shareholder of EFCC in the Star Merger.
(c) As of the Effective Time, to the best of the knowledge of
the management of EFCC, there are no shareholders of EFCC, other than Coss and
Arbor, who own 5% or more of the stock of EFCC.
(d) To the best of the knowledge of the management of EFCC,
Coss acquired their EFCC stock before the formulation of any plan
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Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 6
in connection with the Star Merger and not in contemplation of Merger Sub's
subsequent acquisition of the outstanding capital stock of EFCC.
(e) As of the Effective Time, Coss does not have a binding
commitment or preconceived plan or arrangement for disposing of any of their
Star stock received in the Star Merger.
(f) As of the Effective Time, to the best of the knowledge of
the management of EFCC, none of the shareholders of EFCC have a binding
commitment or preconceived plan or arrangement for disposing of any of their
Star stock received in the Star Merger.
(g) EFCC will transfer to Merger Sub and Merger Sub will
acquire at least 90 percent of the fair market value of EFCC's net assets and at
least 70 percent of the fair market value of EFCC's gross assets held
immediately prior to the Star Merger, including, but not limited to, the assets
formerly held by TPC (which includes the consideration received by TPC upon the
sale of its Jersey City division) and the amount of cash distributed in the EFCC
Dividend. For purposes of this representation, amounts paid by EFCC to
dissenters, amounts paid by EFCC to shareholders who receive cash in lieu of
fractional shares, amounts used by EFCC to pay reorganization expenses and all
redemptions and distributions (except for regular, normal dividends) made by
EFCC will be included as assets of EFCC immediately prior to the Star Merger.
(h) Prior to the Star Merger, Star will be in control of
Merger Sub within the meaning of Section 368(c) of the Code.
(i) Merger Sub has no plan or intention to issue additional
shares of its stock that would result in Star losing control of Merger Sub
within the meaning of Section 368(c) of the Code.
(j) As of the Effective Time, EFCC will not, in anticipation
of or as a part of the plan for the combination of EFCC and Merger Sub have (i)
redeemed any of the EFCC stock or (ii) effected any distributions with respect
to any of its stock, except for normal dividends and except for the EFCC
Dividend.
(k) As of the Effective Time, Star or any corporation
affiliated with Star (i) will not be under any obligation and will not have
entered into any agreement or understanding to redeem or repurchase any of its
stock issued in the Star Merger or to make any extraordinary distributions in
respect of the Star common stock and (ii) will have no plan or intention to
reacquire any of its stock issued in the Star Merger.
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Star Multi Care Services, Inc.
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(l) As of the Effective Time, there will be no plan or
intention on the part of Star or any corporation affiliated with Star to
liquidate Merger Sub, to merge Merger Sub into another corporation, to sell or
otherwise dispose of the stock of Merger Sub or to cause Merger Sub to sell or
otherwise dispose of any of the assets acquired from EFCC (including the assets
that EFCC received from TPC), except for dispositions to be made in the ordinary
course of business or transfers described in Section 368(a)(2)(C) of the Code.
(m) Following the Star Merger, Merger Sub will continue the
"historic business" of TPC or use a "significant portion" of TPC'S "historic
business assets" in a business (as such terms are defined in Treasury Regulation
Section 1.368-1(d)(2)), to the extent they have been acquired by Merger Sub in
the Star Merger.
(n) Star and the shareholders of EFCC will pay (or will have
paid) their respective expenses, if any, incurred in connection with the Star
Merger and will not pay any of the expenses of the other in connection with the
Star Merger. Star will pay or assume only those expenses of EFCC that are solely
and directly related to the Star Merger in accordance with the guidelines
established in Rev. Rul. 73-54, 1973-1 C.B. 187.
(o) As of the Effective Time, there will be no intercorporate
indebtedness existing between Star and EFCC or between Merger Sub and EFCC that
was issued, acquired or will be settled at a discount.
(p) As of the Effective Time, Star and Merger Sub will not be
investment companies as defined in Section 368(a)(2)(F)(iii) and (iv) of the
Code.
(q) At the Effective Time, the fair market value of the assets
of EFCC (including the assets received from TPC) will exceed the sum of its
liabilities, plus the amount of liabilities, if any, to which the assets are
subject. Such liabilities were incurred by in the EFCC or TPC in the ordinary
course of business and are associated with the business of EFCC or TPC.
(r) As of the Effective Time, EFCC will not be under the
jurisdiction of a court in a title 11 or similar case within the meaning of
Section 368(a)(3)(A) of the Code.
(s) The payment of cash in lieu of fractional shares of Star
common stock is solely for the purpose of avoiding the expense and inconvenience
to Star of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash
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July 24, 1997
Page 8
consideration that will be paid in the Star Merger to the EFCC shareholders
instead of issuing fractional shares of Star stock will not exceed one percent
of the total consideration that will be issued in the Star Merger to the EFCC
shareholders in exchange for their shares of EFCC stock. The fractional share
interests of each EFCC shareholder will be aggregated, and no EFCC shareholder
will receive cash in an amount greater to or greater than the value of one full
share of Star stock.
(t) The consideration to be received by the shareholders of
EFCC in the Star Merger is a result of arm's-length bargaining. None of the
compensation received by any shareholder-employees of EFCC will be separate
consideration for, or allocable to, any of their shares of EFCC stock; none of
the shares of Star stock received by any shareholder-employees of FFCC will be
separate consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services.
(u) None of the representations or warranties made by EFCC,
Coss and, to the knowledge of the officers of Star and Merger Sub, none of the
representations or warranties made by Star or Merger Sub, herein or in any
Schedule hereto or in any other documents furnished pursuant to any of the
transactions described herein contain any untrue statement of fact or omit to
state any fact necessary in order to make the statements and opinions contained
herein or therein, including our Meltzer, Lippe, Goldstein, Wolf & Schlissel
P.C. opinions, true and not misleading.
CONCLUSION
Subject to the foregoing and to the qualifications and limitations
set forth herein, we are of the following opinion that, more likely than not:
Provided that the All Cash Option is not exercised, and assuming that
the Star Merger is consummated strictly in accordance with the Merger Agreement
and as described in the Joint Proxy Statement:
1. On the basis of our conclusion set forth below in the
Discussion section of this opinion letter that the shareholders of EFCC should
be deemed to have received and retained a sufficient amount of stock in Star to
satisfy the continuity of interest requirement, and assuming that EFCC is merged
into Merger Sub pursuant to New York State law, the Star Merger will be treated
for
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Star Multi Care Services, Inc.
July 24, 1997
Page 9
United States federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code.
2. Star, Merger Sub and EFCC will each be a party to the
reorganization within the meaning of Section 368(b) of the Code.
3. No gain or loss will be recognized by EFCC shareholders as
a result of the exchange of EFCC common stock solely for Star common stock
pursuant to the Star Merger, except that gain, if any, (but not loss) will be
recognized on the receipt of cash, other than cash received in lieu of
fractional shares, and gain or loss, if any, will be recognized in connection
with the receipt of cash in lieu of fractional shares. The payment of cash in
lieu of fractional share interests of Star common stock will be treated as if
each fractional share was distributed as part of the exchange and then redeemed
by Star. Pursuant to Section 302 (a) of the Code, these cash payments will be
treated as having been received as distributions in full payment in exchange for
such Star common stock. Any gain or loss recognized upon such exchange (as
determined under Code Section 1001 and subject to the limitations of Code
Section 267) will be capital gain or loss provided the shares would constitute a
capital asset in the hands of the exchanging stockholder.
4. Each shareholder of EFCC who elects to dissent from the
Star Merger and receive cash in exchange for his shares of EFCC common stock
will be treated as receiving such payment in complete redemption of his shares
of EFCC, provided such shareholder does not actually or constructively own any
EFCC common stock after the exchange under the provisions and limitations of
Code Section 302.
5. The tax basis of the Star common stock received by EFCC
common stockholders will be the same as the basis of the EFCC common stock
surrendered in exchange therefor, decreased by the amount of basis allocated to
the fractional shares that are hypothetically received by the stockholder and
redeemed for cash, and decreased by any money received in the exchange (other
than cash received in lieu of fractional shares) and increased by any gain
recognized on the exchange.
6. The holding period of the Star common stock received by
the EFCC common stockholders will include the period during which the EFCC
common stock surrendered in exchange therefor was held, provided that the EFCC
common stock is held as a capital asset in the hands of the EFCC stockholders at
the Effective Time.
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7. No gain or loss will be recognized by EFCC on the transfer
of all of its assets to Merger Sub pursuant to the plan of reorganization.
8. No gain or loss will be recognized by Star or Merger Sub
pursuant to the Star Merger.
9. The tax basis of EFCC's assets in the hands of Merger Sub
will be the same as the basis of those assets in the hands of EFCC immediately
prior to the Star Merger. The tax basis of EFCC's assets in the hands of Merger
Sub will not be increased by any cash paid to dissenters or cash paid in lieu of
fractional shares.
10. The holding period of the assets of EFCC in the hands of
Merger Sub will include the period during which such assets were held by EFCC.
We express no opinion other than as stated above, and any such
opinion is not intended to imply or be an opinion on any other matter. This
opinion represents only counsel's best legal judgment as to the likely outcome
of an issue if properly presented to a court (and assuming the court determines
all facts to be consistent with the facts stated in counsel's Is opinion) .
However, the opinion has no binding effect or official status of any kind, and
the conclusions stated herein are not free from doubt. The IRS or a court may
disagree with any or all of our conclusions and, accordingly, there can be no
assurance that the IRS will not successfully contest this opinion in the courts
or otherwise.
DISCUSSION
1. GENERAL
Section 354 (a) (1) of the Code addresses the effects of corporate
reorganizations on shareholders, providing in general that no gain or loss shall
be recognized if stock or securities in a corporation a party to a
reorganization are, in pursuance of the plan of reorganization, exchanged solely
for stock or securities in such corporation or in another corporation a party to
the reorganization.
For purposes of Code Section 354, the term "Reorganization" is
defined in Code Section 368(a). Code Section 368(a)(1)(A) states that the term
reorganization includes a statutory merger or consolidation. Regulation Section
1.368-2(b)(1) states that in order for a transaction to qualify as a
reorganization under Code
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July 24, 1997
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Section 368(a)(1)(A), the transaction must be a merger or consolidation effected
pursuant to the corporation laws of the United States, a State, territory or the
District of Columbia.
The Regulations under Code Section 368 require as a part of a
reorganization a continuity of the business enterprise under the modified
corporate form, a bona fide business purpose for the reorganization and a
"continuity of interest" therein on the part of those persons who, directly or
indirectly, were owners of the enterprise prior to the reorganization.
Regulation Section 1.368-l(d)(2) states that the continuity of business
enterprise requirement is met if the acquiring corporation either continues the
acquired corporation's historic business or uses a significant portion of the
acquired corporation's business assets in the operation of a trade or business.
Regulation section 1.368-2(g) indicates that in addition to coming
within the scope of the specific language of Code Section 368 (a) , a
reorganization must also be "undertaken for reasons germane to the continuance
of the business of a corporation a party to the reorganization." If the
transaction or series of transactions has no business or corporate purpose, then
the plan is not a reorganization pursuant to Code Section 368(a). Regulation
section 1.368-1(c).
The continuity of interest requirement mandates that the historic
shareholders of the acquired corporation must acquire a definite and substantial
interest in the continuing corporation, and stock must represent a material part
of the consideration transferred. The Supreme Court, in NELSON CO. V. HELVERING,
296 U.S. 374 (1935), held that equity equal to 38% of the entire consideration
constituted a definite and substantial interest in the purchasing corporation.
The percentage relates to the proportion of the equity consideration received by
the target shareholders in the aggregate to the total consideration paid by the
acquiror for target's assets or stock. An historic shareholder is a person who
owned the target corporation's stock before the acquisition of target commenced
and who purchased such target corporation stock before the formulation of the
transaction not in contemplation of the acquiring corporation' s subsequent
acquisition of the target. It is not necessary that all historic shareholders of
the acquired corporation have a proprietary interest in the surviving
corporation after the acquisition. The IRS has announced that it considers a 50
percent continuity-of-equity interest by
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Star Multi Care Services, Inc.
July 24, 1997
Page 12
value to be sufficient(1). Nevertheless, pursuant to the NELSON case, a 40
percent continuity of interest by value on the part of the former historic
shareholders of the target should be sufficient.
In addition to meeting the continuity of interest requirement
immediately after the reorganization, the former shareholders of the acquired
corporation must retain their interest in the acquiring corporation for some
unspecified time after the reorganization. The courts have ruled that the
tax-free nature of the reorganization may be retroactively invalidated if the
continuity of interest is not maintained either because, at the time of the
reorganization, the shareholders intended to dispose of the proprietary interest
soon after the reorganization(2) or because a shareholder disposes of stock
immediately following the reorganization in accordance with a pre-existing
commitment to sell.(3)
In Rev. Rul. 66-23, 1966-1 C.B. 67, the IRS held that the target
shareholders must not have a preconceived plan or arrangement for disposing of
their acquiring corporation stock; if such plan or arrangement exists, any
post-reorganization dispositions of the stock of the acquiring corporation may
be stepped together with the initial receipt of such stock in the
reorganization. The consequence of applying step transaction principles(4) to
the subsequent stock disposition is to treat the selling shareholder as having
received the sales proceeds on the date of the reorganization for purposes of
testing continuity of interest. Nevertheless, target shareholders are free to
dispose of their acquiring corporation stock at any time following the
reorganization, as long as the disposition results from circumstances existing
after the reorganization and not from a
- --------
1 Rev. Proc. 77-37, 1977-2 C.B. 568. This is merely a guideline established
by the IRS for purposes of obtaining a private letter ruling, and is not a
requirement of substantive law.
2 MCDONALD'S RESTAURANTS OF ILLINOIS, INC. V. COMMISSIONER, 688 F.2d 520 (7th
Cir. 1982).
3 AMERICAN WIRE FABRICS CORP. V. COMMISSIONER, 16 T.C. 607 (1951).
4 See infra notes 11-13 and accompanying text.
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July 24, 1997
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preexisting plan.(5) During the period of ownership of the acquiring corporation
stock, the target shareholders must have unrestricted rights of ownership for an
unspecified period of time sufficient to warrant the conclusion that such
ownership is definite and substantial.(6)
For purposes of Code Section 354, the term "party to a
reorganization" is defined in Code Section 366(b), which provides that the term
"party to a reorganization" includes both corporations in the case of a
reorganization resulting from the acquisition by one corporation of stock or
properties of another. In the case of a reorganization qualifying under Code
Section 368 (a) (1) (A) by reason of Code Section 368 (a) (2) (D) , the term
"party to a reorganization" includes the corporation which is in control of the
acquiring corporation.
Code Section 356 (a) (1) provides that if Code Section 354 would
apply to an exchange but for the fact that the property received in the exchange
consists not only of property permitted to be received under Code Section 354
without the recognition of gain but also of other property or money then the
gain, if any, to the recipient shall be recognized but not in excess of the sum
of money and the fair market value of such other property. Code Section 356(c)
states that no loss from the exchange may be recognized by the shareholder.
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5 Rev. Rul. 66-23. See also PENROD V. COMMISSIONER, 88 T.C. 1415 (1987) ;
ESTATE OF CHRISTIAN V. COMMISSIONER, 57 T.C.M. (CCH) 1231 (1989). Under
Proposed Regulation Section 1.368-1(e), the IRS states that stock
dispositions of the acquiring corporation by a former target shareholder
generally are not considered for determining continuity of interest.
However, under the Proposed Regulations, if the acquiring corporation or a
related party purchases the acquiring corporation stock shortly after the
reorganization, the facts and circumstances may indicate that the
transaction should be recast to treat the acquiring corporation as
furnishing cash in the reorganization and not satisfying the continuity of
interest requirement. Proposed regulations do not become law until adopted
as final regulations, and generally are applied prospectively once adopted.
Therefore, Proposed Regulation Section 1.368-1(e) is inapplicable to this
transaction. See also infra note 23 and accompanying text.
6 Id.
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Star Multi Care Services, Inc.
July 24, 1997
Page 14
The IRS, in Rev. Rul. 74-515, 1974-2 C.B. 118 and Rev. Rul. 74-516,
1974-2 C.B. 121, treated the distribution of cash as part of a reorganization
and in a transaction subject to Code Section 356 (including cash payments made
to dissenting shareholders of the acquired corporation) by applying the
redemption principles under Code Section 302. Code Section 302 provides, in
part, that a redemption will be treated as a distribution in part or full
payment in exchange for stock if it can meet the tests of that section. The
Supreme Court in CLARK V. COMMISSIONER. , 469 U.S. 726 (1989), applied the tests
of Code Section 302 by viewing the exchange involving cash or other property as
a "hypothetical post-reorganization redemption." The Court viewed the exchange
as first an exchange of solely stock of the acquiring corporation for the
acquired company stock, followed by an exchange by the shareholder of the newly
acquired stock for cash from the acquiring corporation. The Code Section 302
tests are applied to the second hypothetical exchange.
One of the tests of Code Section 302 provides that where there is a
complete redemption of all of a shareholder's stock in a corporation (after
consideration of the constructive ownership rules of Code Section 302(c)) , the
redemption payment is treated as made entirely in exchange for the shareholder's
stock in the corporation. Code Section 302(b)(3). The constructive ownership
rules of Code Section 302(c) are generally contained in Code Section 318 and
provide that an individual or entity is treated as owning the stock owned by
certain other related individuals and entities. Where there is a complete
termination of the shareholder's interest, the constructive ownership rules may
be waived if certain conditions are met.
In Rev. Rul. 66-365, 1966-2 C.B. 116, the IRS announced that in a
transaction qualifying as a reorganization under Section 368(a)(1)(A) of the
Code where a cash payment is made by the acquiring corporation in lieu of
fractional shares and is not separately bargained for, such cash payment will be
treated under Section 302 of the Code as in redemption of fractional share
interests. Therefore, each shareholder's redemption will be treated as a
distribution in full payment in exchange for his or her fractional share
interest under Section 302(a) of the Code and accorded capital gain or loss
treatment provided the redemption is not essentially equivalent to a dividend
and that the fractional shares redeemed constitute a capital asset in the hands
of the holder as discussed below. In Rev. Proc. 77-41, 1977-2 C.B. 574, the IRS
stated that "a ruling will usually be issued under Section 202(a) of the Code
that cash to be distributed to shareholders in lieu of fractional share
interests arising in corporate reorganizations will be treated as having been
received in part or
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Star Multi Care Services, Inc.
July 24, 1997
Page 15
in full payment in exchange for the stock redeemed if the cash distribution is
undertaken solely for the purpose of saving the corporation the expense and
inconvenience of issuing and transferring of fractional shares, and is not
separately bargained-for consideration."
Under Code Section 358(a)(1) , in the case of an exchange to which
Code Section 354 or Code Section 356 applies, the basis of property which is
permitted to be received under such sections without the recognition of gain or
loss shall be the same as that of the property exchanged, decreased by the
amount of any money received by the recipient and the amount of loss recognized
by the recipient as a result of the exchange and increased by the amount which
was treated as a dividend and the amount of other gain recognized by the
recipient as a result of the transaction.
As described above, where cash is received in lieu of fractional
shares, the substance of the transaction is that of a hypothetical receipt of
the fractional shares and then a redemption of such shares. Therefore, the basis
that is to be allocated to the stock of the acquiring corporation received must
be allocated to the shares retained and the fractional shares hypothetically
received. The gain or loss attributable to the receipt of cash in lieu of
fractional shares is measured by comparing the cash received with the basis
allocated to the Factional shares that are hypothetically received, and such
gain or loss is recognized as discussed earlier pursuant to Rev. Rul. 66-365.
Code Section 361 (a) states that, as a general rule, no gain or loss
is to be recognized by a corporation if such corporation is a party to a
reorganization and exchanges property, in pursuance of the plan or
reorganization, solely for stock or securities in another corporation a party to
the reorganization. Code Section 361(b) states that if Code Section 361(a) would
apply to an exchange but for the fact that the property received in the exchange
consists not only of stock or securities afforded nonrecognition treatment under
Code Section 361(a), but also of other property or money, then provided the
corporation receiving such other property or money distributes it in pursuance
of the plan of reorganization, no gain to the corporation shall be recognized
from the exchange. Code Section 361(c) states that as a general rule no gain or
loss shall be recognized by a corporation a party to a reorganization on the
distribution to its shareholders of any stock in another corporation which is a
party to the reorganization if such stock was received by the distributing
corporation in the exchange.
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Code Section 1032(a) states that no gain or loss shall be recognized
to a corporation on the receipt of money or other property in exchange for such
corporation's stock, including treasury stock.
Code Section 362(a) states that the basis of property received by the
acquiring corporation in a reorganization is the same as it would be in the
hands of the transferor of the assets, increased by any gain recognized by the
transferor. The transferors for purposes of the preceding sentence in the
instant case is TPC and EFCC.
Code Section 1221 defines a capital asset as property held by the
taxpayer which is not inventory or other property held by the taxpayer primarily
for sale to customers in the ordinary course of a trade or business, property
used in the taxpayer's trade or business subject to the allowance for
depreciation under Code Section 167, a copyright, literary, musical or artistic
composition, a letter or memorandum, or similar property created by the personal
ef forts of the taxpayer, accounts or notes receivable acquired in the ordinary
course of a trade or business f or services rendered or from the sale of
inventory or other property held by the taxpayer primarily f or sale to
customers in the ordinary course of business, or a publication of the United
States Government which is received from the United States Government or any
agency thereof other than by purchase at the price at which it is offered for
sale to the public.
Code Section 1223(1) states that in determining the period f or which
a taxpayer has held property received in an exchange, there shall be included
the period for which he or she held the property exchanged if the property has,
for the purpose of determining gain or loss from a sale or exchange, the same
basis as the property exchanged and the property exchanged was a capital asset
as defined in Code Section 1221 as of the date of the exchange. Code Section
1223(2) states that for determining the period for which the taxpayer has held
property however acquired there shall be included the period for which such
property was held by another person if the property has the same basis in whole
or in part in his hands as it would have had in the hands of such other person.
2. STAR MERGER
(a) General
Code Section 368(a)(2)(D) provides that the acquisition by one
corporation, in exchange for stock of a corporation which is in control of the
acquiring corporation, of substantially all of the
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July 24, 1997
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properties of another corporation shall not disqualify a transaction under Code
Section 368(a) if no stock of the acquiring corporation is used in the
transaction and such transaction would have qualified under Code Section
368(a)(1)(A) had the merger been into the controlling corporation. Regulations
permit the acquiring corporation or its parent or both to pay some cash, subject
to the continuity of interest requirement discussed above.
Accordingly, an acquisition by Merger Sub in exchange for stock of
Star should qualify as a Code Section 368(a)(1)(A) reorganization via Code
Section 368(a)(2)(D) if (1) substantially all of the properties of EFCC are
acquired by Merger Sub; (2) EFCC is merged into Merger Sub pursuant to state
law; (3) the Star Merger would have qualified under Code Section 368(a)(1)(A)
had it been effected directly into Star; and (4) no stock of the Merger Sub is
used in the Star Merger.
(b) The "Substantially All" Requirement
The "substantially all" requirement has not been statutorily defined.
The determination of "substantially all" is based upon all the facts and
circumstances of each transaction. The IRS's advance ruling guidelines, Rev.
Proc. 77-37, 1977-2 C.B. 568,(7) provide that the "substantially all"
requirement will be met if at least 90% of the fair market value of the net
assets and at least 70% of the fair market value of the gross assets of the
acquired corporation immediately before the merger are transferred to the
acquiring corporation. All payments to dissenters and all redemptions and
distributions (except for regular, normal distributions) made by the corporation
immediately preceding the transfer and which are part of the plan of
reorganization will be considered as assets held by the corporation immediately
prior to the transfer. In addition, where a corporate division effected prior to
and in contemplation of the reorganization removes assets from target, the
reorganization may be taxable on the ground that the acquiror has not acquired
substantially all of target's "historic" assets.(8)
Unlike a spin-off of unwanted assets, a sale of a portion of target's
assets prior to the reorganization does not deplete the aggregate amount of
target's assets -- it only changes the makeup of those assets. That is, the
assets sold are replaced with the
- --------
7 SEE ALSO Rev. Proc. 86-42, 1986-2 C.B. 722.
8 SEE HELVERING V. ELKHORN COAL CO., 95 F.2d 732 (4th Cir. 1938), CERT.
DENIED, 305 U.S. 605 (1938).
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July 24, 1997
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consideration received on the sale, whether it is cash, notes or other assets.
Provided the sale of assets does not destroy continuity of business enterprise,
the nature and amount of the assets sold should have no bearing on the
qualification of the reorganization so long as the sale proceeds remain with the
target's other assets and are not distributed to the shareholders.
In Rev. Rul. 88-48, 1988-1 C.B. 117, target sold one of its two
significant lines of business (constituting 50% of its historic business assets)
for cash and then transferred its other line of business together with the cash
proceeds to acquiror in exchange for acquiror voting stock in a Code Section
366(a)(1)(C) reorganization. The IRS held that because the cash proceeds were
not retained by target or its shareholders but were transferred to acquiror, the
transaction was not divisive in nature. Also, because the sale of the historic
business assets was to "unrelated purchasers," the former target shareholders
retained no direct or indirect interest in those assets. The term "unrelated
purchaser" was not defined or specified. Under those circumstances, the IRS
ruled, the "substantially all" requirement was met.
In the instant case, the sale of TPC's Jersey City, New Jersey
division was to a person who should be treated as an unrelated purchaser for
purposes of the "substantially all" requirement for full and adequate
consideration in a fully taxable transaction. Such consideration was
subsequently transferred to EFCC in the TPC/EFCC merger and will then be
transferred to Merger Sub in the Star Merger of EFCC with and into Merger Sub.
Thus, such sale should not impact the "substantially all" requirement. Based on
the above analysis and on the representation in the Letters of Representation
that EFCC will transfer to Merger Sub and Merger Sub will acquire at least 90
percent of the fair market value of EFCC's net assets and at least 70 percent of
the fair market value of EFCC's gross assets held immediately prior to the Star
Merger, including, but not limited to, the assets formerly held by TPC, the
"substantially all" requirement should be met with respect to the properties of
EFCC acquired by Merger Sub in the Star Merger.
(c) Continuity of Business Enterprise
Based on representations included in the Letters of Representation
that following the Star Merger, Merger Sub will continue the historic business
of TPC or use a significant portion of TPC's historic business assets in a
business (as such terms are defined in Treasury Regulation Section 1.3 68-1
(d)(2)) , the continuity of business enterprise requirement should be met with
respect to the assets and business operations of TPC, EFCC and Merger Sub.
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 19
(d) Business Purpose
In general, Star and EFCC believe that a combination of their
respective businesses will enable both companies to grow and operate more
efficiently. Based on these reasons, the Star Merger should meet the business
purpose requirement.
(e) Continuity of Interest
(1) Arbor Options
For purposes of the Star Merger, continuity of interest must exist in
the "historic shareholders" of EFCC. The exercise of Arbor's options in
contemplation of the Star Merger raises two continuity of interest issues: (1)
does the EFCC stock issued upon exercise of the Arbor options count as
outstanding EFCC stock in applying the continuity of interest test and (2) if
the EFCC stock does count, is Arbor considered to be an historic EFCC
shareholder?
In General Counsel Memoranda ("GCM") 36040 and 36041 (Oct. 8, 1974),
as part of a plan of reorganization, the holders of target warrants and
convertible target debt converted these instruments into target stock and then,
along with the other target shareholders, exchanged their target stock for
acquiror stock in the reorganization. At issue was whether the step-transaction
doctrine should apply to treat the transactions as though the target warrants
and target convertible debt were exchanged directly for acquiror stock. The IRS
concluded that the step-transaction doctrine should not apply because to do so
would ignore the right inherent in the warrants and debentures that allows the
holder thereof to acquire an equity interest in target. Thus, the IRS honored
the form of the transactions and preserved tax-free reorganization treatment for
the warrant holders and convertible debenture holders.
It is unclear whether the IRS would apply the same rationale for
purposes of measuring continuity of interest.(9) On the one
- --------
9 See Priv. Let. Rul. 9008028 (Nov. 21, 1989) (the target shares acquired on
exercise of the options are not excluded from the 50% continuity
representation); BUT SEE Priv. Let. Rul. 9105028 (Nov. 6, 1990) (the target
shares acquired on exercise of the options are excluded from the 50%
continuity representation). Private Letter Rulings may not be relied upon
or otherwise cited as precedent. However, we believe it is appropriate to
refer to them in order to demonstrate an administrative position
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 20
hand, the holdings in GCM 36040 and 36041 imply that the IRS might conclude that
the newly issued EFCC shares count in applying the continuity of interest test.
A representation obtained by the IRS from a taxpayer in a 1993 private letter
ruling also suggests this result.(10) On the other hand, taxpayer
representations in two other private letter rulings indicate that the IRS might
ignore the newly issued EFCC shares in applying the continuity of interest
test.(11)
If the IRS in fact counts the newly issued EFCC shares in measuring
continuity, does Arbor qualify as an historic EFCC shareholder? This issue could
be resolved in three ways:
(i) Arbor automatically could be treated as a non-historic
EFCC shareholders, i.e., as bad continuity.
(ii) Arbor automatically could be treated as an historic EFCC
shareholders, i.e., as good continuity.
(iii) The determination of whether Arbor is an historic EFCC
shareholder could be based on whether it was an historic holder of the options,
i.e., whether it acquired the options in contemplation of the Star Merger.
Some commentators favor approach (iii),(12) although there is no
authority directly on point. The risk that the IRS will disagree and analyze
Arbor's stock ownership in EFCC under approach (i), i.e., the least favorable
approach, exists. In the absence of a private letter ruling from the IRS,
prudence dictates that Arbor be treated as a non-historic shareholder of EFCC
for purposes of calculating the EFCC shareholders' continuity of interest in the
merged entity. Thus, the other historic EFCC shareholders must hold, with the
requisite intent and for the requisite period, Star stock equal to at least 40%
of the fair market value of all of the EFCC shares outstanding immediately prior
to the Star Merger (including the shares received by Arbor pursuant to the
exercise of its options) to satisfy the continuity of interest test.
- --------
previously taken by the Service.
10 Priv. Let. Rul. 9324021 (Mar. 19, 1993) (representation c).
11 SEE Priv. Let. Rul. 9105028 (Nov. 6, 1990) (representation b),
supplemented by Priv. Let. Rul. 9132068 (Apr. 19, 1991) (representation b);
Priv. Let. Rul. 9136027 (June 11, 1991) (representation c).
12 Martin D. Ginsburg and Tack S. Levin, Mergers, Acquisitions, and Buyouts,
ss 610.3.2 (Jan. 1996).
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 21
(2) Pre-Merger Dividend
We believe that the $750,000 of cash distributed by EFCC to all of
its shareholders with respect to their shares prior to the Star Merger should
not be taken into account for purposes of the continuity of interest test. In
Private Letter Ruling 9041064 (July 19, 1990), three corporations paid
significant dividends to their shareholders immediately prior to merging into an
acquiring corporation and as part of the same plan. The IRS ruled that the
mergers qualified as tax-free Code Section 368(a)(1)(A) reorganizations. We
believe the salient point is that the $750,000 dividend did not come from Star
or the Merger Sub. There is no justification for the IRS to conclude that this
cash should be deemed to have come from Star or the Merger Sub, especially since
the cash is proceeds from the exercise of Arbor's options, and not from a
disposition or liquidation of operating assets or equity interests.(13)
Nevertheless it is possible that the IRS may assert that the $750,000
distribution paid by EFCC must be taken into account in applying the continuity
of interest test, which could cause continuity of interest to fall below an
acceptable level to preserve tax-free reorganization treatment.
(3) Less than 5% Shareholders
As a practical matter, in the case of a widely held and publicly
traded target corporation, it is difficult to determine which of the target
corporation's public shareholders have held their target stock long enough to
become historic target shareholders and whether such target corporation's less
than 5% public shareholders intended at the time of the reorganization to retain
their acquiring corporation stock and whether and for how long they in fact
retain such stock following the reorganization. The IRS seems to have recognized
this reality and for purposes of issuing private rulings has focused only on
target shareholders owning at least 5% of the outstanding target stock as well
as target insiders. See Rev. Proc. 77-37, section 7, added by Rev. Proc. 86-42.
The Tax Court seems to agree. In the SEAGRAM CORP. V. COMMISSIONER, 104 T.C. 75
(1995), the Tax Court stated, "[a] requirement that the identity of the acquired
corporation's shareholders be tracked to assume a sufficient number of
'historic' shareholders to satisfy some arbitrary minimal percentage receiving
the acquiring corporation's stock would be completely unrealistic."
- --------
13 See LITTON INDUSTRIES INC. V. COMMISSIONER, 89 T.C. 1086 (1987), ACQ. IN
RESULT, 1988-2 C.B. 1; TSN LIQUIDATING CORP. V. U.S., 624 F.2d 1328 (5th
Cir. 1980). Accord UNIROYAL INC. V. COMMISSIONER, 65 T.C.M. 2690 (1993).
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 22
104 T.C. at 103. Thus, since we believe EFCC should be considered to be widely
held for these purposes, noninsiders who own less than 5% of the outstanding
EFCC stock and who exchange their EFCC stock for Star stock in the Star Merger
generally should be counted toward satisfying the continuity of interest
requirement.
(4) Prior Merger of TPC Into EFCC
As discussed above, a tax-free transaction in which a target
corporation's stock is transferred to new shareholders followed by a subsequent
tax-free reorganization of the target corporation into another corporation
should be respected if such initial transaction has independent significance and
a business purpose.(14) The issue addressed is whether the subsequent merger
affects the qualification of the original reorganization, but implicit in this
analysis is the notion that the new target corporation shareholders may supply
the necessary continuity of interest to qualify the subsequent merger as a
tax-free transaction even though the original reorganization and the subsequent
merger occur pursuant to an overall plan.
In several private letter rulings, the IRS has held that a merger of
a parent corporation into another corporation preceded by an upstream merger or
liquidation of a wholly-owned subsidiary into the target parent corporation
qualified as tax-free reorganization under Code Section 368 (a).(15) Although we
are unaware of any direct case law authority supporting this proposition, we
believe the conclusion is consistent with the policies underlying the
reorganization provisions of Code Section 368 et. seq. since the shareholders in
the TPC Merger principally changed the form of their ownership but retained the
requisite proprietary interest. Therefore, subsequent to their exchange of TPC
stock for EFCC stock pursuant to the TPC Merger and based on the representations
in the Letters of Representation, the former shareholders of TPC should be
treated as historic shareholders of EFCC for purposes of satisfying the Star
Merger's continuity of interest requirement. In addition, based on the
representations in the Letters of Representation and the discussion above, Coss
and the public shareholders are historic shareholders of EFCC.
- --------
14 See supra notes 11-13 and accompanying text.
15 See Priv. Let. Rul. 8713033 (Dec. 29, 1986); Priv. Let. Rul. 8425081 (Mar.
21, 1984) ; Priv. Let. Rul. 8032114 (May, 1980); Priv. Let. Rul. 8024137
(Mar. 20, 1980).
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 23
(5) Post-Reorganization Continuity of Interest
Based on the representations in the Letters of Representation that as
of the Effective Time, Coss, the shareholders of Coss and any other shareholder
of EFCC, including the former shareholders of TPC, will not have a binding
commitment or preconceived plan or arrangement for disposing of any of their
Star common stock received in the Star Merger, the former EFCC shareholders will
satisfy the continuity of interest requirement that they retain their interest
in Star for some unspecified time after the reorganization.(16)
(6) Value of Star Common Stock
The IRS position in connection with determining whether at least
50%(17) by value of the target corporation's outstanding stock is exchanged for
the acquiring corporation's stock in the reorganization is that the value of the
target corporation stock is determined "as of the effective time of the
reorganization."(18) Nevertheless, assuming that the fair market value of the
outstanding EFCC stock at the Effective Time is determined by reference to the
exchange value of the EFCC stock in terms of Star stock and cash, and assuming
that the parties to the Star Merger make a good faith and reasonable effort to
achieve a consideration mix consisting of at least 40% Star stock, the use of a
value as determined on the third business day prior to the Effective Time, using
the average of the closing sales price of a share of Star common stock as
reported on the NASDAQ National Market during the 120 trading days immediately
preceding the date of determination should be sufficient for purposes of
determining whether the 40% continuity of interest requirement is met in the
Star Merger if, solely as a result of market fluctuations between the date that
the
- --------
16 See supra notes 3-6 and accompanying text.
17 As discussed above at note 1 and accompanying text, the IRS has announced
that it considers a 50 percent continuity-of-equity interest by value to be
sufficient. Rev. Proc. 77-37. Nevertheless, pursuant to the NELSON case and
as discussed above, a 40 percent continuity of interest by value on the
part of the former historic shareholders of the target should be
sufficient.
18 Id.
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 24
Merger Agreement is signed and the Effective Time, the consideration paid to the
EFCC historic shareholders turns out to be less than 40% Star stock.(19)
This formula was devised by the parties in an attempt to minimize the
impact on the business arrangement of temporary market fluctuations of Star
stock. In addition, since (1) there was an unusually protracted time period
between the parties agreement in concept and an actual contract and closing, (2)
the shareholders of EFCC had locked in their investment during the 120 days
since the principal economic terms of the transaction were in place, (3) Star
assumed the management of EFCC and the profits therefrom were largely payable to
Star in the form of consulting fees so that the EFCC shareholders could share in
those profits during such period only through this pricing mechanism and (4) the
principal reason for not closing the Star Merger immediately was the need to
secure approvals of governmental authorities, the adjustment mechanism merely
reflects the fact that the economic merger of EFCC and Star does not occur
solely on the closing date, but rather will occur incrementally over time so
that a valuation as of the closing date is less likely to accurately reflect the
true value of the continuity of interest of the EFCC shareholders. However,
there is no authority that addresses whether an average trading price may be
used and there is a risk that this issue could be resolved unfavorably. If the
price of the Star stock declines prior to the Effective Time, the risk that the
Star Merger will be treated as a taxable transaction by the IRS becomes greater.
Immediately prior to the Effective Time, the historic shareholders of
EFCC (i.e., Coss, the former TPC minority shareholders and the other public
shareholders of EFCC, assuming Arbor is not an historic shareholder of EFCC)
will own 66.8% of the stock of EFCC. For purposes of calculating continuity of
interest, the value of the stock consideration paid by Star ($4,400,000) to the
EFCC shareholders in the Star Merger will equal 60.69% of the total
consideration paid by Star ($7,250,000) in the Star Merger. Thus, 40.54% of the
total consideration paid by Star to the historic shareholders of EFCC will
consist of Star stock.
Based on the representations in the Letters of Representation, and
assuming that (1) EFCC's shareholders receive Star common stock with a value of
at least $4,607,5O6(20) as determined on the third business day prior to the
Effective Time, using the average of the
- --------
19 SEE Rev. Rul. 81-190, 1981-2 C.B. 84.
20 See infra note 28.
<PAGE>
Extended Family Care Corporation, Inc.
Star Multi Care Services, Inc.
July 24, 1997
Page 25
closing sales price of a share of Star common stock as reported on the NASDAQ
National Market during the 120 treading days immediately preceding the date of
determination and that (2) all shareholders receive, at a maximum, aggregate
cash in the amount of $2,714,998,(21) which amount includes total cash paid to
dissenting shareholders, it is our opinion that, although not free from doubt,
the continuity of interest requirement should be met with respect to the Star
Merger.
Very truly yours,
Meltzer, Lippe, Goldstein, Wolf
& Schlissel, P.C.
By:
Stephen M. Breitstone
- --------
21 These numbers are based on certain assumptions as to possible payments to
dissenting shareholders. If the value of the stock received by the EFCC
shareholders is less than $4,607,506 and/or the amount of cash received is
greater than $2,714,998, the continuity of interest test will be below 40%
and, therefore, tax-free reorganization treatment may be jeopardized.
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts"
and the use of our dated July 19, 1996, except as to the pooling interests with
AMSERV HEALTHCARE INC., which is as of August 23, 1996, with respect to
consolidated financial statements of Star Multi Care Services, Inc. included in
this Proxy Statement Star Multi Care Services, Inc. that is made a part of the
Registration Statement (Form S-4) and Prospectus of Star Multi Care Services,
Inc.
/S/ HOLTZ RUBENSTEIN & CO., LLP
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
July 23, 1997
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 8, 1996, except for Note 6 and 13, as to which
the date is August 23, 1996, with respect to the audited financial statements of
AMSERV HEALTHCARE INC., included in the Proxy Statement for Star Multi Care
Services, Inc. that is made a part of the Registration Statement (Form S-4) and
Prospectus of Star Multi Care Services, Inc.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
July 23, 1997
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Registration Statement Star Multi Care
Services, Inc. on Form S-4 of our report dated October 7, 1994 (relating to the
financial statements of AMSERV HEALTHCARE INC., and subsidiaries not presented
separately herein) and to the reference to us under the heading "Experts" in the
Proxy, which is part of this Registration Statement.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
July 23, 1997
CONSENT OF CARPENTER & ONORATO, P.C., INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 18, 1997, with respect to the consolidated
financial statements of Extended Family Care Corporation included in this Proxy
Statement for Star Multi Care Services, Inc. that is made a part of the
Registration Statement (Form S-4) and Prospectus of Star Multi Care Services,
Inc.
/S/ CARPENTER & ONORATO, P.C.
CARPENTER & ONORATO, P.C.
Garden City, New York
July 23, 1997
TELESIS MERGERS & ACQUISITIONS, INC.
[LETTERHEAD]
July 23, 1997
Extended Family Care Corporation
One Old Country Road, Suite #335
Carle Place, New York 11514
Star Multi Care Services, Inc.
33 Walt Whitman Road, Suite #302
Huntington, New York 11746
We hereby consent to the inclusion of the fairness opinion in
relation to the EFCC/Star Merger and the TPC/EFCC Merger in the Registration
Statement on Form S-4 being filed by Star and EFCC, respectively.
Telesis Mergers & Acquisitions, Inc.
/s/ Fred Roa
------------------------------------
Fred Roa
President, CEO
795 Franklin Avenue, Franklin Lakes, NJ 07417 (201) 848-9544
FAX (201) 848-8335
CONSENT TO BE NAMED AS AN EXPERT
We hereby consent to the use of our name as Regulatory Counsel of
Star Multi Care Services, Inc. ("Registrant") under the caption "Risk
Factors-Audits" of the joint Proxy Statement-Prospective constituting part of
this Registration Statement on Form S-4.
Dated: July 25, 1997 Broad and Cassel
By: /s/ Martin R. Press
---------------------
Martin R. Press
STAR MULTI CARE SERVICES, INC.
99 RAILROAD STATION PLAZA
HICKSVILLE, NY 11801
THIS PROXY IS SOLICITED BY THE BOARD
OF DIRECTORS OF STAR MULTI CARE SERVICES, INC.
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 5, 1997
The undersigned holder of Common Stock of Star Multi Care Services,
Inc., a New York corporation ("STAR"), hereby appoints Stephen Sternbach and
William Fellerman, and each of them, as proxies for the undersigned, each with
full power of substitution, for and in the name of the undersigned to act for
the undersigned and to vote, as designated below, all of the shares of Common
Stock of STAR that the undersigned is entitled to vote at the Special Meeting of
Shareholders of STAR, to be held on September 5, 1997 at 10:00 A.M. local time,
at the offices of Parker Chapin Flattau & Klimpl, LLP, (18th Floor), New York,
New York, and at any adjournments or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF ADOPTION AND
APPROVAL OF THE AGREEMENT AND PLAN OF MERGER.
1. Adoption and approval of the Agreement and Plan of Merger dated
January 3, 1997, between EXTENDED FAMILY CARE CORPORATION, a New York
corporation ("EFCC") and STAR, providing for the merger of EFCC Acquisition
Corp., a New York corporation and a wholly owned subsidiary of STAR, with EFCC.
|_| FOR |_| AGAINST |_| ABSTAIN
2. Adoption of an amendment to STAR's 1992 Stock Option Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
3. Adoption of STAR's 1997 Non-Employee Director Stock Option
Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
4. Upon such other matters as may properly come before the
Special Meeting and any adjournments or postponements thereof. In their
discretion, the proxies are authorized to vote upon such other business as may
properly come before the Special Meeting and any adjournments or postponements
thereof. This proxy does not convey discretionary authority to adjourn or
postpone the meeting for the purpose of soliciting additional votes.
(Continue and Sign on Other Side)
<PAGE>
(Continued from other side)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED "FOR" THE PROPOSAL SET FORTH IN ITEM 1, 2 AND 3 AND WITH
REGARD TO OTHER MATTERS THAT MAY COME BEFORE THE MEETING OR ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF, IN THE DISCRETION OF THE PROXYHOLDERS AS DESCRIBED IN THE
JOINT PROXY STATEMENT.
The undersigned hereby acknowledges receipt of the Notice of the
Special Meeting and the accompanying Joint Proxy Statement.
Dated: __________, 1997 ____________________________________
(Signature)
____________________________________
(Signature if held jointly)
Please sign exactly as name(s)
appears hereon and mail it promptly
even though you now plan to attend
the Special Meeting. When shares are
held by joint tenants, both should
sign. When signing as Attorney,
Executor, Administrator, Guardian or
Trustee, please add your full title
as such. If a corporation, please
sign in full title as such. If a
corporation, pleas sign in full
corporate name by president or other
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
PLEASE MARK, SIGN AND DATE THIS PROXY CARD
AND PROMPTLY RETURN IT IN THE ENVELOPE PROVIDED.
NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.
EXTENDED FAMILY CARE CORPORATION
ONE OLD COUNTRY ROAD
SUITE 335
CARLE PLACE, NEW YORK 11514
THIS PROXY IS SOLICITED BY THE BOARD
OF DIRECTORS OF EXTENDED FAMILY CARE CORPORATION
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 5, 1997
The undersigned holder of Common Stock of Extended Family Care
Corporation, a New York corporation ("EFCC"), hereby appoints Joseph Heller and
Paul Elenio, and each of them, as proxies for the undersigned, each with full
power of substitution, for and in the name of the undersigned to act for the
undersigned and to vote, as designated below, all of the shares of Common Stock
of EFCC that the undersigned is entitled to vote at the Special Meeting of
Shareholders of EFCC, to be held on September 5, 1997 at 10: A.M. local time, at
offices of Arbor Health Care Holdings LLC, 333 Earle Ovington Blvd., Uniondale,
New York 11553, and at any adjournments or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF ADOPTION AND
APPROVAL OF THE AGREEMENT AND PLAN OF MERGER.
1. Adoption and approval of the Agreement and Plan of Merger dated
January 3, 1997, between EXTENDED FAMILY CARE CORPORATION, a New York
corporation ("EFCC") and STAR, providing for the merger of EFCC Acquisition
Corp., a New York corporation and a wholly owned subsidiary of STAR, with EFCC.
|_| FOR |_| AGAINST |_| ABSTAIN
2. Upon such other matters as may properly come before the Special
Meeting and any adjournments or postponements thereof. In their discretion, the
proxies are authorized to vote upon such other business as may properly come
before the Special Meeting and any adjournments or postponements thereof. This
proxy does not convey discretionary authority to adjourn or postpone the meeting
for the purpose of soliciting additional votes.
(Continue and Sign on Other Side)
<PAGE>
(Continued from other side)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED "FOR" THE PROPOSAL SET FORTH IN ITEM 1 AND WITH REGARD TO
OTHER MATTERS THAT MAY COME BEFORE THE MEETING OR ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF, IN THE DISCRETION OF THE PROXYHOLDERS AS DESCRIBED IN THE
JOINT PROXY STATEMENT.
The undersigned hereby acknowledges receipt of the Notice of the
Special Meeting and the accompanying Joint Proxy Statement.
Dated: __________, 1997 ____________________________________
(Signature)
____________________________________
(Signature if held jointly)
Please sign exactly as name(s)
appears hereon and mail it promptly
even though you now plan to attend
the Special Meeting. When shares are
held by joint tenants, both should
sign. When signing as Attorney,
Executor, Administrator, Guardian or
Trustee, please add your full title
as such. If a corporation, please
sign in full title as such. If a
corporation, pleas sign in full
corporate name by president or other
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
PLEASE MARK, SIGN AND DATE THIS PROXY CARD
AND PROMPTLY RETURN IT IN THE ENVELOPE PROVIDED.
NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.
-2-
