<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1996
REGISTRATION NO. 333-5945
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KAPSON SENIOR QUARTERS CORP.
(Exact name of Registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8361 11-3323503
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
242 CROSSWAYS PARK WEST
WOODBURY, NEW YORK 11797
(516) 921-8900
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
GLENN KAPLAN
242 CROSSWAYS PARK WEST
WOODBURY, NEW YORK 11797
(516) 921-8900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
ARNOLD J. LEVINE, Esq. WILLIAM F. GORIN, Esq.
Proskauer Rose Goetz & Mendelsohn LLP Cleary, Gottlieb, Steen & Hamilton
1585 Broadway One Liberty Plaza
New York, New York 10036 New York, New York 10006
(212) 969-3000 (212) 225-2000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same
offering. / / _____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / _____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
SUCH DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF FORM S-1 AND TITLE OF ITEM PROSPECTUS CAPTION
- -------------------------------------------------------------- --------------------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Outside Front Cover Page
Front Cover Page of Prospectus....................
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page; Outside Back Cover Page
Prospectus........................................
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors
Earnings to Fixed Charges.........................
4. Use of Proceeds.................................... Prospectus Summary; Risk Factors; Use Of Proceeds
5. Determination of Offering Price.................... Underwriting
6. Dilution........................................... Risk Factors; Dilution
7. Selling Security Holders........................... Principal and Selling Stockholders
8. Plan of Distribution............................... Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered......... Description of Capital Stock
10. Interests of Named Experts and Counsel............. *
11. Information with Respect to the Registrant......... Prospectus Summary; Risk Factors; Use of Proceeds;
Capitalization; Dividend Policy; Selected Financial,
Operating and Pro Forma Data; Management's Discussions
and Analysis of Financial Condition and Results of
Operations; Business; Management; Certain Transactions;
Principal and Selling Stockholders; Description of
Capital Stock; Shares Eligible for Future Sale;
Additional Information; Financial Statements
12. Disclosure of Commission Position on *
Indemnification for Securities Act Liabilities....
</TABLE>
- ------------------------
* Item is inapplicable or the answer thereto is in the negative and is omitted
from the Prospectus.
<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 State.
<PAGE>
PROSPECTUS
[LOGO]
3,550,000 SHARES
KAPSON SENIOR QUARTERS CORP.
COMMON STOCK
($.01 PAR VALUE)
All of the 3,550,000 shares of Common Stock, $.01 par value per share (the
"Common Stock"), offered hereby are being sold by Kapson Senior Quarters Corp.
(the "Company").
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
will be between $10.00 and $12.00 per share. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "KPSQ".
SEE "RISK FACTORS" ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS OF THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THE OFFERING, ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total(2)................................... $ $ $
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $ .
(2) The Company and certain selling stockholders (the "Selling Stockholders")
have granted the Underwriters a 30-day option to purchase up to an aggregate
of 532,500 additional shares of Common Stock at the Price to Public, less
the Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such option, in full, the Price to Public,
Underwriting Discount, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ , and $ ,
respectively. See "Underwriting" and "Principal and Selling Stockholders."
The Shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock will be made at the
office of Salomon Brothers Inc, Seven World Trade Center, New York, New York, or
through the facilities of The Depository Trust Company, on or about
, 1996.
SALOMON BROTHERS INC
RAYMOND JAMES & ASSOCIATES, INC.
WHEAT FIRST BUTCHER SINGER
The date of this Prospectus is , 1996.
<PAGE>
KAPSON SENIOR QUARTERS CORP.
Assisted Living Facilities Location Map
Top (left to right)
(1) Kapson Senior Quarter Corp. logo.
(2) Location Map with footnote
(3) Legend
Middle (graphics from left to right)
(1) Kapson Senior Quarters Corp. logo.
(2) Staff member assisting resident in a daily activity.
(3) Residents being served a meal by a member of the facility catering staff.
The Company owns the entire interest in six of its facilities, and a partial
interest in five of its facilities, and manages four facilities in which it does
not have an equity interest. For details on the ownership and operation of the
Company's facilities, see "Business -- The Company's Assisted Living
Facilities," and "Certain Transactions -- Arrangements Regarding Operation of
Certain Facilities."
------------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE- COUNTER MARKET
(INCLUDING THE NASDAQ NATIONAL MARKET) OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER "RISK FACTORS." UNLESS THE CONTEXT OTHERWISE
REQUIRES, REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" REFER TO KAPSON SENIOR
QUARTERS CORP., ITS CONSOLIDATED SUBSIDIARIES AND ITS PREDECESSOR. EXCEPT AS
OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION. THE INFORMATION CONTAINED IN THIS
PROSPECTUS GIVES EFFECT TO CERTAIN TRANSACTIONS TO BE CONSUMMATED PRIOR TO OR
SIMULTANEOUSLY WITH THE CLOSING OF THE OFFERING.
THE COMPANY
Kapson Senior Quarters Corp. (the "Company") is a leading provider of
assisted living services in the northeastern region of the United States, and
has owned, managed and/or operated assisted living facilities since 1972.
Assisted living facilities provide a residential alternative for elderly senior
citizens who need or desire assistance with their activities of daily living and
certain home health care services, in a non-institutional environment. A
majority of the Company's assisted living facilities are operated under the
"Senior Quarters" trademark.
The Company owns, manages and/or operates 15 assisted living facilities with
an aggregate of 1,623 units and a capacity for 2,392 residents, located in New
York, New Jersey, Connecticut and Pennsylvania. Of these facilities, the Company
owns all or a portion of eleven facilities (six facilities are wholly owned and
five partially owned, with partial ownership interests ranging from 10.0% to
50.1%) with an aggregate of 1,145 units and a capacity for 1,749 residents.
Revenues from these eleven facilities constituted 96.7% of total revenues in
1995, with the balance provided by management fees from the four facilities
owned by unaffiliated third parties. In addition, the Company currently has
under pre-construction development seven assisted living facilities in these
states with an expected aggregate of 948 units and a capacity for 1,146
residents. At June 30, 1996, the Company's facilities that were stabilized
(i.e., in operation for at least twelve months) had a weighted average occupancy
rate of 99.0%, with many of them maintaining waiting lists. Furthermore, such
facilities have operated at a 98.0% occupancy rate for the past five calendar
years.
The Company believes that it is characterized by the following:
- A pioneer in assisted living in the northeastern United States since 1972,
and a preeminent provider of assisted living services in the State of New
York, the state with the second highest elderly population in the United
States
- Well-positioned to capitalize on the considerable growth opportunities in
the assisted living industry presented by strong demographic trends,
cost-containment initiatives, long-term care facility supply and demand
imbalances and quality of life advantages
- Assisted living facilities that are designed to provide premium
accommodations and a comprehensive, bundled package of standard services
for a single monthly fee
- Focused on "private-pay" residents who pay through private insurance or
funds
- Large facilities, with a prototype facility consisting of 125 units and a
capacity for 200 residents, that produce cost-efficiencies and enhance
operating margins
- Three senior executives with combined experience of over 50 years in the
assisted living industry and a management team (the members of which have
on average been with the Company for approximately 10 years) with the
demonstrated ability necessary to (i) implement the Company's growth
strategy, (ii) operate assisted living facilities in the State of New York
(traditionally one of the states in which assisted living is most heavily
regulated), and (iii) operate licensed home health care services agencies
so as to enable the Company to provide home health care services at many
of its facilities
3
<PAGE>
The Company's operating philosophy is to provide services and care which
meet the individual needs of its residents, and to enhance their physical and
mental well-being, thereby allowing them to live longer and to "age in place."
The Company's facilities are designed to provide premium accommodations and a
comprehensive, bundled package of standard services for a single monthly fee.
These facilities offer, on a 24-hour basis, personal, supportive and home health
care services appropriate for their residents in a home-like setting, which
allow residents to maintain their independence and quality of life. Furthermore,
many of the Company's facilities, through its Extended Care Program, also offer
additional specialized care and services to residents in the beginning stages of
Alzheimer's disease, dementia and other cognitive impairments. At June 30, 1996,
the average monthly fee for standard services at the Company's facilities was
approximately $2,980 per unit.
The Company's growth strategy focuses on the expansion of its existing
portfolio through the development, acquisition and conversion of additional
assisted living facilities, the expansion of its ancillary services (which have
not yet produced significant revenues), including home health care, in-house
pharmacy services and its Extended Care Program, as well as cost-efficient
facilities management. The Company's primary focus is the northeastern United
States, where it intends to maintain its position as a leading assisted living
provider. In the future, the Company will also selectively seek additional
opportunities in other regions of the United States. Since 1985, the Company has
developed ten assisted living facilities and acquired all, or an interest in,
three others. The Company anticipates that, by utilizing its infrastructure and
assisted living experience, it will develop or acquire an additional 30
facilities with 3,500 units and a capacity for 4,100 residents by the end of
1999.
The Company believes its assisted living business benefits from the
following significant demographic trends, cost-containment initiatives, and
long-term care facility supply and demand imbalances: (i) the continued aging of
the United States population, resulting in increasing demand for care of the
elderly; (ii) changing family dynamics, which increase the likelihood of
families utilizing the assisted living alternative; (iii) the increased net
worth of the elderly and their increased ability to pay for such care, and (iv)
a general effort to contain health care costs by governmental authorities,
private insurers and managed care organizations by limiting lengths of stay,
services and reimbursement amounts.
The Company incurred net losses for the six months ended June 30, 1996 and
for fiscal 1995 primarily as a result of the Company's development and
construction of two facilities that opened on September 1, 1995 and March 15,
1996, as well as the Company's strategic decision to invest in management and
facility development capabilities to support future growth. The Company intends
to pursue a rapid growth strategy, the success of which will depend upon a large
number of factors, including the availability of financing and general real
estate and construction risks. Other risks include the fact that the Company and
its facilities are subject to governmental regulation; competition in the
assisted living market; the Company's dependence on senior management; and other
business risks common to assisted living operations. See "Risk Factors."
The Company was formed in order to consolidate and expand the assisted
living business of The Kapson Group, a New York general partnership of which the
sole equal partners are Glenn Kaplan, Wayne Kaplan and Evan Kaplan, who are
brothers (collectively, the "Kaplans"). The Kaplans are the three senior
executive officers of the Company and, after giving effect to the Offering, will
own approximately 53.9% of the outstanding shares of the Company's Common Stock
(48.8% if the Underwriters' over-allotment option is exercised in full). While
the Company has an ownership interest in substantially all of its facilities, in
order to comply with applicable New York law and regulations prohibiting the
operation of certain types of adult care facilities by a publicly-traded
for-profit corporation, substantially all of the Company's New York facilities
are operated by the Kaplans individually. As licensed operators, the Kaplans
have site control over substantially all of the Company's New York facilities,
and have personal liability for operating these facilities. With respect to such
facilities, the Kaplans have engaged a wholly owned subsidiary of the Company to
perform the day-to-day operations of the facilities in a manner that the Company
believes is consistent with New York law and regulations.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.............. 3,550,000 shares (1)
Common Stock outstanding after the
Offering......................... 7,700,000 shares (1)(2)(3)
Use of Proceeds................... The Company will use the net proceeds of the Offering
for the development and acquisition of assisted living
facilities (including seven facilities currently in
various stages of pre-construction development), to pay
to the Kaplans $6.0 million (the approximate tax
liability expected to be incurred by them from
transactions pertaining to the transfer of certain
facilities to the Company), to pay all real estate
transfer taxes arising from these transactions
(estimated to be approximately $250,000), to acquire the
remaining interest in one of its partially owned
facilities, and for working capital and general
corporate purposes.
Proposed Nasdaq National Market
Symbol........................... "KPSQ"
</TABLE>
- ------------------------
(1) Excludes 532,500 shares of Common Stock subject to the Underwriters'
over-allotment option granted by the Company and the Selling Stockholders.
The Company will not receive any proceeds from the sale of any shares by the
Selling Stockholders, which will occur only if the over-allotment option is
exercised. See "Principal and Selling Stockholders."
(2) Excludes 600,000 shares of Common Stock reserved for issuance and available
for grant under the Kapson Senior Quarters Corp. 1996 Stock Incentive Plan,
under which options to purchase 117,500 shares of Common Stock have already
been issued. See "Management -- 1996 Stock Incentive Plan."
(3) Excludes approximately 50,000 shares that the Company expects to issue in
connection with the purchase of the 50% interest it does not already own in
one of its facilities.
5
<PAGE>
SUMMARY FINANCIAL, OPERATING AND PRO FORMA DATA
The following table sets forth certain historical financial and operating
data as of and for each of the three years ended December 31, 1995 and the six
months ended June 30, 1995 and 1996 for The Kapson Group (the "Predecessor"),
and certain pro forma financial data and operating data as of and for the six
months ended June 30, 1996 and for the year ended December 31, 1995 for the
Company as described in footnote (1) below. The Predecessor represents a
combination of the businesses of partnerships, Subchapter S corporations and
limited liability companies which, as of June 30, 1996, consisted of six wholly
owned, two majority-owned and three minority-owned assisted living facilities,
and two entities that provided managerial services to five related and four
unrelated entities. The businesses of the Predecessor are being acquired by the
Company in connection with the Offering. The financial data below should be read
in conjunction with, and is qualified in its entirety by reference to, the
combined financial statements of the Predecessor, including the notes thereto,
and the information in "Unaudited Pro Forma Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ---------------------------------
PREDECESSOR PRO FORMA PREDECESSOR PRO FORMA
------------------------------- ----------- -------------------- -----------
1993 1994 1995 1995 (1) 1995 1996 1996 (1)
--------- --------- --------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Assisted living revenues.............. $ 12,628 $ 13,349 $ 14,275 $ 17,828 $ 7,024 $ 9,529 $ 10,440
Management fees....................... 248 348 443 443 209 432 432
Other -- affiliates................... 112 57 45 -- 23 23 --
--------- --------- --------- ----------- --------- --------- -----------
Total revenues.......................... 12,988 13,754 14,763 18,271 7,256 9,984 10,872
--------- --------- --------- ----------- --------- --------- -----------
Operating Expenses:
Assisted living operating expenses.... 7,591 7,837 8,314 10,913 3,931 6,252 7,070
General and administrative............ 727 1,142 1,658 3,096 730 1,275 1,832
Depreciation.......................... 1,188 1,180 1,234 1,440 576 912 964
--------- --------- --------- ----------- --------- --------- -----------
Total operating expenses................ 9,506 10,159 11,206 15,449 5,237 8,439 9,866
--------- --------- --------- ----------- --------- --------- -----------
Operating income........................ 3,482 3,595 3,557 2,822 2,019 1,545 1,006
Interest expense, net................. (3,541) (3,487) (3,892) (4,780) (1,739) (2,861) (3,013)
Other income (expense), net........... (10) (1) (34) (30) 1 20 20
--------- --------- --------- ----------- --------- --------- -----------
Income (loss) before minority interest
and extraordinary item................. (69) 107 (369) (1,988) 281 (1,296) (1,987)
Minority interest in net loss of
combined partnerships.................. -- -- 16 360 -- 371 271
--------- --------- --------- ----------- --------- --------- -----------
Income (loss) before extraordinary
item................................... (69) 107 (353) (1,628) 281 (925) (1,716)
Extraordinary Item...................... -- 4,399 -- -- -- -- --
--------- --------- --------- ----------- --------- --------- -----------
Net Income (loss)....................... (69) 4,506 (353) (1,628) 281 (925) (1,716)
Unaudited pro forma data:
Pro forma benefit (provision) for income
taxes (2).............................. 28 (1,803) 141 651 (112) 370 686
--------- --------- --------- ----------- --------- --------- -----------
Pro forma net income (loss)............. $ (41) $ 2,703 $ (212) $ (977) $ 169 $ (555) $ (1,030)
--------- --------- --------- ----------- --------- --------- -----------
--------- --------- --------- ----------- --------- --------- -----------
Pro forma net loss per share (3)........ $ (.20) $ (.21)
----------- -----------
----------- -----------
Pro forma weighted average number of
common shares outstanding (3).......... 4,954 4,954
----------- -----------
----------- -----------
Pro forma, as adjusted, net loss per
share (3)(4)........................... $ (.13) $ (.13)
----------- -----------
----------- -----------
Pro forma, as adjusted, weighted
average number of common shares
outstanding (3)(4)..................... 7,750 7,750
----------- -----------
----------- -----------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
PREDECESSOR PREDECESSOR
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Assisted living units owned, managed and/or operated (end of period)... 661 661 862 661 1,623
Assisted living resident capacity (end of period)...................... 1,143 1,143 1,403 1,143 2,392
Weighted average occupancy of fully-stabilized assisted living
facilities............................................................ 98% 98% 98% 99% 99%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
PRO FORMA AS
PREDECESSOR ADJUSTED
1996 1996(1)(3)(4)
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................................................... $ (4,344) $ 23,977
Total assets...................................................................... 67,853 94,340
Long-term debt, excluding current portion......................................... 67,816 67,816
Partners'and shareholders' equity (deficit)....................................... (11,107) 19,814
</TABLE>
- ------------------------
(1) The pro forma statements of operations data for the year ended December 31,
1995 and the six months ended June 30, 1996 gives effect to (a) the
acquisition on April 1, 1996 by the Predecessor of the operations of Town
Gate Manor (Rochester, New York) and Town Gate East (Penfield, New York);
(b) the April 1996 acquisition of the 49.9% interest in Senior Quarters at
Chestnut Ridge by an unrelated third party; (c) the pending acquisition of
the 50% interest it does not already own in the entity which owns Senior
Quarters at East Northport from an unrelated party for $2,600. The purchase
price is payable from Offering proceeds ($2,050) and the issuance of 50
shares of common stock at an assumed initial public offering price of
$11.00 per share ($550); (d) operating fees payable to the Kaplans as
operators for various New York facilities, net of management fees payable
to a subsidiary of the Company; (e) compensation of the Kaplans and
additional general and administrative costs of operating as a public
company; (f) the initial capitalization of the Company; (g) the issuance of
4,150 shares of the Company's common stock as consideration for the
conveyance of all of the Predecessor's assets relating to its assisted
living business; and (h) the elimination of net indebtedness and interest
payable to an uncombined affiliate of the Predecessor all as if the
transactions had occurred as of January 1, 1995. The pro forma balance
sheet as of June 30, 1996 gives effect to these transactions as if they
occurred on that date, except for the transactions in (a) and (b) which are
included in the historical combined balance sheet at June 30, 1996. See
"Unaudited Pro Forma Financial Information."
(2) Includes a pro forma income tax adjustment for federal and state income
taxes to reflect the Predecessor as a C corporation. See Note 2 to the
Combined Financial Statements of the Predecessor.
(3) Reflects (a) the assumed issuance of common stock at an initial public
offering price of $11.00 to satisfy the $6,250 distribution payable to the
Kaplans to be paid from the proceeds of the Offering which will be used
primarily to satisfy (i) the tax liabilities of the Kaplans expected to be
incurred in connection with transactions pertaining to the transfer of the
Predecessor's interests in the facilities to the Company ($6,000) and (ii)
real estate transfer taxes arising out of the transaction estimated to be
approximately ($250) and (b) the expected issuance of 50 shares of common
stock expected to be issued in connection with the agreement to purchase
the 50% interest it does not already own in the entity which owns Senior
Quarters at East Northport, at an assumed initial public offering price of
$11.00 per share, to satisfy a portion ($550) of the total $2,600 purchase
price.
(4) Reflects the proposed issuance of all 3,550 shares in connection with the
Offering.
7
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the factors set forth below
together with the other information contained in this Prospectus before making a
decision to purchase the Common Stock.
CAPITAL REQUIREMENTS; PARTNERS' AND SHAREHOLDERS' DEFICIT
At June 30, 1996, the Predecessor had Partners' and Shareholders' deficit of
$11.1 million and negative working capital of $4.3 million. After giving effect
to the receipt and application of the net proceeds of the Offering (assuming no
exercise of the Underwriters' over-allotment option and an initial public
offering price of $11.00), the Company's pro forma shareholders' equity would
have been $19.8 million. The Company believes that the proceeds of the Offering,
in conjunction with other financial resources, will be sufficient to fund its
growth strategy for 12 months. Other resources include $117.9 million which, as
of the consummation of the Offering and subject to certain conditions, will be
available ($9.1 million of which is scheduled to be drawn down for the project
in Briarcliff Manor, NY) under the Company's $140.0 million acquisition and
development credit facility with Health Care REIT, Inc. ("HCR"), along with any
bank financing, long-term operating leases with REITs, and joint ventures that
it may obtain or enter into. The HCR credit facility requires, as a condition to
future drawings, that the Company meet certain financial tests, including one
that requires the Company to have, at the time of each drawing, a minimum net
worth of $14.0 million ($20.0 million once aggregate drawings exceed $100.0
million). There can be no assurance that the Company will not need to obtain
additional financing within this time or that such financing will be available,
or available on terms acceptable to the Company, particularly in light of the
Company's anticipated net losses. See "-- Net Losses and Anticipated Net Losses;
Negative Cash Flow," "Capitalization" and "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Results of Operations."
NET LOSSES AND ANTICIPATED NET LOSSES; NEGATIVE CASH FLOW
Newly developed assisted living facilities typically operate at a loss,
inclusive of financing costs, for five to seven months after completion.
Primarily as a result of the Company's development and construction of two
facilities that opened on September 1, 1995 and March 15, 1996, as well as the
Company's strategic decision to invest in management and facility development
capabilities to support future growth, the Company incurred a net income (loss)
before extraordinary items of ($925,000) for the six months ended June 30, 1996,
compared to $281,000 for the six months ended June 30, 1995, and ($353,000),
$107,000 and ($69,000) for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company was not required and did not pay income taxes in these
years. On a pro forma basis, the Company would have incurred net income (loss)
of ($1,030,000) for the six months ended June 30, 1996 and ($977,000) for the
year ended December 31, 1995. In addition, for the six months ended June 30,
1996, net cash used in operations was ($1,077,000). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations." As a result of its development activities and plans, the Company
anticipates that it will incur a net loss for the balance of 1996. Furthermore,
if the Company continues to experience negative cash flow from operations, or if
it does not achieve its development objectives, or if newly developed assisted
living facilities do not achieve break-even operating results within the time
expected, or if development or construction or operating expenses exceed
expectations, the Company's financial condition will be further impacted. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
INDEBTEDNESS AND OTHER OBLIGATIONS OF THE COMPANY
Upon completion of the Offering, the Company will have outstanding long-term
debt of $67.8 million, $15.5 million of which bears interest at variable rates.
In addition, the Company will, as of the consummation of the Offering and
subject to certain conditions, have $117.9 million of credit available (of which
$9.1 million is scheduled to be drawn down for the project in Briarcliff Manor,
NY) under its secured acquisition and development credit facility with HCR,
which provides for interest payments at rates that are established at the time
of opening of the new assisted living facility for which a particular drawdown
is taken. Furthermore, the Company's growth strategy contemplates developing
and/or
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acquiring approximately 30 facilities by the end of 1999 at an aggregate cost of
$405 million. A portion of such funds may be financed through additional
indebtedness. As a result, the Company's cash flow will continue to be adversely
impacted by debt service, and there is a risk that the Company may be unable to
generate sufficient cash flow from operations to cover required interest and
principal payments, particularly if variable interest rates and, consequently,
interest payments, increase. If the Company were unable to meet interest or
principal payments in the future, there can be no assurance that sufficient
financing would be available to cover the insufficiency or, if available, the
financing would be on terms acceptable to the Company. In the absence of
financing, the Company's ability to make scheduled principal and interest
payments on its indebtedness or to respond to changing business and economic
conditions to fund scheduled investments, cash contributions and capital
expenditures to make future acquisitions or developments and to absorb adverse
operating results would be adversely affected. Any payment or other default by
the Company with respect to any of its indebtedness could cause the lender to
foreclose on the facility or facilities securing such indebtedness and could
impair the Company's right to receive payments under the management contracts
relating to those facilities. Further, because of cross-default and
cross-collateralization provisions in certain of the Company's mortgages, a
default by the Company on any of its payment obligations could adversely affect
a significant number of the Company's other properties. Accordingly, any payment
or other default by the Company could have an adverse effect on the Company's
business, financial condition, results of operations and prospects. In addition,
the terms of certain of the Company's indebtedness have imposed, and may in the
future impose, constraints on the Company's operations, including constraints on
its ability to open new facilities in close proximity to, or otherwise compete
with, existing facilities, constraints on its ability to increase its management
fees or vary the level of services that it provides to residents, and a
requirement under the Company's facility with HCR that the Company or the
Kaplans be the licensed operators of the Company's facilities, where required by
law. Furthermore, the Company may in the future utilize tax-exempt bond
financing. Such bonds usually impose various restrictions, conditions and
requirements, including requirements that a certain percentage of residential
units in facilities financed by such bonds be made available to persons with
below median income. Bond compliance requirements may have the effect of
limiting the Company's income from the bond-financed properties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
UNCERTAIN ABILITY TO ACHIEVE AND/OR MANAGE RAPID GROWTH
The Company intends to pursue a rapid growth strategy, the success of which
will depend upon a large number of factors, many of which are beyond the
Company's control. See "Business -- Growth Strategy -- Development and
Acquisition." At the present time the Company is a party to a limited number of
agreements related to specific facilities to be developed, and there can be no
assurance that these facilities will be successfully completed or that
additional facilities will be developed. Factors that will affect the success of
the Company's growth strategy include the Company's ability to locate suitable
sites, its ability to obtain appropriate zoning, land use, building, occupancy
or other governmental permits, authorizations, licenses and approvals, the risk
that construction may not proceed according to plan or that its cost may exceed
estimates, the risk that occupancy rates may not reach anticipated levels, and
risks relating to the competitive environment for development and/or
acquisitions. Furthermore, even if the Company were to develop or acquire new
facilities, its ability to achieve managed growth will be dependent upon a
number of factors, including its ability to hire, train and assimilate
management and other employees and its ability to adapt its purchasing,
management information and other systems to accommodate its expanded operations.
See "Business -- Growth Strategy -- Development and Acquisition." If the Company
is unable to implement its growth strategy successfully, of which there can be
no assurance, its business, financial condition, results of operations and
prospects could be adversely affected.
DISCRETIONARY USE OF PROCEEDS
A substantial portion of the net proceeds of the Offering is expected to be
used to partially finance the development and acquisition of facilities,
including the projects referred to elsewhere in this Prospectus that are
currently in various stages of pre-construction development. At the present
time, the
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Company has not entered into binding contracts or other agreements, arrangements
or other understandings to develop or acquire any additional sites, and the
Company will continue to have broad discretion in identifying potential sites
for development and existing facilities for acquisition. Accordingly, the
Company will have broad discretion in using the net proceeds of the Offering.
See "Use of Proceeds" and "Business -- Growth Strategy -- Development and
Acquisition."
DEPENDENCE ON SENIOR MANAGEMENT; OTHER PERSONNEL
The Company depends upon the continued services of Glenn Kaplan, its
Chairman and Chief Executive Officer; Evan Kaplan, its President and Chief
Operating Officer; and Wayne Kaplan, its Vice Chairman and Senior Executive Vice
President. The Company has entered into a five-year employment agreement which
is renewable automatically for successive one-year periods with each of these
individuals. See "Management -- Employment Agreements." The Company's dependence
on these three individuals is increased by the fact that, primarily because of
legal requirements in New York, substantially all of the Company's facilities in
New York are operated by them individually. See "-- Operating Agreements;
Management Agreements" and "Certain Transactions." Accordingly, the loss of the
services of any of these three individuals could have an adverse effect on the
Company's business, financial condition, results of operations and prospects.
In addition, the Company competes with other providers of long-term care in
attracting and retaining senior management and other personnel responsible for
various management functions, as well as the day-to-day operations of the
Company's facilities. The Company is dependent upon the available pool of such
personnel. A shortage of qualified personnel may require the Company to enhance
its wage and benefits package in order to compete. There can be no assurance the
Company's labor costs will not increase, or that, if they do increase, they can
be matched by corresponding increases in its revenues.
GOVERNMENT REGULATION
The health care industry is subject to extensive federal and state
regulation and frequent regulatory change. See "Business -- Government
Regulation." The Company's facilities are and will continue to be subject to
varying degrees of regulation by health and/or social service agencies and other
regulatory authorities in the various states and localities in which the Company
operates or intends to operate. The Company believes, based on its experience in
conducting an assisted living business since 1972 and its consequent knowledge
of applicable law and regulations, that it is in compliance with all applicable
law and regulations; however, there can be no assurance that such is the case.
The Company's belief is not based on advice or an opinion of counsel; however,
counsel was engaged to prepare the operating and management agreements
pertaining to the Company's New York licensed facilities. See "-- Operating
Agreements; Management Agreements." The success of the Company will be dependent
upon its ability to satisfy applicable law and regulations and to procure and
maintain required licenses and registrations. Changes in applicable laws and
regulations, or in the interpretations thereof, could have an adverse effect on
methods and costs of doing business, and amounts of reimbursement from
governmental and other payors.
Although a number of states have not adopted specific assisted living
regulations, in New York, where a majority of the Company's present facilities
is located, an array of statutes and regulations govern assisted living
facilities and the provision of home health care services in such facilities.
These laws include licensure restrictions that prohibit a publicly traded
for-profit corporation from operating certain types of assisted living
facilities (referred to herein as "licensed facilities"). See "-- Operating
Agreements; Management Agreements" and "Business -- Government Regulation." Such
facilities include facilities that are designated by the State as Adult Homes or
Assisted Living Program facilities ("ALP facilities"). Accordingly, the Company
is not the licensed operator of any of its New York licensed facilities. As
mentioned above, the Company believes that its management relationship with the
licensed operators complies with all applicable law and regulations, although it
has not sought or obtained any ruling from regulatory agencies to that effect.
The Company has been advised that regulations relating to
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licensed facilities in New York are presently undergoing review. A task force
established by the legislature to study long-term care financing alternatives
recently issued its report, which, among other things, encourages the
development of assisted living facilities and recommends that existing ownership
restrictions, including those that prohibit sponsorship by publicly traded
corporations, be examined. If existing law and regulations were interpreted as,
or amended with the effect of, prohibiting the Company's management relationship
with the licensed operators, there could be an adverse effect on the Company's
business, financial condition, results of operations and prospects. See "--
Operating Agreements; Management Agreements."
As part of the Company's two ALP facilities, the Kaplans operate the Kapson
Licensed Home Care Services Agency, a partnership that is licensed in some New
York counties. See "Business -- Government Regulation -- New York." Since the
Kapson Licensed Home Care Services Agency provides and, as required by
applicable law and regulations, will continue, even after the Company obtains a
home care services agency license, to provide services that are reimbursed by
Medicaid for Medicaid-covered residents in the Company's New York ALP
facilities, the Kaplans are, and the Company (through its provision of
management services to the ALP facilities) may be, subject to federal and state
Medicaid fraud and abuse laws and regulations, including anti-kickback
provisions. In particular, those laws may prohibit certain health care
professionals from holding an ownership or financial interest in a company that
provides or manages home health care or pharmaceutical services to which health
care professionals refer Medicare or Medicaid patients. New York State has
similar laws and regulations that restrict such financial relationships with
entities that provide pharmaceuticals. See "Business -- Government Regulation."
OPERATING AGREEMENTS; MANAGEMENT AGREEMENTS
Under applicable New York law and regulations, a publicly traded for-profit
corporation is not permitted to be the licensed operator of a licensed facility.
Therefore, the Kaplans individually are the licensed operators of all the
Company's licensed facilities in New York, except for one which is operated by
its not-for-profit owner and have responsibility for the day-to-day operations
of the Company's facilities in New York to ensure that these facilities are
operated in accordance with applicable New York law and regulations. These
facilities are operated pursuant to either an operating agreement between the
Company and the licensed operators or the pre-existing agreement with the
applicable third party owner of the facility that has been assigned to the
licensed operators by the Company. The licensed operators have, in turn, engaged
a wholly owned subsidiary of the Company to provide certain management services
to each such facility. As a result of recently enacted legislation, privately
owned for-profit corporations are permitted to operate certain types of licensed
facilities in New York, and the Kaplans may form one or more corporations to
operate the Company's licensed facilities. See "Business -- Government
Regulation" and "Certain Transactions." The Kaplans are entitled, pursuant to
the operating agreements, to assign such agreements to any for-profit
corporation that is wholly owned by them.
With respect to the Company's licensed facilities of which the Kaplans are
the licensed operators, the operating agreements between the Company and the
licensed operators have a term of 25 years and provide for an operating fee; the
pre-existing agreements with third-party owners generally have a term of five
years and also provide for an operating fee and, in some instances, an incentive
fee based on the performance of the facility. The operating agreements may be
terminated by either the Company or the licensed operators under certain
circumstances. The Company may terminate the agreement upon the occurrence of
certain events of default or upon the death or disability of all the licensed
operators. If the operating agreement is terminated by the Company other than
for an event of default by the licensed operators, the licensed operators will
be entitled to liquidated damages equal to twice the licensed operators' fees
under the applicable operating agreement (net of fees payable under the
applicable management agreement) over the preceding twelve months. See "Certain
Transactions -- Arrangements Regarding Operation of Certain Facilities." In
addition, the employment agreement with each Kaplan provides that each Kaplan
may withdraw as a licensed operator if he ceases to be an employee of the
Company for any reason. See "Management -- Employment Agreements." Each
management
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agreement between the licensed operators and the Company's wholly owned
subsidiary is co-terminous with the underlying operating agreement or
pre-existing agreement with third-party owners, provides for a management fee
equal to a portion of the licensed operators' fee, and may be terminated by
either the Company's wholly owned subsidiary or the licensed operators under
certain circumstances. See "Certain Transactions -- Arrangements Regarding
Operation of Certain Facilities."
In order to comply with applicable law and regulations, each management
agreement, by its own terms, does not confer upon the Company's wholly owned
subsidiary control over the facility. It specifically provides that the licensed
operators shall retain the authority and power, among other things, to hire and
discharge persons working at the licensed entity, maintain and control the books
and records of the licensed entity, to incur any liability on behalf of the
licensed entity, and to adopt or enforce policies regarding the operation of the
licensed entity. The management agreements provide that the Company's wholly
owned subsidiary shall perform such services as may be requested by the licensed
operators, including the following: establishing the schedules of charges;
administration of personnel matters; the development of publicity materials; the
maintenance of all required licenses, permits, qualifications and approvals and
otherwise ensuring that the operation of the facility is in compliance with all
applicable laws and regulations; accounting support; maintenance and upgrading
of the facility; and contract administration, all subject to the direction and
control of the licensed operators.
Accordingly, in accordance with New York law and regulations, the licensed
operators will maintain site control and responsibility for day-to-day
operations of the facility. In the case of the New York ALP facilities, the
licensed operators are responsible for both the licensed Adult Home portion of
the facility and the licensed home care services agency servicing the facility.
In addition, the licensed operators will remain responsible for the overall
compliance of the facility with applicable law and regulations. Moreover, in
accordance with New York law and regulations, the operating agreements between
the licensed operators and the Company, the management agreements between the
licensed operators and the Company's wholly owned subsidiary, and the employment
agreements between each of the Kaplans and the Company provide that the licensed
operators act independently of the Company and/or its wholly owned subsidiary
and, in the performance of their obligations as the licensed operators of the
applicable facility, are explicitly relieved of any fiduciary obligation to the
Company and its stockholders. As the Company is not itself the licensed operator
of these facilities, it is highly dependent on the Kaplans as the licensed
operators, and its agreements with them, in order to generate revenue in New
York State. The Company is therefore limited in its ability to exercise control
over these facilities.
See "-- Conflicts of Interest."
There can be no assurance that these agreements will not be terminated by
the licensed operators of the applicable facility or the Company, or as a result
of a change in the applicable law or regulations or the interpretation thereof
by the appropriate state agencies. Any termination of these agreements would be
subject to applicable state law and regulations, which may restrict the options
of the Company in dealing with the applicable facility. Although the Company
believes that it is in compliance with applicable law and regulations, the
Kaplans, as licensed operators of each such facility, have agreed that they
would cooperate with the Company in restructuring the current arrangement with
respect to the operation and management of that facility if the need should
arise. Any termination of an operating agreement or a management agreement, for
any reason whatsoever, could have an adverse effect on the Company's business,
financial condition, results of operations and prospects.
This basic structure, and substantially similar agreements, are also used
with respect to one New York facility that is an independent living facility
which, as such, is not a licensed facility. The effect and risks are
substantially the same as those described above, except that New York law and
regulations with respect to licensed facilities are not applicable to this
management arrangement.
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REVENUE FROM SUPPLEMENTAL SECURITY INCOME DEPENDENT RESIDENTS AND MEDICAID
In the Company's two ALP facilities, the full monthly payment for services
provided to each Medicaid-eligible resident is paid to the Company by those
residents, at charges based on Supplemental Security Income ("SSI") rates for
the residential portion and by Medicaid for the home care portion. In these
facilities, the combined SSI-based and Medicaid monthly payments average $4,500
per unit.
With few exceptions, the only residents for whom the Company's facilities
accept SSI payments as the residential fee are Medicaid-eligible residents in
the Company's two New York ALP facilities. Currently, less than 1% of the
Company's revenue is derived from SSI payments. The Company anticipates that,
upon stabilization of its New York ALP and other facilities, approximately 11%
of the Company's revenue will be derived from SSI payments. Residential fees
from these residents could be subject to delay. There can be no assurance that
the Company's proportionate percentage of revenue related to the facilities'
receipts based on SSI rates will not increase, or that the amounts paid under
SSI programs will not be decreased or subject to delay.
The Company derives revenues from Medicaid only for the home care services
provided to Medicaid beneficiaries residing in the Company's two New York ALP
facilities. Medicaid program payments could be subject to delay. Further, since
the payment for home care services in such facilities is a fixed per patient per
day amount based on an anticipated range of services for the resident's assessed
level of care, the Company is at risk for the cost of services within the
anticipated range even if beyond the amount paid by Medicaid. The Company has
committed to 380 Medicaid beds, and applicable law and regulations forbid a
reduction in the beds committed to Medicaid beneficiaries in the Assisted Living
Program without further state approval, which may or may not be granted.
Currently, less than 2% of the Company's revenue is derived from the Medicaid
program. The Company anticipates that, upon stabilization of its New York ALP
and other facilities, approximately 20% of the Company's revenue will be derived
from the Medicaid program. There can be no assurance that the Company's
proportionate percentage of revenue related to the facilities' receipts from
Medicaid will not increase, or that the amounts paid by Medicaid will not be
further limited or subject to delay.
On occasion, in order to meet budgetary demands, the government has delayed
payments to beneficiaries of government programs such as Medicaid. In addition,
possible limitations on amounts paid may result from proposed federal and state
legislation. See "-- Potential Impact of Proposed Legislation Regarding Medicaid
Funding." There can be no assurance that acceptance of SSI-based fees, the
provision of services to Medicaid beneficiaries or changes in the applicable SSI
or Medicaid programs and/or applicable law and regulations will not adversely
affect the business, financial condition, results of operations and prospects of
the Company. See "-- Potential Impact of Proposed Legislation Regarding Medicaid
Funding" and "Business -- Government Regulation."
GEOGRAPHIC CONCENTRATION
Since a majority of the Company's current facilities are located within the
New York metropolitan area, the Company will be more susceptible to changes in
general economic factors affecting the health care industry or the laws
governing, and regulatory environment in, the New York metropolitan area because
any such change or act could affect a high percentage of the Company's
facilities. There can be no assurance that such geographic concentration will
not have an adverse effect on the Company's business, financial condition,
results of operations and prospects. See "Business."
COMPETITION
The long-term care industry is highly competitive and the Company expects
that the assisted living industry will become more competitive in the future.
The Company competes with numerous local, regional and national companies
providing long-term care alternatives such as home health care services
agencies, life care communities, skilled nursing facilities, community-based
service programs, retirement communities and convalescent centers. The Company
expects that as the assisted living industry receives increased attention,
competition will grow, and that new market entrants will include companies
focusing primarily on assisted living. Assisted living providers compete for
residents primarily on the basis of quality of service, price, reputation,
physical appearance and location of the living
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environment, services offered, family preferences and physician referrals.
Moreover, the Company expects to face competition for the development or
acquisition of assisted living facilities during the course of its
implementation of its growth strategy. Competition may be increased by changes
in the regulatory environment, especially in New York where assisted living is
highly regulated and a majority of the Company's facilities is located. Some of
the Company's present and potential competitors are significantly larger and
have, or may obtain, greater financial resources than those of the Company.
There can be no assurance that the Company will not encounter increased
competition in the future, which could limit its ability to attract residents or
expand its business and thereby have an adverse effect on the Company's
business, financial condition, results of operations and prospects.
POTENTIAL IMPACT OF PROPOSED LEGISLATION REGARDING MEDICAID FUNDING
The United States Congress is considering legislation which may change
substantially the amount of federal funding available for the Medicaid program,
the method by which such funds are distributed to the states and the extent of
state control over such funds. It is not possible to predict whether and when
legislation relating to Medicaid will be passed, and, if passed, what features
such legislation will contain or whether the President would sign such
legislation. The Company cannot make any assessment as to the ultimate timing
and impact that any pending health care proposals may have on the assisted
living, nursing facility and rehabilitation care industries, or on the health
care industry in general. In addition, changes in Medicaid funding have been
proposed in New York State which, alone or in combination with changes in
federal funding, may have a significant impact on the New York Assisted Living
Program as it presently functions or on future funding. Similar changes may take
place in other states in which the Company operates. No assurance can be given
that any such changes will not have an adverse effect on the business, financial
condition, results of operations or prospects of the Company.
BUSINESS RISKS COMMON TO ASSISTED LIVING OPERATIONS
LIABILITY AND INSURANCE. The provision of assisted living and other
services for residents entails an inherent risk of liability. In recent years,
participants in the long-term care industry have become subject to an increasing
number of lawsuits alleging malpractice or related legal theories, many of which
involve large claims and significant defense costs. In addition, the Company
intends to apply for registration as a pharmacy in New York. Participants in the
pharmacy industry may be subject to potential liability for negligence and other
claims. The Company currently maintains liability insurance intended to cover
such claims and the Company believes that its insurance is in keeping with
industry standards and appropriate in relation to the Company's assisted living
and, in the future, pharmacy business. There can be no assurance, however, that
claims in excess of the Company's insurance coverage or claims not covered by
the Company's insurance coverage (E.G., claims for punitive damages) will not
arise. A successful claim against the Company not covered by or in excess of the
Company's insurance coverage could have an adverse effect upon the Company's
business, financial condition, results of operations and prospects. Claims
against the Company, regardless of their merit or eventual outcome, may also
have an adverse effect upon the Company's ability to attract residents or expand
its business, and would require management to devote time to matters unrelated
to the operation of the Company's business. In addition, the Company's insurance
policies must be renewed annually. There can be no assurance that the Company
will be able to maintain liability insurance coverage in the future or that, if
such coverage is available, it will be available on acceptable terms.
ESTABLISHING AND MAINTAINING RENTAL RATES AT PROFITABLE LEVELS. There can
be no assurance that the Company's facilities will continue to be substantially
occupied at current rental rates. If operating expenses increase due to factors
such as the cost of labor, food or energy, government regulation or various
uninsurable risks, the local rental market may limit the extent to which rents
may be increased. Because rent increases generally can only be implemented at
the time of expiration of leases, rental increases may lag behind increases in
operating expenses.
REVENUE FROM FACILITIES. Revenue from the Company's facilities (whether
owned, managed and/or operated by the Company) is dependent upon the performance
of those facilities. The performance of substantially all of the Company's New
York facilities will depend in part on the Kaplans individually
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because they will have control over the operation of these facilities. See "--
Operating Agreements; Management Agreements." The performance of the Company's
facilities will also depend in part upon the ability to attract and retain
residents (most of whom rent on a month-to-month basis), which will in turn
depend upon prevailing financial conditions, the nature and extent of
competitive properties in the areas where such facilities are located, and the
real estate market generally. The failure of the Company to generate sufficient
revenue and cash flow could result in an inability to meet future principal and
interest payments in respect of its indebtedness.
GENERAL REAL ESTATE RISKS. The performance of the Company's facilities is
influenced by factors affecting real estate investments generally, including the
general economic climate and local conditions, such as an oversupply of, or a
reduction in demand for, similar facilities. Other factors include the
attractiveness of properties to residents, zoning, rent control, environmental
quality regulations or other regulatory restrictions, competition from other
forms of housing and the ability of the Company to provide adequate maintenance
and insurance and to control operating costs, including maintenance, insurance
premiums and real estate taxes. Real estate investments also are affected by
such factors as applicable laws, including tax laws, interest rates and the
availability of financing. In addition, real estate investments are relatively
illiquid and, therefore, limit the ability of the Company to vary its portfolio
promptly in response to changes in economic or other conditions.
CONSTRUCTION/CONVERSION RISKS. Certain construction and conversion risks
are beyond the Company's control and could cause the cost of, and the time
required to complete, construction or conversion to exceed estimates. These
risks include but are not limited to force majeure, labor disputes, adverse
weather, acts of God, limited supply of materials and labor, and other unknown
contingencies. If existing buildings are to be converted into assisted living
facilities, costs of conversion may be more difficult to assess and control than
with respect to the construction of a new facility. The Company's cash flow
could be adversely affected if construction or conversion is not commenced or
completed, or if there are unpaid subcontractors or suppliers, or if required
occupancy permits are not issued in a timely manner. See "Business -- Growth
Strategy -- Development and Acquisition."
POSSIBLE ENVIRONMENTAL LIABILITIES. The Company's facilities and the
operations thereof are subject to various federal, state and local environmental
and worker health and safety laws and regulations. These laws and regulations
generally relate to these facilities' solid, medical, special waste handling and
disposal practices and work place health and safety. Although the Company
believes that its facilities are in substantial compliance with these laws and
regulations, there can be no assurance that they are or will remain in
compliance, that penalties or fines may not be imposed for non-compliance or
that new, more stringent environmental and worker health and safety laws and
regulations will not be adopted, any of which could have an adverse effect on
the Company's business, financial condition, results of operations or prospects.
In addition, under these environmental laws and regulations, liability could be
imposed on the facilities or the Company for the costs of, among other things,
investigating, remediating and/or monitoring contamination that may be found to
exist in the environment at off-site disposal sites where waste from the
Company's facilities has been disposed of and from contamination at the
Company's facilities or properties. Although the Company is unaware of any
contamination at any of its facilities or properties requiring remediation,
contamination could result from, for example, a leaking underground heating fuel
storage tank, a spill of cleaning fluids and materials or the presence of
asbestos-containing materials in its facilities. The presence of such
contamination at any of the Company's facilities or properties could also
subject the Company to lawsuits by or liability to neighbors, residents of the
facilities, and workers who may have been injured or damaged by any such
contamination. Moreover, if contamination is found to exist, the Company's
ability to sell or lease the facility or property or to borrow money using that
facility or property as collateral could be adversely affected.
RESTRICTIONS IMPOSED BY LAWS BENEFITING DISABLED PERSONS. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist which also may require modifications to existing and planned
properties to create access to the properties by disabled persons. While the
Company believes that its facilities are substantially in
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compliance with present requirements or are exempt therefrom, if required
changes involve a greater expenditure than anticipated or must be made on a more
accelerated basis than anticipated, additional costs would be incurred by the
Company. Further legislation may impose additional burdens or restrictions with
respect to access by disabled persons, the costs of compliance with which could
be substantial.
CONFLICTS OF INTEREST
Pursuant to employment agreements with the Company, each of Glenn Kaplan,
Wayne Kaplan and Evan Kaplan have agreed to devote substantially all of his
business time, energy, skill and efforts to the performance of his duties under
the agreement and to faithfully serve the Company, subject to the performance of
his obligations as operator of one or more of the Company's facilities in his
individual capacity. These employment agreements contain non-compete provisions
by which the Kaplans agree not to compete with the assisted living business of
the Company in any area within a ten-mile radius of one of the Company's
facilities for a period of one year after the termination of the applicable
employment agreement for any reason other than the non-renewal thereof by the
Company on substantially the same terms. In the past, the Kaplans (who are
officers and directors of the Company) have directly or indirectly selected,
bought, sold and owned real estate investments for their own accounts and they
may continue to do so with respect to investments not involving the provision of
assisted living services. In addition, in order to meet the requirement under
applicable New York regulations that a licensed facility located in New York be
operated by one or more individuals or general partnerships composed of
individuals, in each case having site control over any such facility, the
Kaplans are the licensed operators of substantially all of the Company's New
York facilities, and, therefore, will have site control over those facilities.
See "-- Operating Agreements; Management Agreements." These activities and
ownership interests create actual or potential conflicts of interest on the part
of the Kaplans. The Board of Directors of the Company has adopted a policy that
all future transactions between the Company and its officers, directors,
principal stockholders and their affiliates will be subject to approval of a
majority of the independent and disinterested outside directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties. See "Certain Transactions." Joseph G. Beck, a director of the
Company, is a principal, executive committee member and shareholder of Shattuck
Hammond Partners Inc., which provided investment banking and financial advisory
services to the Predecessor, and will continue to provide such services to the
Company. See "Certain Transactions -- Shattuck Hammond Fee" and "Underwriting."
CONTROL BY PRINCIPAL STOCKHOLDERS; ANTI-TAKEOVER MEASURES
After the Offering, the three senior executives of the Company, the Kaplans,
will beneficially own in aggregate 53.9% (48.8% if the Underwriters'
over-allotment option is exercised in full) of the Company's issued and
outstanding Common Stock. As a result, the Kaplans may be able to substantially
influence many matters required to be submitted to the stockholders for
approval, including, without limitation, the election of directors. This
concentration of voting power and the right of first refusal each Kaplan has
with respect to the other Kaplans' shares of Common Stock pursuant to a
stockholders' agreement between the Kaplans and the Company may, among other
things, have the effect of delaying or preventing a change in control of the
Company. See "Certain Transactions" and "Principal and Selling Stockholders." In
the event of any such change of control, each Kaplan may have the right to
receive payments from the Company if his employment is terminated either by him
or the Company. See "Management -- Employment Agreements." The Kaplans will
also, as licensed operators of a majority of the Company's facilities, have site
control over those facilities. See "-- Operating Agreements; Management
Agreements." In addition, the Company's certificate of incorporation provides
for authorized but unissued Preferred Stock, the terms of which may be fixed by
the Board of Directors, and also provides, among other things, that the Board of
Directors will be classified. Such provisions could also have the effect of
delaying, deferring or preventing a change of control of the Company.
BENEFITS TO AFFILIATES
The Kaplans will realize substantial benefits from the Offering. In
particular, the Kaplans, who beneficially own in the aggregate 4,150,000 shares
of Common Stock, upon completion of the Offering
16
<PAGE>
will own beneficially in the aggregate shares with a market value of $45,650,000
(assuming no exercise of the Underwriters' over-allotment option and an initial
public offering price of $11.00). If the Underwriters' over-allotment option is
exercised in full (at such assumed offering price), the Kaplans will receive in
the aggregate net proceeds of $2,724,000. In addition, as partial consideration
for the Predecessor's transfer of its facilities to the Company, the Company
shall pay (i) to the Kaplans $6.0 million (the approximate tax liability
expected to be incurred by the Kaplans in connection with transactions
pertaining to that transfer) as the cash portion of the consideration for the
Predecessor's transfer of its facilities to the Company, and (ii) all real
estate transfer taxes arising out of such transfer to the Company of the
Company's facilities by its Predecessor (estimated to be approximately
$250,000). The Kaplans guaranteed certain indebtedness incurred by the
Predecessor with respect to certain facilities, and the Kaplans expect to be
released from such guarantees in connection with the consummation of the
Offering. See "Certain Transactions -- Conveyance of Assisted Living Business to
the Company." Further, the Kaplans individually are the operators of
substantially all of the Company's New York assisted living facilities, either
pursuant to a separate operating agreement entered into by the Company or the
pre-existing agreement with the unaffiliated owner of the facility (that has
been assigned to the Kaplans). The Kaplans, as operators of each of these
facilities, have engaged a wholly owned subsidiary of the Company to provide
certain management services in connection with the day-to-day operations of each
facility they operate, in each case pursuant to a separate management agreement.
The operating agreements provide for a fee equal to 5% of gross revenues; the
pre-existing agreements with third party owners provide for an operating fee
equal to 5% of gross revenues or the greater of 5% of gross revenues and a
minimum fee (ranging from $96,000 to $150,000 per annum) and including, in some
instances, an incentive fee. The fee payable to the Company's subsidiary under
each management agreement is 30% of the operators' fees, increasing to 96% of
the operators' fees generated by aggregate gross revenues of all facilities
operated under this fee structure exceeding $23.0 million. The Kaplans have also
agreed that, with respect to any other projects for which the Company may not
act as the licensed operator (such as Senior Quarters at East Northport), they
will act as licensed operators in exchange for a fee equal to 5% of gross
revenues and pay the Company's wholly owned subsidiary a servicing fee equal to
96% of their operating fee. See "Certain Transactions" and "-- Shares Eligible
for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
after the Offering, or the perception that those sales could occur, could
adversely affect the market price of the Common Stock and the Company's ability
to raise equity capital in the future in the equity markets. Upon completion of
the Offering, the Company will have 7,700,000 shares of Common Stock outstanding
(7,966,250 if the Underwriters' over-allotment option is exercised in full). Of
these shares, the 3,550,000 shares sold in the Offering (4,082,500 if the
Underwriters' option is exercised in full) will be tradeable in the public
market immediately without restriction or limitation under the Securities Act of
1933, as amended (the "Securities Act"), except for any shares purchased by
"affiliates" of the Company. The remaining 4,150,000 shares of Common Stock
outstanding are "restricted securities" within the meaning of Rule 144 under the
Securities Act. It has been agreed that none of these restricted securities
shall be sold or otherwise disposed of, without the prior written consent of the
representatives of the Underwriters, for at least 180 days after the date of
this Prospectus, except in connection with the Offering. After that date, these
shares may be sold subject to the limitations of Rule 144. In addition,
3,849,999 of such shares are further subject to: (i) an agreement with the
Company pursuant to which each Kaplan shall not, for so long as he shall be an
operator of any of the Company's facilities, transfer any shares of Common Stock
if it would result in his personally owning fewer than 500,000 shares of Common
Stock initially, or 250,000 shares of Common Stock after the fifth anniversary
of the consummation of the Offering, in each case, subject to certain
exceptions; and (ii) a stockholders' agreement among the Kaplans and the Company
pursuant to which (A) each Kaplan has a right of first refusal with respect to a
transfer of the shares of Common Stock of the other Kaplans, except for
transfers to or for the benefit of family members and a limited exception in the
case of any Kaplan's death, and (B) the Kaplans agree that all their shares of
Common Stock shall be voted as a unit. The Securities and Exchange Commission
17
<PAGE>
(the "Commission") has proposed to amend the holding period required by Rule 144
to permit sales of "restricted securities" after one year rather than the
current two years (and two years rather than three years for "non-affiliates"
who desire to trade free of other Rule 144 restrictions). If such proposed
amendment were enacted, the "restricted securities" described above would become
freely tradeable (subject to any applicable contractual restrictions) at
correspondingly earlier dates. In addition, each of the Kaplans and their
father, Herbert Kaplan, who in the aggregate beneficially own 4,150,000 shares
of Common Stock, have certain rights, including demand rights, with respect to
the registration of such shares of Common Stock for sale to the public, subject
to their agreement with the Underwriters, and, upon consummation of an agreement
regarding the Company's acquisition of the interest it does not already own in
one of its facilities, another stockholder will have certain registration rights
with respect to 50,000 shares. If one or more of the Kaplans or the other
stockholder, by exercising their registration rights, cause a large number of
shares to be sold in the public market, such sales could have an adverse effect
on the market price for the Company's Common Stock. See "Shares Eligible For
Future Sale," "Underwriting," and "Certain Transactions -- Registration Rights."
ABSENCE OF PUBLIC MARKET AND DETERMINATION OF INITIAL PUBLIC OFFERING PRICE
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "KPSQ." Prior to the Offering, there has been
no market for the Common Stock and there can be no assurance that an active
public market for the Common Stock will develop or continue after the Offering.
The initial public offering price will be determined by negotiations among the
Company, the Selling Stockholders, and the representatives of the Underwriters.
The negotiated initial public offering price may not be indicative of the market
price for the Common Stock after the Offering. See "Underwriting."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate
dilution in net tangible book value per share of Common Stock of $8.44 from the
initial public offering price per share (after deduction of the underwriting
discount and estimated offering expenses and assuming an initial public offering
price of $11.00 per share). See "Dilution."
DIVIDENDS
The Company is newly formed and has never declared or paid a dividend on its
Common Stock. The Company expects to retain its earnings to finance the
operation and expansion of its business and, therefore, does not anticipate
paying any dividends in the foreseeable future. See "Dividend Policy."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting estimated
underwriting discount and offering expenses payable by the Company, are
approximately $ million (approximately $ million if the Underwriters'
over-allotment option is exercised in full).
Approximately $20.0 million of the net proceeds will be used to fund a
portion of the costs for the seven assisted living facilities currently under
pre-construction development and expected to have an aggregate of 948 units and
a capacity for 1,146 residents that are described elsewhere in this Prospectus.
Although the Company is continually reviewing and negotiating with respect to
assisted living development and acquisition projects, the Company has no firm
commitment or other agreements, arrangements or understandings with respect to
any such development or acquisition project other than those that are described
in this Prospectus. The Company will also use a portion of the net proceeds to
pay (i) to the Kaplans $6.0 million (the approximate tax liability expected to
be incurred by the Kaplans in connection with transactions pertaining to the
transfer by the Predecessor of its facilities to the Company) as the cash
portion of the consideration for such transfer, and (ii) all real estate
transfer taxes arising out of such transfer (estimated to be approximately
$250,000). See "Certain Transactions." The Company also expects to use
approximately $2.05 million (together with newly issued stock with an
approximate value of $550,000, assuming an initial public offering price of
$11.00 per share) to acquire the 50% interest that it does not already own in
the entity which owns Senior Quarters at East Northport. The Company will use
the balance of the net proceeds to fund additional currently unspecified
developments and acquisitions and for working capital to be used primarily for
pre-development and pre-acquisition costs the Company anticipates incurring in
connection with its development and acquisition program and general corporate
purposes. See "Business -- Growth Strategies -- Development and Acquisition." If
the Underwriters' over-allotment option is exercised, the Company will not
receive any of the proceeds from the sale of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders."
Pending the uses outlined above, funds will be placed into short-term
investments such as governmental obligations, bank certificates of deposit,
banker's acceptances, repurchase agreements, short-term debt obligations, money
market funds, and interest-bearing accounts.
19
<PAGE>
DILUTION
On a pro forma basis, assuming the Predecessor contributed its interest in
the Company's facilities for, among other things, 4,150,000 shares of Common
Stock and giving effect to the pro forma distribution to partners and
shareholders of $6.25 million and affiliate debt that will not be an obligation
of the Company and the issuance of 50,000 shares of Common Stock in connection
with the purchase of the 50% interest it does not already own in the entity that
owns Senior Quarters at East Northport, at an assumed initial public offering
price of $11.00 per share, the pro forma net tangible deficit of the Company's
4,200,000 shares of Common Stock outstanding at June 30, 1996, was $13.8 million
or ($3.29) per share. Pro forma net tangible deficit per share is determined by
dividing the net tangible deficit before the Offering by the number of shares of
Common Stock before the Offering. The pro forma net tangible book value as
adjusted for the Offering of the Company's 3,550,000 shares of Common Stock at
June 30, 1996 was $19.8 million, or $2.56 per share. Pro forma net tangible book
value reflects the net tangible book value at June 30, 1996 as if the
transactions discussed under "Selected Financial, Operating and Pro Forma Data"
were completed on that date. For purposes of calculating the pro forma net
tangible book value as adjusted for the Offering at June 30, 1996, the
calculation gives effect to the sale of 3,550,000 shares of Common Stock offered
hereby (after deduction of the underwriting discount and estimated offering
expenses and assuming an initial public offering price of $11.00 per share). Pro
forma net tangible book value per share as adjusted assumes the Underwriters'
over-allotment option is not exercised. Dilution is determined by subtracting
pro forma net tangible book value per share as adjusted for the Offering from
the amount of cash paid by a new investor for one share of Common Stock. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $ 11.00
Pro forma net tangible (deficit) per share before the
Offering....................................................... (3.29)
Increase in net tangible book value per share attributable to
new
investors as adjusted.......................................... 5.85
---------
Pro forma net tangible book value per share as adjusted for the
Offering........................................................... 2.56
---------
Dilution per share to new investors................................. $ 8.44
---------
---------
</TABLE>
The foregoing computations do not include 600,000 shares of Common Stock
reserved for issuance and available for grant under the Kapson Senior Quarters
Corp. 1996 Stock Incentive Plan, of which 117,500 shares have been reserved for
issuance pursuant to the exercise of stock options issued under this plan at an
exercise price per share that is equal to the initial public offering price per
share. Accordingly, the exercise of these options will not result in further
dilution to new investors purchasing shares in the Offering. To the extent that
any of the remaining 482,500 shares reserved for issuance under the Kapson
Senior Quarters Corp. 1996 Stock Incentive Plan are issued, there could be
further dilution to new investors if the fair market value of such shares on the
date of grant (which is the exercise price of such shares under this plan) is
less than the initial public offering price per share. See "Management -- 1996
Stock Incentive Plan."
20
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company and
its Predecessor as of June 30, 1996, and pro forma as adjusted to reflect the
issuance of shares to the Kaplans in exchange for their interests in the
Company's facilities, the issuance of 50,000 shares of Common Stock in
connection with the purchase of the 50% interest that it does not already own in
the entity that owns Senior Quarters at East Northport, and the sale of
3,550,000 shares of Common Stock offered by the Company at an assumed initial
public offering price of $11.00 per share after deducting underwriting discounts
and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
PRO FORMA AS
ACTUAL ADJUSTED (1)(2)
----------- ---------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Long-term debt, less current portion................................................ $ 67,816 $ 67,816
----------- ---------------
Stockholders' equity:
Preferred Stock, $0.01 par value; 10,000,000 shares authorized, none issued and
outstanding...................................................................... -- --
Common Stock, $0.01 par value, 30,000,000 shares authorized, no shares issued and
outstanding as of June 30, 1996 (actual) and 7,750,000 shares issued and
outstanding on an adjusted basis................................................. -- 78
Additional paid-in capital.......................................................... -- 19,736
Retained Earnings (accumulated deficit)............................................. (11,107) --
----------- ---------------
Total shareholders' equity (deficit)................................................ (11,107) 19,814
----------- ---------------
Total capitalization................................................................ $ 56,709 $ 87,630
----------- ---------------
----------- ---------------
</TABLE>
- ------------------------
(1) Excludes 532,500 shares of Common Stock subject to the Underwriters'
over-allotment option granted by the Company and the Selling Stockholders.
The Company will not receive any proceeds from the sale of any shares by the
Selling Stockholders, which will occur only if the over-allotment option is
exercised. See "Principal and Selling Stockholders."
(2) Excludes an aggregate of 600,000 shares of Common Stock reserved for
issuance pursuant to the exercise of outstanding stock options under the
Kapson Senior Quarters Corp. 1996 Stock Incentive Plan, under which options
to purchase 117,500 shares have already been granted.
DIVIDEND POLICY
The Company is newly formed and has not declared or paid any dividends on
its Common Stock and does not anticipate paying dividends in the foreseeable
future. It is the present policy of the Company's Board of Directors to retain
earnings, if any, to finance the expansion of the Company's business. The
payment of dividends in the future will depend on the results of operations,
financial condition, capital expenditure plans and other cash obligations of the
Company and will be at the sole discretion of the Board of Directors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
21
<PAGE>
SELECTED FINANCIAL, OPERATING AND PRO FORMA DATA
The following table presents selected financial and operating data for the
Predecessor and selected pro forma data for the Company. The selected financial
data as of December 31, 1994 and 1995, and for each of the three years in the
period ended December 31, 1995, have been derived from the audited combined
financial statements of the Predecessor included elsewhere in this Prospectus.
The selected financial data as of December 31, 1993 have been derived from the
combined financial statements of the Predecessor not included in this
Prospectus. The selected unaudited financial data as of December 31, 1991 and
1992 and for the years then ended were derived from the unaudited combined
financial statements of the Predecessor not included in this Prospectus. The
selected unaudited financial data as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 were derived from the unaudited combined financial
statements of the Predecessor included elsewhere in this Prospectus. In the
opinion of management, the unaudited combined financial statements reflect all
adjustments, which are of a normal recurring nature and necessary for a fair
presentation of the combined financial position and combined results of
operations for the unaudited periods. The combined results of operations for the
six months ended June 30, 1995 and 1996 are not necessarily indicative of the
results to be expected for the full year.
The selected unaudited pro forma data for the Company as of June 30, 1996,
for the year ended December 31, 1995 and for the six months ended June 30, 1996
include, among others, the adjustments to reflect the acquisition of Town Gate
Manor and Town Gate East on April 1, 1996, the sale of a 49.9% interest in
Senior Quarters at Chestnut Ridge, the pending acquisition of the 50% interest
that it does not already own in the entity that owns Senior Quarters at East
Northport, and the transactions contemplated in connection with the Offering as
described in Note 1, below. The unaudited pro forma statements of operations for
the year ended December 31, 1995 and the six months ended June 30, 1996 were
prepared as if the transactions had occurred as of January 1, 1995. The
unaudited pro forma balance sheet as of June 30, 1996 was prepared as if the
transactions occurred at that date, except for the acquisition of Town Gate
Manor and Town Gate East and the disposition of the 49.9% interest in Senior
Quarters at Chestnut Ridge, which are already reflected in the historical June
30, 1996 balance sheet. In the opinion of management of the Company, all
adjustments necessary to present fairly such pro forma financial data have been
made based on the proposed terms and structure of the transactions. This
unaudited pro forma financial data is not necessarily indicative of what actual
results would have been if the transactions had occurred at the beginning of the
respective periods nor do they purport to indicate results of future operations
of the Company.
22
<PAGE>
SELECTED FINANCIAL, OPERATING AND PRO FORMA DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ --------------------
PRO
PREDECESSOR FORMA PREDECESSOR
----------------------------------------------------- ----------- --------------------
1991 1992 1993 1994 1995 1995 (1) 1995 1996
--------- --------- --------- --------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Assisted living revenues......... $ 10,126 $ 11,553 $ 12,628 $ 13,349 $ 14,275 $ 17,828 $ 7,024 $ 9,529
Management fee................... 332 24 248 348 443 443 209 432
Other -- affiliates.............. -- 242 112 57 45 -- 23 23
--------- --------- --------- --------- --------- ----------- --------- ---------
Total revenues................. 10,458 11,819 12,988 13,754 14,763 18,271 7,256 9,984
--------- --------- --------- --------- --------- ----------- --------- ---------
Operating Expenses:
Assisted living operating
expenses........................ 6,514 7,289 7,591 7,837 8,314 10,913 3,931 6,252
General and administrative....... 1,338 1,038 727 1,142 1,658 3,096 730 1,275
Depreciation..................... 1,298 1,264 1,188 1,180 1,234 1,440 576 912
--------- --------- --------- --------- --------- ----------- --------- ---------
Total operating expenses....... 9,150 9,591 9,506 10,159 11,206 15,449 5,237 8,439
--------- --------- --------- --------- --------- ----------- --------- ---------
Operating income................... 1,308 2,228 3,482 3,595 3,557 2,822 2,019 1,545
Interest income.................... 23 22 12 8 44 48 21 104
Interest expense................... (3,655) (3,344) (3,417) (3,288) (3,732) (4,828) (1,655) (2,844)
Interest expense -- affiliates..... (25) (151) (136) (207) (204) -- (105) (121)
Equity in income from joint
ventures.......................... -- -- -- -- -- -- -- 28
Other income (expense), net........ 12 280 (10) (1) (34) (30) 1 (8)
--------- --------- --------- --------- --------- ----------- --------- ---------
Income (loss) before minority
interest and extraordinary item... (2,337) (965) (69) 107 (369) (1,988) 281 (1,296)
Minority interest in net loss of
combined partnerships............. -- -- -- -- 16 360 -- 371
--------- --------- --------- --------- --------- ----------- --------- ---------
Income (loss) before extraordinary
item.............................. (2,337) (965) (69) 107 (353) (1,628) 281 (925)
Extraordinary item................. -- -- -- 4,399 -- -- -- --
--------- --------- --------- --------- --------- ----------- --------- ---------
Net Income (loss).............. (2,337) (965) (69) 4,506 (353) (1,628) 281 (925)
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Unaudited pro forma data:
Net Income (loss)................ (2,337) (965) (69) 4,506 (353) (1,628) 281 (925)
Pro forma benefit (provision) for
income taxes (2)................ 935 386 28 (1,803) 141 651 (112) 370
--------- --------- --------- --------- --------- ----------- --------- ---------
Pro forma net income (loss)...... $ (1,402) $ (579) $ (41) $ 2,703 $ (212) $ (977) $ 169 $ (555)
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Pro forma net loss per
share (3)....................... $ (.20)
-----------
-----------
Pro forma weighted average number
of common shares
outstanding (3)................. 4,954
-----------
-----------
Pro forma, as adjusted, net loss
per share (3)(4)................ $ (.13)
-----------
-----------
Pro forma, as adjusted, weighted
average number of common shares
outstanding (3)(4).............. 7,750
-----------
-----------
<CAPTION>
PRO
FORMA
-----------
1996(1)
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Assisted living revenues......... $ 10,440
Management fee................... 432
Other -- affiliates.............. --
-----------
Total revenues................. 10,872
-----------
Operating Expenses:
Assisted living operating
expenses........................ 7,070
General and administrative....... 1,832
Depreciation..................... 964
-----------
Total operating expenses....... 9,866
-----------
Operating income................... 1,006
Interest income.................... 105
Interest expense................... (3,118)
Interest expense -- affiliates..... --
Equity in income from joint
ventures.......................... 28
Other income (expense), net........ (8)
-----------
Income (loss) before minority
interest and extraordinary item... (1,987)
Minority interest in net loss of
combined partnerships............. 271
-----------
Income (loss) before extraordinary
item.............................. (1,716)
Extraordinary item................. --
-----------
Net Income (loss).............. (1,716)
-----------
-----------
Unaudited pro forma data:
Net Income (loss)................ (1,716)
Pro forma benefit (provision) for
income taxes (2)................ 686
-----------
Pro forma net income (loss)...... $ (1,030)
-----------
-----------
Pro forma net loss per
share (3)....................... $ (.21)
-----------
-----------
Pro forma weighted average number
of common shares
outstanding (3)................. 4,954
-----------
-----------
Pro forma, as adjusted, net loss
per share (3)(4)................ $ (.13)
-----------
-----------
Pro forma, as adjusted, weighted
average number of common shares
outstanding (3)(4).............. 7,750
-----------
-----------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------
PREDECESSOR PREDECESSOR
----------------------------------------------------- ---------
1991 1992 1993 1994 1995 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Assisted living units owned, managed and/or operated (end
of period).............................................. 393 393 661 661 862 661
Assisted living resident capacity (end of period)........ 784 784 1,143 1,143 1,403 1,143
Weighted average occupancy of fully-stabilized assisted
living facilities....................................... 99% 99% 98% 98% 98% 99%
<CAPTION>
1996
---------
<S> <C>
SELECTED OPERATING DATA:
Assisted living units owned, managed and/or operated (end
of period).............................................. 1,623
Assisted living resident capacity (end of period)........ 2,392
Weighted average occupancy of fully-stabilized assisted
living facilities....................................... 99%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------- -----------------------------
PREDECESSOR PREDECESSOR PRO FORMA AS
----------------------------------------------------- ------------- ADJUSTED
1991 1992 1993 1994 1995 1996 1996 (1)(3)(4)
--------- --------- --------- --------- --------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......... $ (24,392) $ (11,233) $ (22,603) $ (17,712) $ (3,596) $ (5,067) $ 23,977
Total assets...................... 33,119 31,825 31,381 34,294 54,407 67,853 94,340
Long-term debt, excluding current
portion.......................... 18,500 30,547 18,500 20,461 53,808 67,816 67,816
Partners' and Shareholders' equity
(deficit)........................ (11,544) (11,704) (12,325) (8,740) (9,811) (11,107) 19,814
</TABLE>
- ------------------------
(1) The pro forma statement of operations data for the year ended December 31,
1995 and the six months ended June 30, 1996 gives effect to (a) the
acquisition on April 1, 1996 by the Predecessor of the operations of Town
Gate Manor (Rochester, New York) and Town Gate East (Penfield, New York);
(b) the April 1996 acquisition of the 49.9% interest in Senior Quarters at
Chestnut Ridge by an unrelated third party; (c) the pending acquisition of
the 50% interest that the Company does not already own in the entity which
owns in Senior Quarters of East Northport that the Company does not already
own from an unrelated party for $2,600. The purchase price is payable from
Offering proceeds ($2,050) and the issuance of 50 shares of common stock at
an assumed initial public offering price of $11.00 per share ($550); (d)
operating fees payable to the Kaplans as operators for various New York
facilities, net of management fees payable to a subsidiary of the Company;
(e) compensation of the Kaplans and additional general and administrative
costs of operating as a public company; (f) the initial capitalization of
the Company; (g) the issuance of 4,150 shares of the Company's common stock
as consideration for the conveyance of all of the Predecessor's assets
relating to its assisted living business; and (h) the elimination of net
indebtedness and interest payable to an uncombined affiliate of the
Predecessor all as if the transactions had occurred as of January 1, 1995.
The pro forma balance sheet as of June 30, 1996 gives effect to these
transactions as if they occurred on that date except for the transactions
in (a) and (b) which are included in the historical combined balance sheet
at June 30, 1996. See "Unaudited Pro Forma Financial Information."
(2) Includes a pro forma income tax adjustment for federal and state income
taxes to reflect the Predecessor as a C corporation. See Note 2 to the
Combined Financial Statements of the Predecessor.
(3) Reflects (a) the assumed issuance of common shares at an initial public
offering price of $11.00 to satisfy the $6,250 distribution payable to the
Kaplans to be paid from the proceeds of the Offering which will be used
primarily to satisfy (i) the tax liabilities of the Kaplans expected to be
incurred in connection with transactions pertaining to the transfer of the
Predecessor's interests in the facilities to the Company ($6,000) and (ii)
real estate transfer arising out of the transaction estimated to be
approximately ($250) and (b) the expected issuance of 50 shares of common
stock issued in connection with the purchase of the 50% interest that the
Company does already own in the entity which owns Senior Quarters at East
Northport, at an assumed initial public offering price of $11.00 per share,
to satisfy a portion ($550) of the total $2,600 purchase price.
(4) Reflects the proposed issuance of all 3,550 shares in connection with the
Offering.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE ON FORWARD-LOOKING STATEMENTS
Certain information contained in this Prospectus are forward-looking
statements. Factors set forth in "Risk Factors" could affect the Company's
actual results and could cause the Company's actual results to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company in this Prospectus. Prospective investors in the shares of the
Company's Common Stock offered hereby should carefully consider the factors set
forth in "Risk Factors," in addition to the other information appearing in this
Prospectus.
OVERVIEW
Kapson Senior Quarters Corp. (the "Company") is a leading provider of
assisted living services in the northeastern region of the United States, and
has owned, managed and/or operated assisted living facilities since 1972.
Assisted living facilities are an increasingly popular form of senior housing
which generally provide a residential alternative for elderly senior citizens
who need or desire help with their activities of daily living and certain home
health care services, in a non-institutional environment. Many of the
Predecessor's facilities also provide, through its Extended Care Program,
additional specialized care and services to residents in the beginning stages of
Alzheimer's disease, dementia and other cognitive impairments. The Company owns,
manages and/or operates 15 assisted living facilities, having in the aggregate
1,623 units with a capacity for 2,392 residents, a majority of which facilities
are located in New York; the remaining facilities are located in New Jersey,
Connecticut and Pennsylvania. Of these facilities, the Company owns all or a
portion of eleven facilities (six facilities are wholly owned and five partially
owned, with partial ownership interests ranging from 10.0% to 50.1%) with an
aggregate of 1,145 units and a capacity for 1,749 residents. Revenues from these
eleven facilities constituted 96.7% of total revenues in 1995, with the balance
provided by management fees from the four facilities owned by unaffiliated third
parties. In addition, the Company currently has under pre-construction
development seven assisted living facilities with an expected aggregate of 948
units and a capacity for 1,146 residents. Prior to the Offering, the Company's
facilities were owned, managed and/or operated by one or more S corporations,
limited partnerships or limited liability companies of the Company's
predecessor, The Kapson Group (the "Predecessor"). The Kapson Group is a general
partnership of which Glenn Kaplan, Wayne Kaplan and Evan Kaplan (collectively,
the "Kaplans") are the sole equal partners.
In August 1996, the Company entered into an agreement to acquire the 50%
interest it does not already own in the entity which owns Senior Quarters at
East Northport for a purchase price of $2.6 million. Approximately $2.05 million
of the purchase price is payable in cash expected to be paid from the proceeds
of the Offering and approximately $550,000 is payable in shares of Common Stock
of the Company, assuming an initial public offering price of $11.00 per share.
The historical financial statements of the Predecessor represent the
combined historical results of operations and financial condition of: (i) four
facilities that were wholly owned by the Predecessor (Senior Quarters at
Stamford, Senior Quarters at Huntington Station, Senior Quarters at Centereach
I, and Senior Quarters at Centereach II); (ii) two wholly owned facilities of
the Predecessor that were acquired on April 1, 1996 (Town Gate Manor and Town
Gate East); (iii) one facility that was wholly owned by the Predecessor but in
which a 49.9% interest was sold to an unrelated third party in April 1996
(Senior Quarters at Chestnut Ridge); (iv) an entity through which the
Predecessor controlled a 50% interest (and in August, 1996 agreed to acquire the
remaining 50% interest) in a newly-developed facility in East Northport, New
York (Senior Quarters at East Northport) which began operations on March 15,
1996; (v) an entity through which the Company owned a 23.75% minority interest
in Change Bridge Inn; (vi) two entities through which the Predecessor owned a
minority interest in facilities that were under construction (an 11% interest in
Senior Quarters at Glen Riddle and a 10% interest in Senior Quarters at
Jamesburg); (vii) a management company which received management fees from five
related and four unrelated entities, and (viii) an entity that provided
administrative support to the Predecessor and other affiliated entities.
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On June 7, 1996, the Company was formed in order to consolidate and expand
the assisted living business of the Predecessor. At or prior to the consummation
of the Offering, the Predecessor shall have transferred to the Company the
following: (i) certain wholly owned subsidiaries of the Predecessor that own the
entire fee in the land and building underlying six facilities (Town Gate East,
Town Gate Manor, Senior Quarters at Huntington Station, Senior Quarters at
Centereach I, Senior Quarters at Centereach II, and Senior Quarters at
Stamford); (ii) certain wholly owned subsidiaries of the Predecessor that own,
directly or indirectly, less than the entire fee in the land and building
underlying five facilities (23.75% of Change Bridge Inn, 50.1% of Senior
Quarters at Chestnut Ridge, 50% of Senior Quarters at East Northport, 10% of
Senior Quarters at Jamesburg, and 11% of Senior Quarters at Glen Riddle); (iii)
two wholly owned subsidiaries of the Predecessor that provided management
services for all the foregoing facilities, in addition to four facilities in
which the Predecessor did not have an equity interest (Castle Gardens, The
Regency at Glen Cove, Senior Quarters at Lynbrook, and Senior Quarters at
Cranford); (iv) the Predecessor's interests in pre-construction development
projects for seven facilities (located in Patterson, NY; Albany, NY; Briarcliff
Manor, NY; Tinton Falls, NJ; Riverdale, NY; Westchester County, NY; and
Northampton County, PA); and (v) all of its other assets relating to its
assisted living business. In addition, at or prior to the consummation of the
Offering certain agreements and/or assignments of pre-existing agreements shall
have been executed pursuant to which the Kaplans act as the operators of
substantially all of the Company's New York facilities and be paid an operating
fee of which a portion is paid to a wholly owned subsidiary of the Company as a
fee for management services. See "Certain Transactions." With respect to Senior
Quarters at East Northport, management fees accrue but shall not be paid in any
year until the co-owner of that property recovers a preferred rate of return
upon his equity investment.
In consideration of the transfer of the Company facilities to the Company
described in the foregoing paragraph, the Company shall have, at or prior to the
consummation of the Offering: (i) issued to the Kaplans, as sole equal partners
of the Predecessor, 4,150,000 shares of Common Stock, and paid to them the sum
of $6.0 million (representing the approximate amount of a tax liability expected
to be incurred by the Kaplans as a result of transactions pertaining to the
transfer of the Predecessor's facilities to the Company), and (ii) agreed to pay
all real estate transfer taxes arising out of such transactions (estimated to be
approximately $250,000).
The pro forma combined statement of operations and balance sheet of the
Company therefore differ from the historical financial statements in significant
respects. They give effect to: (a) the acquisition on April 1, 1996 by the
Predecessor of the operations of Town Gate Manor (Rochester, New York) and Town
Gate East (Penfield, New York); (b) the April 1996 acquisition of the 49.9%
interest in Senior Quarters at Chestnut Ridge by an unrelated third party; (c)
the pending acquisition of the 50% interest that it does not already own in the
entity which owns Senior Quarters at East Northport; (d) operating fees payable
to the Kaplans as operators for various New York facilities, net of management
fees payable to a subsidiary of the Company; (e) compensation of the Kaplans and
additional general and administrative costs of operating as a public company;
(f) the initial capitalization of the Company; (g) the issuance of 4,150,000
shares of the Company's common stock as consideration for the conveyance of all
of the Predecessor's assets relating to its assisted living business; and (h)
the elimination of net indebtedness and interest payable to an uncombined
affiliate of the Predecessor, all as if the transactions had occurred as of
January 1, 1995 and June 30, 1996, respectively, except for the transactions in
(a) and (b) above, which are included in the historical balance sheet as of June
30, 1996. They also give effect to a pro forma income tax adjustment for federal
and state income taxes to reflect the Predecessor as a C corporation. As the
Company is newly formed, all references in this Prospectus to the Company in
connection with historical financial data or otherwise include the Predecessor.
The revenues of the Company are derived primarily from two sources: (i)
revenue from assisted living services, and (ii) management and/or operating fees
for the management and/or operation of facilities owned in whole or part by
third parties. Historically, most revenues consisted of assisted living
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service revenue which comprised 96.7% of gross revenues in 1995. The Company
expects that revenues from ancillary services that it provides to the residents
of its facilities, such as home health care and the Extended Care Program (which
have not been significant to date), will increase as a percentage of total
revenue as the Company seeks to expand the number of such services that it
offers at its facilities.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
REVENUES. Assisted living revenues increased to $9.5 million for the six
months ended June 30, 1996, compared to $7.0 million for the six months ended
June 30, 1995, an increase of 35.7%. The increase is attributable to: (i) the
opening of Senior Quarters at Chestnut Ridge on September 1, 1995 and Senior
Quarters at East Northport on March 15, 1996 which contributed revenue of
$827,000 and $744,000, respectively; and (ii) the acquisition of Town Gate East
and Town Gate Manor on April 1, 1996 which contributed combined revenue of
$947,000. Excluding Senior Quarters at Chestnut Ridge, Senior Quarters at East
Northport, Town Gate East and Town Gate Manor, assisted living revenues were
approximately equivalent for the six months ended June 30, 1996 and 1995.
Management believes that assisted living revenues for the six months ended June
30, 1996 were negatively impacted by inclement weather experienced during the
first quarter of 1996 which resulted in decreased occupancy at certain of the
Company's facilities, which was approximately offset by fee increases.
Management fee revenue increased to $432,000 for the six months ended June 30,
1996, compared to $209,000 for the six months ended June 30, 1995, an increase
of 106.7%. The increase was primarily attributable to Change Bridge Inn, Senior
Quarters at Jamesburg, Castle Gardens, Senior Quarters at Lynbrook and Senior
Quarters at Glen Riddle which the Company assumed management responsibility for
on August 8, 1995, February 1, 1996, January 1, 1996, June 1, 1996, and June 19,
1996, respectively.
OPERATING EXPENSES. Assisted living operating expenses increased to $6.3
million for the six months ended June 30, 1996, compared to $3.9 million for the
six months ended June 30, 1995, an increase of 59.0%. As a percentage of
assisted living revenues, assisted living operating expenses were 65.6% and
56.0% for the six months ended June 30, 1996 and 1995, respectively. The
increase in assisted living operating expenses as a percentage of assisted
living revenues is primarily attributable to the opening of Senior Quarters at
Chestnut Ridge and Senior Quarters at East Northport on September 1, 1995 and
March 15, 1996, respectively. As is consistent with the Company's experience
during the "rent-up" of a new facility, assisted living operating expenses as a
percentage of assisted living revenues are higher than they are for a facility
which is operating at or near full occupancy. Excluding Senior Quarters at
Chestnut Ridge and Senior Quarters at East Northport, assisted living operating
expenses as a percentage of assisted living revenues would have been 59.6% and
55.3% for the six months ended June 30, 1996 and 1995, respectively. The
increase in assisted living operating expenses as a percentage of assisted
living revenues during the six months ended June 30, 1996 is also attributable
to: (i) inclement winter weather during the first quarter of 1996 which
adversely affected revenues and increased operating expenses; and (ii) increased
payroll and employee benefits related to start-up costs for one of the Company's
ALP facilities and the introduction of the Company's Extended Care Program at
another facility. General and administrative expense was $1.3 million for the
six months ended June 30, 1996, compared to $730,000 for the six months ended
June 30, 1995. As a percentage of total revenues, general and administrative
expense was 12.8% and 10.1% for the six months ended June 30, 1996 and 1995,
respectively. The increase is primarily the result of: (i) $389,000 related to
higher payroll and employee benefit costs in connection with a strategic
decision by the Company to invest in its management and facility development
capabilities in order to support future growth through development, acquisition
and management of additional facilities; and (ii) costs related to the opening
of Senior Quarters at Chestnut Ridge and Senior Quarters at East Northport and
preparations for the opening of the Senior Quarters at Lynbrook, Senior Quarters
at Patterson, Senior Quarters at Jamesburg and Senior Quarters at Glen Riddle.
INTEREST EXPENSE. Interest expense was $2.8 million for the six months
ended June 30, 1996, compared to $1.7 million for the six months ended June 30,
1995, an increase of 71.8%. The increase is
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attributable to: (i) the opening of Senior Quarters at Chestnut Ridge and Senior
Quarters at East Northport facilities on September 1, 1995 and March 15, 1996,
respectively; and (ii) the acquisition of Town Gate East and Town Gate Manor on
April 1, 1996. Interest expense with respect to Senior Quarters at Chestnut
Ridge and Senior Quarters at East Northport was capitalized prior to their
opening.
NET INCOME (LOSS). Net income (loss) was ($925,000) for the six months
ended June 30, 1996, compared to $281,000 for the six months ended June 30,
1995. The decrease in net income is primarily the result of the opening of
Senior Quarters at Chestnut Ridge and Senior Quarters at East Northport and, to
a lesser extent, higher payroll and benefit costs in connection with the
Company's expansion plans. Excluding Senior Quarters at Chestnut Ridge and
Senior Quarters at East Northport, net income (loss) would have been ($59,000)
and $495,000 for the six months ended June 30, 1996 and 1995, respectively. The
Company was not required to and did not pay federal or state income taxes. The
minority interest for the six months ended June 30, 1996 is related to the
partial ownership of Senior Quarters at East Northport and Senior Quarters at
Chestnut Ridge by unrelated third parties.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
REVENUES. Assisted living revenues increased to $14.3 million for the year
ended December 31, 1995, compared to $13.3 million for the year ended December
31, 1994, an increase of 6.9%. The increase is attributable primarily to
increased rental rates and to the opening of Senior Quarters at Chestnut Ridge
on September 1, 1995, which contributed revenue of approximately $283,000.
Excluding Senior Quarters at Chestnut Ridge, assisted living revenues increased
4.8%. Management fee revenue increased to $443,000 for the year ended December
31, 1995, compared to $348,000 for the year ended December 31, 1994, an increase
of 27.3%. The increase was primarily attributable to Senior Quarters at
Cranford, a facility managed by the Company which opened in late 1993 and for
which revenue increased significantly in 1995 due to a full year of stabilized
occupancy.
OPERATING EXPENSES. Assisted living operating expenses increased to $8.3
million for the year ended December 31, 1995, compared to $7.8 million for the
year ended December 31, 1994, an increase of 6.1%. As a percentage of assisted
living revenues, assisted living operating expenses were 58.2% and 58.7% for the
years ended December 31, 1995 and 1994, respectively. Excluding: (i) pre-opening
expenses and negative margins during the "rent-up" period for Senior Quarters at
Chestnut Ridge; and (ii) a one-time tax refund related to a real estate tax
grievance, assisted living operating expenses would be 57.1% of assisted living
revenues for the year ended December 31, 1995. General and administrative
expense was $1.7 million for the year ended December 31, 1995, compared to $1.1
million for the year ended December 31, 1994, an increase of 45.3%. As a
percentage of total revenues, general and administrative expense was 11.2% and
8.3% for the years ended December 31, 1995 and 1994, respectively. The increase
is primarily the result of: (i) approximately $160,000 related to higher payroll
and employee benefit costs in connection with a strategic decision by the
Company to invest in its management and facility development capabilities in
order to support future growth; and (ii) approximately $228,000 of general and
administrative expenses related to the Company's expansion, including Senior
Quarters at Chestnut Ridge, Change Bridge Inn and Castle Gardens.
INTEREST EXPENSE. Interest expense was $3.7 million for the year ended
December 31, 1995, compared to $3.3 million for the year ended December 31,
1994, an increase of 13.5%. The increase is primarily attributable to the
opening of Senior Quarters at Chestnut Ridge at which point interest expense
with respect to this facility was no longer capitalized.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. Income (loss) before extraordinary
item was ($353,000) for the year ended December 31, 1995, compared to $107,000
for the year ended December 31, 1994. The decrease in net income is primarily
the result of the opening of Senior Quarters at Chestnut Ridge and higher
payroll costs in connection with the Company's expansion plans. The Company was
not required to pay and did not pay federal or state income taxes.
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EXTRAORDINARY ITEM. For the year ended December 31, 1994, the Company
recorded an extraordinary gain of $4.4 million. This gain resulted from a
settlement with various lenders to satisfy certain outstanding mortgage notes
payable and accrued interest payable at a $4.4 million discount. The Predecessor
simultaneously refinanced this debt with other lenders at then prevailing market
rates.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993.
REVENUES. Assisted living revenues increased to $13.4 million for the year
ended December 31, 1994, compared to $12.6 million for the year ended December
31, 1993, an increase of 5.7%. The increase is attributable primarily to
increased rental rates. Management fee revenue increased to $348,000 for the
year ended December 31, 1994, compared to $248,000 for the year ended December
31, 1993, an increase of 40.4%. The increase was primarily attributable to The
Regency at Glen Cove, a facility which the Company assumed management
responsibility for in 1993 and received a full year of management fees in 1994.
OPERATING EXPENSES. Assisted living operating expenses increased to $7.8
million for the year ended December 31, 1994, compared to $7.6 million for the
year ended December 31, 1993, an increase of 3.2%. As a percentage of assisted
living revenues, assisted living operating expenses were 58.7% and 60.1% for the
years ended December 31, 1994 and 1993, respectively. During 1994, however, the
decrease was limited by the fact that the Company experienced an increase in its
employee health care benefit costs as a percentage of wages and salaries. In
response to this increase, on July 1, 1995, the Company changed its health care
benefit program to offer a more cost-effective managed care option and, as a
result, employee health care benefit costs as a percentage of wages and salaries
decreased. General and administrative expense was $1.1 million for the year
ended December 31, 1994, compared to $727,000 for the year ended December 31,
1993, an increase of 57.0%. As a percentage of total revenues, general and
administrative expense was 8.3% and 5.6% for the years ended December 31, 1994
and 1993, respectively. The increase is primarily the result of hiring of
additional personnel to support anticipated growth.
INTEREST EXPENSE. Interest expense was $3.3 million for the year ended
December 31, 1994, compared to $3.4 million for the year ended December 31,
1993.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. Income (loss) before extraordinary
item was $107,000 for the year ended December 31, 1994, compared to ($69,000)
for the year ended December 31, 1993. The increase is primarily due to improved
operating margins, and reduced interest payments which were partially offset by
higher interest expense to affiliates.
EXTRAORDINARY ITEM. For the year ended December 31, 1994, the Company
recorded an extraordinary gain of $4.4 million. This gain resulted from a
settlement with various lenders to satisfy certain outstanding mortgage notes
payable and accrued interest payable at a $4.4 million discount. The predecessor
simultaneously refinanced this debt with other lenders at then prevailing market
rates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was ($1.1 million) for
the six months ended June 30, 1996, compared to $513,000 for the six months
ended June 30, 1995. The decrease is primarily attributable to: (i) a net loss
for the six months ended June 30, 1996, compared to net income for the six
months ended June 30, 1995; (ii) a minority interest in the net loss of a
partnership owning Senior Quarters at East Northport; and (iii) a decrease in
accounts payable and accrued expenses. Net cash provided by operating activities
was $3.1 million, $1.7 million and $1.9 million for the years ended December 31,
1995, 1994 and 1993, respectively. The increase in 1995, compared to 1994 is
primarily attributable to an increase in accounts payable and accrued expenses.
Net cash used in investing activities was $14.4 million for the six months
ended June 30, 1996, compared to $8.2 million for the six months ended June 30,
1995. Net cash used in investing activities was $17.6 million, $468,000 and
$505,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Substantially all of the cash used in investing activities for the six months
ended June 30,
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1996 and 1995 and the year ended December 31, 1995 was for the development
and/or acquisition of new facilities (which was partially offset by the sale of
a minority interest in Senior Quarters at Chestnut Ridge for $1.2 million)
during the six months ended June 30, 1996, compared to facility improvements and
equipment purchased and an increase in restricted mortgage escrow funds during
the years ended December 31, 1994 and 1993. Net cash used in investing
activities for the year ended December 31, 1994 was offset by the sale of a
minority interest in Senior Quarters at East Northport for $1.5 million. Net
cash used in investing activities was funded primarily through long-term debt
and cash provided by operations.
Net cash provided by financing activities was $13.8 million for the six
months ended June 30, 1996, compared to $7.5 million for the six months ended
June 30, 1995. Net cash provided by financing activities primarily consists of
the proceeds of long-term debt offset by principal repayments of long-term debt
and distributions to partners and shareholders. The increase for the six months
ended June 30, 1996 is primarily the result of long-term debt associated with
the completion and opening of Senior Quarters at East Northport and the
acquisition of Town Gate Manor and Town Gate East. Net cash provided by (used
in) financing activities was $16.0 million, ($661,000) and ($963,000) for the
years ended December 31, 1995, 1994, and 1993, respectively. The increase in
1995, compared to 1994, is primarily the result of long-term debt associated
with Senior Quarters at East Northport. Net cash used in financing activities
was negative in 1994 and 1993 as a result of payments on long-term debt and
deferred financing costs incurred by the Company and shareholder and partner
distributions.
Historically, the Company has operated with significant working capital
deficits primarily as a consequence of current liabilities owed to an uncombined
affiliate of the Predecessor as well as certain financing activities. The
working capital deficit for the Company was $4.3 million at June 30, 1996 and
$3.6 million and $17.7 million at December 31, 1995 and 1994, respectively.
Excluding current liabilities owed to an affiliate of the Company (which will
not be an obligation of the Company), the Company's working capital position
would have been a deficit of $1.4 million at June 30, 1996 and $296,000 and
$14.6 million at December 31, 1995 and 1994, respectively. At December 31, 1994,
the Company's working capital position was adversely impacted by the $15.0
million current portion of long-term debt. Such current portion of long-term
debt was $246,000 at December 31, 1995. On a pro forma basis, which reflects a
$6.0 million payment to partners and stockholders and an assumption of a
liability currently estimated to be approximately $250,000, the Company's
working capital deficit at June 30, 1996 was $10.6 million. Following the
Offering and the application of the estimated net proceeds therefrom, the
Company will have pro forma working capital of $24.0 million.
The various facilities owned by the Company, excluding minority-owned
facilities, were subject to mortgage indebtedness in an aggregate amount of
approximately $68.7 million at June 30, 1996. The mortgage indebtedness bears
interest at market rates, currently ranging from 7.7% to 10.5%. In January 1995,
the Predecessor obtained a $40.0 million acquisition and development credit
facility with Health Care REIT, Inc. ("HCR"), pursuant to which temporary
construction financing bears interest at 3.5% above the base rate announced by
The National City Bank of Cleveland but not less than 11.25%, and permanent
financing bears interest at the rate of a ten-year U.S. Treasury Note plus 4.25%
per annum. The permanent financing rate increases by 30 basis points per year.
Approximately $22.1 million of the HCR credit facility has been drawn for
specific projects and is secured by four facilities (Senior Quarters at Chestnut
Ridge, Town Gate Manor, Town Gate East and the project at Briarcliff Manor, NY);
an additional $9.1 million has been allocated to the project at Briarcliff
Manor, NY. Effective as of the date of the Offering, the Company will have a
$140.0 million acquisition and development credit facility with HCR, pursuant to
which temporary construction financing bears interest at 3.5% above the base
rate announced by The National City Bank of Cleveland and permanent financing
bears interest at the rate of a ten-year U.S. Treasury Note plus either 4.0% per
annum for mortgage indebtedness or 3.75% per annum for permanent operating
leases. The permanent financing rate increases by 25 basis points per annum. The
amounts drawn on the original $40.0 million HCR credit facility will be applied
against the new $140.0 million facility. The HCR credit facility requires, as a
condition to future drawings, that the Company meet certain financial tests on
the date of each closing, including that the Company have a
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minimum net worth of $14.0 million ($20.0 million once aggregate drawings exceed
$100.0 million); that the subject facility's payment coverage of net operating
income to debt service be not less than 1.25 to 1.0 (including management fees
equal to 5% of gross revenue and a replacement reserve equal to $400 per unit
per year) after the first 12 months of operation; that the Company maintain a
current ratio of 1.25 to 1.0 and a minimum cash balance of $2.5 million at all
times; and that the Company's debt to equity ratio not exceed certain designated
levels. The HCR credit line also imposes certain negative covenants that
prohibit, without the prior written consent of the lender: (i) transfers of
interests in the subject facility; (ii) changes in ownership or management of
the Company or the subject facility; (iii) the creation of certain other types
of indebtedness of the subject facility; (iv) the modification of any material
contracts; (v) mergers, consolidations, sale of substantially all of the assets
or other structural changes with respect to the subsidiary which owns the
facility; and (vi) mergers, consolidations, or transfers of any assets by the
Company which would cause the net worth of the Company to fall below the amounts
specified above. Notwithstanding the foregoing, consent is not required in
connection with the public trading of the shares offered hereby, or for certain
transfers of shares by the Kaplans. Indebtedness on two other properties (Senior
Quarters at Huntington Station and Senior Quarters at Stamford) having a
combined outstanding balance of $15.5 million matures in February 1999, at which
time all unpaid principal balances, if any, become due and payable. While the
Company expects to refinance such debt with the existing lender or with another
financing source, there can be no assurance that the Company will be able to
obtain such refinancing on terms acceptable to the Company, which could result
in an adverse effect on the Company's operating results and financial condition.
With respect to current indebtedness on Senior Quarters at Huntington
Station and Senior Quarters at Stamford, which matures in February 1999, the
lending arrangements contain an equity participation feature payable at maturity
in an amount which is the greater of (a) $480,000 or (b) 25% of appraised market
value over $17.5 million. The Company is negotiating to remove the equity
participation features of these loans, but there can be no assurance that such
negotiations will be successful.
The net proceeds to the Company from the Offering, at an assumed offering
price of $11.00 per share, after deducting estimated underwriting discount and
offering expenses payable by the Company, are approximately $33.7 million ($36.4
million if the Underwriters' over-allotment option is exercised in full).
Approximately $20.0 million of the net proceeds will be used to fund the
Company's equity investment in identified development and acquisition projects
for seven assisted living facilities having in the aggregate 948 units and a
capacity for 1,146 residents. Accordingly, the Company estimates that this
portion of the proceeds will be sufficient to fund its development and
acquisition activities for the next 12 months. The Company will use a portion of
the net proceeds to fund: (i) payment to the Kaplans of the sum of $6.0 million
(representing the approximate tax liability expected to be incurred by the
Kaplans in connection with transactions pertaining to the transfer by the
Predecessor of its facilities to the Company); and (ii) all real estate transfer
taxes arising out of the transfer by the Predecessor of its facilities to the
Company (estimated to be approximately $250,000). The Company also expects to
use approximately $2.05 million (together with newly issued stock with an
approximate value of $550,000) to acquire the 50% interest that it does not
already own in the entity which owns Senior Quarters at East Northport. The
Company will use the balance of the net proceeds to fund additional currently
unspecified development and acquisitions and for working capital to be used
primarily for pre-development and pre-acquisition costs the Company anticipates
incurring in connection with its development and acquisition program and general
corporate purposes. See "Use of Proceeds" and "Certain Transactions." Pending
the uses outlined above, funds will be placed into short-term investment such as
governmental obligations, bank certificates of deposit, banker's acceptances,
repurchase agreements, short-term debt obligations, money market funds, and
interest bearing accounts.
The Company's growth strategy contemplates developing and/or acquiring
approximately 30 facilities containing in the aggregate 3,500 units and a
capacity for 4,100 residents by the end of 1999. The Company intends to either
develop facilities by constructing new facilities or converting existing
buildings into new facilities, or acquiring existing facilities. Over the past
three years, the average cost for the development or acquisition of a new
facility has ranged from $8.0 million to $22.0 million, with an
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<PAGE>
average of $13.5 million. Based on this average, the 30 facilities that the
Company contemplates developing through 1999 will cost an aggregate of $405
million. The Company's primary focus is the northeastern United States, which is
traditionally one of the most expensive areas for development because of a
variety of factors, including, but not limited to, the cost of land,
construction, zoning and regulatory compliance.
The Company intends to finance its growth strategy for the next three to
five years through a variety of sources, including the proceeds of the Offering,
bank and other financing, long-term operating leases with REITs, future debt or
equity offerings, joint ventures and other sources. To a limited extent, the
Company may also use other forms of financing such as taxable or tax-exempt
long-term debt, including publicly issued debt. Because the Company intends to
use such financing for its properties, the amount of its indebtedness may
increase as the Company pursues its growth strategy. As a result of existing and
future indebtedness, a substantial portion of the Company's cash flow will be
devoted to debt service. There can be no assurance that the Company will
generate sufficient cash flow from operations to cover required interest and
principal payments. If the Company were unable to meet interest and principal
payments, it could be required to seek renegotiation of such payments with its
lenders or obtain additional equity or debt financing. There can be no
assurance, however, that such efforts will be successful or timely or that the
terms of any such financing or refinancing would be acceptable to the Company.
Further, in the event of future financings and refinancings, increases in
prevailing interest rates could increase the Company's debt service obligations.
IMPACT OF CERTAIN ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123), which prescribes a new method of accounting for stock-based
compensation that determined compensation expense based on fair value measured
at the grant date. SFAS No. 123 gives companies that grant stock options or
other equity instruments to employees the option of either adopting the new
rules or continuing current accounting; however, disclosure would be required of
the pro forma amounts as if the new rules had been adopted. SFAS No. 123 is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company has not yet decided whether to adopt the new
method of accounting.
IMPACT OF INFLATION AND CHANGING PRICES
Assisted living revenue and management fees from assisted living facilities
are the primary sources of revenue earned by the Company. These properties are
affected by rental rates which are highly dependent upon market conditions and
the competitive environments where the facilities are located. Employee
compensation is the principal cost element of property operations. Although
there can be no assurance it will continue to do so, the Company has been able
historically to offset the effects of inflation on salaries and other operating
expenses by increasing rental rates.
32
<PAGE>
BUSINESS
GENERAL
Kapson Senior Quarters Corp. (the "Company") is a leading provider of
assisted living services in the northeastern region of the United States, and
has owned, managed and/or operated assisted living facilities since 1972.
Assisted living facilities provide a residential alternative for elderly senior
citizens who need or desire assistance with their activities of daily living and
certain home health care services, in a non-institutional environment. A
majority of the Company's assisted living facilities are operated under the
"Senior Quarters" trademark.
The Company's operating philosophy is to provide services and care which
meet the individual needs of its residents, and to enhance their physical and
mental well-being, thereby allowing residents to live longer and to "age in
place." The Company's facilities are designed to provide premium accommodations
and a comprehensive, bundled package of standard services for a single monthly
fee. These facilities offer, on a 24-hour basis, personal, supportive and home
health care services appropriate for their residents in a home-like setting,
which allow residents to maintain their independence and quality of life.
Furthermore, many of the Company's facilities, through its Extended Care
Program, also offer additional specialized care and services to residents in the
beginning stages of Alzheimer's disease, dementia and other cognitive
impairments. At June 30, 1996, the average monthly fee for standard services at
the Company's facilities was approximately $2,980 per unit. The Company believes
that its facilities are generally larger than typical assisted living facilities
in terms of units and resident capacity. Its prototype development facility
consists of 125 units with capacity for up to 200 residents. Over 50 years of
combined experience in the assisted living industry have led the three senior
executives of the Company, Glenn Kaplan, Wayne Kaplan and Evan Kaplan
(collectively, the "Kaplans"), to develop and implement this prototype which
enhances operating margins by capitalizing on economies of scale.
The Company owns, manages and/or operates 15 assisted living facilities with
an aggregate of 1,623 units and a capacity for 2,392 residents, located in New
York, New Jersey, Connecticut and Pennsylvania. Of these facilities, the Company
owns all or a portion of eleven facilities (six entirely and five partially,
with partial ownership interests ranging from 10.0% to 50.1%) with an aggregate
of 1,145 units and a capacity for 1,749 residents. Revenue from these eleven
facilities constituted 96.7% of the Company's 1995 revenues, with the balance
provided by management fees from the four facilities owned by unaffiliated third
parties. In addition, the Company currently has under pre-construction
development seven assisted living facilities in these states with an expected
aggregate of 948 units and a capacity for 1,146 residents. The average age of
residents at the Company's facilities is approximately 85, and the average
length of stay is 24 months. At June 30, 1996, the Company's facilities that
were stabilized (I.E., in operation for at least twelve months) had a weighted
average occupancy rate of 99.0%, with many of them maintaining waiting lists.
Furthermore, such facilities have operated at a 98.0% occupancy rate for the
past five calendar years. Management attributes its success in maintaining high
monthly fees and occupancy levels to a number of factors, such as the premium
nature of its facilities; the comprehensive bundling of standard services as
part of a single package and the quality of those services; referrals from
former residents, their families and health care professionals; and the long
tenure and low turnover of its staff, which produces strong relationships with
the residents and their families.
Under applicable New York law and regulations, a publicly traded for-profit
corporation is not permitted to be the licensed operator of a licensed facility,
although legislation recently enacted in New York permits privately owned
for-profit corporations to operate certain types of licensed facilities. See "--
Government Regulation." The Kaplans individually are the licensed operators of
all the Company's licensed facilities in New York (except for one which is
operated by its not-for-profit owner), and the Kaplans may in the future form
one or more corporations to operate these facilities. These facilities are
operated pursuant to either an operating agreement between the Company and the
licensed operators or the pre-existing agreement with the applicable third party
owner of the facility that has been assigned to the licensed operators by the
Company. The licensed operators have, in turn, engaged a wholly owned subsidiary
of the Company to provide certain management services to each such facility.
This
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<PAGE>
basic structure, and substantially similar agreements, are also used with
respect to one New York facility that is an independent living facility which,
as such, is not a licensed facility. See "Certain Transactions -- Arrangements
Regarding Operation of Certain Facilities."
The Company was formed in order to consolidate and expand the assisted
living facility business of The Kapson Group, a New York general partnership of
which the sole equal partners are the Kaplans, who are brothers. In connection
with the Offering, a series of transactions designed to consolidate The Kapson
Group's assisted living facility business in the Company are being entered into.
See "Business -- Government Regulation" and "Certain Transactions." The address
of the Company's headquarters is 242 Crossways Park West, Woodbury, New York
11797. Its telephone number is (516) 921-8900 and its facsimile number is (516)
921-8998. The Company is a Delaware corporation incorporated on June 7, 1996.
THE ASSISTED LIVING INDUSTRY
THE ASSISTED LIVING MARKET. The long-term care industry encompasses a wide
continuum of services and residential arrangements for elderly senior citizens.
Skilled nursing facilities provide the highest level of care and are designed
for elderly senior citizens who need chronic nursing and medical attention and
are not able to live on their own. Further, skilled nursing facilities tend to
be one of the most expensive alternatives while providing elderly senior
citizens with limited independence and a diminished quality of life. On the
other end of the continuum is home-based care, which typically is provided in an
individual's private residence. While this alternative allows the elderly
individual to "age in place" in his or her home and, in certain instances, can
provide most of the services available at a skilled nursing facility, it does
not foster any sense of community or the ability to participate in group
activities.
Assisted living facilities generally are designed to fill the gap in the
middle of this continuum. Assisted living facilities have been described by the
Assisted Living Facilities Association of America ("ALFAA") as providing a
special combination of housing and personal, supportive and home health care
services designed to respond to the individual needs of those who need or desire
help with their activities of daily living, including personal care and
household management. According to ALFAA, residents of assisted living
facilities are generally in their eighties. Services in an assisted living
facility are generally available 24 hours a day to meet the scheduled and
unscheduled needs of residents, thereby promoting maximum dignity and
independence.
The assisted living industry is highly fragmented, with only approximately
5% of the industry's beds represented by the top 30 industry participants based
on 1995 studies. However, the Company believes that substantial industry
consolidation is underway. At present, the industry is characterized by
participants who operate only a limited number of facilities and who frequently
can offer only basic assistance with a limited number of activities of daily
living. The Company believes that it is characterized by the following: (i) the
ability to offer premium accommodations and a comprehensive bundle of standard
services for a single inclusive monthly fee; (ii) sophisticated, professional
management structures and highly trained employees; (iii) a cost-efficient,
user-specific prototype facility; (iv) experience in providing home health care
services, and (v) the proven ability to operate in a highly regulated
environment such as that in the State of New York.
TRENDS AFFECTING THE INDUSTRY. The Company believes its assisted living
business benefits from the following demographic trends, cost-containment
initiatives, long-term care facility supply and demand imbalances and quality of
life advantages affecting the long-term care industry:
AGING POPULATION. The continued aging of the United States population
results in increased demand for care of elderly senior citizens. This group
represents one of the fastest growing segments of the population, and requires a
disproportionately high percentage of health care services. According to U.S.
Bureau of the Census data, the number of people in the United States aged 75 and
older increased by approximately 47% from 1981 to 1995, growing from 10.1
million to 14.8 million. The segment of the population over 85 years of age,
which comprises the largest group of residents at the Company's facilities, is
projected, according to U.S. Census data, to increase by approximately 42%
between the
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years 1990 and 2000 in the United States. Furthermore, according to projections
by the U.S. Bureau of the Census, by the year 2010, six million members of the
United States population will be aged 85 years or over, and, according to the
Agency for Health and Policy Research, an estimated 57% of these individuals
will need help with one or more activities of daily living. The Company believes
that the aforementioned statistics and the significant growth of the elderly
population in comparison to the general population, as depicted in the graph
below, will contribute to continued strong demand for assisted living services.
PROJECTED PERCENTAGE CHANGE IN THE ELDERLY POPULATION OF THE UNITED STATES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
85+ 75-84 GENERAL POPULATION
<S> <C> <C> <C>
1980 0.0% 0.0% 0.0%
1990 34.9% 29.5% 9.8%
2000 93.4% 59.8% 19.4%
2010 166.0% 69.0% 23.9%
2020 210.6% 98.4% 26.8%
</TABLE>
Source: U.S. Bureau of the Census.
CHANGING FAMILY DYNAMICS. Changing family dynamics increase the likelihood
that families will utilize the assisted living alternative. Because of the
growing number of two-income households as well as the increased geographical
separation of elderly family members from their children and grandchildren, many
families (especially those with children at home) are not able to care for their
elderly relatives in their homes. Historically, unpaid women (typically
daughters or daughters-in-law) have represented a large portion of the
care-givers of the non-institutionalized elderly. Consequently, due to the
increased number of women in the labor force, there has been a reduction in the
supply of in-home family care-givers. Other factors, including the increase in
single-parent households, as well as wider geographic dispersion of families,
have contributed to the growing inability of families to care for their elderly
relatives in the home.
INCREASED AFFLUENCE OF THE ELDERLY. The net worth of elderly senior
citizens has increased and, consequently, many can better afford to pay for
third-party care. Many seniors have accumulated equity through savings plans as
well as home ownership. According to U.S. Bureau of the Census data, the median
net worth of householders aged 75 or more has increased from $55,178 in 1984 and
$61,491 in 1988 and $76,541 in 1991 to $77,654 in 1993 in the United States.
LIMITATION ON THE SUPPLY OF LONG-TERM CARE FACILITIES. State regulation and
the growing number of persons over the age of 75 may, in some areas, create an
imbalance between the supply and demand for assisted living services. The
majority of states in the United States (including New York) have enacted
certificate of need or similar legislation which generally limits the
construction of new skilled nursing facilities and the addition of beds or
services in existing skilled nursing facilities. High construction costs,
limitations on government reimbursement for the full cost of construction, and
start-up time and expenses also act to constrain growth in the supply of such
facilities. Such legislation benefits the assisted living industry by limiting
the supply of skilled nursing beds available for elderly senior citizens.
Certificates of need are not required for assisted living facilities in most
states, although some states do require
35
<PAGE>
assisted living providers to obtain a license to operate their facilities and to
comply with various regulations regarding building requirements and operating
procedures. Furthermore, states often impose additional requirements on specific
types of assisted living facilities over and above standard congregate care
requirements, making it increasingly difficult for potential industry
participants who are
not familiar with applicable regulatory requirements to open new facilities. New
York requires both a public needs assessment and licensure for certain types of
assisting living facilities. Further, the limited pool of experienced assisted
living staff and management, as well as the costs and start-up expenses to
construct an assisted living facility, provide an additional entry barrier for
the assisted living business. However, the Company competes with numerous local,
regional and national companies providing assisted living services and other
long-term care alternatives. The Company expects that, as assisted living
receives increased attention, competition will grow. See "-- Competition."
COST-CONTAINMENT PRESSURES; PUSH-DOWN EFFECT. In response to rapidly rising
health care costs, both government and private pay sources have adopted
cost-containment measures that have encouraged reduced lengths of stay in
hospitals and skilled nursing facilities. Moreover, cost factors are placing
pressure on skilled nursing facilities to shift their focus toward more intense
levels of care which enables them to charge higher fees, thus creating a
shortage of facilities where skilled but less intensive care is available. The
result of these forces is that patients are being "pushed down" from hospitals
and skilled nursing facilities to assisted living facilities. For example, the
State of New York enacted its Assisted Living Program as a cost-effective
long-term care alternative mainly for Medicaid beneficiaries who are eligible
for placement in a skilled nursing facility. The rate paid by Medicaid for the
home care services for Medicaid beneficiaries in an Assisted Living Program is
50% of the rate that would be paid for the same services in a skilled nursing
facility in the same geographical area.
QUALITY OF LIFE ADVANTAGES. The Company believes that assisted living is
becoming a preferred choice over skilled nursing homes for elderly senior
citizens and their families. This preference can be attributed to the ability of
residents of assisted living facilities to "age in place" in a residential
group-setting, thereby promoting independence, dignity and an improved quality
of life.
GROWTH STRATEGY
OVERVIEW. The Company's growth strategy for the next three to five years
will focus on the expansion of its existing portfolio through the development
and acquisition of additional assisted living facilities, the expansion of its
ancillary services, such as home health care services, in-house pharmacy
services and its Extended Care Program, and maintaining its focus on
cost-efficient facilities management. The Company also intends to continue to
capitalize on public recognition of the "Senior Quarters" trademark to
distinguish itself from competitors.
The Company's primary focus is the northeastern United States where it
intends to maintain its position as a leading assisted living provider. The
Company also will seek to develop or acquire facilities in other areas of the
United States in which it believes it will be able to create a sizable presence.
The Company believes that by concentrating or "clustering" its facilities in
target areas with desirable demographics, it can increase the efficiency of its
management resources and achieve broad economies of scale.
Three generations of the Kaplan family have shaped the growth strategy of
the Company. Since 1985, the Company has developed ten assisted living
facilities and acquired all or an interest in three others, formed home health
care service agencies in order to offer such services in the Company's
facilities, and developed its prototype facility for cost-effective management.
Most of these facilities have been located in New York State, which has one of
the most extensive regulatory frameworks with respect to the provision of
assisted living services. Accordingly, the Company believes that it not only has
the requisite experience but also the systems, procedures and infrastructure to
support its growth strategy and to adapt to regulatory change. The Company
intends to continue to finance its development and acquisition of new facilities
through a variety of sources, including the proceeds of the Offering, bank and
other financing, long-term operating leases with REITs, future debt or equity
offerings, joint ventures and other sources.
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<PAGE>
DEVELOPMENT AND ACQUISITION. Since 1985, the Company has developed ten
assisted living facilities having in the aggregate 1,069 units with a capacity
for 1,599 residents and has acquired the entire or a partial interest in three
facilities having in the aggregate 270 units with a capacity for 311 residents.
The Company presently intends to develop and acquire approximately 30 assisted
living facilities with an aggregate of 3,500 units with a capacity for 4,100
residents by the end of 1999, thereby increasing by approximately 175% the
resident capacity in all of the facilities that it owns, manages and/ or
operates. The Company will seek to realize this growth primarily through the
construction of new facilities and through the acquisition of existing
facilities. The Company intends to pursue the conversion of buildings employed
for other uses on a selective basis, thereby increasing its universe of
potential development activities. Additionally, the Company will selectively
enter into management contracts to manage facilities for not-for-profit and
for-profit institutions and developers that do not have experience in operating
an assisted living facility.
The Company's experience with real estate developers and lenders has led it
to believe that the "Senior Quarters" trademark and the Company's established
reputation in the assisted living industry increases its development and
acquisition opportunities and that its participation in a project generally
lends that project credibility with the potential financing sources, local
governing bodies and communities and potential residents. Further, through its
activities as a leading developer and operator of assisted living facilities in
the northeastern United States and management's activities in numerous industry
associations, the Company has generated numerous contacts through which it is
able to identify possible development and acquisition opportunities.
DEVELOPMENT OF NEW FACILITIES
PROTOTYPE FACILITY. Through its quarter of a century of industry
experience, the Company has developed a prototype facility floor plan with more
efficient and flexible multi-purpose common areas and residential unit layout.
The design of this prototype has enabled the Company to reduce the square
footage required by 25% without adversely impacting the quality of its services
and facilities. The prototype facility contains 125 units with a capacity for up
to 200 residents, includes studios, one-bedroom and two-bedroom units, and spans
82,000 square feet.
DEVELOPMENT PROCESS. The development of a facility begins with the zoning
process, which the Company has significant experience at managing. Local zoning
board members are strongly encouraged to visit the Company's existing facilities
on both an escorted and a "drop-in" basis and to discuss with the Company's
senior management any concerns that may arise so that they may be addressed well
in advance of zoning board meetings. While the Company has developed a prototype
for its facilities, this plan is extremely flexible with respect to the exterior
facade, which can be tailored to blend into the surrounding community. The
construction of the Company's new facilities is typically undertaken by a select
group of general contractors with whom the Company works or intends to work on a
continuing basis. All contractors are required to submit performance and payment
bonds in favor of the Company. Several bids are solicited for each project and
the winning bidder is brought into the planning process in its initial stages.
The intensive involvement of the general contractor at such an early stage has
resulted in most of the Company's existing projects being completed on time and
within budget. There can be no assurance, however, that future projects will be
completed on time and within budget.
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<PAGE>
DEVELOPMENT IN PROGRESS. The Company is currently involved in various
stages of pre-construction development with respect to the seven assisted living
facilities listed in the chart below, which the Company will have, unless
otherwise indicated, a majority interest in, manage and/or operate.
<TABLE>
<CAPTION>
ANTICIPATED ANTICIPATED
NUMBER OF UNITS/ COMMENCEMENT OF COMPLETION OF
FACILITY LOCATION RESIDENT CAPACITY CONSTRUCTION CONSTRUCTION
- ------------------------------------- ----------------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Senior Quarters Briarcliff Manor, NY 102/130 3d Quarter 1996 3d Quarter 1997
Senior Quarters (1) Patterson, NY 100/120 3d Quarter 1996 3d Quarter 1997
Senior Quarters Albany, NY 125/200 4th Quarter 1996 3d Quarter 1997
Senior Quarters Riverdale, NY 221/221 4th Quarter 1996 4th Quarter 1997
Senior Quarters Tinton Falls, NJ 125/150 1st Quarter 1997 1st Quarter 1998
Senior Quarters Northampton County, PA 125/125 1st Quarter 1997 1st Quarter 1998
Senior Quarters Westchester County, NY 150/200 2d Quarter 1997 2d Quarter 1998
</TABLE>
- ------------------------------
(1) The Company owns a minority interest in the entity owning the fee interest
in the land and building underlying this facility. See "Certain
Transactions."
PRELIMINARY NEGOTIATIONS FOR FUTURE DEVELOPMENT. The Company is in the
preliminary stage of discussions to develop or acquire an additional 20 sites in
five states. In considering a prospective site for development, the Company
generally considers such factors as a potential market's demographics, the
number of existing long-term care facilities (including those owned or managed
by the Company) in the area, and the income level of the target population.
Preliminary development activities include due diligence activities (including
the evaluation of environmental and geo-technical matters), the preparation of
architectural and engineering plans and the negotiation of definitive agreements
regarding the acquisition of the site and the financing of the development. The
Company currently has no binding commitment or other agreement, arrangement or
understanding to acquire or to proceed with the development of any of these
sites, and there can be no assurance that the Company will ultimately be able to
or elect to acquire and develop any of these sites.
ACQUISITION OF EXISTING FACILITIES
ACQUISITION CRITERIA. Driven by the assisted living industry's current
fragmentation and ongoing consolidation, the Company believes that there are a
large number of acquisition opportunities available for well financed,
experienced operators. Through its extensive experience in the assisted living
industry and its development and acquisition team, the Company continually seeks
to acquire facilities in its targeted markets. In evaluating potential
acquisitions, the Company reviews and considers: (i) the location, ability to
cluster with existing facilities, and demographics of the area; (ii) the current
and projected revenues and cash flow of the facility; and (iii) the Company's
ability to increase bottom line profitability through enhanced services
(including home health care), operational efficiencies and capital improvements.
ACQUISITION PROCESS. Through its experience in developing and operating
assisted living facilities and management's participation in industry
associations, the Company has generated numerous contacts through which it is
able to identify possible acquisitions. The Company is regularly contacted by
other operators, industry participants and groups, as well as lenders and banks
associated and unassociated with the Company. The Company believes that it is
chosen over others due to its recognition as an experienced operator and its
ability to operate effectively in highly regulated states. Management intends to
pursue single and portfolio acquisitions of assisted living facilities where the
Company believes it can add increased value to the existing operations. Further,
the Company will seek to acquire independent living facilities where there is an
opportunity to reposition the existing operation into a Senior Quarters assisted
living facility.
EXISTING MANAGED OR PARTIALLY OWNED FACILITIES. The Company intends, in the
future, to discuss with one or more third-party owners of interests in the
Company's existing facilities, the potential for purchase by the Company of all
or a part of their interests. The Company would use the same analysis that would
be applied to new acquisitions when reviewing these opportunities. The Company
recently entered into
38
<PAGE>
an agreement to acquire the 50% interest that it does not already own in the
entity which owns Senior Quarters at East Northport. With the exception of such
agreement, the Company currently has no firm commitments or other agreements,
arrangements or understandings with respect to any such acquisition.
CONVERSIONS OF EXISTING FACILITIES USED FOR OTHER PURPOSES. The Company has
extensive experience with the conversion of existing buildings into assisted
living facilities which it believes expands its universe of potential
development opportunities. In certain instances, the conversion of an existing
facility may have compelling economic advantages compared to the development of
a new facility, including: (i) lower total development costs; (ii) less time
required for preparation of the facility; and (iii) an expedited zoning permit
process. While the Company believes that the majority of the facilities it
develops in the future will be newly constructed, the Company also believes that
its extensive experience with conversions enlarges its universe of potential
development projects and will enable it to take advantage of economically
lucrative conversion opportunities that do arise.
CONVERSION OF EXISTING BUILDINGS SINCE 1985
<TABLE>
<CAPTION>
FACILITY CONVERSION
- ------------------------------------- --------------------------------------------------------------------------
<S> <C>
Senior Quarters at Huntington Station In 1986, the Company purchased a vacant school building and developed an
assisted living facility by adding a new wing and implementing extensive
renovation and rehabilitation.
Senior Quarters at Stamford This assisted living facility was formerly a luxury hotel that was
purchased by the Company in 1988 and thereafter converted into a managed
residential facility with its own Assisted Living Services Agency.
The Regency at Glen Cove This assisted living facility was formerly an unfinished condominium
project that was converted, designed and built in 1993 by its owner with
the Company's assistance.
Senior Quarters at Cranford The Company assisted the owner of this former hotel in converting it to an
assisted living facility in 1993.
Senior Quarters at Chestnut Ridge This assisted living facility was formerly a hotel that, in 1995, was
converted by doing extensive renovation and adding a new building which
incorporated many of the common areas.
Senior Quarters at East Northport The Company converted this former school building into an ALP facility in
1995-96 by performing extensive renovation and adding two residential
wings.
</TABLE>
ADDITION OF MANAGEMENT CONTRACTS WITH UNAFFILIATED THIRD PARTIES. The
Company currently has four facilities which it manages for not-for-profit
institutions and other unaffiliated third parties. The Company believes that
management contracts are not only generally profitable but also allow management
a close look at a facility which may lead to its acquisition. Management
believes that it is chosen due to its experience in operating assisted living
facilities.
EXPANSION OF COMPANY-PROVIDED ANCILLARY SERVICES. The Kaplans own and
operate a New York licensed home care services agency, which offers home care
services in most of the Company's New York facilities. The Company intends to
provide such services (which have not produced significant revenues to date) in
all of its facilities, where permitted under applicable law, and has applied for
such licensure to provide such services in New York and Connecticut. The Company
expects to apply in the next year for registration as a pharmacy in New York in
order to offer and provide in-house pharmacy services in its New York facilities
and, where permissible, at its other facilities. See "-- Government Regulation."
In addition, the Company intends to offer its Extended Care Program for
residents suffering from cognitive impairments at many of its existing
facilities and all of its new facilities. The Company believes not only that
these ancillary services will enable the Company to attract additional residents
and
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<PAGE>
enable residents to stay at the Company's assisted living facilities longer,
rather than having to transfer to more expensive skilled nursing facilities, but
also that its provision of such services will increase as its growth strategy is
implemented.
The Company also seeks to enhance and increase the amount and diversity of
assisted living services it provides through: (i) the continued education of the
senior community, and particularly the residents and their families, concerning
the cost effectiveness of receiving additional services in an assisted living
facility; (ii) the continued development and refinement of assisted living
programs designed to meet the needs of its residents as they "age in place"; and
(iii) the consistent delivery of quality services for residents.
COST-EFFICIENT FACILITIES MANAGEMENT. The Company's growth strategy also
emphasizes continued cost-efficient management at its assisted living
facilities. This includes the use of the Company's new facility prototype, the
balancing of increases in costs with increases in assisted living fees, and the
maximization of occupancy rates. In addition, because its facilities are
relatively close to one another, the Company is able to take advantage of volume
purchases of supplies from vendors with whom it has an established relationship,
thereby reducing operating expenses. Lastly, the Company maintains an aggressive
facility maintenance program which helps not only to attract and retain
residents but also to avoid costly replacements and repairs.
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<PAGE>
THE COMPANY'S ASSISTED LIVING FACILITIES
The Company currently owns, manages and/or operates 15 assisted living
facilities containing 1,623 units with a capacity for 2,392 residents. The
following chart sets forth information regarding the Company's existing
facilities.
<TABLE>
<CAPTION>
NUMBER OF YEAR OF
UNITS/ YEAR COMMENCEMENT
RESIDENT OWNED OR CONSTRUCTED OF KAPSON
FACILITY CITY CAPACITY MANAGED OR CONVERTED OPERATIONS
- ------------------------------------------------ -------------- ----------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
CONNECTICUT
Senior Quarters at Stamford (1)............... Stamford 94/188 100% 1988 1988
NEW JERSEY
Senior Quarters at Cranford (1)............... Cranford 173/254 Managed 1993 1993
Change Bridge Inn (1)......................... Montville 103/112 23.75% 1988 1995
Senior Quarters at Jamesburg (1).............. Jamesburg 125/156 10% 1996 1996
NEW YORK
Senior Quarters at Centereach I (2)........... Centereach 101/200 100% 1979 1978
Senior Quarters at Huntington Station (2)..... Huntington 99/198 100% 1987 1987
Senior Quarters at Centereach II (3).......... Centereach 99/198 100% 1989 1989
The Regency at Glen Cove (4).................. Glen Cove 95/105 Managed 1993 1993
Senior Quarters at Chestnut Ridge (2)......... Chestnut Ridge 98/148 50.1% 1995 1995
Castle Gardens (5)............................ Vestal 84/84 Managed 1990/1993 1996
Senior Quarters at East Northport (2)(6)...... East Northport 139/200 50% 1996 1996
Senior Quarters at Lynbrook (2)............... Lynbrook 126/200 Managed 1996 1996
Town Gate East (2)............................ Penfield 100/120 100% 1972 1996
Town Gate Manor (2)........................... Rochester 67/79 100% 1970 1996
PENNSYLVANIA
Senior Quarters at Glen Riddle (1)............ Glen Riddle 120/150 11% 1996 1996
-----------
TOTAL........................................... 1,623/2,392
</TABLE>
- ------------------------------
(1) This facility is directly managed by a wholly owned subsidiary of the
Company. See "-- Government Regulation" and "Certain Transactions."
(2) In order to comply with applicable New York law and regulations, this
facility is operated by the Kaplans individually pursuant to an operating
agreement. The Kaplans have engaged a wholly owned subsidiary of the
Company to provide certain management services pursuant to a management
agreement. See "-- Government Regulation" and "Certain Transactions."
(3) This facility is operated by the Kaplans individually pursuant to an
operating agreement with the Company. The Kaplans have engaged a wholly
owned subsidiary of the Company to provide certain management services
pursuant to a management agreement. See "Certain Transactions."
(4) This facility is operated by its owner, a New York not-for-profit
corporation that is unaffiliated with the Company. The owner has engaged a
wholly owned subsidiary of the Company to provide management services
pursuant to a management agreement. See "-- Government Regulation" and
"Certain Transactions."
(5) The portion of this facility that is operated as an independent living
facility (84 beds) is managed by a wholly owned subsidiary of the Company
pursuant to a management agreement. The portion that is operated as an
Enriched Housing Program facility (27 beds) is operated by a New York
not-for-profit corporation.
(6) The Company has entered into an agreement to acquire the 50% interest that
it does not already own in the entity that owns this facility.
The Company's facilities are generally located near or in a major population
center and close to shopping malls and social and cultural activity centers.
Management believes that, among other factors, residents generally choose a
facility that is located close to their homes or the homes of their families.
Room configurations consist of studios and variously sized one-bedroom or
two-bedroom apartments.
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Communal areas usually include a variety of activity rooms, a medical
examination room, beauty salon/ barbershop, library, chapel, media rooms,
billiard room, a crafts room and a 24-hour per day country kitchen.
The Company believes that its facilities are generally larger than typical
assisted living facilities in terms of units and resident capacity. Management
believes that economies of scale enhance operating margins at large facilities
and that "rent-up" risk is minimized through management's extensive experi-
ence in marketing and developing, acquiring, managing and/or operating large
facilities, and the proximity of the Company's facilities to population centers
that can sustain such facilities. At June 30, 1996, the Company's facilities
that were stabilized (I.E., in operation for at least twelve months) had a
weighted average occupancy rate of 99.0%, with many of them maintaining waiting
lists. Furthermore, such facilities have operated at a 98.0% occupancy rate for
the past five calendar years. Management attributes its success in maintaining
high monthly fees and occupancy rates to a number of factors such as the premium
nature of its facilities; the comprehensive bundling of standard services as
part of a single package and the quality of those services; referrals from
former residents and health care professionals; and the long tenure and low
turnover of its staff which produces strong relationships with residents and
their families.
THE COMPANY'S ASSISTED LIVING SERVICES
The Company's facilities provide services and care which are designed to
meet the individual needs of its residents, enhance their physical and mental
well-being and to promote a supportive, independent and home-like setting. Most
of the Company's facilities are primarily designed as premium facilities at
which residents receive a comprehensive, bundled package of standard services
for a single monthly fee.
TAILORED CARE PLAN. A primary element of the Company's strategy is the
concept of "tailored" care to meet each resident's specific needs. The
customizing of services to meet a resident's needs commences with the admissions
process, during which the resident, his or her family and physician, and the
facility's medical director and management staff discuss the resident's needs
and develop a plan for his or her care. If recommended by the resident's
physician, additional home health care or medical services may be provided at
the facility by a home health care services agency. The care plan is reviewed
and modified on a regular basis.
EXTENDED CARE PROGRAM. The Company has implemented its Extended Care
Program at certain of its facilities. The program is designed to accept
residents with the beginning stages of Alzheimer's Disease, dementia and other
cognitive impairments and to enhance their opportunity to "age in place." This
program, which is provided at additional cost, includes special services such
as: personal care aides specifically trained to help seniors with declining
cognitive functioning; separate activity areas; special activities for cognitive
and behavioral problems, including ones that encourage artistic outlets for
creative expression; additional assistance with bathing, personal hygiene and
dressing; a high staff-to-resident ratio; either a separate dining room or
separate dining times; and special living arrangements. The Company intends to
expand its Extended Care Program to many of its current facilities and to offer
it at all new facilities.
NEW YORK STATE ASSISTED LIVING PROGRAM. In June 1993, the Company was
awarded 400 of the 698 beds (approximately 57%) allocated to the Long Island
Region under the State of New York's Assisted Living Program. This program is
geared to residents who are eligible for Medicaid and who require a higher
acuity of care than is typically provided in assisted living facilities. As part
of this program, the Company has committed to accept 380 Medicaid residents at
two facilities. The remaining number of beds may be filled by private-pay
residents. The Assisted Living Program is closed to new applicants and the
Company is not aware of any proposals pending in the New York State Legislature
to enact similar programs or to award additional beds under the existing
program. See "-- Government Regulation."
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<PAGE>
The Company's ALP facilities offer, in addition to the residential and
assisted living services provided at its other licensed facilities, certain home
care services which are provided by the licensed home care services agency owned
by the Kaplans or other home care services agencies, as appropriate. Under the
Assisted Living Program, residential fees are generally paid in accordance with
SSI residential rates and the home care services provided to residents who are
Medicaid beneficiaries are reimbursed by Medicaid on a per day capitated basis.
The reimbursement rate is equal to 50% of the amount that would be paid for the
anticipated services at each resident's level of care (based on social and
nursing assessments) to nursing facilities in the same geographic area for a
Medicaid resident's home care services. As a result, there is a cost savings to
the State, and yet the Company's revenues are comparable to those derived from
private-pay residents in non-ALP facilities. The Company's two ALP facilities
(Senior Quarters at Centereach I and Senior Quarters at East Northport) began
operation in March and April 1996, respectively. The Company operates its ALP
facilities with the same number of staff as its other facilities, although the
professional training of the staff is higher (I.E., home health aides rather
than personal care aides and the medical director is a registered nurse).
Although ALP facilities are, in general, highly regulated, the Company is
confident that its experience in operating under New York's Assisted Living
Program will better enable it to obtain future awards under similar programs in
New York or other states and manage increased regulatory requirements.
SERVICE AND CARE PACKAGE. The Company's facilities typically charge a
single monthly fee which includes a large package of services and amenities. The
Company believes that this fee is larger than that of typical providers of
assisted living services, and that such a fee is viable because: (i) the
Company's facilities are designed as premium facilities; (ii) the Company's
basic package includes services that typical assisted living providers charge
for on an "as-needed" basis; (iii) the overall quality of its services; and (iv)
the long tenure of its staff which, because of its low turnover, becomes well
known and trusted by the facility's residents and their families. At June 30,
1996, the average monthly fee for standard services at the Company's facilities
was approximately $2,980 per unit. Among other things, the Company believes that
this fee structure distinguishes the Company from other assisted living
providers and enhances the home-like environment of its facilities, makes it
easier for the Company to predict operating expenses at any given facility and,
therefore, increases profitability at its facilities.
The Company's monthly fee generally covers the following services and
amenities:
RESIDENTIAL SERVICES & AMENITIES
- Three daily meals served by waiters/ waitresses
- 24-hour staff on hand
- Housekeeping, laundry and linen services
- Daily afternoon socials
- A full social activities calendar
- Exercise room
- Library
- Bingo room, billiard room, card room and other recreational areas
- On-site convenience store
- Private dining room
- Cocktail bar/Country kitchen
- Shuffleboard, bocce and barbecue areas
- Full-time concierge services
- Security staff on duty at all hours
- Safety and security systems
- Daily transportation to local events, shopping and attractions
43
<PAGE>
HEALTH SERVICES
PERSONAL CARE ASSISTANCE
- Assistance with activities of daily living, such as bathing, personal
hygiene and dressing
- Monitoring of prescribed medication
HEALTH CARE MONITORING
- Evaluation of present condition and setting of goals for improvement
- Maintenance of comprehensive medical records
A MEDICAL EXAMINING ROOM
- Private exam room for use of visiting physicians and other health care
professionals who charge separately for their services
- All visits are coordinated and reviewed by the facility's full-time
Medical Director
SKILLED NURSING AND HOSPITAL CARE
- Relationships with each area's providers of quality medical care
- Referral and admission assistance with skilled nursing facilities
- Medical Director who maintains current referral list of specialized
physicians
- If allowed by law, nursing services are provided by on-site staff
AN EMERGENCY CALL SYSTEM
- Immediate contact with the reception area at all hours by emergency call
cord in every room and bathroom and a direct link intercom in living area
of each apartment
- Personnel trained in emergency procedures on premises 24 hours a day
WELLNESS MONITORING. The staff at the Company's facilities closely monitors
the physical and mental health of its residents in order to identify and respond
to changes and then, together with the resident and the resident's family and
physician, as appropriate, designs a solution to fit that resident's particular
needs. This monitoring activity takes place at meals and other scheduled
activities, and informally as the staff performs its services around the
facility. In addition, the staff works with home health care services agencies
to provide services that the facilities cannot provide, such as physical and
occupational therapy.
SOCIAL AND RECREATIONAL ACTIVITIES. The Company believes that an essential
part of enjoying an assisted living environment as well as maintaining a healthy
lifestyle is participation in social and recreational activities. Residents are
encouraged to participate in facility activities, and numerous activities rooms
(such as bingo rooms, card rooms, cocktail lounges) are included in the design
of each of its facilities. At a typical Company facility there will be between
eight and 14 scheduled activities per day, seven days a week. The activities
vary facility by facility in accordance with the particular interests of the
facility's residents.
RESIDENT PARTICIPATION. Each facility has a Residents' Council and a Food
Service Committee comprised of several residents who are elected by their
co-residents. The Residents' Council meets with the Administrator of the
facility on a regular basis to discuss concerns and suggestions of the
residents. The Food Service Committee meets with the Administrator and the Chef
on a frequent basis to discuss possible changes and variations to the menu. Both
of these groups help to involve residents in the community while providing
day-to-day quality control.
OPERATIONS OF THE COMPANY'S FACILITIES
CORPORATE. Over the past 24 years the Company has provided centralized
management services to each of its facilities, including the development of
operating procedures, recruiting and training, financial accounting services, a
licensing facilitator and legal support systems. As part of the Company's
training procedures, new staff train at existing facilities to observe methods
of administration, cash
44
<PAGE>
management, personal care assistance, housekeeping, maintenance, security,
medication management, food preparation, nutrition planning, supervision of
recreational activities and other operational elements. For a description of
management arrangements regarding the operation of certain facilities, see
"Certain Transactions."
FACILITY. The operational staff at each of the Company's assisted living
facilities generally consists of an administrator, who has overall
responsibility for the operation of the facility (subject, however, to the
control of the licensed operator, where applicable), a medical director, a
recreation director, a case manager or social worker and an assistant
administrator. At least one personal care aide is on duty 24 hours per day to
respond to emergencies, and scheduled 24-hour assisted living services are
available to residents. Each facility has a kitchen staff, a housekeeping staff
and a small maintenance staff. The Company's assisted living facilities have on
average 70 to 80 full-time or part-time employees depending on the size of the
facility and the extent of assisted living services provided in that facility.
The Company's facilities place emphasis on diet and nutrition, as well as
preparing attractively presented healthy meals which can be enjoyed by the
residents. The Company's food service program is led by a nutritionist, who
prepares all menus and recipes for each facility. The menus and recipes are
reviewed and changed based on consultation with nutritional experts, input from
the residents, and applicable law and regulations. Under certain circumstances,
the Company also provides special meals for residents who require special diets.
EMPLOYEES. The Company emphasizes maximizing each employee's potential
through support and training. The Company experiences low turnover in the staff
at both its central office and its facilities and, consequently, it is able to
promote from within. Management personnel is trained in the areas of supervision
and management skills. At the facility level, key personnel such as an
administrator or an assistant administrator will generally have received
approximately eight months training at the Company's central office and one of
the Company's facilities prior to the opening of the facility. Other key
personnel, such as medical directors, case managers or recreational directors
will generally have received approximately four months training at one the
Company's facilities prior to assuming duties at a new facility. In addition,
the administrators of each facility conduct monthly in-service training sessions
relating to various practical areas of care-giving at the facility. These
monthly training sessions cover policies and procedures of all facets of
facility operations, including special areas such as state and social service
regulations, quality assurance, fire, safety disaster procedures, and resident
care. In addition, hourly employees are trained in the Company's philosophy of
assisted living, motivational sessions and practical how-to areas of dealing
with residents. The Company believes that the long tenure of its operational
staff is due to the advancement opportunities that arise out of the Company's
rapid growth.
TRANSITION TEAM. In order to manage its growth more effectively, the
Company dispatches a transition team to each new facility that offers its
permanent staff back-up assistance and technical and other advice with respect
to all aspects of the operation of the new facility, such as budgets, policies,
procedures and systems, activities for the elderly, administration and provision
of specific assisted living services, food service, wellness monitoring,
maintenance, and other operational areas. Depending on the size and nature of
the new facility, a transition team generally consists of two to eight persons
who are department heads of other facilities. The team is typically on site
prior to and through the new facility's opening date, and remains there for a
week at a time during the new facility's first two months of operation.
QUALITY CONTROL. The Company ensures the quality of its services through
frequent, thorough reviews. The administrator of each facility conducts a
"walk-through" inspection every day and the department heads hold frequent staff
meetings to discuss issues concerning the operation of the facility. A Vice
President of Operations conducts a regular site review on an unannounced basis.
The Company also uses outside inspectors to examine the facility from the
viewpoint of the family member of a prospective resident and to report their
impressions to Company management.
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<PAGE>
COMPETITION
The long-term care industry is highly competitive and the Company expects
that the assisted living industry will become more competitive in the future.
The Company competes with numerous local, regional and national companies
providing long-term care alternatives such as home care services agencies, life
care communities, skilled nursing facilities, community-based service programs,
retirement communities and convalescent centers. The Company expects that as
assisted living receives increased attention, competition will grow, and that
new market entrants will include companies focusing primarily on assisted
living. Assisted living providers compete for residents primarily on the basis
of quality of service, price, reputation, physical appearance and location of
the living environment, services offered, family preferences and physician
referrals. Moreover, the Company expects to face competition for the development
or acquisition of assisted living facilities during the course of its
implementation of its growth strategy. Competition may be increased by changes
in the regulatory environment, especially in New York where assisted living is
highly regulated and a majority of the Company's facilities is located. Some of
the Company's present and potential competitors are significantly larger and
have, or may obtain, greater financial resources than those of the Company.
GOVERNMENT REGULATION
The Company's facilities are and will continue to be subject to certain
federal, state and local regulations and licensing requirements. In addition,
the facilities are also subject to various local building codes and ordinances.
These requirements vary from state to state and are monitored to varying degrees
by state agencies. Specific categories and names of licensed facilities also
vary from state to state. Most states in which the Company currently does
business require that assisted living facilities and home health care services
agencies be licensed. New York requires state registration in order to own and
operate a pharmacy; other states in which the Company intends to provide
pharmacy services also regulate such services.
REIMBURSEMENT. Assisted living residents or their families generally pay
the cost of their care from their own financial resources. In certain instances
private long-term care insurance may provide funds for assisted living services.
The purchase of private long-term care insurance appears to be increasing
dramatically as more variety in types of insurance has become available.
Government payments for assisted living facilities have been limited, and
there is no assurance that the proposed federal and state legislation involving
Medicaid, in whatever form such legislation may take, will not reduce government
support. The Company's facilities currently do not accept SSI-based rates from
their residents as full payment of their residential fee except for Medicaid
beneficiaries who are residents in the Company's two New York ALP facilities and
for a small number of residents in the Company's other facilities. Federal SSI
payments are available to certain low-income individuals who are aged, blind or
disabled. Some states, such as New York, supplement federal SSI payments. With
respect to "private-pay" residents, the single monthly fee paid to the Company's
facilities may include a resident's SSI income but the balance is made up either
by that resident's family or other available funds. The Company does not
anticipate that changes in SSI residential rates will have a material effect on
the Company's current facilities, except with respect to its ALP facilities in
New York.
The Medicaid program provides payment for certain financially needy persons,
regardless of age, and is funded jointly by federal, state and local
governments. States may only use federal Medicaid funds to pay for long-term
care in nursing facilities or for certain home care services. Because under New
York's Assisted Living Program an ALP facility is considered to be the
resident's home, federal Medicaid funds may be used for home care services
provided to Medicaid-eligible residents at ALP facilities. Although the New York
Assisted Living Program is not solely for the benefit of Medicaid beneficiaries,
the state has, in the past, given preference to facilities that include Medicaid
residents, and the Company's two ALP facilities are intended to serve primarily
Medicaid residents. The residential fee for Medicaid residents, whether eligible
for SSI or not, is based on the SSI residential rate applicable to ALP
facilities. Home care services provided to residents of the ALP facility who are
Medicaid beneficiaries are reimbursed by Medicaid on a per day basis, which is
equal to 50% of the amount that would be paid for the
46
<PAGE>
anticipated services at each resident's level of care (based on social and
nursing assessments) to nursing facilities in the same geographical area for a
Medicaid resident's home care services. Because the ALP facility only receives a
fixed amount from Medicaid for a range of home care services within the
resident's level of care, the ALP facility is at financial risk should its
Medicaid eligible residents require a level of services within the range for the
specified level of care that exceeds the amount reimbursed by Medicaid. The
combined payments for Medicaid-eligible residents are approximately the same as
the overall monthly fee for a private paying resident in a semi-private
accommodation.
OTHER. The significant aspects of both the licensing and regulatory
environments in states where the Company currently operates and applicable
federal law include the following:
NEW YORK. The State of New York has a variety of levels of senior housing
ranging from those for residents requiring limited or no services to those aimed
at residents whose health needs are substantial. Certain of the lower levels,
such as independent living facilities, are subject to little or no regulation as
residential facilities. The Company owns and/or manages two independent living
facilities. However, residential facilities in which personal care and other
services are provided, are licensed and regulated by New York State's Department
of Social Services, and, with regard to ALP facilities, by the Department of
Health, as well. The Company's New York licensed facilities consist of Adult
Homes and ALP facilities. Adult Homes are a class of residential facilities for
adults needing levels of care that are more moderate than the higher levels of
care required for a resident in order to qualify for an ALP facility. The
licensure application process for licensed facilities, which includes an
assessment of public need, is complex and may take one year or more.
Current New York law and regulations prohibit a publicly traded for-profit
corporation from operating a licensed facility. Legislation has been enacted
recently in New York State which allows for-profit corporations, whose stock
(and whose parent entity's stock) is not traded on a national exchange or
over-the-counter market, to operate Adult Homes, ALP facilities, and Enriched
Housing Programs. Natural persons individually or in partnership and privately
held corporations may operate Adult Homes and ALP facilities. The licensed
operator(s) of an Adult Home may enter into management contracts which provide
that the licensed operator(s) shall maintain ultimate responsibility and
liability for the licensed entity and the power to discharge persons working at
the licensed facility. Licensed operators of ALP facilities may enter into
management contracts that provide additionally that the licensed operator shall
retain control and responsibility for the day-to-day operations by the licensed
operators, the authority and power to hire and discharge persons working at the
licensed entity, maintain and control the books and records of the licensed
entity, retain ultimate authority to dispose of assets used in the operation of
the licensed entity, to incur any liability on behalf of the licensed entity,
and to adopt or enforce policies regarding the operation of the licensed entity.
Any change in the operator of any type of licensed facility requires prior
notification and approval of the state. New York's licensed facilities are also
subject to periodic inspection and license renewal every four years.
Applicable regulations also include admission standards with respect to the
needs of each individual, and require that assessments be made by a professional
health care provider prior to the provision of home care services. Home care
services may only be provided to residents of a licensed facility by a licensed,
certified or otherwise approved home care services agency. Licensed and
certified agencies may be owned and operated by the operator of the licensed
facility or by a for-profit corporation but are subject to regulation by the
Department of Health. The Kaplans operate the Kapson Licensed Home Care Services
Agency, a home care services agency licensed by the state to arrange and/or
provide, directly or through sub-contracting, nursing services, home health
aides, physical, occupational and speech therapy, nutritional services, personal
care services, and housekeeper or chore services. The Kapson Licensed Home Care
Services Agency has applied to the New York State Department of Health to extend
its license to additional counties so as to provide such services to all of the
New York facilities serviced by the Company. A significant portion of the home
care services provided in the Company's ALP facilities are already being
provided by the Kapson Licensed Home Care Services Agency. If and when its
license is extended to other counties by the Department of Health, the Kapson
Licensed Home Care Services Agency intends to maintain on-site office space at
the Company's facilities. In addition,
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the Company has applied for licensure as a home care services agency so that it
may provide all such services in all its New York facilities (other than its ALP
facilities). See "-- Federal and State Fraud and Abuse Laws and Regulations."
The Company expects to apply within the next year to New York state
authorities for registration as a pharmacy in order to provide in-house pharmacy
services in all of its facilities. A New York pharmacy may be owned by a
for-profit corporation provided that the corporation obtains a registration and
that the actual practice of pharmacy is conducted by licensed pharmacists. New
York pharmacies are subject to inspections, notice requirements relating to,
among other things, changes of ownership, and extensive regulations on all
aspects of pharmacy business practices, including but not limited to the
labeling and dispensing of drugs, the preparation of sterile products, and
recordkeeping. The sale of pharmaceutical products by a pharmacy in other states
is subject to regulation by such states.
Licensed facilities in New York are not required to provide a specific mix
of SSI-eligible and private-pay residents, but preference has, in the past, been
given with respect to applicants for licenses under New York's Assisted Living
Program to those who will commit beds to Medicaid residents. Once approved to
provide a designated number or percentage of Medicaid beds, an ALP facility
operator cannot reduce that amount without further state approval, which may or
may not be granted.
In addition to its Adult Homes, the Company operates two ALP facilities in
New York. Pursuant to state law, ALP facilities combine an Adult Home with a
type of home care services agency, which in the Company's facilities is a
licensed home care services agency. The New York State Department of Social
Services and Department of Health have joint oversight over ALP facilities. To
qualify as an ALP resident, an individual must require more care and services
than can be directly provided by a typical Adult Home and must be medically
eligible for placement in a nursing facility. The Assisted Living Program is
available to residents who pay privately but priority is given to
Medicaid-eligible individuals. Payment for such residents is based on a
combination of residential fees based on SSI-established rates, and a daily
capitated Medicaid payment. See "-- Reimbursement." The Program, which was
enacted in 1991 but has only recently been in operation, is subject to
reevaluation in the near future.
In 1995, the New York State legislature set up a task force to study
long-term care financing, which recently issued its report. Changes in
applicable law or regulations may result from this report, which, among other
things, encourages development of assisted living facilities and recommends that
existing ownership restrictions, including those that prohibited sponsorship by
publicly traded corporations, be examined.
NEW JERSEY. The State of New Jersey has four levels of supportive senior
housing, all of which are licensed, regulated and subject to inspection. The two
lowest levels, Class C Boarding Homes and Residential Health Care Facilities,
are not considered assisted living facilities by the State of New Jersey even
though they provide some of the same services as New Jersey assisted living
facilities. The Company owns part of and manages one New Jersey Residential
Health Care Facility. The two highest levels, Assisted Living Residences
("ALRs") and Comprehensive Personal Care Homes ("CPCHs"), were created to
promote "aging in place" by providing supportive health and social services as
needed to enable residents to maintain their independence in a familiar
environment. ALRs are subject to more extensive regulation than CPCHs. The
Company will be managing one ALR and one CPCH in New Jersey.
The state generally requires a certificate of need for an ALR or CPCH
facility under an expedited review process. The state also requires a
certificate of need for Residential Health Care Facilities, but not for Class C
Boarding Homes. The New Jersey legislature has considered legislation exempting
such facilities from any certificate-of-need-type review but such legislation
has not yet passed. The state mandates that five percent of all ALR/CPCH
residents be SSI-eligible and twenty percent of ALR residents must be
nursing-home eligible within 36 months of licensure. Prior state notification
and/or approval is required for changes in ownership, including transfer of ten
percent or more of the corporation's stock. New Jersey prohibits any facility
that is not licensed as an ALR or CPCH from advertising that it is providing
assisted living services and care or other similar services.
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CONNECTICUT. Assisted living facilities (designated "managed residential
communities" in the State of Connecticut) are facilities consisting of private
residential units that provide a managed group living environment, including
housing and services primarily for persons aged 55 or older. Managed residential
communities may be owned and operated by a for-profit corporation and do not
themselves need to be licensed but they are regulated and subject to state
inspection. A corporation owned by the Kaplans and which will be transferred to
the Company at or prior to consummation of the Offering currently owns and
operates one managed residential community in Connecticut. A managed residential
community generally may provide home health care services only through an
outside licensed home health care services agency or by contract with an
"Assisted Living Services Agency" ("ALSA"). However, if the managed residential
community provides certain core activities as defined by state regulations, that
managed residential community may itself become a licensed ALSA. Assisted living
services are defined by regulation as nursing services and assistance with
activities of daily living provided to clients living within a managed
residential community. A Certificate of Need is a prerequisite to licensure as
an ALSA.
Under the recently enacted ALSA legislation and regulations, the owner and
operator of a managed residential community that owns and operates a licensed
ALSA may also own and operate a licensed home health care services agency but,
unless it is licensed as a home health care services agency, the managed
residential community must otherwise contract with one or more licensed home
health care services agencies for services that cannot be provided by the ALSA.
Once licensed as an ALSA, the managed residential community is required to
provide assisted living services to its residents. Any change in ownership,
including beneficial ownership of 10% or more of the stock of a corporation that
owns or operates such agency, is subject to prior state approval. A change in
ownership of a managed residential community requires notification to the state
and any ALSA providing services to its residents. The Company has been advised
that Medicaid reimbursement is not currently available or projected for ALSA
services. A corporation owned by the Kaplans which owns the Connecticut managed
residential community and which will be transferred to the Company at or prior
to consummation of the Offering has applied for licensure as an ALSA to offer
such services at that facility.
PENNSYLVANIA. Assisted living facilities in the State of Pennsylvania are
designated "personal care homes" ("PCHs"). PCHs must receive a state license and
are subject to regulation and inspection but there is no certificate of need
procedure and for-profit corporations may own and operate such facilities. There
are no state requirements as to the mix of SSI/private-pay residents in PCHs. A
change of ownership such that there is a change in the approved operators
(principal individuals) would require a new license.
FEDERAL AND STATE FRAUD AND ABUSE LAWS AND REGULATIONS. The Kaplans offer
home care services through their ownership and operation of the Kapson Licensed
Home Care Services Agency. A portion of the services currently provided by the
Kapson Licensed Home Care Services Agency to ALP residents is reimbursed by
Medicaid. The Kapson Licensed Home Care Services Agency is not certified to
provide Medicare-reimbursable services and is not a Medicare provider. As a
Medicaid provider, the Kapson Licensed Home Care Services Agency is subject to
federal and state Medicaid fraud and abuse laws to the extent such services are
reimbursed by Medicaid.
In addition, the Federal "Stark Law" provides that where certain health care
professionals have a "financial relationship" with a provider of
Medicaid-reimbursable "designated health services" (including, among other
things, home health care and pharmacy services), the health care professional
may be prohibited from making a referral to the health care provider, and such
health care professionals may be prohibited from billing for the designated
health service. Although the Company believes that ownership in it is not
subject to the Stark Law, a "financial relationship" may be interpreted by the
government to include ownership of stock of the Company as a provider of
management services to the home health care services agency. Accordingly,
referrals by certain health care professionals who are stockholders of the
Company to the Kapson Licensed Home Care Services Agency or the Company's
pharmacy for residents whose services are reimbursable by Medicaid, and billing
Medicaid by the ALP for such services, may be prohibited under the Stark Law.
Certain exceptions available under the Stark Law to
49
<PAGE>
certain health care professionals who are investors would not be applicable as
the Company does not currently meet the qualifying test of stockholder equity of
at least $75.0 million. Submission of a claim for services for which payment is
prohibited under the Stark Law could result in substantial civil penalties. New
York State imposes similar prohibitions against health care professionals
referring any patients to a company that provides pharmacy services in which the
health care professional has an ownership or financial interest such as stock
ownership in the Company. Laws imposing various restrictions applicable to such
referrals exist in many other states. The Company reviews and will continue to
review all aspects of its operations to assure compliance with federal and state
health care fraud and abuse laws, and will monitor developments under such laws.
COMPANY HISTORY
The Kaplan family has an extensive background in real estate and assisted
living. In 1932, the grandfather of the Kaplans founded a family-owned
commercial real estate enterprise with a number of subsequent investments in
hotel and hospitality properties. This enterprise entered the assisted living
business in 1972 by opening its first facility. A second assisted living
facility was opened two years later. Thereafter the family's existing assisted
living facilities were expanded, another was opened and land for future assisted
living projects was purchased. In 1985, The Kapson Group was formed as a New
York general partnership between Glenn Kaplan, Wayne Kaplan and Evan Kaplan. The
Kapson Group retained one of these assisted living facilities. Since that time,
The Kapson Group has phased out its commercial real estate operations, focused
strictly on its assisted living business, and built an executive management team
and assisted living operation with experience and expertise in the financing,
acquisition, development, management and operation of assisted living
facilities.
The Company was formed as a Delaware corporation on June 7, 1996 in order to
consolidate and expand the assisted living facility business of The Kapson
Group. The Kapson Group operated its business in the form of a series of S
corporations, partnerships and limited liability companies. In anticipation of
the Offering, the Company entered into a number of transactions with The Kapson
Group and its affiliates. For a description of these transactions, see "Certain
Transactions."
EMPLOYEES
As of the date hereof, the Company and its facilities employ approximately
900 persons, including 26 in the Company's corporate headquarters. The Company
believes its employee relations are good.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits and other matters arising in the
normal course of business. In the opinion of management of the Company, although
the outcomes of these claims and suits are uncertain, in the aggregate they
should not have a material adverse effect on the Company's financial position or
results of operations.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information regarding the executive officers
and directors of the Company as of September 24, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Glenn Kaplan (2) 43 Chairman of the Board of Directors and Chief
Executive Officer
Wayne L. Kaplan 40 Vice Chairman of the Board of Directors; Senior
Executive Vice President and Secretary
Evan A. Kaplan (1) 37 President and Chief Operating Officer; Director
John M. Sharpe, Jr. 43 Vice President, Chief Financial Officer and
Treasurer
Joseph G. Beck (2) 42 Director
Bernard J. Korman (1)(3) 64 Director
Risa Lavizzo-Mourey, M.D. (1)(3) 41 Director
Gerald Schuster (2)(3) 66 Director
</TABLE>
- ------------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Stock Option Committee.
GLENN KAPLAN is the Chairman of the Board of Directors and Chief Executive
Officer of the Company. Prior to June 1996 he was a partner and co-founder of
The Kapson Group. Glenn received a B.S. degree in Accounting from the University
of Bridgeport.
WAYNE L. KAPLAN is the Vice Chairman of the Board of Directors, Senior
Executive Vice President, and Secretary of the Company. Prior to June 1996 he
was a partner and co-founder of The Kapson Group. Wayne is a member of the New
York State Bar, was appointed by Governor Mario Cuomo to the New York State Life
Care Community Council, sits on the Board of Directors of the Assisted Living
Facilities Association of America, the Connecticut Assisted Living Association,
the Empire State Association of Adult Homes (assisted living facilities in New
York State), and the New Jersey Assisted Living Association. Wayne received a
B.S. degree in business from the University of Rhode Island and a J.D. degree
from the George Washington University School of Law.
EVAN A. KAPLAN is a director and the President and Chief Operating Officer
of the Company. Prior to June 1996 he was a partner and co-founder of The Kapson
Group. Evan received a B.A. degree in Psychology from Syracuse University.
JOHN M. SHARPE, JR. has been the Vice President, Chief Financial Officer and
Treasurer of the Company since July 8, 1996. From June 1994 to June 1996 he was
the Chief Financial Officer of Executive Plan Design, Inc., a privately held
full brokerage company, where he was responsible for the administrative and
operational functions of the Company and, among other things, oversaw the
establishment of a financial consulting division. From January 1984 to June
1994, he was the Chief Financial Officer and Treasurer of Medical Sterilization,
Inc., a publicly traded medical products manufacturer and service company where
he eventually was involved in arranging financing, and supervised all financial
personnel. Prior to 1984, he was a Senior Associate at Coopers & Lybrand. He
received a B.B.A. degree in accounting at Iona College.
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JOSEPH G. BECK, director, is a founding principal and executive committee
member of Shattuck Hammond Partners Inc. ("Shattuck Hammond"), a specialty
health care investment banking firm based in New York. He directs Shattuck
Hammond's activities in the area of long-term care and related companies. Prior
to Shattuck Hammond, he was a Vice-President (1987-1990) and Principal
(1990-1993) at Cain Brothers, Shattuck & Company, a predecessor to Shattuck
Hammond. From 1985 to 1987, he was a Vice-President at Chemical Bank where he
eventually directed the investment banking work with hospitals and other health
care companies. Prior thereto, he was a senior credit analyst at Moody's
Investors Services, Inc., a financial service company. From 1978 to 1982, he
held several positions in health care regulation and policy analysis for various
departments of the New York State Government and for the New York State Senate.
Mr. Beck is a member of the Board of Trustees of The Lighthouse, a
not-for-profit vision rehabilitation, research and training agency. He received
a B.A. degree from LeMoyne College and a Masters degree in Health Policy and
Management from the Harvard University School of Public Health.
BERNARD J. KORMAN, director, has been Chairman of the Board of Directors of
The Graduate Health System, a Philadelphia based not-for-profit health system
with hospitals in Pennsylvania and New Jersey, since December 1995. From 1983 to
1996, Mr. Korman was Chairman of PCI Services, Inc., a publicly traded company.
Since 1986, Mr. Korman has been Chairman and a director of NutraMax Products,
Inc., a publicly traded consumer healthcare products company. From 1983 until
1996, Mr. Korman was President, CEO and a director of MEDIQ, Incorporated, a
publicly traded healthcare services company. Mr. Korman is currently a director
of: The New America High Income Fund; The Pep Boys -- Manny, Moe & Jack; Today's
Man, Inc.; Omega Healthcare Investors, Inc.; and InnoServ Technologies, Inc. PCI
Services, Inc. and NutraMax Products are affiliates of MEDIQ, Incorporated. Mr.
Korman received a B.S. degree from the University of Pennsylvania and an L.L.B.
degree from the University of Pennsylvania School of Law.
DR. RISA LAVIZZO-MOUREY, director, has been Director of the Institute of
Aging, Chief of the Division of Geriatric Medicine and Associate Executive Vice
President for Health Policy at the University of Pennsylvania, Ralston-Penn
Center, since 1994. From 1992 to 1994, Dr. Lavizzo-Mourey served with the Agency
for Health Care Policy and Research, U.S. Public Health Service of the
Department of Health and Human Services. Dr. Lavizzo-Mourey has been on the
faculty of the University of Pennsylvania School of Medicine since 1986, and is
currently the Sylvan Eisman Associate Professor of Medicine. Dr. Lavizzo-Mourey
is a director of Beverly Enterprises, Inc., Medicus Systems Corp., Managed Care
Solutions, Inc., and Nellco Puritan Bennett Inc. Dr. Lavizzo-Mourey received an
M.D. degree from the Harvard Medical School and an M.B.A. degree in Health Care
Administration from The Wharton School of Business, University of Pennsylvania.
GERALD SCHUSTER, director, has been President and Chief Executive Officer of
Continental Wingate Company, Inc., a real estate, health care and financial
services company which is engaged in commercial mortgage lending and servicing,
development and syndication of multifamily housing, and has developed and has
operated eight long-term care and rehabilitation facilities with 1,100 beds in
New York and Massachusetts, since 1971. Mr. Schuster serves as Chairman of the
Advisory Committee for the Massachusetts Housing Finance Agency, a state
authority for the issuance of multifamily housing debt. Mr. Schuster received a
B.B.A. degree from Clark University.
See "Certain Transactions" and "Principal and Selling Stockholders" for
certain information concerning the Company's Directors and executive officers.
Glenn Kaplan, Wayne L. Kaplan and Evan A. Kaplan are brothers. There are no
other family relationships among any directors or officers of the Company.
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
the Company hold office until the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three
52
<PAGE>
years, and until their successors are elected and qualified, or until their
earlier resignation or removal. All officers are appointed by and serve at the
discretion of the Board of Directors. See "-- Election of Directors."
KEY EMPLOYEES
MARYELLEN K. POKOWITZ has been Vice President of Operations of the Company
since May 1996. Ms. Pokowitz was Head Administrator for the Company from April
1989 to May 1996. Prior to that, Ms. Pokowitz was employed in various
operational positions by the Company since 1977. Ms. Pokowitz was awarded the
"Administrator of the Year" award by the Empire State Association of Adult Homes
in 1990.
PAUL M. HANNAN has been Vice President of Development of the Company since
July 1994. From May 1991 to June 1994, Mr. Hannan was Director of Finance for
Genesis Health Ventures, Inc., a publicly traded long-term health care company,
where he analyzed prospective acquisitions, managed the financial activities and
supervised the development and expansion of existing facilities. Mr. Hannan
received an M.B.A. degree in Finance from Drexel University and a B.S. degree in
Business Administration from Delaware Valley College.
ROBERT C. ROSENBERG has been Vice President of Development of the Company
since March 1996. From January 1995 to March 1996, Mr. Rosenberg was Vice
President - Development for the Economic Development Corp. of the City of New
York, where he was responsible for financial analysis and due diligence for a
broad range of real estate projects. From December 1992 to August 1994, Mr.
Rosenberg was Deputy Director of Real Estate for the Metropolitan Transit
Authority. From August 1987 to November 1992, Mr. Rosenberg worked in various
development management positions for Olympia & York Companies (USA). Mr.
Rosenberg received a B.A. in Urban Planning from Stanford University and an
M.B.A. degree in Finance from New York University.
WILLIAM D. BURSON has been Vice President of Marketing for the Company since
March 1996. From September 1991 to March 1996, Mr. Burson was director of
independent living operations for Church Homes, Inc., a 500-bed congregate care
community where he directed general operations and marketing. From 1986 to
September 1991, Mr. Burson was Executive Vice President -- Marketing and Sales
for Retirement Management Group, Inc., a manager of nursing homes and retirement
communities.
DENNIS R. CREGAN has been Project Manager for the Company since October
1994. From January 1994 to June 1994, Mr. Cregan worked for Hunter Real Estate
Management where he was Project Manager for a $12 million capital improvement
project; from May 1990 to December 1993, Mr. Cregan was Manager -- Plant
Engineering for Hazeltine Corporation, a subsidiary of ESCO Electronics Corp., a
publicly traded manufacturer of defense and electronics equipment and systems,
where he was responsible for facilities management, construction budget
administration, contractor selection and compliance with local, state and
federal regulations. From 1982 to May 1990, Mr. Cregan served in several project
planning and administration positions for Hazeltine. Mr. Cregan received a
degree in Architectural Engineering from the State University of New York at
Farmingdale. Mr. Cregan is certified by the International Facilities Management
Association and is a professional member of the National Fire Protection
Association and Construction Specifications Institute.
JUNE F. HECK has been the Controller for the Company since November 1994.
From December 1993 to November 1994, Ms. Heck served as General Manager --
Corporate Accounting for Synergy Gas Corporation, a utility gas company. From
April 1990 to November 1993, Ms. Heck was Accounting Manager of the Weight
Watchers International, Inc. division of H.J. Heinz & Co., a publicly traded
food products company. From August 1984 to April 1990, Ms. Heck served as
Controller for F. Robbins Corp., a commercial heating and air conditioning
company. From July 1981 to February 1984, Ms. Heck was an accountant for Price
Waterhouse. Ms. Heck received a B.S. degree and is pursuing an M.B.A. degree
from the School of Professional Accountancy of the Long Island University --
C.W. Post Campus.
53
<PAGE>
MARLYNN B. COHEN has been Director of Human Resources for the Company since
August 1995. From September 1987 to August 1995, Ms. Cohen was Director of
Administration and Human Resources at Ernst & Young LLP, a public accounting
firm, in Melville, New York. At Ernst & Young, Ms. Cohen was responsible for
employee recruiting, benefit and salary administration, financial budgeting,
computer evaluation and support, and facilities management for a branch office.
Ms. Cohen received a B.A. degree in Economics from New York University.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee, which consists of a majority of
independent directors who are not affiliated with the Kaplans ("Independent
Directors"), makes recommendations concerning the engagement of independent
public accountants, reviews with the independent public accountants the plans
and results of the audit engagement, approves professional services provided by
the independent public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal accounting controls.
COMPENSATION COMMITTEE. The Compensation Committee, which consists of a
majority of Independent Directors, approves the salaries and other benefits of
the executive officers of the Company and administers any non-stock based bonus
or incentive compensation plans of the Company (excluding any cash awards
intended to qualify for the exception for performance-based compensation under
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code")).
In addition, the Compensation Committee consults with the Company's management
regarding pension and other benefit plans, and compensation policies and
practices of the Company.
STOCK OPTION COMMITTEE. The Stock Option Committee, consisting solely of
directors who, to the extent legally required, qualify as "Outside Directors"
under Section 162(m) of the Code and as "Non-Employee Directors" under Rule
16b-3(c) of the Securities Exchange Act of 1934, as amended, administers any
stock-based incentive plans of the Company, including the 1996 Stock Incentive
Plan. In addition, the Stock Option Committee will be responsible for granting
any cash awards intended to qualify for the exception for performance-based
compensation under Section 162(m) of the Code.
ELECTION OF DIRECTORS
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three years. No determination has been made as to which directors will be
members of each class. See "Description of Capital Stock -- Delaware
Anti-Takeover Law and Certain Charter Provisions."
COMPENSATION OF DIRECTORS
The Company intends to pay its directors who are not employees of the
Company an annual compensation fee of $10,000 and a per meeting fee of $500 for
each directors' meeting and each committee meeting attended. Under the Company's
1996 Stock Incentive Plan (the "Incentive Plan"), each non-employee director has
been granted, effective as of the date on which the offer price is determined, a
non-qualified option to purchase 10,000 shares of Common Stock at the initial
public offering price, and each new non-employee director upon the date of his
or her election or appointment will be granted a non-qualified option to
purchase 10,000 shares of Common Stock at the fair market value on the date of
grant. All options granted to non-employee directors will vest at the rate of
25% on each of the first four anniversaries of the date of grant, assuming the
non-employee director is a director on those dates, and all such options
generally will be exercisable for a period of ten years from the date of grant.
Upon a Change of Control (as defined in the Incentive Plan) all unvested options
(which have not yet expired) will automatically become 100% vested. Directors
who are employees of the Company will not be compensated for services as a
director. See "Management--1996 Stock Incentive Plan."
54
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation earned for services rendered in all capacities to the Company for
the fiscal year ended December 31, 1995 by the Company's Chief Executive Officer
and each other executive officer whose salary and bonus for such fiscal year was
in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION (1)
---------------------------------------- ------------------------------------
OTHER ANNUAL RESTRICTED STOCK SECURITIES
NAME AND PRINCIPAL COMPENSATION AWARD(S) UNDERLYING
POSITION YEAR SALARY ($) BONUS ($) ($) ($) OPTIONS #
- --------------------------------- --------- ----------- ----------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Glenn Kaplan(2) ................. 1995 67,177 0 169,189(3) 0 0
Chairman of the Board and Chief
Executive Officer
Wayne L. Kaplan(2) .............. 1995 67,177 0 160,513(3) 0 0
Vice Chairman of the Board,
Senior Executive Vice President
and Secretary
Evan A. Kaplan(2) ............... 1995 67,177 0 160,382(3) 0 0
President and Chief Operating
Officer
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL COMPENSATION
POSITION ($)
- --------------------------------- --------------
<S> <C>
Glenn Kaplan(2) ................. 39,500(4)
Chairman of the Board and Chief
Executive Officer
Wayne L. Kaplan(2) .............. 39,500(4)
Vice Chairman of the Board,
Senior Executive Vice President
and Secretary
Evan A. Kaplan(2) ............... 39,500(4)
President and Chief Operating
Officer
</TABLE>
- --------------------------
(1) Other than the salary, bonus and other compensation described above, the
Company did not pay the persons named in the Summary Compensation Table any
compensation, including incidental personal benefits, in excess of 10% of
such executive officer's salary.
(2) Each of the Kaplans has entered into an employment agreement with the
Company and will be compensated in accordance with the terms of that
employment agreement from the date of the consummation of the Offering.
(3) Represents distributions ($158,400 in each case), the personal use of a
Company-paid automobile ($1,982, $2,113 and $1,982, respectively), and club
membership dues paid in part for Glenn Kaplan ($8,807).
(4) Represents, in each case, the Company's payment of premiums on a life
insurance policy. See "-- Employment Agreements."
EMPLOYMENT AGREEMENTS
The Company has entered into substantially similar employment agreements,
effective upon consummation of the Offering, with each of Glenn Kaplan (as
Chairman and Chief Executive Officer), Wayne L. Kaplan (as Vice-Chairman, Senior
Executive Vice President and Secretary) and Evan A. Kaplan (as President and
Chief Operating Officer) (each individually, an "Executive"). Each agreement
provides for an initial five-year term which is automatically renewable for
successive one-year terms (the "Employment Term") unless either party gives
written notice to the other at least six months prior to the expiration of the
then Employment Term. During the Employment Term, the Executive will be
obligated to devote substantially all his business time, energy, skill and
efforts to the performance of his duties under the agreement and shall
faithfully serve the Company, subject to his right to perform his obligations as
operator of one or more of the Company's facilities in his individual capacity.
The agreement provides for an annual base salary of $213,000 (as adjusted
annually for cost of living increases) and a discretionary bonus. The
Compensation Committee shall determine the amount of the bonus to be awarded to
the Kaplans, taking into account the operating results of the Company as well as
such subjective factors as the Compensation Committee deems appropriate and in
the best interests of the Company and its stockholders, which bonus amount will
be shared equally by the Kaplans. In addition, under the agreement the Executive
will be entitled to long-term disability coverage, use of an automobile and club
membership, and benefits generally provided to executive employees.
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<PAGE>
The agreement also provides that during the Employment Term and thereafter,
the Company will indemnify Executive to the fullest extent permitted by law, in
connection with any claim against Executive as a result of Executive serving as
an officer or director of the Company or in any capacity at the request of the
Company in or with regard to any other entity, employee benefit plan or
enterprise. Following Executive's termination of employment, the Company will
continue to cover the Executive under the Company's directors and officers
insurance for the period during which Executive may be subject to potential
liability for any claim, action or proceeding (whether civil or criminal) as a
result of his service as an officer or director of the Company at the highest
level then maintained for any then or former officer or director.
Any dispute or controversy arising under or in connection with this
Agreement (other than injunctive relief) shall be settled exclusively by
arbitration. Each party shall bear its own legal fees except that, in the event
the Executive prevails on any material issue, the arbitrator shall award the
Executive his legal fees, except those attributable to frivolous positions.
The agreement may be terminated at any time by the Executive for Good Reason
(including a Change in Control of the Company) or by the Company with or without
Cause (as each capitalized term is defined in the agreement). Good Reason also
includes an event of default or termination, other than in accordance with its
terms, by the Company or its subsidiaries without cause, of any operating
agreement between the Company and the Kaplans, as operators of the Company's
facilities, or any management agreement between the Company's wholly owned
subsidiary and the Kaplans. If the employment of the Executive is terminated for
any reason, he may withdraw as a licensed operator of certain of the Company's
facilities. Likewise, if any Kaplan is terminated by the Company as an operator
of one of its facilities, he may resign his employment with the Company. See
"Risk Factors -- Operating Agreements; Management Agreements" and "Certain
Transactions."
If the Executive terminates his employment with the Company for Good Reason
(including the Company giving notice of non-renewal) or is terminated without
Cause, he will receive severance pay (i) in an amount equal to two years' Base
Salary and bonus, plus (ii) continued medical benefits for two years. The
agreement provides that Executive will have no obligation to mitigate the
Company's financial obligations in the event of his termination for Good Reason
or without Cause and there will be no offset against the Company's financial
obligations for other amounts earned by the Executive. If termination is the
result of Executive's death or disability, the Company will pay to the Executive
(or his estate), an amount equal to six months' Base Salary at his then current
rate of pay (reduced in the case of disability by his long-term disability
policy payments). If the Executive's employment is terminated by him for Good
Reason or by the Company without Cause, he may also withdraw as an operator of
the Company's facilities; in such an event, he will be entitled to receive twice
his pro rata share of the operating fees (net of fees payable under the
applicable management agreement) for the preceding twelve months. See "Risk
Factors -- Operating Agreements; Management Agreements" and "Certain
Transactions."
1996 STOCK INCENTIVE PLAN
BACKGROUND; PURPOSE; ELIGIBILITY. On June 7, 1996, the Board of Directors
and the stockholders of the Company approved the Incentive Plan. The Incentive
Plan was subsquently amended and restated, effective as of June 7, 1996, to
reflect certain changes in applicable securities laws and to make certain other
changes. The following description of the Incentive Plan is intended only as a
summary and is qualified in its entirety by reference to the Incentive Plan. The
purpose of the Incentive Plan is to enhance the profitability and value of the
Company and its affiliates for the benefit of their stockholders by enabling the
Company (i) to offer employees of the Company stock based incentives and other
equity interests in the Company, thereby creating a means to raise the level of
stock ownership by employees in order to attract, retain and reward such
employees and strengthen the mutuality of interests between employees and the
Company's stockholders, and (ii) to make equity based awards to non-employee
directors thereby attracting, retaining and rewarding such non-employee
directors and strengthening the mutuality of interests between non-employee
directors and the stockholders. All employees of the
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<PAGE>
Company and its subsidiaries that satisfy certain ownership requirements are
eligible to be granted awards under the Incentive Plan. In addition,
non-employee directors of the Company will receive awards of non-qualified stock
options under the Incentive Plan, but are not eligible for other awards
thereunder.
ADMINISTRATION. The Incentive Plan will be administered by the Stock Option
Committee of the Board of Directors of the Company (the "Board") which, to the
extent legally required, will be comprised solely of two or more directors
qualifying as "outside directors" under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code") and satisfying any requirements of Rule
16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Stock Option Committee will have full authority and discretion, subject to
the terms of the Incentive Plan, to determine those individuals eligible to
receive awards and the amount and type of awards. Terms and conditions of awards
will be set forth in written grant agreements, the terms of which will be
consistent with the terms of the Incentive Plan. Awards under the Incentive Plan
may not be made on or after the tenth anniversary of the date of its adoption,
but awards granted prior to such date may extend beyond that date.
AVAILABLE SHARES AND OTHER UNITS. A maximum of 600,000 shares of Common
Stock may be issued or used for reference purposes pursuant to the Incentive
Plan. The maximum number of shares of Common Stock subject to each of stock
options or stock appreciation rights that may be granted to any individual under
the Incentive Plan is 50,000 for each fiscal year of the Company during the term
of the Incentive Plan. If a stock appreciation right is granted in tandem with a
stock option, it shall apply against the individual limits for both stock
options and stock appreciation rights, but only once against the maximum number
of shares available under the Incentive Plan.
In general, upon the cancellation or expiration of an award, the unissued
shares of Common Stock subject to such awards will again be available for awards
under the Incentive Plan, but will still count against the individual specified
limits.
The Stock Option Committee may make appropriate adjustments to the number of
shares available for awards and the terms of outstanding awards under the
Incentive Plan to reflect any change in the Company's capital stock, split-up,
stock dividend, special distribution to stockholders, combination or
reclassification with respect to any outstanding series or class of stock or
consolidation, or merger or sale of all or substantially all of the assets of
the Company.
AMENDMENTS. The Incentive Plan provides that it may be amended by the Board
of Directors, except that no such amendment, without stockholder approval (to
the extent such approval is required by Rule 16b-3 of the Exchange Act, the
exception for performance-based compensation under Section 162(m) of the Code
or, to the extent applicable to incentive stock options, under Section 422 of
the Code), may increase the aggregate number of shares of Common Stock reserved
for awards or the maximum individual limits for any fiscal year, change the
classification of employees and non-employee directors eligible to receive
awards, decrease the minimum option price of any option, extend the maximum
option period under the Incentive Plan, change any rights with respect to
non-employee directors or make any other change that requires stockholder
approval under, to the extent applicable, Rule 16b-3 of the Exchange Act, the
exception for performance-based compensation under Section 162(m) of the Code
or, to the extent applicable to incentive stock options, Section 422 of the
Code. The Incentive Plan may not be amended without the approval of the
stockholders of the Company in accordance with the applicable laws or other
requirements to (i) increase the aggregate number of shares of Common Stock that
may be issued under the Incentive Plan, (ii) decrease the minimum option price
of any option, or (iii) make any other amendment that would require stockholder
approval under the rules of any exchange or system on which the Company's
Securities are listed or traded at the request of the Company.
TYPES OF AWARDS. The Incentive Plan provides for the grant of any or all of
the following types of awards to eligible employees: (i) stock options,
including incentive stock options and non-qualified stock options; (ii) stock
appreciation rights, in tandem with stock options or freestanding), and (iii)
restricted stock. In addition, the Incentive Plan provides for the one-time
non-discretionary award of
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stock options to non-employee directors of the Company. Each of these types of
awards is discussed in more detail below. Awards may be granted singly, in
combination, or in tandem, as determined by the Stock Option Committee.
STOCK OPTIONS. Under the Incentive Plan, the Stock Option Committee may
grant awards in the form of options to purchase shares of the Company's Common
Stock. Options may be in the form of incentive stock options or non-qualified
stock options. The Stock Option Committee will, with regard to each stock
option, determine the number of shares subject to the option, the term of the
option (which shall not exceed ten years, provided, however, that the term of an
incentive stock option granted to a ten percent stockholder of the Company shall
not exceed five years), the exercise price per share of stock subject to the
option, the vesting schedule (if any), and the other material terms of the
option. No option may have an exercise price less than the Fair Market Value of
the Common Stock at the time of grant (or, in the case of an incentive stock
option granted to a ten percent stockholder of the Company, 110% of Fair Market
Value), except that, in the case of certain modifications of the stock options
that are deemed to be new issuances under the Code, the exercise price may
continue to be the original exercise price.
The option price upon exercise may, to the extent determined by the Stock
Option Committee at or after the time of grant, be paid by a participant in
cash, in shares of Common Stock owned by the participant (free and clear of any
liens and encumbrances), in shares of restricted stock valued at fair market
value on the payment date as determined by the Stock Option Committee (without
regard to any forfeiture restrictions applicable to restricted stock), by a
reduction in the number of shares of Common Stock issuable upon exercise of the
option or by such other method as is approved by the Stock Option Committee. If
an option is exercised by delivery of shares of restricted stock, the shares of
Common Stock acquired pursuant to the exercise of the option will generally be
subject to the same restrictions as were applicable to such restricted stock.
All options may be made exercisable in installments, and the exercisability of
options may be accelerated by the Stock Option Committee. The Stock Option
Committee may at any time offer to buy an option previously granted on such
terms and conditions as the Stock Option Committee shall establish. The Stock
Option Committee may in its discretion reprice options or substitute options
with lower exercise prices in exchange for outstanding options that are not
incentive stock options, provided that the exercise price of substitute options
or repriced options shall not be less than the Fair Market Value at the time of
such repricing or substitution. Options may also, at the discretion of the Stock
Option Committee, provide for "reloads," whereby a new option is granted for the
same number of shares as the number of shares of Common Stock or restricted
stock used by the participant to pay the option price upon exercise.
RESTRICTED STOCK. The Incentive Plan authorizes the Stock Option Committee
to award shares of restricted stock. Upon the award of restricted stock, the
recipient has all rights of a stockholder with respect to the shares, including
the right to receive dividends currently, unless so specified by the Stock
Option Committee at the time of grant, subject to the conditions and
restrictions generally applicable to restricted stock or specifically set forth
in the recipient's restricted stock award agreement. Unless otherwise determined
by the Committee at grant, payment of dividends, if any, shall be deferred until
the date that the relevant share of restricted stock vests.
Recipients of restricted stock are required to enter into a restricted stock
award agreement with the Company which states the restrictions to which the
shares are subject and the date or dates or criteria on which such restrictions
will lapse. Within the limits of the Incentive Plan, the Stock Option Committee
may provide for the lapse of such restrictions in installments in whole or in
part or may accelerate or waive such restrictions at any time.
STOCK APPRECIATION RIGHTS ("SARS"). The Incentive Plan authorizes the Stock
Option Committee to grant SARs either with a stock option ("Tandem SARs") or
independent of a stock option ("Non-Tandem SARs"). A SAR is a right to receive a
payment either in cash or Common Stock as the Stock Option Committee may
determine, equal in value to the excess of the Fair Market Value of a share of
Common Stock on the date of exercise over the reference price per share of
Common Stock established in connection with the grant of the SAR. The reference
price per share covered by an SAR will be the per
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share exercise price of the related option in the case of a Tandem SAR and will
be not less than the per share Fair Market Value of the Common Stock on the date
of grant (or any other date chosen by the Committee) in the case of a Non-Tandem
SAR subject to the same exception that applies to stock options.
A Tandem SAR may be granted at the time of the grant of the related stock
option or, if the related stock option is a non-qualified stock option, at any
time thereafter during the term of the stock option. A Tandem SAR generally may
be exercised at and only at the times and to the extent the related stock option
is exercisable. A Tandem SAR is exercised by surrendering the same portion of
the related option. A Tandem SAR expires upon the termination of the related
stock option.
A Non-Tandem SAR will be exercisable as provided by the Stock Option
Committee and will have such other terms and conditions as the Stock Option
Committee may determine. A Non-Tandem SAR may have a term no longer than ten
years from its date of grant. A Non-Tandem SAR is subject to acceleration of
vesting or immediate termination upon termination of employment in certain
circumstances.
The Stock Option Committee is also authorized to grant "limited SARs,"
either as Tandem SARs or Non-Tandem SARs. Limited SARs would become exercisable
only upon the occurrence of a Change in Control (as defined in the Incentive
Plan) or such other event as the Stock Option Committee may designate at the
time of grant or thereafter.
CHANGE IN CONTROL. Subject to the next sentence, unless determined
otherwise by the Stock Option Committee at the time of grant, upon a Change in
Control (as defined in the Incentive Plan), all vesting and forfeiture
conditions, restrictions and limitations in effect with respect to any
outstanding award will immediately lapse and any unvested awards will
automatically become 100% vested. However, unless otherwise determined by the
Stock Option Committee at the time of grant, no acceleration of exercisability
shall occur with regard to certain options that the Stock Option Committee
reasonably determines in good faith prior to a Change in Control will be honored
or assumed or new rights substituted therefor by a participant's employer
immediately following the Change in Control.
AWARDS TO NON-EMPLOYEE DIRECTORS. The Incentive Plan provides for a
one-time nondiscretionary award of 10,000 options to purchase Common Stock to
each non-employee director. See "Management -- Compensation of Directors."
401(K) PLAN
The Predecessor established and maintained a tax-qualified plan under
Section 401(a) of the Code including a Section 401(k) feature (the "401(k)
Plan"). The Company has become the sponsor and will continue to maintain the
401(k) Plan. The 401(k) Plan provides retirement and other benefits to employees
of the Company and provides employees with a means to save for their retirement.
Employees become eligible to participate in the 401(k) Plan after they have
attained age 21 and have worked for at least twelve consecutive months during
which they complete at least 1,000 hours of service.
Subject to legal limitations, participants may elect, on a salary reduction
basis, to have one percent to 15% of their eligible compensation contributed to
their accounts under the 401(k) Plan. The Company may make a discretionary match
of participants' contributions to the 401(k) Plan up to 6% of eligible
compensation ("Matching Contributions"). In addition, the Company may make a
discretionary contribution to the 401(k) Plan ("Optional Contributions") which
will be allocable based on relative eligible compensation of participants who
have completed 1,000 hours of service during the plan year and are employed on
the last day of the plan year (or have retired, died or incurred a disability
during a plan year).
Participants are always fully vested in the value of their 401(k)
contributions and amounts "rolled over" from other qualified retirement plans.
Participants become vested in the Company's Matching Contributions and Optional
Contributions based on a graded seven year vesting schedule (or upon a
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participant's attainment of age 65 while still employed, retirement after
attaining age 65, death, disability or a termination of the 401(k) Plan, if
earlier). Benefits under the 401(k) Plan may be distributed in a number of
different forms to be elected by a participant, including a lump sum,
installment payments and various annuity forms. In certain circumstances,
participants may receive loans or make hardship withdrawals from their accounts
in the 401(k) Plan. Participants may direct the investment of their accounts
under the 401(k) Plan among the various investment vehicles offered under the
401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 145 of the General Corporation Law of the State of Delaware grants
each corporation organized thereunder the power to indemnify its officers and
directors against liability for certain of their acts. Article Ninth of the
Company's Certificate of Incorporation provides that no director of the Company
shall be liable to the Company for breach of fiduciary duty as a director to the
fullest extent permitted by the laws of the State of Delaware. Article Tenth of
the Company's Certificate of Incorporation provides that the Company shall, to
the extent permitted by Delaware law, indemnify its officers and directors
against liability for certain of their acts.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, its controlling persons, on the one hand, and the Underwriter and
its controlling persons, on the other hand, against certain liabilities in
connection with this offering, including liabilities under the Securities Act.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation policies and decisions, including those relating to salary,
bonuses and benefits of executive officers, have been set or made by the Board
of Directors since the formation of the Company. The Kaplans have participated
as members of the Board of Directors in deliberations concerning executive
officer compensation. Upon consummation of the Offering, the Board of Directors
will create a Compensation Committee consisting of a majority of Independent
Directors which will recommend to the Board the cash compensation to be paid to
the Company's executive officers.
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CERTAIN TRANSACTIONS
CONSOLIDATING TRANSACTIONS. The Company was formed in order to consolidate
and expand the assisted living business of the Predecessor. The Predecessor
historically operated its business through a number of partnerships, limited
liability companies and S corporations. In connection with the Offering, the
Predecessor and the Company are entering into certain transactions pursuant to
which the Company shall receive substantially all of the Predecessor's assets
associated with its assisted living business. In addition, a number of
transactions are being entered into in connection with the operation of the
Company's facilities, largely in order to comply with applicable law and
regulations.
CONVEYANCE OF ASSISTED LIVING BUSINESS TO THE COMPANY. At or prior to
the consummation of the Offering, the Predecessor shall have transferred to the
Company the following: (i) certain wholly owned subsidiaries of the Predecessor
that own the entire fee in the land and building underlying six facilities (Town
Gate East, Town Gate Manor, Senior Quarters at Huntington Station, Senior
Quarters at Centereach I, Senior Quarters at Centereach II and Senior Quarters
at Stamford); (ii) certain wholly owned subsidiaries of the Predecessor that
own, directly or indirectly, less than the entire fee in the land and building
underlying five facilities (23.75% of Change Bridge Inn, 50.1% of Senior
Quarters at Chestnut Ridge, 50% of Senior Quarters at East Northport, 10% of
Senior Quarters at Jamesburg, and 11% of Senior Quarters at Glen Riddle); (iii)
two wholly owned subsidiaries of the Predecessor that provided management
services for all the foregoing facilities, in addition to four facilities in
which the Predecessor did not have an equity interest (Castle Gardens, The
Regency at Glen Cove, Senior Quarters at Lynbrook, and Senior Quarters at
Cranford); (iv) the Predecessor's interest in pre-construction development
projects in seven facilities (Patterson, NY; Albany, NY; Briarcliff Manor, NY;
Tinton Falls, NJ; Westchester County, NY; Riverdale, NY and Northampton County,
PA), and (v) all of its other assets relating to its assisted living business.
In consideration of the foregoing, the Company shall have at or prior to the
consummation of the Offering: (i) issued to the Kaplans, as sole equal partners
of the Predecessor, 4,150,000 shares of Common Stock, and paid to them the sum
of $6.0 million (representing the approximate tax liability expected to be
incurred by the Kaplans in connection with transactions pertaining to the
transfer by the Predecessor of its facilities to the Company), and (ii) agreed
to pay all real estate transfer taxes arising out of the foregoing transactions
(estimated to be approximately $250,000). As a result of these transactions, the
Company shall have assumed all indebtedness encumbering the Company's
facilities. The Kaplans guaranteed certain indebtedness incurred by the
Predecessor with respect to certain facilities, and the Kaplans expect to be
released from such guarantees after consummation of the Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ARRANGEMENTS REGARDING OPERATION OF CERTAIN FACILITIES. Because of New
York law and regulations, the Kaplans individually are the operators of
substantially all the Company's assisted living facilities located in New York.
Of these facilities, the Kaplans are or will be the operators of Town Gate East,
Town Gate Manor, Senior Quarters at Huntington Station, Senior Quarters at
Centereach I, Senior Quarters at Centereach II, Senior Quarters at Chestnut
Ridge and Senior Quarters at Lynbrook, either pursuant to a separate operating
agreement entered into by the Company (each, an "Operating Agreement") or the
pre-existing agreement with the unaffiliated owner of the facility (that has
been assigned to the Kaplans). Each Operating Agreement has a term of 25 years
and provides for an operating fee equal to 5% of gross revenues from the
facility. The pre-existing agreements with third party owners generally have a
term of five years and provide for an operating fee equal to 5% of gross
revenues or the greater of 5% of gross revenues and a minimum fee (ranging from
$96,000 to $150,000 per annum). In some instances, the Company may also be
entitled to an incentive fee or may have an equity interest in the facility. The
Kaplans, as operators of each of these facilities, have engaged a wholly owned
subsidiary of the Company to provide certain management services in connection
with the day-to-day operations of each facility it operates, in each case
pursuant to a separate management agreement (each, a "Management Agreement").
Each Management Agreement is co-terminous with the underlying Operating
Agreement or pre-existing agreement with the third-party owner. The fee payable
to the Company's subsidiary under each Management Agreement is 30% of the
operators' fee, increasing to 96% of all the fees generated by aggregate gross
revenues of all facilities operated under this fee
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structure exceeding $23.0 million. The Kaplans have also agreed that, with
respect to any other projects for which the Company may not act as the licensed
operator (such as Senior Quarters at East Northport), they will act as licensed
operators in exchange for a fee equal to 5% of gross revenues and pay the
Company's wholly owned subsidiary a servicing fee equal to 96% of their
operating fee. The Operating Agreements may be terminated: (i) by either the
Company or the licensed operators upon the occurrence of certain events of
default (such as failure to timely pay the licensed operators' fees, failure to
perform any material term, provision or covenant, subject to certain cure
periods, or an event of default under the Management Agreement); (ii) by the
Company upon the death or disability of all the licensed operators; (iii) by the
licensed operators upon a change of control in the Company or at any time after
five years, or (iv) by the Company in its discretion at any time, provided that
if the operating agreement is terminated by the Company other than for an event
of default by the licensed operators, the licensed operators will be entitled to
liquidated damages equal to twice the licensed operators' fees under the
applicable Operating Agreement (net of fees payable under the applicable
Management Agreement) over the preceding twelve months. In addition, the
employment agreement with each Kaplan provides that each Kaplan may withdraw as
a licensed operator if he ceases to be an employee of the Company for any
reason, and that if his employment is terminated by him for good reason or by
the Company without cause, he will be entitled to receive, in addition to the
severance payments provided for in his employment agreement, either the
liquidated damages provided for in the applicable Operating Agreement or a lump
sum equal to twice his share of the licensed operators' fees (net of fees
payable under the applicable Management Agreement) for the preceding twelve
months. Good reason includes the termination of an Operating Agreement or a
Management Agreement by the Company or its wholly owned subsidiary, as the case
may be, other than in accordance with its terms or by a licensed operator
because of an event of default. See "Management -- Employment Agreements". This
basic structure, and substantially similar agreements, are used with respect to
one New York facility (Senior Quarters at Centereach II) that is not a licensed
entity. See "Management -- Employment Agreements."
Legislation has, however, been recently enacted in New York State which
allows for-profit corporations whose stock (and whose parent entity's stock) is
not traded on a national exchange or over-the-counter market, to operate certain
types of licensed facilities, including ALP facilities. As a result, the Kaplans
may form one or more corporations to operate these facilities. The Kaplans are
entitled, pursuant to the operating agreements, to assign such agreement to any
for-profit corporation that is wholly owned by them.
CERTAIN TRANSACTIONS REGARDING SALES OF COMMON STOCK.
RESTRICTIONS ON TRANSFER. Each Kaplan has agreed with the Company that
he shall not, for so long as he shall be the licensed operator of any of the
Company's facilities, transfer any shares of Common Stock, if it would result in
his personally owning fewer than 500,000 shares of Common Stock initially, or
250,000 shares of Common Stock after the fifth anniversary of the consummation
of the Offering, in each case, subject to certain exceptions. In addition, a
stockholders' agreement between the Kaplans and the Company, provides (i) each
Kaplan with a right of first refusal with respect to a transfer of the shares of
Common Stock of the other Kaplans, except for a limited exception in the case of
his death, and (ii) that the Kaplans shall vote all their shares of Common Stock
as a unit.
REGISTRATION RIGHTS. After the Offering, each of the Kaplans, along
with Herbert Kaplan, who beneficially own in the aggregate 4,150,000 shares of
Common Stock (assuming no exercise of the Underwriters' over-allotment option)
will be entitled to certain rights with respect to the registration of such
shares under the Securities Act. Under the terms of the agreement between the
Company and the Kaplans, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, each of the
Kaplans are entitled to notice of such registration and are entitled to include
shares of such Common Stock therein. The stockholders benefiting from these
rights may, acting jointly, also require the Company on two separate occasions
to file a registration statement under the Securities Act at the Company's
expense with respect to shares of Common Stock beneficially owned by them, and
the Company is required to use its diligent reasonable efforts to effect such
registration. These rights are subject to
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certain restrictions, conditions and limitations, among them (i) the right of
the underwriters of an offering to limit the number of shares included in such
registration, and (ii) the lock-up agreement whereby the Company and the Kaplans
have agreed with the Underwriters, except in connection with the Offering and
the Underwriters' over-allotment option, not to sell or otherwise dispose of any
shares of Common Stock or other equity securities of the Company for at least
180 days after the date of this Prospectus without the prior written consent of
the representatives of the Underwriters. See "Underwriting."
SHATTUCK HAMMOND FEE. The Company will pay its financial advisor,
Shattuck Hammond Partners Inc., approximately $976,250 (assuming no exercise of
the Underwriters' over-allotment and an initial public offering price of $11.00
per share), as its fee for various investment banking services rendered. Joseph
G. Beck, a director of the Company, is a founding principal, executive committee
member and shareholder of Shattuck Hammond Partners Inc.
FUTURE TRANSACTIONS. The Board of Directors of the Company has adopted
a policy that future transactions between the Company and its officers,
directors, principal stockholders and their affiliates will be subject to
approval of a majority of the Independent Directors, and will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of September 24, 1996, after giving
effect to the conveyance of the Company's facilities and the payment of the
consideration to the Kaplans as adjusted to reflect the sale of the Common Stock
offered hereby, by: (i) each person known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock; (ii) each of the Company's
directors; (iii) the Company's Chief Executive Officer and each of the Company's
other executive officers, and (iv) the Company's directors and executive
officers as a group:
<TABLE>
<CAPTION>
OWNERSHIP
AFTER
OFFERING
AND
SHARES OVER-ALLOTMENT
OWNERSHIP PRIOR TO OFFERING OWNERSHIP AFTER OFFERING SUBJECT TO OPTION (2)
------------------------------- ---------------------------- OVER- -----------
NAME AND ADDRESS OF NUMBER OF NUMBER OF ALLOTMENT NUMBER OF
BENEFICIAL OWNER (1) SHARES PERCENTAGE SHARES PERCENTAGE OPTION SHARES
- ------------------------------------ --------------- -------------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Glenn Kaplan (3).................... 300 100.0% 4,150,000 53.9% 266,250 3,883,750
Wayne L. Kaplan (3)................. 300 100.0 4,150,000 53.9 266,250 3,883,750
Evan A. Kaplan (3).................. 300 100.0 4,150,000 53.9 266,250 3,883,750
John M. Sharpe, Jr. ................ 0 0 0 0 0 0
Joseph G. Beck...................... 0 0 0 0 0 0
Bernard J. Korman................... 0 0 0 0 0 0
Gerald Schuster..................... 0 0 0 0 0 0
Risa Lavizzo-Mourey, M.D............ 0 0 0 0 0 0
Directors and officers as a group (8
persons)........................... 300 100.0% 4,150,000 53.9% 266,250 3,883,750
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNER (1) PERCENTAGE
- ------------------------------------ ---------------
<S> <C>
Glenn Kaplan (3).................... 48.8%
Wayne L. Kaplan (3)................. 48.8
Evan A. Kaplan (3).................. 48.8
John M. Sharpe, Jr. ................ 0
Joseph G. Beck...................... 0
Bernard J. Korman................... 0
Gerald Schuster..................... 0
Risa Lavizzo-Mourey, M.D............ 0
Directors and officers as a group (8
persons)........................... 48.8%
</TABLE>
- ------------------------------
(1) Except as otherwise noted, the address of the Company's directors,
executive officers and Selling Stockholders is c/o Kapson Senior Quarters
Corp., 242 Crossways Park West, Woodbury, New York 11797.
(2) Assumes Underwriters' over-allotment option is exercised in full. The
Selling Stockholders will sell 50% of any shares with respect to which the
option is exercised.
(3) Includes shares owned of record by Glenn Kaplan, Wayne Kaplan, and Evan
Kaplan, each of whom share voting and dispositive power over all of these
shares, and Herbert Kaplan, who has a pecuniary interest in, and has shared
voting dispositive power over, 300,001 shares. Herbert Kaplan is the father
of the Kaplans.
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DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport to
be complete and is qualified in its entirety by reference to (i) applicable
provisions of Delaware law, and (ii) the provisions of the Company's Certificate
of Incorporation and By-laws, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $.01, and 10,000,000 shares of Preferred Stock, par
value $.01, which may be issued in one or more classes and series. Upon
consummation of the Offering, assuming no exercise of the Underwriters'
over-allotment option, there will be 7,700,000 shares of Common Stock and no
shares of Preferred Stock issued and outstanding.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share of record on
all matters to be voted upon by the stockholders. Holders do not have cumulative
voting rights. Stockholders casting a plurality of the votes of stockholders
entitled to vote in an election of directors may elect all of the directors.
Subject to the preferential rights of any Preferred Stock that may at the time
be outstanding, each share of Common Stock will have an equal and ratable right
to receive dividends when, if and as declared from time to time by the Board of
Directors out of funds legally available therefor. The Company may in the future
be subject to certain agreements which restrict the payment of dividends. The
Company does not anticipate paying cash dividends in the foreseeable future. See
"Dividend Policy."
In the event of liquidation, dissolution or winding up at the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payments to creditors and after satisfaction of the liquidation
preference, if any, of any shares of Preferred Stock that may at the time be
outstanding. Holders of Common Stock have no preemptive, subscription,
conversion or redemption rights and are not subject to further calls or
assessments by the Company. The outstanding shares of Common Stock are, and the
shares of Common Stock offered by the Company in the Offering will be, when
issued and paid for, validly issued, fully paid and nonassessable.
UNDESIGNATED PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Board of
Directors, without any vote or action by the stockholders (subject to applicable
law or regulatory agencies or by the rules of Nasdaq or any stock exchange on
which the Company's Common Stock may then be listed), to issue up to 10,000,000
shares of Preferred Stock, par value $.01 per share, in one or more classes and
series and to fix the designations, preferences, rights, qualifications,
limitations and restrictions thereof, including the voting rights, dividend
rights, dividend rate, conversion rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences and number
of shares constituting any series. Although it presently has no intention to do
so, the Board of Directors, without stockholder approval, could issue Preferred
Stock with voting and conversion rights that could adversely affect the voting
powers of the holders of the Common Stock and the market price of the Common
Stock. Issuance of Preferred Stock may also have the effect of delaying,
deferring or preventing the change of control of the Company without further
action by the stockholders and may discourage bids for the Common Stock at a
premium over the market price.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (for the purposes
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of determining the number of shares outstanding, under Delaware law, those
shares owned (x) by persons who are directors and also officers, and (y) by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer are excluded from the calculation), or
(iii) on or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
Section 203 defines a business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder, or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Certain provisions of the Company's Certificate of Incorporation and
Delaware law may have a significant effect in delaying, deferring or preventing
a change in control of the Company and may adversely affect the voting and other
rights of other holders of Common Stock. In particular, the ability of the Board
of Directors to issue Preferred Stock without further stockholder approval may
have the effect of delaying, deferring or preventing a change in control of the
Company and may adversely affect the voting and other rights of other holders of
Common Stock. In addition, the Company's Certificate of Incorporation provides
for a classified Board of Directors and the inability of stockholders to vote
cumulatively for directors.
LIMITATION ON DIRECTORS' LIABILITY
The Certificate of Incorporation of the Company limits the liability of
directors and officers to the Company or its holders to the fullest extent
permitted by Delaware Law. The inclusion of this provision in the Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors or officers of the Company and may discourage or
deter stockholders or management from bringing a lawsuit against directors of
the Company for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited the Company and its stockholders.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon consummation of the Offering, there will be 22,300,000 shares (assuming
no exercise of the Underwriters' over-allotment option) of Common Stock, par
value $.01, and 10,000,000 shares of Preferred Stock, par value $.01, available
for future issuance without stockholder approval, except as may be required for
a particular transaction by the Company's Certificate of Incorporation, by
applicable law or regulatory agencies or by the rules of Nasdaq or any stock
exchange on which the Company's Common Stock may then be listed. These
additional shares may be utilized for a variety of corporate purposes, including
future public offerings to raise additional capital or to facilitate corporate
acquisitions. The Company does not currently have plans to issue additional
shares of capital stock. See "Shares Eligible for Future Sale."
STOCK TRANSFER AGENT AND REGISTRAR
The Stock Transfer Agent and Registrar for the Common Stock is The Bank of
New York. Its address and telephone number is The Bank of New York, Attn:
Investor Relations, 101 Barclay St., 11W, New York, NY; (800) 524-4458.
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for the Common
Stock of the Company. No prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares of Common
Stock for sale will have on the market price prevailing from time to time.
Nevertheless, sales of Common Stock or the perception that sales of substantial
amounts of Common Stock could occur in the public market after the restrictions
described below could adversely affect the prevailing market price of the Common
Stock and the ability of the Company to raise equity capital in the future.
Upon completion of the Offering, the Company will have outstanding 7,700,000
shares of Common Stock (7,966,250 shares if the over-allotment option is
exercised in full). Of these shares, 3,550,000 shares of Common Stock sold in
the Offering (4,082,500 if the over-allotment option is exercised in full) will
be tradeable without restriction or limitation under the Securities Act, except
for any shares purchased by "affiliates" (as that term is defined in the
Securities Act) of the Company which will be subject to the resale limitations
under Rule 144 of the Securities Act. The remaining 4,150,000 outstanding shares
of Common Stock held by existing stockholders (3,883,750 shares if the
over-allotment option is exercised in full) are "restricted securities" within
the meaning of Rule 144 (the "Restricted Shares"). The Restricted Shares were
issued and sold by the Company in private transactions in reliance upon
exemptions from registration under the Securities Act and may not be sold in a
public distribution except in compliance with the registration requirements of
the Securities Act or pursuant to an exemption, including that provided by Rule
144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Offering, a person (or persons whose shares are aggregated) who owns shares
that were purchased from the Company (or any affiliate) at least two years
previously, including persons who may be deemed affiliates of the Company, is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of the Company's Common
Stock (approximately 77,000 shares immediately after the Offering assuming no
exercise of the Underwriters' over-allotment option) or the average weekly
trading volume of the Company's Common Stock in the Nasdaq National Market
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who owns shares within the
definition of "restricted securities" under Rule 144 under the Securities Act
that were purchased from the Company (or any affiliate) at least three years
previously, would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
The Commission has proposed to amend the holding period required by Rule 144
to permit sales of "restricted securities" after one year rather than two years
(and two years rather than three years for "non-affiliates" who desire to sell
such shares under Rule 144(k)). If such proposed amendment were enacted, the
"restricted securities" would become freely tradeable (subject to any applicable
contractual restrictions) at correspondingly earlier dates.
After the Offering (and upon consummation of the Company's agreement to
acquire the 50% interest it does not already own in the entity that owns Senior
Quarters at East Northport), the holders of 4,200,000 shares of Common Stock
(assuming no exercise of the Underwriters' over-allotment option), or their
transferees, will be entitled to certain rights with respect to the registration
of such shares under the Securities Act, subject to the contractual restrictions
described below. See "Certain Transactions -- Registration Rights." Registration
of such shares under the Securities Act would result in such shares becoming
freely tradeable without restriction under the Securities Act (except for shares
purchased by affiliates) immediately upon the effectiveness of such
registration.
The Company, the Selling Stockholders, each director, executive officer and
affiliate of the Company has agreed with the Underwriters, except in connection
with the Offering and the Underwriters'
66
<PAGE>
over-allotment option, not to sell or otherwise dispose of any shares of Common
Stock or other equity securities of the Company for at least 180 days after the
date of this Prospectus without the prior written consent of the representatives
of the Underwriters, except in connection with the Offering. See "Underwriting."
Each Kaplan has also agreed with the Company that he shall not, for so long as
he shall be the operator of any of the Company's facilities, transfer any shares
of Common Stock if it would result in his personally owning fewer than 500,000
shares of Common Stock initially, or 250,000 shares of Common Stock after the
fifth anniversary of the consummation of the Offering, in each case, subject to
certain exceptions. In addition, a stockholders' agreement among the Kaplans and
the Company, provides (i) each Kaplan with a right of first refusal with respect
to a transfer of the shares of Common Stock of the other Kaplans, except for
transfers to or for the benefit of family members and a limited exception in the
case of his death, and (ii) that the Kaplans shall vote all their shares of
Common Stock as a unit.
The Company intends to file a registration statement under the Securities
Act covering approximately 600,000 shares of Common Stock issued or reserved for
issuance under the Incentive Plan. See "Management -- 1996 Stock Incentive
Plan." Such registration statement is expected to be filed prior to the end of
the 1996 fiscal year and will automatically become effective upon filing.
Accordingly, shares registered under such registration statement pursuant to the
Plan will, subject to Rule 144 volume limitations applicable to affiliates, be
available for sale in the open market, except to the extent that such shares are
subject to vesting restrictions. At September 25, 1996, options to purchase
117,500 shares have been granted under the Plan, none of which have vested.
67
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company, the Selling Stockholders and the Underwriters (the
"Underwriting Agreement"), the Company has agreed to sell to the underwriters
named below (the "Underwriters"), for whom Salomon Brothers Inc is acting as
representative (the "Representative"), and each such Underwriter has severally
agreed to purchase from the Company, the aggregate number of shares of Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Salomon Brothers Inc ..........................................................
Raymond James & Associates, Inc. ..............................................
Wheat, First Securities, Inc. .................................................
-------------
Total...................................................................... 3,550,000
-------------
-------------
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
Common Stock offered hereby (other than those subject to the over-allotment
option described below) if any such shares are purchased. In the event of a
default by an Underwriter, the Underwriting Agreement provides that, in certain
circumstances the purchase commitments of the non-defaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representative that the several
Underwriters propose to offer shares of Common Stock directly to the public at
the public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. After the Offering, the initial
public offering price and such concessions may be changed.
The Company and the Selling Stockholders have each granted the Underwriters
an option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 266,250 and 266,250 additional shares of Common
Stock, respectively (532,500 in the aggregate), to cover over-allotments, if
any, at the price to the public less the Underwriting Discount set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise such
option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the same proportion of the option shares as the number
of shares of Common Stock to be purchased by such Underwriter in the above table
bears to the total number of shares of Common Stock offered by the Underwriters
hereby. In the event that the Underwriters exercise less than the full
over-allotment option, the number of shares to be sold pursuant thereto shall be
allocated equally as between the Company and the Selling Stockholders in
proportion to the number of such persons' or entity's shares subject to such
option.
Shattuck Hammond Partners Inc., which is not acting as an underwriter in the
Offering, will receive approximately $976,250 (assuming no exercise of the
Underwriters over-allotment option and an initial public offering price of
$11.00 per share) from the Company as its fee for various investment banking and
financial advisory services rendered. Joseph G. Beck, a founding principal,
executive committee member and shareholder of Shattuck Hammond Partners Inc. is
a director of the Company.
The Company, the Selling Stockholders, and each director, executive officer
and affiliate of the Company has agreed that they will not offer, sell, contract
to sell or otherwise dispose of, directly or indirectly, with certain
exceptions, any shares of Common Stock or any securities convertible into, or
exchangeable for, shares of Common Stock for a period of at least 180 days from
the date of this Prospectus without the prior consent of the Representative.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
The Representative has informed the Company that it does not intend to
confirm sales to any account over which it exercises discretionary authority.
68
<PAGE>
Prior to the Offering, there has been no market for the Common Stock. The
initial public offering price for the Common Stock has been determined by
negotiation between the Company and the Underwriters and is based on, among
other things, the Company's financial and operating history and condition, the
prospects of the Company and its industry in general, the management of the
Company and the market prices of securities of companies in businesses similar
to those of the Company.
EXPERTS
The combined financial statements of the Predecessor as of December 31, 1994
and 1995 and for each of the years in the three year period ended December 31,
1995 and the Balance Sheet of the Company as of June 10, 1996, included in this
registration statement, have been included herein in reliance upon the reports
of Coopers & Lybrand L.L.P., independent accountants, appearing elsewhere
herein, given on the authority of that firm as experts in accounting and
auditing.
The financial statements of Town Gate East (a partnership) and Town Gate
Manor (a partnership) as of December 31, 1994 and 1995 and for each of the years
in the three-year period ended December 31, 1995, included in this registration
statement, have been included herein in reliance upon the report of Rotenberg &
Company LLP, independent accountants, appearing elsewhere herein, given on the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon for the
Company by Proskauer Rose Goetz & Mendelsohn LLP, New York. Certain legal
matters in connection with the Offering are being passed upon for the
Underwriters by Cleary, Gottlieb, Steen & Hamilton, New York.
ADDITIONAL INFORMATION
The Company has filed with the Commission, through the Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR"), a Registration Statement on
Form S-1 under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, filed as part of the Registration Statement, does not
contain all of the information included in the Registration Statement and the
exhibits and schedules thereto, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and the exhibits and
schedules filed therewith. Statements contained in this Prospectus by reference
as to the contents of any contract, agreement or other document referred to are
not necessarily complete and in each such instance, reference is made to the
copy of such contract, agreement or other document filed as an exhibit to the
Registration Statement for a more complete description of the matters involved,
and each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge and copied at the offices of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at 7 World Trade
Center, 13th Floor, New York, New York 10048; and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained at the prescribed rates from the Commission's Public Reference
Section at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Electronic registration statements filed through EDGAR may also be
accessed electronically through the Commission's home page on the World Wide Web
at http://www.sec.gov.
As a result of the Offering, the Company will be subject to the
informational requirements of the Exchange Act. So long as the Company is
subject to the periodic reporting requirements of the Exchange Act, it will
furnish the reports, proxy statements and other information required thereby to
the Commission via EDGAR. The Company intends to furnish holders of the Common
Stock with annual reports containing, among other information, audited financial
statements certified by an independent public accounting firm and quarterly
reports containing unaudited condensed financial information for the first three
quarters of each fiscal year. The Company also intends to furnish such other
reports as it may determine or as may be required by law. Copies of such
material may be inspected and copied at the offices of the Commission and
accessed electronically through the Commission's home page on the World Wide
Web.
69
<PAGE>
KAPSON SENIOR QUARTERS CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Pro Forma Combined Condensed Balance Sheet as of June 30, 1996....................................... F-3
Pro Forma Combined Condensed Statement of Operations for the year ended December 31, 1995............ F-4
Pro Forma Combined Condensed Statement of Operations for the six months ended June 30, 1996.......... F-5
Notes to Pro Forma Combined Condensed Balance Sheet.................................................. F-6
Notes to Pro Forma Combined Condensed Statement of Operations........................................ F-8
THE KAPSON GROUP (THE PREDECESSOR)
Report of Independent Accountants.................................................................... F-12
Combined Balance Sheets as of December 31, 1994 and 1995
and (unaudited) as of June 30, 1996................................................................. F-13
Combined Statements of Operations for the years ended December 31, 1993, 1994
and 1995 and (unaudited) for the six months ended June 30, 1995 and 1996............................ F-14
Combined Statements of Changes in Partners and Shareholders' (Deficit) for
the years ended December 31, 1993, 1994 and 1995 and (unaudited)
for the six months ended June 30, 1996.............................................................. F-15
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and
(unaudited) for the three months ended June 30, 1995 and 1996....................................... F-16
Notes to Combined Financial Statements............................................................... F-17
KAPSON SENIOR QUARTERS CORP. (THE COMPANY)
Report of Independent Accountants.................................................................... F-29
Balance Sheet as of June 10, 1996.................................................................... F-30
Notes to Balance Sheet............................................................................... F-31
TOWN GATE EAST
Report of Independent Accountants.................................................................... F-34
Balance Sheets as of December 31, 1994 and 1995 and (unaudited) as of March 31, 1996................. F-35
Statements of Income for the years ended December 31, 1993, 1994 and 1995 and (unaudited) for the
three months ended March 31, 1995 and 1996.......................................................... F-36
Statements of Changes in Partners' Capital for the years
ended December 31, 1993, 1994 and 1995 and (unaudited) as of March 31, 1996......................... F-37
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and (unaudited) for the three months ended March 31, 1995 and 1996............................. F-38
Reconciliation of Net Income to Net Cash Flows from Operating Activities............................. F-39
Notes to Financial Statements........................................................................ F-40
TOWN GATE MANOR
Report of Independent Auditors....................................................................... F-44
Balance Sheets as of December 31, 1994 and 1995 and (unaudited) as of March 31, 1996................. F-45
Statements of Income for the years ended December 31, 1993, 1994 and 1995 and (unaudited) for the
three months ended March 31, 1996................................................................... F-46
Statements of Changes in Partners' Capital for the years ended December 31, 1993, 1994 and 1995 and
(unaudited) for the three months ended March 31, 1996............................................... F-47
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and (unaudited) for the three months ended March 31, 1995 and 1996............................. F-48
Reconciliation of Net Income to Net Cash Flows from Operating Activity............................... F-49
Notes to Financial Statements........................................................................ F-50
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
At or prior to the consummation of the Offering, the Company will acquire
from the Kapson Group (the Predecessor) the following: (i) certain wholly owned
entities of the Predecessor that own the entire fee in the land and building
underlying six facilities (Town Gate Manor and Town Gate East (acquired by the
Predecessor on April 1, 1996 for approximately $10,375,000 financed through
mortgage notes with an institution at annual interest of 4.25% above U.S.
Treasury notes), Senior Quarters at Huntington Station, Senior Quarters at
Centereach I, Senior Quarters at Centereach II and Senior Quarters at Stamford);
(ii) certain wholly owned entities of the Predecessor that have a
controlling/majority ownership of the fee in the land and building underlying
two facilities (Senior Quarters at East Northport and Senior Quarters at
Chestnut Ridge) and; (iii) certain wholly owned entities that own a minority
interest in certain facilities (Senior Quarters at Jamesburg, Senior Quarters at
Glen Riddle and Senior Quarters at Montville). The unaudited pro forma combined
condensed financial statements reflect the following: 1) adjustment for the
allocation of the purchase price and the historical operations prior to
acquisition of Town Gate Manor and Town Gate East based on the estimated fair
value of the assets assumed and the related financing in accordance with the
purchase method of accounting; 2) additional compensation for senior executives
of the Company and additional general and administrative costs of operating as a
public company; 3) operating fees to be paid to the Kaplans to operate certain
New York facilities; 4) the initial capitalization of the Company and the
issuance of approximately 4,150,000 shares of the Company's common stock to the
Kaplans for the conveyance of their facilities and interests to the Company; 5)
the sale of a minority interest in Senior Quarters at Chestnut Ridge in April
1996, and 6) the agreement to purchase for $2,600,000 the remaining 50% interest
in Senior Quarters at East Northport through issuance of 50,000 shares of common
stock, at an assumed initial public offering price of $11.00, ($550,000) and the
remainder ($2,050,000) paid with proceeds of the initial public offering. See
"Certain Transactions" elsewhere in this Prospectus.
The unaudited pro forma combined condensed balance sheet as of June 30, 1996
was prepared as if the Certain Transactions had occurred at that date. The
unaudited pro forma statements of operations for the year ended December 31,
1995 and for the six months ended June 30, 1996 were prepared as if the
acquisition of Town Gate Manor and Town Gate East, the sale of the 49.9%
minority interest in Senior Quarters at Chestnut Ridge and the pending
acquisition of the remaining 50% interest in Senior Quarters at East Northport
and the Certain Transactions had occurred as of January 1, 1995.
In the opinion of management, all adjustments necessary to present fairly
such pro forma financial statements have been made based on the proposed terms
and structure of the transactions. The Company anticipates, however, that
changes in the composition of the assets to be acquired and liabilities to be
assumed will occur due to changes in the ordinary course of business. The
Company believes any related change in adjustments will not be material to the
pro forma combined condensed financial statements. In addition, the pro forma
adjustments relating to the fair value adjustments for the acquisition of Town
Gate Manor and Town Gate East and the pending acquisition of the remaining 50%
interest in Senior Quarters at East Northport are subject to revision when final
analyses of such values are completed. In management's opinion, such adjustments
are not expected to materially differ from the final fair value adjustments.
These unaudited pro forma combined condensed financial statements are not
necessarily indicative of what actual results would have been had the
transactions occurred at the beginning of the respective periods nor do they
purport to indicate the results of future operations of the Company. These
unaudited pro forma financial statements should be read in conjunction with the
accompanying notes, "Certain Transactions", "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and the audited and
unaudited historical financial statements and notes thereto of the Predecessor,
Town Gate Manor and Town Gate East included elsewhere in this Prospectus.
F-2
<PAGE>
KAPSON SENIOR QUARTERS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR ADJUSTMENTS PRO FORMA
------------- ------------- ------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents........................................... $ 1,714 $ 25,350(e) $ 27,064
Accounts receivable................................................. 95 95
Prepaid expenses and other current assets........................... 348 348
------------- ------------- ------------
Total current assets.............................................. 2,157 25,350 27,507
Property and equipment, net........................................... 56,996 56,996
Facility development costs............................................ 187 -- 187
Restricted cash....................................................... 2,384 -- 2,384
Deferred financing costs, net......................................... 2,139 2,139
Intangibles........................................................... 3,176 1,137(g) 4,313
Investment in joint ventures.......................................... 503 503
Other assets.......................................................... 311 311
------------- ------------- ------------
Total assets...................................................... $ 67,853 $ 26,487 $ 94,340
------------- ------------- ------------
------------- ------------- ------------
LIABILITIES AND PARTNERS' AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt................................... $ 913 $ -- $ 913
Accounts payable and accrued expenses............................... 1,998 1,998
Accrued interest.................................................... 301 -- 301
Due to affiliates................................................... 2,971 (2,971)(d) --
Deferred revenue.................................................... 318 -- 318
------------- ------------- ------------
Total current liabilities......................................... 6,501 (2,971) 3,530
Long-term debt........................................................ 67,816 67,816
Residential security deposits......................................... 1,573 -- 1,573
Deferred interest payable............................................. 176 -- 176
Other liabilities..................................................... 602 602
------------- ------------- ------------
Total liabilities................................................. 76,668 (2,971) 73,697
------------- ------------- ------------
Minority interest..................................................... 2,292 (1,463)(f) 829
------------- ------------- ------------
Commitments and contingencies......................................... -- -- --
Partners' and shareholders' (deficit)................................. (11,107) 11,107(c) --
Common stock.......................................................... -- 78(a) 78
Paid in capital....................................................... -- 19,736(b) 19,736
------------- ------------- ------------
Total partners' and shareholders' equity (deficit).................. (11,107) 30,921 19,814
------------- ------------- ------------
Total liabilities and partners' and shareholders' equity
(deficit)........................................................ $ 67,853 $ 26,487 $ 94,340
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
F-3
<PAGE>
KAPSON SENIOR QUARTERS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TOWN GATE TOWN GATE PRO FORMA
PREDECESSOR MANOR EAST SUBTOTAL ADJUSTMENTS PRO FORMA
--------------- ----------- ----------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Assisted living revenues.............. $ 14,275 $ 1,407 $ 2,146 $ 17,828 $ -- $ 17,828
Management fees....................... 443 -- -- 443 -- 443
Other -- affiliate.................... 45 -- -- 45 (45)(a) --
--------------- ----------- ----------- --------- ------------- ----------------
Total revenues...................... 14,763 1,407 2,146 18,316 (45) 18,271
--------------- ----------- ----------- --------- ------------- ----------------
OPERATING EXPENSES:
Assisted living operating expenses.... 8,314 854 1,258 10,426 487(b) 10,913
Management fees....................... -- 8 11 19 (19)(c) --
General and administrative............ 1,658 73 96 1,827 1,269(d) 3,096
Depreciation.......................... 1,234 75 136 1,445 (5)(e) 1,440
--------------- ----------- ----------- --------- ------------- ----------------
Total operating expenses............ 11,206 1,010 1,501 13,717 1,732 15,449
--------------- ----------- ----------- --------- ------------- ----------------
Operating income (loss)............... 3,557 397 645 4,599 (1,777) 2,822
Interest income....................... 44 -- 4 48 -- 48
Interest expense...................... (3,732) (127) (191) (4,050) (778)(f) (4,828)
Interest expense -- affiliates........ (204) -- -- (204) 204(g) --
Other income (expense), net........... (34) 8 (4) (30) -- (30)
--------------- ----------- ----------- --------- ------------- ----------------
Income (loss) before minority
interest........................... (369) 278 454 363 (2,351) (1,988)
Minority interest in net loss of
combined partnership................. 16 -- -- 16 344(i) 360
--------------- ----------- ----------- --------- ------------- ----------------
Net income (loss)..................... $ (353) $ 278 $ 454 $ 379 $ (2,007) $ (1,628)
--------------- ----------- ----------- --------- ------------- ----------------
--------------- ----------- ----------- --------- ------------- ----------------
UNAUDITED PRO FORMA DATA
Pro forma benefit for income taxes.... -- -- -- -- 651(h) 651
--------------- ----------- ----------- --------- ------------- ----------------
Pro forma net income (loss)........... $ (353) $ 278 $ 454 $ 379 $ (1,301) $ (977)
--------------- ----------- ----------- --------- ------------- ----------------
--------------- ----------- ----------- --------- ------------- ----------------
Pro forma net loss per common share... $ (.08) $ (.20)
--------------- ----------------
--------------- ----------------
Pro forma weighted average number of
common shares outstanding............ 4,718(j) 236(k) 4,954(k)
--------------- ------------- ----------------
--------------- ------------- ----------------
</TABLE>
F-4
<PAGE>
KAPSON SENIOR QUARTERS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996
----------------------------
TOWN GATE TOWN GATE PRO FORMA
PREDECESSOR MANOR EAST SUBTOTAL ADJUSTMENTS PRO FORMA
-------------- ------------- ------------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Assisted living revenues................. $ 9,529 $ 357 $ 554 $ 10,440 $ -- $ 10,440
Management fees.......................... 432 -- -- 432 -- 432
Other -- affiliates...................... 23 -- -- 23 (23)(a) --
------- ----- ----- --------- ------------- ---------------
Total revenues......................... 9,984 357 554 10,895 (23) 10,872
------- ----- ----- --------- ------------- ---------------
Operating expenses:
Assisted living operating expenses....... 6,252 264 310 6,826 244(b) 7,070
Management fees.......................... -- 2 3 5 (5)(c) --
General and administrative............... 1,275 9 20 1,304 528(d) 1,832
Depreciation............................. 912 20 35 967 (3)(e) 964
------- ----- ----- --------- ------------- ---------------
Total operating expenses............... 8,439 295 368 9,102 764 9,866
------- ----- ----- --------- ------------- ---------------
Operating income (loss).................. 1,545 62 186 1,793 (787) 1,006
Equity in income from joint ventures..... 28 -- -- 28 -- 28
Interest income.......................... 104 -- 1 105 -- 105
Interest expense......................... (2,844) (20) (30) (2,894) (224)(f) (3,118)
Interest expense -- affiliates........... (121) -- -- (121) 121(g) --
Other income (expense), net.............. (8) -- -- (8) -- (8)
------- ----- ----- --------- ------------- ---------------
Income (loss) before minority
interest.............................. (1,296) 42 157 (1,097) (890) (1,987)
Minority interest in net loss of combined
partnerships............................ 371 -- -- 371 (100) (i) 271
------- ----- ----- --------- ------------- ---------------
Net income (loss)........................ $ (925) $ 42 $ 157 $ (726) $ (990) $ (1,716)
------- ----- ----- --------- ------------- ---------------
------- ----- ----- --------- ------------- ---------------
UNAUDITED PRO FORMA DATA:
Pro forma benefit for income taxes....... -- -- -- -- 686(h) 686
------- ----- ----- --------- ------------- ---------------
Pro forma net income (loss).............. $ (925) $ 42 $ 157 $ (726) $ (304) $ (1,030)
------- ----- ----- --------- ------------- ---------------
------- ----- ----- --------- ------------- ---------------
Pro forma net loss per common share...... $ (.20) $ (.21)
------- ---------------
------- ---------------
Pro forma weighted average number of
common shares outstanding............... 4,718(j) 236(k) 4,954(k)
------- ------------- ---------------
------- ------------- ---------------
</TABLE>
F-5
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a) COMMON STOCK:
<TABLE>
<S> <C>
Issuance of 3,550,000, shares of common stock $.01 par value pursuant to the
initial public offering...................................................... 36
Issuance of 4,150,000, shares of common stock $.01 par value to the Kaplans in
consideration for their contribution of facilities and interests therein..... 41
Issuance of 50,000 shares of common stock $.01 par value pursuant to the
agreement to purchase the remaining 50% interest in Senior Quarters at East
Northport.................................................................... 1
---------
$ 78
---------
---------
(b) PAID IN CAPITAL:
Issuance of 3,550,000, shares of common stock $.01 par value pursuant to the
initial public offering at an assumed offering price of $11 per share........ $ 39,014
Issuance of 4,150,000, shares of common stock $.01 par value to the Kaplans in
consideration for their contribution of facilities, and interests therein.... (41)
Issuance of 50,000 shares of common stock $.01 par value pursuant to the
agreement to purchase the remaining 50% interest in Senior Quarters at East
Northport at an assumed offering price of $11 per share...................... 549
Carry over of historical cost basis of the net assets of the facilities of the
Predecessor.................................................................. (11,107)
Estimated costs of the offering ($2,666) and underwriters discount ($2,734)... (5,400)
Assumption by the Kaplans of amounts due to affiliates of the Predecessor that
will not be obligations of the Company....................................... 2,971
Distributions payable to the Kaplans to be paid from the proceeds of the
Offering which will be used primarily to satisfy (i) the tax liabilities of
the Kaplans expected to be incurred pertaining to the transfer of the
Predecessor interests in the facilities to the Company ($6,000) and (ii) real
estate transfer taxes arising out of the transaction estimated to be
approximately ($250)......................................................... (6,250)
---------
$ 19,736
---------
---------
</TABLE>
F-6
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(c) PARTNERS' AND SHAREHOLDERS' (DEFICIT):
<TABLE>
<S> <C>
Elimination of historical partners' and shareholders' (deficit) of the
facilities of the Predecessor................................................ $ 11,107
---------
---------
</TABLE>
(d) DUE TO AFFILIATES:
<TABLE>
<S> <C>
Assumption by the Kaplans of amounts due to affiliates of the Predecessor that
will not be obligations of the Company....................................... $ (2,971)
---------
---------
</TABLE>
(e) CASH:
<TABLE>
<S> <C>
Gross proceeds from offering.................................................. $ 39,050
Less: estimated cost of the offering ($2,666) and Underwriters Discount
($2,734)..................................................................... (5,400)
Distributions payable to the Kaplans to be paid from the proceeds of the
Offering which will be used primarily to satisfy (i) the tax liabilities of
the Kaplans expected to be incurred pertaining to the transfer of the
Predecessor interests in the facilities to the Company ($6,000) and (ii) real
estate transfer taxes arising out of the transaction estimated to be
approximately ($250)......................................................... (6,250)
Payment to be made under the terms of the agreement to purchase the remaining
50% interest in Senior Quarters at East Northport ($2,600) from proceeds of
the Offering, net of purchase price payable in common stock ($550)........... (2,050)
---------
$ 25,350
---------
---------
</TABLE>
(f) MINORITY INTEREST:
<TABLE>
<S> <C>
Elimination of the historical minority interest in Senior Quarters at East
Northport due to the acquisition agreement entered into by the Company to
purchase the remaining 50% interest.......................................... $ (1,463)
---------
---------
</TABLE>
(g) INTANGIBLES:
<TABLE>
<S> <C>
To record the excess of the purchase price pursuant to the acquisition
agreement price of the remaining 50% interest in Senior Quarters at East
Northport ($2,600) over the historical minority interest in the facility
($1,463) (goodwill) to be amortized over fifteen years....................... $ 1,137
---------
---------
</TABLE>
F-7
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a) Other -- affiliates:
<TABLE>
<S> <C>
Elimination of revenue from affiliates for services performed by the
Predecessor which will not be continued by the Company........................ $ (45)
---------
---------
</TABLE>
(b) Assisted living operating expenses:
<TABLE>
<S> <C>
Reduction in historical owners'/administrators' salary and consulting fees of
Town Gate Manor and Town Gate East ($133) offset by compensation to be
incurred under new employment contracts ($120)................................ $ (13)
Operating fees to be incurred by the Company under new operating agreements
(3.5%, of respective revenues, net), (Senior Quarters at Huntington Station,
Senior Quarters at Centereach I, Senior Quarters at Centereach II, Senior
Quarters at Chesnut Ridge, Town Gate Manor and Town Gate East)................ 500
---------
$ 487
---------
---------
</TABLE>
(c) Management fee expense:
<TABLE>
<S> <C>
Elimination of historical management fees paid by Town Gate Manor and Town Gate
East which will not be incurred by the Company................................ $ (19)
---------
---------
</TABLE>
(d) General and administrative:
<TABLE>
<S> <C> <C>
Incremental increase in salaries and related benefits associated with new
employment contracts entered into with the former owners/partners of the
Predecessor who will become the senior officers of the Company.................... $ 413
Estimated additional administrative and financial reporting expenses which would
have been incurred by the Company had it been operating as a public company during
the period:
Salaries and wages.................................................... $ 250
Directors' and officer's insurance and fees........................... 100
Legal and accounting.................................................. 140
Other................................................................. 50 540
---------
Amortization of goodwill ($2,903) associated with the acquisition of Town Gate
Manor and Town Gate East on a straight line basis over fifteen years.............. 194
Amortization of non-compete agreements ($322) associated with the acquisition of
Town Gate Manor and Town Gate East on a straight line basis over seven years, the
life of the agreements............................................................ 46
Amortization of goodwill ($1,137) associated with the agreement to
purchase the remaining 50% interest in Senior Quarters at East
Northport on a straight line basis over fifteen years.................. 76
---------
$ 1,269
---------
---------
</TABLE>
(e) Depreciation and amortization:
<TABLE>
<S> <C>
Adjustment to historical depreciation of buildings and furniture and fixtures
associated with Town Gate Manor and Town Gate East, based upon fair value of
the acquired assets and increase in depreciable lives......................... $ (5)
---------
---------
</TABLE>
F-8
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(f) Interest expense:
<TABLE>
<S> <C>
Interest expense associated with the acquisition of Town Gate Manor and Town
Gate East ($10,375 of debt incurred at 4.25% above the 10 year Treasury rate,
10.56% at date of acquisition) ($1,096), net of elimination of historical
interest expense incurred on debt not assumed by the Predecessor nor the
Company ($318)................................................................. $ (778)
---------
---------
</TABLE>
(g) Interest income -- affiliates:
<TABLE>
<S> <C>
Elimination of interest expense on amounts due ($3,206) to affiliates not being
assumed by the Company......................................................... $ 204
---------
---------
</TABLE>
(h) Benefit for income taxes:
<TABLE>
<S> <C>
The Predecessor and the entities that operated Town Gate Manor and Town Gate
East prior to acquisition were not taxable entities. This adjustment provides
pro forma benefit for income taxes at a 40% effective rate. The pro forma
effect of recognizing the deferred tax liability resulting from the change in
tax status effective January 1, 1995 is $2,750................................. $ 651
---------
---------
</TABLE>
(i) Minority interest:
<TABLE>
<S> <C>
To record the 49.9% minority interest in the loss of Senior Quarters at Chestnut
Ridge.......................................................................... $ 360
Elimination of the historical minority interest in the loss of Senior Quarters
at East Northport due to the acquisition agreement entered into by the Company
to purchase the remaining 50% interest in the facility......................... (16)
---------
$ 344
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
(j) Pro forma net loss per share is based upon the pro forma weighted 4,718Shares
average number of common shares issued in the exchange (4,150) plus the
number of shares issued at the assumed offering price of $11 necesary
to pay the $6,250 distribution to the Kaplans (568)....................
-------
-------
(k) Pro forma net loss per share is based upon the pro forma weighted 4,954Shares
average number of common shares in (j) above plus the $550 of actual
shares of common stock to be issued in connection with the agreement to
purchase the remaining 50% interest in Senior Quarters at East
Northport at an assumed offering price of $11 per share (50) and the
assumed number of shares of common stock to be issued in connection
with the agreement to purchase the remaining 50% interest in Senior
Quarters at East Northport, at an assumed offering price of $11 per
share, to satisfy the remainder of the purchase price of $2,050 in cash
(186)..................................................................
-------
-------
</TABLE>
F-9
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a) Other -- affiliates:
<TABLE>
<S> <C>
Elimination of revenue from affiliates for services performed by the Predecessor
which will not be continued by the Company...................................... $ (23)
---------
---------
</TABLE>
(b) Assisted living operating expenses:
<TABLE>
<S> <C>
Reduction in historical owners'/administrators' salary and consulting fees of
Town Gate East Town Gate Manor ($34) offset by compensation to be incurred the
period prior to its acquisition ($30)........................................... $ (4)
Operating fees to be incurred by the Company under new operating agreements (3.5%
of the respective revenues, net) (Senior Quarters at Huntington Station, Senior
Quarters at Centereach I, Senior Quarters at Centereach II, Senior Quarters at
Chestnut Ridge, Senior Quarters at East Northport Town Gate Manor and Town Gate
East)........................................................................... $ 248
---------
$ 244
---------
---------
</TABLE>
<TABLE>
<S> <C>
(c) Elimination of historical management fees paid by Town Gate East and Town Gate
Manor which will not be included by the Company................................. (5)
---------
---------
</TABLE>
(d) General and administrative:
<TABLE>
<S> <C> <C>
Incremental increase in salaries and related benefits associated with new employment
contracts entered into with the former owners/partners of the Predecessor, who will
become the senior officers of the Company........................................... $ 161
Estimated additional administrative and financial reporting expenses which would have
been incurred by the Company had it been operating as a public company during the
period:
Salaries and wages...................................................... $ 125
Directors' and officer's insurance and fees............................. 50
Legal and accounting.................................................... 70
Other................................................................... 25 270
---------
Amortization of goodwill ($2,903) associated with the acquisition of Town Gate Manor
and Town Gate East on a straight line basis over fifteen years for the period prior
to its acquisition.................................................................. 48
Amortization of non-compete agreements ($322) associated with the acquisition of Town
Gate Manor and Town Gate East on a straight line basis over seven years, the life of
the agreements for the period prior to its acquisition.............................. 11
Amortization of goodwill ($1,137) associated with the acquisition
agreement to purchase the remaining 50% interest in Senior Quarters at
East Northport on a straight line basis over fifteen years............... 38
---------
$ 528
---------
---------
</TABLE>
(e) Depreciation and amortization:
<TABLE>
<S> <C>
Depreciation of buildings and furniture and fixtures associated with Town Gate
Manor and Town Gate East, based upon fair value of the acquired assets for the
period prior to its acquisition................................................. $ (3)
---------
---------
</TABLE>
F-10
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(f) Interest expense:
<TABLE>
<S> <C>
Interest expense associated with the acquisition of Town Gate Manor and Town
Gate East ($10,375 of debt incurred at 4.25% above the 10 year Treasury rate,
10.56% at date of acquisition) for the period prior to its acquisition ($274),
net of elimination of historical interest expense incurred on debt of these
entities not assumed by the Predecessor nor the Company ($50).................. $ (224)
---------
---------
</TABLE>
(g) Interest income -- affiliates:
<TABLE>
<S> <C>
Elimination of interest expense on amounts due to affiliates ($2,971) not being
assumed by the Company......................................................... $ 121
---------
---------
</TABLE>
(h) Benefit for income taxes:
<TABLE>
<S> <C>
The Predecessor was not a taxable entity. This adjustment provides pro forma
benefit for income taxes at a 40% effective rate............................... $ 686
---------
---------
</TABLE>
(i) Minority interest:
<TABLE>
<S> <C>
To record the 49.9% minority interest on the net loss of Senior Quarters at
Chestnut Ridge for the period prior to the sale of such interest in April
1996.......................................................................... $ 169
Elimination of the historical minority interest in the loss of Senior Quarters
at East Northport due to the acquisition agreement entered into by the Company
to purchase the remaining 50% interest in the facility........................ (269)
---------
$ (100)
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
(j) Pro forma net loss per share is based upon the pro forma weighted 4,718Shares
average number of common shares issued in the exchange (4,150) plus the
number of shares issued at the assumed offering price of $11 necessary
to pay the $6,250 distribution to the Kaplans (568)....................
-------
-------
(k) Pro forma net loss per share is based upon the pro forma weighted 4,954Shares
average number of common shares in (j) above plus the $550 of actual
shares of common stock to be issued in connection with the agreement to
purchase the remaining 50% interest in Senior Quarters at East
Northport at an assumed offering price of $11 per share (50) and the
assumed number of shares of common stock to be issued in connection
with the agreement to purchase the remaining 50% interest in Senior
Quarters at East Northport, at an assumed offering price of $11 per
share, to satisfy the remainder of the purchase price of $2,050 in cash
(186)..................................................................
-------
-------
</TABLE>
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Partners of
The Kapson Group:
We have audited the accompanying combined balance sheets of The Kapson Group
(the Predecessor) as of December 31, 1994 and 1995, and the related combined
statements of operations, changes in partners' and shareholders' (deficit) and
cash flows for each of the years in the three year period ended December 31,
1995. These financial statements are the responsibility of the Predecessor's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of The Kapson Group as
of December 31, 1994 and 1995, and the combined results of its operations and
its cash flows for each of the years in the three year period ended December 31,
1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
NEW YORK, NEW YORK
JUNE 7, 1996
F-12
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------- JUNE 30, 1996 PROFORMA JUNE
--------------- 30, 1996
(UNAUDITED) ---------------
(NOTE 2)
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents................... $ 1,886,634 $ 3,392,318 $ 1,714,172 $ 1,714,172
Accounts receivable......................... 28,441 77,837 95,000 95,000
Prepaid expenses and other current assets... 219,895 270,317 348,365 348,365
-------------- -------------- --------------- ---------------
Total current assets...................... 2,134,970 3,740,472 2,157,537 2,157,537
Property and equipment, net................... 23,563,033 29,445,121 56,995,793 56,995,793
Facility development costs.................... 5,627,426 16,374,566 186,558 186,558
Restricted cash............................... 1,503,834 2,592,185 2,383,680 2,383,680
Deferred financing costs, net................. 1,421,073 2,082,285 2,139,091 2,139,091
Intangibles................................... -- -- 3,175,662 3,175,662
Investment in joint ventures.................. 502,938 502,938
Other assets.................................. 44,019 172,163 311,654 311,654
-------------- -------------- --------------- ---------------
Total assets.............................. $ 34,294,355 $ 54,406,792 $ 67,852,913 $ 67,852,913
-------------- -------------- --------------- ---------------
-------------- -------------- --------------- ---------------
LIABILITIES AND PARTNERS' AND SHAREHOLDERS' (DEFICIT)
Current liabilities
Current portion of long-term debt........... $ 15,000,000 $ 245,867 $ 913,047 $ 913,047
Accounts payable and accrued expenses....... 1,257,548 3,219,472 1,997,775 1,997,775
Accrued interest............................ 261,873 363,198 300,842 300,842
Due to affiliates........................... 3,149,802 3,300,450 2,971,114 2,971,114
Deferred revenue............................ 177,713 207,564 318,535 318,535
Pro forma distribution to partners and
shareholders............................... -- -- -- 6,250,000
-------------- -------------- --------------- ---------------
Total current liabilities................. 19,846,936 7,336,551 6,501,313 12,751,313
Long-term debt................................ 20,461,411 53,807,880 67,815,513 67,815,513
Resident security deposits.................... 1,199,032 1,278,147 1,573,192 1,573,192
Deferred interest payable..................... 47,500 105,200 175,500 175,500
Construction retainage payable................ -- 227,200 602,322 602,322
-------------- -------------- --------------- ---------------
Total liabilities......................... 41,554,879 62,754,978 76,667,840 82,917,840
-------------- -------------- --------------- ---------------
Minority interest............................. 1,479,116 1,463,271 2,292,575 2,292,575
-------------- -------------- --------------- ---------------
Commitments and contingencies (Note 8)
Partners' and shareholders' (deficit)......... (8,739,640) (9,811,457) (11,107,502) (17,357,502)
-------------- -------------- --------------- ---------------
Total liabilities and partners' and
shareholders' (deficit).................. $ 34,294,355 $ 54,406,792 $ 67,852,913 $ 67,852,913
-------------- -------------- --------------- ---------------
-------------- -------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-13
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Assisted living revenues.............. $ 12,628,697 $ 13,349,033 $ 14,275,484 $ 7,024,189 $ 9,528,925
Management fees....................... 247,750 347,839 442,825 209,061 432,135
Other -- affiliates................... 111,701 57,530 45,065 22,533 22,500
-------------- -------------- -------------- ------------- --------------
Total revenues...................... 12,988,148 13,754,402 14,763,374 7,255,783 9,983,560
-------------- -------------- -------------- ------------- --------------
Operating expenses:
Assisted living operating expenses.... 7,591,122 7,836,765 8,314,372 3,931,327 6,251,739
General and administrative............ 727,009 1,141,735 1,658,658 730,009 1,275,647
Depreciation.......................... 1,188,134 1,180,418 1,233,843 575,689 911,703
-------------- -------------- -------------- ------------- --------------
Total operating expenses............ 9,506,265 10,158,918 11,206,873 5,237,025 8,439,089
-------------- -------------- -------------- ------------- --------------
Operating income........................ 3,481,883 3,595,484 3,556,501 2,018,758 1,544,471
Equity in income from joint ventures.... -- -- -- -- 27,938
Interest income......................... 12,555 8,693 44,234 21,328 104,061
Interest expense........................ (3,417,046) (3,288,107) (3,732,309) (1,655,283) (2,844,142)
Interest expense -- affiliates.......... (136,726) (207,956) (203,487) (104,620) (120,698)
Other income (expense), net............. (9,610) (1,070) (34,065) 1,071 (7,822)
-------------- -------------- -------------- ------------- --------------
Income (loss) before minority interest
and extraordinary item............... (68,944) 107,044 (369,126) 281,254 (1,296,192)
Minority interest in net loss of
combined partnerships................ -- -- 15,845 -- 370,696
-------------- -------------- -------------- ------------- --------------
Income (loss) before extraordinary
item................................. (68,944) 107,044 (353,281) 281,254 (925,496)
Extraordinary item -- forgiveness of
debt................................. -- 4,398,672 -- -- --
-------------- -------------- -------------- ------------- --------------
Net income (loss)..................... $ (68,944) $ 4,505,716 $ (353,281) $ 281,254 $ (925,496)
-------------- -------------- -------------- ------------- --------------
-------------- -------------- -------------- ------------- --------------
Unaudited pro forma data (2):
Net income (loss)..................... $ (68,944) $ 4,505,716 $ (353,281) $ 281,254 $ (925,496)
Pro forma benefit (provision) for
income taxes......................... 27,578 (1,802,286) 141,312 (112,502) 370,198
-------------- -------------- -------------- ------------- --------------
Pro forma net income (loss)............. $ (41,366) $ 2,703,430 $ (211,969) $ 168,752 $ (555,298)
-------------- -------------- -------------- ------------- --------------
-------------- -------------- -------------- ------------- --------------
Pro forma net income (loss) per share
(2).................................... $ (.01) $ .57 $ (.04) $ .04 $ (.12)
-------------- -------------- -------------- ------------- --------------
-------------- -------------- -------------- ------------- --------------
Pro forma weighted average number of
common shares outstanding (2).......... 4,718,182 4,718,182 4,718,182 4,718,182 4,718,182
-------------- -------------- -------------- ------------- --------------
-------------- -------------- -------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-14
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
COMBINED STATEMENTS OF CHANGES IN PARTNERS' AND SHAREHOLDERS' (DEFICIT)
<TABLE>
<S> <C>
Partners' and shareholders' (deficit), December 31, 1992...................... $(11,704,039)
Distributions............................................................... (551,974)
Net loss.................................................................... (68,944)
------------
Partners' and shareholders' (deficit), December 31, 1993...................... (12,324,957)
Distributions............................................................... (920,399)
Net income.................................................................. 4,505,716
------------
Partners' and shareholders' (deficit), December 31, 1994...................... (8,739,640)
Distributions............................................................... (718,536)
Net income.................................................................. (353,281)
------------
Partners' and shareholders' (deficit), December 31, 1995...................... (9,811,457)
Distributions (unaudited)................................................... (370,549)
Net loss (unaudited)........................................................ (925,496)
------------
Partners' and shareholders' (deficit), June 30, 1996 (unaudited).............. $(11,107,502)
------------
------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-15
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
COMBINED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ (68,944) $ 4,505,716 $ (353,281) $ 281,254 $ (925,496)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation.............................. 1,188,134 1,180,418 1,233,843 575,689 911,703
Amortization of deferred financing costs
and intangibles.......................... 104,581 216,867 226,456 73,444 218,131
Extraordinary item........................ -- (4,398,672) -- -- --
Minority interest in income of
partnership, net......................... -- -- (15,845) -- (370,696)
Equity in income from investment in joint
ventures................................. -- -- -- -- (27,938)
Changes in other assets and liabilities
(Excluding the effect of acquired
facilities):
Accounts receivable..................... 16,695 (10,729) (49,396) (36,240) (17,163)
Prepaid expenses and other current
assets................................. 33,312 (29,297) (50,422) (751,415) 17,453
Restricted cash -- resident security
deposits............................... -- (249,637) (19,336) (29,426) (20,161)
Other assets............................ 78,811 (23,620) (128,144) (61,965) (55,495)
Accounts payable and accrued expenses... (805,503) 230,555 1,961,924 320,526 (1,221,697)
Accrued interest........................ 811,787 155,937 101,325 102,734 (62,356)
Resident security deposits.............. 520,620 122,845 79,115 (81,903) 295,045
Deferred interest payable............... -- 47,500 57,700 25,000 70,300
Deferred revenue........................ (28,602) (50,364) 29,851 95,072 110,971
---------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
operating activities................. 1,850,891 1,697,519 3,073,790 512,770 (1,077,399)
---------- ----------- ------------ ----------- -----------
Cash flows from investing activities:
Acquisition of facilities (net of cash
assumed of $518,000) (Note 5).............. -- -- -- -- (9,856,250)
(Increase) decrease in restricted mortgage
escrow funds............................... (32,269) (1,221,928) (1,069,015) (332,759) 228,666
Investment in joint venture (Note 5)........ -- -- -- -- (475,000)
Purchases and development of property and
equipment.................................. (472,324) (724,971) (16,530,708) (7,855,017) (5,477,242)
Sale of minority interests in combined
partnerships (Note 5)...................... -- 1,479,116 -- -- 1,200,000
---------- ----------- ------------ ----------- -----------
Net cash used in investing
activities........................... (504,593) (467,783) (17,599,723) (8,187,776) (14,379,826)
---------- ----------- ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.... -- 1,907,136 17,565,212 8,004,886 15,120,073
Principal payments on long-term debt........ (309,377) (370,939) (78,039) (29,855) (445,260)
Deferred financing costs.................... (89,875) (1,481,980) (887,668) (34,164) (120,849)
Due to affiliates........................... (11,956) 204,920 150,648 (98,260) (404,336)
Distributions to partners and
shareholders............................... (551,974) (920,399) (718,536) (384,381) (370,549)
---------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
financing activities................. (963,182) (661,262) 16,031,617 7,458,226 13,779,079
---------- ----------- ------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents..................... 383,116 568,474 1,505,684 (216,780) (1,678,146)
Cash and cash equivalents, beginning of
period....................................... 935,044 1,318,160 1,886,634 1,886,634 3,392,318
---------- ----------- ------------ ----------- -----------
Cash and cash equivalents, end of period...... $1,318,160 $ 1,886,634 $ 3,392,318 $ 1,669,854 $ 1,714,172
---------- ----------- ------------ ----------- -----------
---------- ----------- ------------ ----------- -----------
Cash, paid for interest....................... $2,499,433 $ 3,036,255 $ 3,400,592 $ 1,454,103 $ 2,647,067
---------- ----------- ------------ ----------- -----------
---------- ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-16
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. OPERATIONS:
The Kapson Group (the Predecessor) represents a combination of the
businesses of Subchapter S corporations, Partnerships or Limited
Liability Companies which own, as of December 31, 1995, five assisted
living facilities, additional facilities under development (including
joint venture interests), an entity that provides facility management
services to unrelated entities and an entity that provides
administrative support to the Predecessor entities and Kapson Senior
Quarters Corp. (the "Company") a non operating entity formed on June 7,
1996 to acquire the interest in the Predecessor.
The Predecessor develops, owns, operates, and manages assisted living
facilities for senior citizens. As discussed in Note 8, the businesses
of the Predecessor will be acquired by the Company at or prior to the
consummation of an initial public offering (the "Offering") by the
Company.
The assisted living facilities owned and operated by the Predecessor are
as follows:
<TABLE>
<CAPTION>
FACILITY ENTITY FORM %
- --------------------------------------- --------------------------------------- ------------------ ---------
<S> <C> <C> <C>
WHOLLY AND MAJORITY OWNED
Senior Quarters at Stamford Kapson Stamford Corp. Subchapter S 100
Senior Quarters at Huntington Station Commco Management Associates, Inc. Subchapter S 100
Senior Quarters at Centereach I H.K. Associates General
Partnership 100
Senior Quarters at Centereach II Kap Shore Development Corp. Subchapter S 100
*Town Gate East Kapson Rochester East, LLC Limited Liability
Company 100
*Town Gate Manor Kapson Rochester Manor, LLC Limited Liability
Company 100
*Senior Quarters at Chestnut Ridge Chestnut Ridge Development LLC Limited Liability
Company 50
+Senior Quarters at East Northport Larkfield Garden Associates L.P. Limited
Partnership 50
MINORITY OWNED JOINT VENTURES
(under development)
Senior Quarters at Jamesburg Kapson Jamesburg Development Corp. Limited Liability
Company 10
Senior Quarters at Glen Riddle Kapson Glen Riddle Development Corp. Limited
Partnership 11
*Senior Quarters at Montville Kapson Montville Limited Liability
Development Corp. Company 23.75
</TABLE>
- ------------------------
*Ownership percentages were acquired or sold in April 1996 (See Note 5)
+See Note 14
F-17
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying combined financial statements include the assets,
liabilities and operations associated with the wholly and majority owned
entities listed above. Since the facilities have ownership and
management interests in common, the assets and liabilities are reflected
at historical cost. Investments in minority owned joint ventures are
accounted for on the equity method. All significant intercompany
accounts and transactions have been eliminated in combination. Minority
interest represents the net equity attributable to non-affiliated
investors that is not owned by the Predecessor.
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 and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
REVENUES
Assisted living revenues are recorded when services are rendered and
consist of resident fees for basic housing, support services and fees
associated with additional services such as personalized health and
support services. Additionally, the Predecessor performs services for
other assisted living facilities and real estate investments. Such fees
are recorded when the respective services are rendered.
CLASSIFICATION OF EXPENSES
All expenses incurred by the Predecessor (except interest, depreciation
and general and administrative costs) are classified as assisted living
operating expenses. All expenses (except interest, depreciation, and
assisted living operating expenses) associated with corporate or support
functions are classified as general and administrative expense.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost with depreciation being
provided over the assets' estimated useful lives using the straight-line
method as follows:
<TABLE>
<CAPTION>
Buildings and improvements...................................... 35 years
<S> <C> <C>
Furniture and equipment......................................... 7-10 years
</TABLE>
Interest incurred during construction periods is capitalized as part of
the building costs. Maintenance and repairs are expensed as incurred;
renewals and improvements are capitalized. Upon disposal of property and
equipment subject to depreciation, the related costs and accumulated
depreciation are removed and resulting gains and losses are reflected in
operations.
If there is an event or a change in circumstances that indicates that
the basis of the Predecessor's long-lived assets may not be recoverable,
the Predecessor's policy is to assess any impairment in value by making
a comparison of the current and projected operating cash flows of the
asset over its remaining useful life, on an undiscounted basis, to the
carrying amount of the asset. Such carrying amounts would be adjusted,
if necessary, to reflect an impairment in the value of the assets.
F-18
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FACILITY DEVELOPMENT COSTS
Facility development costs include direct costs related to development
and construction of facilities. When a project is completed, it is
transferred to property and equipment. If a project is abandoned, any
costs previously capitalized would be expensed.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized to interest expense over the term
of the related debt using the interest method. Accumulated amortization
was $403,400, $74,400 and $263,500 at December 31, 1994 and 1995 and
June 30, 1996, respectively.
INCOME TAXES
The businesses comprising the Predecessor have elected to be taxed as
either S Corporations, Partnerships or Limited Liability Companies
pursuant to the provisions of the Internal Revenue Code and, as such,
are not subject to federal or state income taxes because their taxable
income or loss accrues to individual shareholders, partners or members
respectively.
RESTRICTED CASH
Included in restricted cash are certain resident security deposits and
escrowed funds in connection with mortgage notes that the Predecessor
cannot use in operating activities.
CASH EQUIVALENTS
The Predecessor considers all investments purchased with original
maturities of three months or less at acquisition to be a cash
equivalent.
INTANGIBLE ASSETS
Intangible assets consists of goodwill ($2,883,000 net at June 30, 1996)
which is the excess of the purchase price over the net assets of
acquired facilities which is being amortized on the straight-line method
over 15 years, and a covenant not to compete ($293,000 net at June 30,
1996) which is being amortized on a straight-line basis over 7 years.
If there is an event or change in circumstances that indicates that the
basis of the Predecessor's long-lived intangibles may not be
recoverable, the Predecessor's policy is to assess any impairment in
value by making a comparison of the current and projected operating
costs flows of the facility for which the intangible relates over its
remaining useful life, on an undiscounted basis, to the carrying amount
of the intangible. Such carrying amounts would be adjusted, if
necessary, to reflect an impairment in value of the intangible.
PRE-OPENING COSTS
Costs incurred in connection with preparing facility units for initial
rental are expensed as incurred.
INTERIM FINANCIAL DATA (UNAUDITED)
The interim financial data as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 are unaudited; however, in the opinion of
management, such interim data includes all
F-19
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the combined financial position and the
combined results of operations and cash flows for the periods.
RECENT ACCOUNTING PRONOUNCEMENTS
The Predecessor is not aware of any current accounting pronouncements
that require future adoption that will materially affect the combined
financial condition or combined results of operations of the
Predecessor.
PRO FORMA PRESENTATION (UNAUDITED)
Certain entities that comprise the Predecessor intend on declaring, upon
successful completion of the Offering by the Company, final
distributions to their respective shareholders and partners in the
aggregate of $6,250,000. These distributions will be funded through
proceeds of the Offering and will be used primarily to satisfy (i) the
tax liabilities of the Kaplans expected to be incurred pertaining to the
transfer of the Predecessor interests in the facilities to the Company
($6,000,000) and (ii) real estate transfer taxes arising out of the
transaction expected to be approximately $(250,000).
The pro forma net income (loss) per share for all periods presented were
determined based upon the number of shares of common stock assumed to be
issued by the Company in the initial public offering to fund the
$6,250,000 distribution based on an assumed offering price of $11 per
share (568,182) plus, the issuance of the 4,150,000 shares of common
stock to the Kaplans in the exchange.
The pro forma benefit (provision) for income taxes for the Predecessor
is based on the historical combined financial data of the Predecessor as
if the entities comprising the Predecessor had operated as taxable
corporations for all periods presented and is recorded at the statutory
rate in effect during the period (40%).
3. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------- JUNE 30
--------------
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................ $ 1,419,119 $ 1,959,514 $ 2,450,644
Buildings and improvements.................. 23,756,891 29,728,334 56,432,449
Furniture and equipment..................... 5,927,952 6,396,074 7,628,983
-------------- -------------- --------------
31,103,962 38,083,922 66,512,076
Less, accumulated depreciation.............. 7,540,929 8,638,801 9,516,283
-------------- -------------- --------------
Property and equipment, net................. $ 23,563,033 $ 29,445,121 $ 56,995,793
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The Predecessor's land and buildings and certain furniture and equipment
serve as collateral for long-term debt.
F-20
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT: (CONTINUED)
Interest costs capitalized during development approximated $634,000,
$--, $--, $263,000, and $1,105,000, for the six months ended June 30,
1995 and 1996 and the years ended December 31, 1993, 1994 and 1995,
respectively.
4. INVESTMENTS IN JOINT VENTURES:
At December 31, 1995, the Predecessor had an 11% general partnership
interest in a limited partnership (Senior Quarters at Glen Riddle) and a
10% interest in a limited liability company (Senior Quarters at
Jamesburg). The Predecessor did not have operational control of either
facility. The joint venture agreements provide the Predecessor's joint
venture partners with preference distributions on their initial capital
contributions and provisions for a return of capital before any
distribution can be made to the Predecessor. Senior Quarters at Glen
Riddle and Senior Quarters at Jamesburg, which will commence operations
during 1996, are currently under development. Summarized financial
information for these joint ventures is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
--------------
<S> <C>
Assets
Land........................................................................ $ 1,511,423
Construction in progress.................................................... 6,340,604
Restricted investments...................................................... 20,884,931
Other assets................................................................ 1,344,308
--------------
$ 30,081,266
--------------
--------------
Liabilities and partners' capital:
Bonds payable............................................................... $ 25,585,142
Other liabilities........................................................... 1,267,067
Partners'/members' capital.................................................. 3,229,057
--------------
$ 30,081,266
--------------
--------------
</TABLE>
Effective April 1, 1996 the Predecessor purchased for $475,000 a 23.75%
interest in a limited partnership (Senior Quarters at Montville) (Note
5)
5. ACQUISITIONS AND DISPOSITIONS (UNAUDITED)
ACQUISITIONS:
On April 1, 1996 the Predecessor purchased two assisted living
facilities (Town Gate Manor and Town Gate East) for approximately
$10,375,020 which it fully funded through mortgage notes under the
Credit Facility (Notes 6 and 7). The Predecessor has accounted for this
acquisition under the purchase method. Under the purchase method the
purchase price is allocated to the assets acquired and liabilities
assumed based upon their relative fair value with the excess of
F-21
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
5. ACQUISITIONS AND DISPOSITIONS (UNAUDITED) (CONTINUED)
the purchase price over the fair value of the net assets acquired
recorded as goodwill. The preliminary allocation of the purchase price,
which in management's opinion is not expected to materially differ from
the final fair value valuation adjustments of the net assets acquired
is:
<TABLE>
<S> <C>
Cash.......................................................... $ 518,000
Property and equipment........................................ 6,422,000
Goodwill...................................................... 2,903,000
Covenant not to compete....................................... 323,000
Other assets.................................................. 290,000
Other liabilities............................................. (81,000)
-----------
Purchase price................................................ $10,375,000
-----------
-----------
</TABLE>
The Predecessor also purchased subsequent to December 31, 1995 for
$475,000 in cash, a 23.75% interest in an assisted living facility joint
venture. The Predecessor is accounting for this investment in joint
venture under the equity method of accounting. (See Note 14)
DISPOSITIONS:
Subsequent to year end, the Predecessor sold a 49.9% interest in its
Senior Quarters at Chestnut Ridge facility to an unrelated party for
$1,200,000. Since the Predecessor has retained operational and 50.1%
voting control of the facility the results of the operations of the
facility are combined in the accompanying financial statements with the
49.9% investment reflected as a component of minority interest.
PRO FORMA FINANCIAL INFORMATION:
The Predecessor acquired and disposed of interests in facilities during
the six months ended June 30, 1996. The pro forma financial information
set forth below is based upon the Predecessor's historical Combined
Statements of Operations for the six months ended June 30, 1996 and the
year ended December 31, 1995, adjusted to give effect to these
transactions as of January 1, 1995.
The pro forma financial information is presented for informational
purposes only and may not be indicative of what actual results of
operations would have been had the acquisitions occurred on January 1,
1995, nor does it purport to represent the results of operations for
future periods.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31, 1995
JUNE 30, 1996 -------------------
-------------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C>
Total revenue...................................................... $ 10,895 $ 18,316
Net loss........................................................... 835 242
</TABLE>
F-22
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------- JUNE 30
--------------
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage note payable to a financial institution
bearing interest at 7.605% per annum due in monthly
principal and interest installments of $119,333
through December 1, 2005 when unpaid balance of
$12,954,978 is due. (B)............................. $ -- $ 16,000,000 $ 15,872,053
Mortgage note payable to a financial institution
bearing interest at 4% above the financial
institution's lending rate (9.40% at June 30, 1996).
Note matures on February 28, 1999. (A)(B)(C)(E)..... 6,907,290 6,931,282 6,850,850
Mortgage note payable to a financial institution
bearing interest at 4% above the financial
institution's lending rate (9.40% at June 30, 1996).
Note matures on February 28, 1999. (A)(B)(C)(E)..... 8,774,147 8,759,298 8,657,653
Mortgage note payable to an institution with interest
only payments through December 1996 at 4.25% above
U.S. Treasury Notes (10.7%) beginning January 1997
monthly payments of principal and interest are due.
The note matures December 2006. (B)(D)(See Note
7).................................................. -- 8,000,000 8,000,000
Construction note payable to a financial institution,
maturing June 1, 2036 and providing up to
$20,599,900 in funding, bearing interest at 9.325%
per annum, interest accrued through June 1, 1996 and
thereafter monthly payments of principal and
interest of $164,072 through maturity. (F).......... $ 4,779,974 $ 14,363,167 $ 18,973,004
Mortgage note payable bearing interest at prime plus
2% (10.5% at December 31, 1994). The note provided
for monthly interest only payments and matured in
1995. The Company refinanced this mortgage with a
$16,000,000 facility in 1995........................ 15,000,000 -- --
</TABLE>
F-23
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- --------------
JUNE 30
--------------
1996
--------------
(UNAUDITED)
Mortgage note payable to a financial institution with
interest only payments through March 1997 at 4.25%
above U.S. Treasury Notes (10.56%). Beginning April
1997 monthly payments of principal and interest are
due. The note matures April 2006 (B)(F)(G) (Note
7).................................................. -- -- 6,484,375
<S> <C> <C> <C>
Mortgage note payable to a financial institution with
interest only payments through March 1997 at 4.25%
above U.S. Treasury Notes (10.56%). Beginning April
1997 monthly payments of principal and interest are
due. The note matures April 2006 (B)(F)(G) (Note
7).................................................. -- -- 3,890,625
-------------- -------------- --------------
35,461,411 54,053,747 68,728,560
Less, current portion................................ 15,000,000 245,867 913,047
-------------- -------------- --------------
Long-term portion.................................... $ 20,461,411 $ 53,807,880 $ 67,815,513
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- ------------------------
(A) Effective February 1996, the Predecessor will make monthly payments
equal to the outstanding mortgage principal balance multiplied by 12.0%.
The difference between this payment and the interest expense is applied
as a reduction of principal.
(B) The mortgage notes are collaterized by the facilities property and
equipment.
(C) The mortgage notes include an equity participation provision for the
lender. The Predecessor is obligated to pay the lender at either (i) the
maturity of the loan; (ii) refinancing of the loan; or (iii) sale of the
facility, the greater of $480,000 or 25% of the appraised market value of
the facility in excess of $17,500,000. The Predecessor has treated the
$480,000 as deferred interest and has reflected this amount in the
accompanying financial statements under the effective interest method.
The difference between the effective interest rate and the pay rate is
reflected as deferred interest payable. The effective interest rate on
this note was 10.1%, 9.9% and 10.4% at June 30, 1996, December 31, 1994
and 1995, respectively.
(D) Monthly principal and interest payments are based upon a 25 year
amortization period. At maturity, the Predecessor has an option to renew
the note for ten years at a rate of 6.25% above U.S. Treasury Notes
increased annually by 30 basis points. Monthly principal and interest
payments will be based upon a 16-year amortization period. The note also
includes an equity participation for the lender. The Predecessor is
obligated to pay the lender at the expiration of the initial term,
prepayment or upon default, the greater of $800,000 or 50% of the
difference between the fair market value of the facility and $8,000,000.
The Predecessor has treated the $800,000 as deferred interest and has
reflected this amount in the accompanying financial
F-24
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. LONG-TERM DEBT: (CONTINUED)
statements under the effective interest method. The difference between
the effective interest rate and the pay rate is reflected as deferred
interest payable. The effective interest rate on this note was 11.6% at
June 30, 1996 and December 31, 1995.
(E) These notes are partially or totally guaranteed by the respective
partners and shareholders of the Predecessor.
(F) Various prepayment penalties exist.
(G) Monthly principal and interest payments are based upon a 25 year
amortization period. At maturity, the Predecessor has an option to renew
the note for ten years at a rate of 6.25% above U.S. Treasury Notes
increased annually by 30 basis points. Monthly principal and interest
payments will be based upon a 16 year-amortization period. The note also
includes an equity participation for the lender. The Predecessor is
obligated to pay the lender at the expiration of the initial term,
prepayment, default or termination of the note, 50% of the difference
between the fair market value of the facility and $10,375,000 if the fair
market value of the property exceeds the loan amount by more than 125%,
otherwise the Predecessor will pay 10% of the fair market value of the
facility subject to a cap of 50% of the difference between the fair
market value of the facility and the loan amount.
Principal payments on long-term debt as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
- ----------------------------------------------------------
<S> <C>
1996..................................................... $ 245,867
1997.................................................... 360,889
1998.................................................... 391,506
1999.................................................... 16,116,514
2000.................................................... 463,458
Thereafter.............................................. 36,475,513
--------------
Total............................................... $ 54,053,747
--------------
--------------
</TABLE>
7. CREDIT FACILITY
The Predecessor has available a $40 million recourse line of credit (the
"Credit Facility") from Health Care REIT Inc. The Credit Facility
provides both construction and permanent financing.
Construction financings, which can also be used for acquisitions,
generally expire in twelve months or the date the certificate of
occupancy is received. Interest on construction financing is 3.5% above
the base rate announced by National City Bank of Cleveland. Monthly
payments of interest only are required. At this expiration date the
construction financing is automatically converted to a permanent
financing.
Permanent financings ("Mortgage Notes") are for initial terms of 10
years, with a 10 year renewal at the Predecessor's option. Interest,
which is fixed on the date of the permanent financing, is charged at
4.25% above comparable U.S. Treasury Notes during the initial financing
term and 6.25% above comparable U.S. Treasury Notes during any renewal
term. Monthly payments of interest only are due during the first year,
after which monthly payments of principal and interest are due based on
a 25 year amortization period.
F-25
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
7. CREDIT FACILITY (CONTINUED)
The Credit Facility is collateralized by the Predecessor's real estate,
equipment and accounts receivable. At June 30, 1996, the Predecessor has
available under the $40 million Credit Facility $21,625,000.
SUBSEQUENT EVENT (UNAUDITED)
Subsequent to June 30, 1996 and effective as of the date of the initial
public offering of the Company, the Company will obtain an additional
$100 million recourse line of credit from Health Care REIT, Inc.
In addition, subsequent to June 30, 1996, the Company received a
commitment for an additional draw down of $12,810,000 under the Credit
Facility of which $3,744,458 has been drawn.
8. COMMITMENTS AND CONTINGENCIES:
MANAGEMENT AGREEMENTS
The Predecessor has agreements with unaffiliated parties to manage their
facilities. These agreements, which range from three to ten years with
five year renewal options, expire at various dates from 1997 through
2006. The fees received under these agreements are generally 5% of gross
rental revenue of the facility and incentive fees related to facility
operating results.
LEGAL PROCEEDINGS
The Predecessor is named as a defendant in various lawsuits which arise
in the normal course of business. Although the ultimate outcome of these
proceedings cannot be determined, management believes that in no
instance will the outcome have a material adverse effect on the
Predecessor's financial position, result of operations or cash flows.
OPERATING LEASES
The Predecessor is obligated under certain long term non-cancellable
operating leases for its corporate office and office equipment expiring
at various dates through 2007. Future minimum lease payments required
under these leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- -------------------------------------------------------------
<S> <C>
1996..................................................... $ 119,700
1997...................................................... 153,400
1998...................................................... 159,660
1999...................................................... 139,918
2000...................................................... 138,746
</TABLE>
Rent expense was approximately $64,000, $75,000 and $90,000 in 1993,
1994 and 1995, respectively and $44,000 and $60,000 for the six months
ended June 30, 1995 and 1996, respectively.
INITIAL PUBLIC OFFERING
The Company intends to file a Registration Statement under the
Securities Act of 1933 to effect the Offering. The businesses' of the
Predecessor will be contributed to the Company concurrently with the
Offering (see Note 1). In addition to its owned facilities, the
Predecessor will contribute its management agreements with respect to
unaffiliated facilities.
F-26
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
9. EXTRAORDINARY ITEM:
During 1994, the Predecessor negotiated a settlement with various
lenders to satisfy certain outstanding mortgage notes payable and
accrued interest payable at a $4,398,672 discount. The Predecessor
simultaneously refinanced this debt with other lenders at the then
prevailing market rates. This amount has been reflected in the 1994
combined statement of operations as an extraordinary item.
10. RELATED PARTY TRANSACTIONS
DUE TO AFFILIATES
This represents advances from uncombined affiliated entities that are
not presented as a component of the Predecessor. These advances, which
are due on demand and bear interest at rates ranging from 6.53% to
6.92%, were made to assist in the funding of certain of the Predecessor
entities start-up operations.
OTHER -- AFFILIATES
The Predecessor has arrangements with affiliated entities to provide
real estate advisory services. The fees received by the Predecessor are
based on a percentage of the affiliate's annual rental revenue.
11. EMPLOYEE BENEFIT PLAN
In August 1995, the Predecessor established a 401(k) plan for all
employees that meet minimum employment criteria. The plan provides that
the Predecessor may, at its option, contribute to the plan up to 6% of
an employee's salary. Employees are always 100% vested in their own
contributions and vested in Predecessor contributions over seven years.
The Predecessor made no contributions for the year ended December 31,
1995 and the six months ended June 30, 1996.
12. CONCENTRATION OF RISK:
BUSINESS AND CREDIT CONCENTRATION
Concentration of credit risk with respect to resident receivables is
limited due to the large number of residents comprising the resident
roster and the policy of the Predecessor to obtain security deposits and
personal guarantees from third parties in many instances.
FINANCIAL RISK
The Predecessor maintains its cash primarily at two financial
institutions which management believes are of high credit quality.
GEOGRAPHIC CONCENTRATION
The Predecessor's facilities are located primarily in New York, New
Jersey and Connecticut. This concentration imposes on the Predecessor
certain risks, which include local economic conditions, that are not
within management's control.
F-27
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash and cash equivalents, restricted cash and variable rate and fixed
rate mortgage notes payable are reflected in the accompanying balance
sheet at amounts considered by management to reasonably approximate fair
value. Management estimates the fair value of its long-term fixed rate
notes payable generally using discounted cash flow analysis based upon
the Predecessor's current borrowing rate for debt with similar
maturities.
14. SUBSEQUENT EVENT:
In August 1996, the Company entered into an agreement to purchase for
$2,600,000 the remaining 50% interest in Senior Quarters at East
Northport. The $2,600,000 purchase price will be satisfied through (i)
the lesser of 50,000 shares of common stock at the initial public
offering price or $750,000 worth of common stock based upon the initial
public offering price and (ii) the remainder of the purchase price will
be paid in cash.
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kapson Senior Quarters Corp.
We have audited the accompanying balance sheet of Kapson Senior Quarters
Corp. as of June 10, 1996. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on the balance
sheet 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Kapson Senior Quarters Corp. as of
June 10, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 11, 1996
F-29
<PAGE>
KAPSON SENIOR QUARTERS CORP.
BALANCE SHEET
AS OF JUNE 10, 1996
ASSETS
<TABLE>
<S> <C>
Cash................................................................................. $ 300
---------
Total Assets..................................................................... $ 300
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Commitments and Contingencies (Note 5)
Shareholders' Equity:
Preferred Stock; $.01; par value 10,000,000 shares authorized, none issued or
outstanding
Common Stock; $.01; par value; 30,000,000 shares authorized, 300 shares issued and
outstanding....................................................................... $ 3
Additional Paid in Capital......................................................... 297
---------
Total Liabilities and Shareholders' Equity....................................... $ 300
---------
---------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-30
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO BALANCE SHEET
JUNE 10, 1996
(1) FORMATION OF THE COMPANY
Kapson Senior Quarters Corp. (the "Company") was incorporated under the
General Corporation Law of Delaware on June 7, 1996 by three individual
equal owners (the "Kaplans"). There have been no operations since formation.
The Company was formed in order to consolidate and expand the assisted
living facility business of the Kapson Group (the "Predecessor") of which
the Kaplans are owners. In connection with a proposed public offering (see
Note 2), the Prececessor will contribute their interests in six wholly owned
facilities (Senior Quarters at Huntington Station, Senior Quarters at
Centereach I, Senior Quarters at Centereach II, Senior Quarters at Stamford,
Town Gate Manor and Town Gate East); two majority controlled/owned
facilities (Senior Quarters at Chestnut Ridge and Senior Quarters at East
Northport), three minority owned facilities (Change Bridge Inn, Senior
Quarters at Jamesburg and Senior Quarters at Glen Riddle) (two of which are
under development) and management agreements for four facilities -- (The
Regency at Glen Cove, Senior Quarters at Cranford, Castle Gardens and Senior
Quarters at Lynbrook( (one of which is under development) owned by unrelated
third parties for an aggregate of approximately 4,150,000 shares of common
stock the Company, See Note 2 -- The Initial Public Offering.
(2) STOCKHOLDER EQUITY
COMMON STOCK
The Company is authorized to issue 30,000,000 shares of common stock with a
$.01 par value. On June 10, 1996, the Company issued 300 shares of common
stock to the Kaplans for $1 per share.
THE INITIAL PUBLIC OFFERING
In connection with the Company's plan to expand the assisted living business
of the Predecessor, the Company intends to file a Registration Statement
under the Securities Act of 1933 to effect an initial public offering (the
"Offering"). The proceeds of the Offering are intended to be used for the
development and acquisition of additional assisted living facilities,
working capital and general corporate purposes as well as a distribution to
the Kaplans of an aggregate of $6.25 million which will be used primarily to
satisfy (i) tax liabilities of the Kaplans expected to be incurred
pertaining to the transfer of the Predecessor interests in the facilities to
the Company ($6,000,000) and (ii) real estate transfer taxes arising out of
the transaction estimated to be approximately $250,000.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
$.01 par value, in one or more classes or series and to fix the designation,
preferences, rights, qualifications, limitations and restrictions thereof,
including the voting rights, dividends rights, dividend rates, conversion
rights, terms of redemption, redemption prices, liquidation preferences and
number of shares constituting any series. The Company, may without
shareholder approval, issue preferred stock with voting and conversion
rights that could adversely affect the voting power of the holders of the
common stock and the market price of the common stock.
STOCK OPTIONS
The Company adopted the 1996 Stock Incentive Plan (the "Plan") which may be
awarded to key employees. Under the Plan, a maximum of 600,000 shares of
common stock may be issued pursuant to the Plan. The Plan provides for the
grant of any or all of the following types of awards to eligible employees:
(i) stock options, including incentive stock options and non-qualified stock
options; (ii) stock appreciation rights, in tandem with stock options or
freestanding; (iii) restricted stock; and (iv) performance shares. In
addition, the Plan provides for the non-discretionary award of stock options
to non-employee directors of the Company as a portion of their annual
retainer fee. Awards may be granted singly, in combination, or in tandem, as
determined by the Stock Option
F-31
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO BALANCE SHEET (CONTINUED)
JUNE 10, 1996
(2) STOCKHOLDER EQUITY (CONTINUED)
Committee. The maximum number of shares of common stock subject to stock
options, performance shares, restricted stock or stock appreciation rights
that may be granted to any individual under the Plan is 50,000 for each
fiscal year of the Company during the term of the Plan. The exercise price
may not be less than the fair market value of the common stock at the time
of grant. In contemplation of the Offering, the Company has granted
effective as of the date the Offering is priced, 117,500 options to purchase
shares of common stock to key employees and Directors at the Offering price.
(3) CREDIT FACILITY
The Predecessor has available a $40 million recourse line of credit (the
"Credit Facility") from Health Care REIT Inc. that it intends to assign to
the Company in connection with the Offering. The Credit Facility provides
both construction and permanent financing. At June 30, 1996, $21,625,000
(unaudited) was available under the $40 million credit facility.
Construction financings (which can also be used for acquisitions) generally
expire in twelve months or the date the certificate of occupancy is
received. Interest on construction financing is 3.5% above the base rate
announced by National City Bank of Cleveland. Monthly payments of interest
only are required. At this expiration date the construction financing is
automatically converted to a permanent financing.
Permanent financings ("Mortgage Notes") are for initial terms of 10 years,
with a 10 year renewal at the Predecessor's option. Interest, which is fixed
on the date of permanent financing, is charged at 4.25% above comparable
U.S. Treasury Notes during the initial financing term and 6.25% above
comparable U.S. Treasury Notes during any renewal term. Monthly payments of
interest only are due during the first year, after which monthly payments of
principal and interest are due based on a 25 year amortization period.
The Credit Facility is collateralized by the Predecessor's real estate,
equipment and accounts receivable.
The Company intends to use the Credit Facility to finance the acquisition of
developed and undeveloped properties, construction, development and
renovation costs and for working capital purposes.
SUBSEQUENT EVENT (UNAUDITED):
Subsequent to June 30, 1996 and effective as of the date of the initial
public offering of the Company, the Company will obtain an additional $100
million recourse line of credit from Health Care REIT, Inc. In addition,
subsequent to June 30, 1996 the Company received a commitment for an
additional draw down of $12,810,000 (unaudited) under the Credit Facility of
which $3,744,458 (unaudited) has been drawn.
(4) OFFERING COSTS
In connection with the Offering, affiliates will incur legal, accounting,
and related costs which will be reimbursed by the Company upon completion of
the Offering. These costs will be deducted from the gross proceeds of the
Offering and reflected as an adjustment to additional paid in capital.
(5) COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company will enter into employment agreements with Glenn Kaplan,
Chairman of the Board and Chief Executive Officer, Wayne Kaplan, Vice
Chairman of the Board, Senior Executive Vice President, Secretary, and
General Counsel, and Evan Kaplan, President, Chief Operating Officer,
F-32
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO BALANCE SHEET (CONTINUED)
JUNE 10, 1996
(5) COMMITMENTS AND CONTINGENCIES (CONTINUED)
and director, each of whom will receive annual cash compensation and a bonus
pursuant to substantially identical five year employment contracts with the
Company. These agreements will be effective upon the consummation of the
Offering, and are renewable from year to year after the initial five year
period. Each contract provides for a salary of $213,000, increased annually
by a percentage equal to the Consumer Price Index. Each contract also
provides for a discretionary bonus to be set by the Company's Compensation
Committee, based on the earnings of the Company and other criteria
determined by the Compensation Committee. If the executive covered by the
contract is terminated by the Company without cause, the executive shall be
paid the salary provided for in the contract for the remainder of the term
of the contract but in no event less than one year's salary. In addition,
the contract provides for a payment equal to two year's base salary upon the
occurrence of certain events relating to a change of control of the Company
and subsequent termination. Each executive officer has agreed to devote
substantially all of his time to the Company and not to compete with the
Company while employed thereby and for a period of one year from the date of
termination unless such executive officer is terminated without cause.
OPERATING AGREEMENTS
The Kaplans, due to New York State law, are required to individually be the
licensed operators of all of the Company's assisted living facilities
located in New York. the Company has entered into operating agreements with
the Kaplans, relating to the facilities, for a term of 25 years at a net fee
of 3.5% of the respective facilities' revenues.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), which prescribes a new method of accounting for
stock-based compensation that determines compensation expense based on fair
value measured at the grant date. SFAS No. 123 gives companies that grant
stock options or other equity instruments to employees, the option of either
adopting the new rules or continuing current accounting, however, disclosure
would be required of the pro forma amounts as if the new rules had been
adopted. SFAS No. 123 is effective for transactions entered into in fiscal
years that begin after December 15, 1995. The Company has not yet determined
whether to adopt the new method of accounting and has not yet determined the
effect on the financial statements.
(7) SUBSEQUENT EVENT:
In August 1996, the Company entered into an agreement to purchase for
$2,600,000, the remaining 50% interest in Senior Quarters at East Northport.
The $2,600,000 purchase price will be satisfied through (i) the lesser of
50,000 shares of common stock at the initial public offering price or
$750,000 worth of common stock based upon the initial public offering price
and (ii) the remainder of the purchase price will be paid in cash.
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Partners
Town Gate East
Penfield, New York
We have audited the accompanying balance sheets of Town Gate East (a
Partnership) as of December 31, 1995 and 1994, and the related statements of
income, changes in partners' capital and cash flows for each of the years in the
three year period ended December 31, 1995. These financial statements are the
responsibility of the facility's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Town Gate East (a
Partnership) as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 1995 in conformity with generally accepted accounting principles.
/s/ Rotenberg & Company LLP
Rochester, NY
February 21, 1996
F-34
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
BALANCE SHEETS
AT DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995
------------- ------------- THREE MONTHS
ENDED
MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents....................................... $ 106,746 $ 100,773 $ 86,225
Accounts Receivable -- Net of Allowance for Doubtful Accounts... 19,166 28,709 30,471
Inventories..................................................... 9,654 8,980 8,980
Prepaid Expenses................................................ 56,820 59,457 118,698
------------- ------------- ---------------
Total Current Assets.......................................... $ 192,386 $ 197,919 $ 244,374
Property and Equipment -- Net of Accumulated Depreciation......... 2,433,530 2,349,390 2,318,354
Mortgage Acquisition Costs -- Net of Accumulated Amortization..... 36,624 30,520 29,020
------------- ------------- ---------------
Total Assets................................................ $ 2,662,540 $ 2,577,829 $ 2,591,748
------------- ------------- ---------------
------------- ------------- ---------------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Notes and Mortgage Payable -- Due Within One Year............... $ 94,708 $ 53,040 $ 39,972
Accounts Payable................................................ 41,991 45,136 28,436
Accrued Expenses................................................ 27,623 30,055 8,928
Unearned Resident Care Revenue.................................. 12,333 -- --
------------- ------------- ---------------
Total Current Liabilities..................................... $ 176,655 $ 128,231 $ 77,336
Other Liabilities
Notes and Mortgage Payable -- Due After One Year................ 1,804,759 1,772,572 1,772,572
------------- ------------- ---------------
Total Liabilities........................................... $ 1,981,414 $ 1,900,803 $ 1,849,908
Partners' Capital................................................. 681,126 677,026 741,840
------------- ------------- ---------------
Total Liabilities and Partners' Capital....................... $ 2,662,540 $ 2,577,829 $ 2,591,748
------------- ------------- ---------------
------------- ------------- ---------------
</TABLE>
The accompanying notes are an integral part of this financial statement
and should be read in conjunction therewith.
F-35
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------- MARCH 31, 1996
1993 1994 1995 ----------------------------
AMOUNT AMOUNT AMOUNT 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 1,978,568 $ 2,036,539 $ 2,137,991 $ 527,325 $ 554,657
Operating Expenses.................... 1,385,669 1,439,418 1,557,656 358,884 361,465
Depreciation and Amortization......... 130,386 135,981 142,203 36,900 36,000
------------- ------------- ------------- ------------- -------------
Income Before Other Income............ $ 462,513 $ 461,140 $ 438,132 $ 131,541 $ 157,192
Other Income.......................... 9,443 13,300 14,468 0 0
------------- ------------- ------------- ------------- -------------
Net Income............................ $ 471,956 $ 474,440 $ 452,600 $ 131,541 $ 157,192
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-36
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
TOTAL TOTAL TOTAL
------------- ------------- ------------- THREE MONTHS
ENDED
MARCH 31,
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance -- Beginning of Year.......................... $ 561,330 $ 687,486 $ 681,126 $ 677,026
Net Income............................................ 471,956 474,440 452,600 157,192
------------- ------------- ------------- ------------
Subtotal.............................................. $ 1,033,286 $ 1,161,926 $ 1,133,726 $ 834,218
Partners' Withdrawals................................. 345,800 480,800 456,700 92,378
------------- ------------- ------------- ------------
Balance -- End of Year................................ $ 687,486 $ 681,126 $ 677,026 $ 741,840
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
F-37
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- --------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Cash Received from Residents........... $ 1,959,587 2,036,328 $ 2,110,115 $ 515,285 $ 551,941
Cash Paid to Suppliers and Employees... (1,267,332) (1,296,989) (1,361,568) (397,586) (429,658)
Interest Received...................... 2,514 2,465 3,622 719 954
Interest Paid.......................... (142,204) (151,621) (185,253) (15,227) (28,875)
Other Income........................... 6,929 10,835 10,846
-------------- -------------- -------------- ------------ ------------
Net Cash Flows from Operating
Activities........................ $ 559,494 $ 601,018 $ 577,762 $ 103,191 94,362
-------------- -------------- -------------- ------------ ------------
Cash Flows from Investing Activities
Cash Purchases of Property and
Equipment............................. $ (42,230) $ (71,169) $ (44,324) $ (27,078) $ (3,464)
Proceeds from Sale of Assets........... -- -- 9,010
-------------- -------------- -------------- ------------ ------------
Net Cash Flows from Investing
Activities.......................... $ (42,230) $ (71,169) $ (35,314) $ (27,078) $ (3,464)
-------------- -------------- -------------- ------------ ------------
Cash Flows from Financing Activities.....
Repayment of Debt...................... $ (89,840) $ (69,422) $ (91,721) $ (14,240) $ (13,068)
Partners' Withdrawals.................. 345,800) (480,800) (456,700) 105,200) (92,378)
-------------- -------------- -------------- ------------ ------------
Net Cash Flows from Financing
Activities.......................... $ (435,640) $ (550,222) $ (548,421) $ (119,440) $ (105,446)
-------------- -------------- -------------- ------------ ------------
Net Decrease in Cash and Cash
Equivalents............................. $ 81,624 $ (20,373) $ (5,973) $ (43,327) $ (14,548)
Cash and Cash Equivalents -- Beginning of
Year.................................... 45,495 127,119 106,746 106,746 100,773
-------------- -------------- -------------- ------------ ------------
Cash and Cash Equivalents -- End of
Year.................................... $ 127,119 $ 106,746 $ 100,773 $ 63,419 $ 86,225
-------------- -------------- -------------- ------------ ------------
-------------- -------------- -------------- ------------ ------------
</TABLE>
F-38
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Income......................................... $ 471,956 $ 474,440 $ 452,600 $ 131,541 $ 157,192
Adjustments:
Depreciation..................................... 124,282 129,877 136,099 35,400 34,500
Amortization..................................... 6,104 6,104 6,104 1,500 1,500
Bad Debts........................................ -- -- 6,000 -- --
Loss on Sale of Assets........................... -- -- 1,221 -- --
Changes:
Accounts Receivable.............................. (2,721) (10,084) (15,543) 1,012 (1,762)
Inventories...................................... (195) (649) 674 -- --
Prepaid Expenses................................. (11,186) (4,656) (2,637) (51,467) (59,241)
Accounts Payable................................. 18,303) (2,744) 3,145 (10,888) 16,700)
Accrued Expenses................................. 5,817 (1,143) 2,432 8,426 (21,127)
Unearned Resident Care Revenue................... (16,260) 9,873 (12,333) (12,333) --
----------- ----------- ----------- ----------- -----------
Net Cash Flows from Operating Activities....... $ 559,494 $ 601,018 $ 577,762 $ 103,191 $ 94,362
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
NON-CASH TRANSACTIONS
During 1995, long term debt in the amount of $17,866 was incurred to
purchase a vehicle.
F-39
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The partnership maintains its books and prepares its financial statements on
the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits, certificates of deposit,
and all highly liquid debt instruments with original maturities of three months
or less. The partnership maintains cash and cash equivalents at financial
institutions which periodically may exceed federally insured amounts.
INVENTORIES
Inventories are stated at the lower of cost or market, on the first-in,
first-out method.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation of property and equipment is provided over the estimated useful
lives of the respective assets on the straight line basis as follows:
<TABLE>
<S> <C>
Auto................................................. 5 Years
Building............................................. 40 Years
32 - 40
Building Addition.................................... Years
Equipment............................................ 3 - 15 Years
Improvements......................................... 3 - 20 Years
</TABLE>
Maintenance and repairs are charged to expense. The cost of property and
equipment retired or otherwise disposed of and the related accumulated
depreciation are removed from the accounts.
MORTGAGE ACQUISITION COSTS
Mortgage acquisition costs have been capitalized and are being amortized
using the straight line method over the term of the debt.
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 and the reported amounts of revenues and expense during the reporting
period. Actual results can differ from those estimates.
INCOME TAXES
Partnership profit and losses are reported by the individual partners on
their personal tax returns. Accordingly, no provision for taxes is reflected in
these financial statements.
NOTE B -- SCOPE OF BUSINESS
The partnership was organized on November 1, 1978 and is engaged in the
operation of a one hundred twenty (120) certified bed adult care facility in
Penfield, New York.
F-40
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1994 and 1995
and the three months ended March 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Residents...................................................... $ 16,018 $ 27,961 $ 31,602
Town Gate Manor................................................ 3,148 6,748 4,869
--------- --------- ---------------
$ 19,166 $ 34,709 $ 36,471
Less: Allowance for Doubtful Accounts.......................... -- 6,000 6,000
--------- --------- ---------------
Net Accounts Receivable.................................... $ 19,166 $ 28,709 $ 30,471
--------- --------- ---------------
--------- --------- ---------------
</TABLE>
NOTE D -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Auto.................................................... $ 18,090 $ 24,866 $ 24,866
Building................................................ 1,122,627 1,122,627 1,122,627
Building Additions...................................... 1,668,890 1,668,890 1,669,119
Equipment............................................... 385,976 391,183 391,304
Improvements............................................ 216,841 247,047 250,161
------------- ------------- ---------------
$ 3,412,424 $ 3,454,613 $ 3,458,077
Less: Accumulated Depreciation.......................... 1,054,294 1,180,623 1,215,123
------------- ------------- ---------------
$ 2,358,130 $ 2,273,990 $ 2,242,954
Add: Land............................................... 75,400 75,400 75,400
------------- ------------- ---------------
Net Property and Equipment.......................... $ 2,433,530 $ 2,349,390 $ 2,318,354
------------- ------------- ---------------
------------- ------------- ---------------
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994, and 1995
and the three months ended March 31, 1996 was $124,282, $129,877, $136,099 and
$34,500, respectively.
Substantially all of the building and equipment is pledged as collateral
security on notes and mortgages payable.
NOTE E -- MORTGAGE ACQUISITION COSTS
Mortgage acquisition costs at December 31, 1994 and 1995 and March 31, 1996,
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Total Costs.................................................... $ 61,041 $ 61,041 $ 61,041
Less: Accumulated Amortization................................. 24,417 30,521 32,021
--------- --------- ---------------
Net Mortgage Acquisition Costs............................. $ 36,624 $ 30,520 $ 29,020
--------- --------- ---------------
--------- --------- ---------------
</TABLE>
Amortization expense for each of the years ended December 31, 1993, 1994 and
1995 was $6,104, and for the three months ended March 31, 1996, $1,500.
F-41
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- NOTES AND MORTGAGE PAYABLE
Notes and mortgage payable consisted of the following at December 31, 1994
and 1995 and March 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
NOTE PAYABLE -- M & T BANK
$200,000 line of credit bearing interest at prime plus 1%.
Collateralized by all assets of the partnership and guaranteed by
the partners..................................................... $ 40,000 $ -- $ --
NOTE PAYABLE -- FORD MOTOR CREDIT COMPANY
Installment note paid in full..................................... 5,328 -- --
NOTE PAYABLE -- CHASE MANHATTAN BANK
Installment note payable in monthly payments of $459, including
interest at 10.49%. Note matures in May, 1999. Collateralized by
vehicle.......................................................... $ -- $ 15,764 $ 14,797
MORTGAGE PAYABLE -- M & T BANK
Payments are based on a twenty year schedule with the principal
balance due in the tenth year (2001). Monthly payments including
principal and interest at prime plus 1% are $18,608.
Collateralized by the real and personal property used in the
operation of the facility and guaranteed by the partners......... $ 1,854,139 $ 1,809,848 $ 1,797,747
------------- ------------- -------------
Total Notes and Mortgage Payable................................ $ 1,899,467 $ 1,825,612 $ 1,812,544
Less: Amount Due Within One Year.................................. 94,708 53,040 39,972
------------- ------------- -------------
Amount Due After One Year........................................... $ 1,804,759 $ 1,772,572 $ 1,772,572
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Annual maturities of debt at March 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- --------------------------------------------------------------------- -------------
<S> <C>
1996............................................................... $ 39,972
1997............................................................... 58,482
1998............................................................... 64,482
1999............................................................... 67,787
2000............................................................... 72,244
Thereafter........................................................... 1,509,577
-------------
Total............................................................ $ 1,812,544
-------------
-------------
</TABLE>
Interest expense for the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1996, was $141,695, $155,160, $184,952, and
$28,875, respectively.
NOTE G -- RELATED PARTY TRANSACTIONS
Josephine Kennedy, partner, receives a salary as administrator of the
facility. Albert R. Christiano, partner, receives a salary for consulting
services and is also the legal counsel for the facility. Den Pac
F-42
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE G -- RELATED PARTY TRANSACTIONS (CONTINUED)
Management, Inc., a corporation whose stock is solely owned by Dennis
Christiano, partner, receives payments for management services. The amounts of
these transactions for the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Josephine Kennedy....................................... $ 52,832 $ 55,212 $ 58,150 $ 15,126
Albert R. Christiano.................................... 8,400 10,600 10,800 2,700
Den-Pac Management, Inc................................. 8,400 10,600 10,800 2,700
</TABLE>
There is an intercompany receivable from Town Gate Manor, related through
common ownership, for shared administrative expenses of $3,148, $6,748 and
$4,869 at December 31, 1994 and 1995 and March 31, 1996, respectively. These
amounts are included in accounts receivable.
NOTE H -- EMPLOYEE BENEFIT PLAN
During 1995, the partnership implemented a 401(k) plan whereby all employees
who meet age and length of service requirements may voluntarily defer up to 15%
of wages. The partnership has elected not to make matching contributions under
the plan.
NOTE I -- SUBSEQUENT EVENT
During 1995, the partners agreed to sell the operations and real estate of
Town Gate East for an amount in excess of book value. The sale closing is April
1, 1996.
F-43
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
REPORT OF INDEPENDENT AUDITORS
The Partners
Town Gate Manor
Rochester, New York
We have audited the accompanying balance sheet of Town Gate Manor (a
Partnership) as of December 31, 1995 and 1994, and the related statements of
income, changes in partners' capital and cash flows for each of the years in the
three year period ended December 31, 1995. These financial statements are the
responsibility of the facility's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Town Gate Manor (a
Partnership) as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 1995 in conformity with generally accepted accounting principles.
/s/ Rotenberg & Company LLP
Rochester, New York
January 29, 1996
F-44
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
BALANCE SHEETS
AT DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995
------------- ------------- THREE MONTHS
ENDED MARCH
31, 1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents......................................... $ 76,344 $ 133,878 $ 90,327
Accounts Receivable............................................... 2,335 1,648 2,480
Inventories....................................................... 6,134 6,005 6,005
Prepaid Expenses.................................................. 25,612 34,921 55,856
------------- ------------- -------------
Total Current Assets.......................................... $ 110,425 $ 176,452 $ 154,668
Property and Equipment -- Net of Accumulated Depreciation........... 1,495,447 1,458,930 1,439,430
Mortgage Acquisition Costs -- Net of Accumulated Amortization....... 29,368 23,984 22,484
------------- ------------- -------------
Total Assets.................................................. $ 1,635,240 $ 1,659,366 $ 1,616,582
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Mortgage and Loan Payable -- Due Within One Year.................. $ 32,189 $ 42,547 $ 31,800
Accounts Payable.................................................. 30,127 42,323 63,328
Accrued Expenses.................................................. 20,080 26,064 107
Unearned Resident Care Revenues................................... 2,579 -- --
------------- ------------- -------------
Total Current Liabilities..................................... $ 84,975 $ 110,934 $ 95,235
Other Liabilities
Mortgage and Loan Payable -- Due After One Year................... 1,157,611 1,127,304 1,127,304
------------- ------------- -------------
Total Liabilities............................................. $ 1,242,586 $ 1,238,238 $ 1,222,539
Partners' Capital................................................... 392,654 421,128 394,043
------------- ------------- -------------
Total Liabilities and Partners' Capital....................... $ 1,635,240 $ 1,659,366 $ 1,616,582
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this financial statement
and should be read in conjunction therewith.
F-45
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------------------------- ------------------------
1993 AMOUNT 1994 AMOUNT 1995 AMOUNT 1995 1996
----------- ------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 993,443 $ 1,106,551 $ 1,406,311 $ 337,734 $ 357,462
Operating Expenses.......................... 752,185 854,173 1,055,969 251,157 294,247
Depreciation................................ 48,337 58,993 79,755 23,100 21,000
----------- ------------- ------------- ----------- -----------
Income Before Other Income.................. $ 192,921 $ 193,385 $ 270,587 $ 63,477 $ 42,215
Other Income................................ 770 1,198 7,087 0 0
----------- ------------- ------------- ----------- -----------
Net Income.................................. $ 193,691 $ 194,583 $ 277,674 $ 63,477 $ 42,215
----------- ------------- ------------- ----------- -----------
----------- ------------- ------------- ----------- -----------
</TABLE>
F-46
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 TOTAL 1994 TOTAL 1995 TOTAL
----------- ----------- ----------- THREE MONTHS
ENDED MARCH
31, 1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance -- Beginning of Year................................ $ 298,260 $ 356,871 $ 392,654 $ 421,128
Net Income.................................................. 193,691 194,583 277,674 42,215
----------- ----------- ----------- ------------
Subtotal.................................................... $ 491,951 $ 551,454 $ 670,328 $ 463,343
Partners' Withdrawals....................................... 135,080 158,800 249,200 69,300
----------- ----------- ----------- ------------
Balance -- End of Year...................................... $ 356,871 $ 392,654 $ 421,128 $ 394,043
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
F-47
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------------
1993 1994 1995 1995 1996
------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flow Operating Activities
Cash Received from Residents.................... $ 987,652 $ 1,116,440 $ 1,404,419 $ 332,901 $ 356,492
Cash Paid to Suppliers and Employees............ (715,576) (766,973) (925,935) (246,751) (292,878)
Interest Received............................... 264 447 604 53 137
Interest Paid................................... (48,126) (43,436) (121,034) (31,692) (27,255)
Miscellaneous................................... 506 751 2,559 -- --
------------ ------------- ------------- ------------ ------------
Net Cash Flows from Operating Activities........ $ 224,720 $ 307,229 $ 360,613 $ 54,511 $ 36,496
------------ ------------- ------------- ------------ ------------
Cash Flows from Investing Activities
Cash Purchases of Equipment..................... $ (35,920) (804,498) $ (40,430) $ (17,897) $ --
Proceeds from Sale of Automobile................ -- -- 6,500 -- --
------------ ------------- ------------- ------------ ------------
Net Cash Flows from Investing Activities........ $ (35,920) $ (804,498) $ (33,930) $ (17,897) $ --
------------ ------------- ------------- ------------ ------------
Cash Flows from Financing Activities
Proceeds from Debt.............................. $ -- $ 710,512 $ 10,200 $ 10,200 $ --
Repayment of Debt............................... (59,099) (5,191) (30,149) -- (10,747)
Partners' Withdrawals........................... (135,080) (158,800) (249,200) (58,267) (69,300)
Cash Payment for Mortgage Acquisition Costs..... (6,000) -- -- -- --
------------ ------------- ------------- ------------ ------------
Net Cash Flows from Financing Activities........ $ (200,179) $ 546,521 $ (269,149) $ (48,067) $ (80,047)
------------ ------------- ------------- ------------ ------------
Net Increase in Cash and Cash Equivalents......... $ (11,379) $ 49,252 $ 57,534 $ (11,453) $ (43,551)
Cash and Cash Equivalents -- Beginning of Year.... 38,471 27,092 76,344 76,344 133,878
------------ ------------- ------------- ------------ ------------
Cash and Cash Equivalents -- End of Year.......... $ 27,092 $ 76,344 $ 133,878 $ 64,891 $ 90,327
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
</TABLE>
F-48
<PAGE>
RECONCILIATION OF NET INCOME TO
NET CASH FLOWS FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Income............................................... $ 193,691 $ 194,583 $ 277,674 $ 63,477 $ 42,215
Adjustments:
Depreciation and Amortization.......................... 48,337 58,993 79,755 23,100 21,000
Gain on Sale of Asset.................................. -- -- (3,924) -- --
Changes:
Accounts Receivable.................................... (6,169) 7,689 687 (2,201) (833)
Inventory.............................................. (143) (814) 129 -- --
Prepaid Expenses....................................... (8,477) (2,720) (9,309) (10,972) (20,935)
Real Estate Tax Escrow................................. (1,787) 27,463 -- -- --
Accounts Payable....................................... (3,169) 5,276 12,196 (3,181) 21,005
Accrued Expenses....................................... 2,059 14,558 5,984 (13,133) (25,956)
Unearned Resident Care Revenue......................... 378 2,201 (2,579) (2,579) --
----------- ----------- ----------- ----------- -----------
Net Cash Flows from Operating Activities............... $ 224,720 $ 307,229 $ 360,613 $ 54,511 $ 36,496
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
NON-CASH TRANSACTIONS
During 1994, the first and second mortgages were refinanced into a
construction loan. The total amount refinanced was $455,920. Mortgage
acquisition costs of $23,368 were incorporated into the construction loan.
F-49
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The partnership maintains its books and prepares its financial statements on
the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits, certificates of deposit,
and all highly liquid debt instruments with original maturities of three months
or less. The partnership maintains cash and cash equivalents at financial
institutions which periodically may exceed federally insured amounts.
INVENTORIES
Inventories are stated at the lower of cost or market, on the first-in,
first-out method.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation of property and equipment is provided over the estimated useful
lives of the respective assets on the straight line basis as follows:
<TABLE>
<S> <C>
Auto.................................................. 5 Years
Building and Building Addition........................ 40 Years
3 - 10
Equipment............................................. Years
3 - 12
Improvements.......................................... Years
</TABLE>
Maintenance and repairs are charged to expense. The cost of property and
equipment retired or otherwise disposed of and the related accumulated
depreciation are removed from the accounts.
MORTGAGE ACQUISITION COSTS
Mortgage acquisition costs have been capitalized and are being amortized
using the straight line method over the term of the debt commencing in 1995.
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 and the reported amounts of revenues and expense during the reporting
period. Actual results can differ from those estimates.
INCOME TAXES
Partnership profit and losses are reported by the individual partners on
their personal tax returns. Accordingly, no provision for taxes is reflected in
these financial statements.
NOTE B -- SCOPE OF BUSINESS
The partnership was organized on November 1, 1978 and is engaged in the
operation of a seventy-nine (79) certified bed adult care facility including an
adult day care program in Rochester, New York. Seventeen (17) of the total beds
were constructed in 1994.
F-50
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Auto...................................................... $ 14,053 $ -- $
Building.................................................. 966,673 966,673 966,673
Building Addition......................................... 718,593 733,144 733,144
Equipment................................................. 186,112 200,280 200,280
Improvements.............................................. 203,791 215,502 215,502
------------- ------------- -------------
$ 2,089,222 $ 2,115,599 $ 2,115,599
Less: Accumulated Depreciation............................ 639,250 702,144 721,644
------------- ------------- -------------
$ 1,449,972 $ 1,413,455 $ 1,393,955
Add: Land................................................. 45,475 45,475 45,475
------------- ------------- -------------
Net Property and Equipment............................ $ 1,495,447 $ 1,458,930 $ 1,439,430
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994 and 1995
and the three months ended March 31, 1996 was $48,337, $58,993, $74,371 and
$19,500, respectively.
NOTE D -- MORTGAGE ACQUISITION COSTS
Mortgage acquisition costs consisted of the following at December 31, 1994
and 1995 and March 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Total Costs....................................................... $ 29,368 $ 29,368 $ 29,368
Less: Accumulated Amortization.................................... -- 5,384 6,884
--------- --------- ------------
Net Mortgage Acquisition Costs.................................. $ 29,368 $ 23,984 $ 22,484
--------- --------- ------------
--------- --------- ------------
</TABLE>
Amortization expense for the year ended December 31, 1995, and the three
months ended March 31, 1996 was $5,384 and $1,500, respectively.
F-51
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- MORTGAGE AND LOAN PAYABLE
Mortgages and loan payable consisted of the following at December 31, 1994
and 1995 and the three months ended March 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
MORTGAGE PAYABLE -- FIRST NATIONAL BANK
Mortgage payable in monthly installments of $12,895, including
interest at prime plus 1%. Mortgage matures with a balloon
payment due January, 2000. Collateralized by real and personal
property used in the operation of the facility and personally
guaranteed by the partners. Converted from a construction loan in
February, 1995................................................... $ -- $ 1,169,851 $ 1,159,104
CONSTRUCTION LOAN -- FIRST NATIONAL BANK
Loan payable in monthly installments of interest only at prime
plus 1% until converted to a permanent mortgage in February,
1995............................................................. 1,189,800 --
------------- ------------- -------------
Total Mortgages and Loan Payable................................ $ 1,189,800 $ 1,169,851 $ 1,159,104
Less: Amount Due Within One Year.................................. 32,189 42,547 31,800
------------- ------------- -------------
Amount Due After One Year....................................... $ 1,157,611 $ 1,127,304 $ 1,127,304
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Annual maturities of debt as of March 31, 1996 are as follows:
<TABLE>
<S> <C>
1996................................................... $ 31,800
1997................................................... 46,886
1998................................................... 51,668
1999................................................... 56,937
2000................................................... 971,813
----------
Total.............................................. $1,159,104
----------
----------
</TABLE>
Interest expense for the years ended December 31, 1993, 1994 and 1995 was
$48,126, $52,574 and $121,718, respectively. Interest expense for the period
ended March 31, 1996 was $18,117. Interest capitalized on the new construction
at December 31, 1994 was $15,450.
NOTE F -- RELATED PARTY TRANSACTIONS
Richard Hood, partner, receives a salary as administrator of the facility.
Albert R. Christiano, partner, receives a salary for consulting services and is
also the legal counsel for the facility. Den Pac Management, Inc., a corporation
whose stock is solely owned by Dennis Christiano, partner, receives payments for
management services. The amounts of these transactions for the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996, were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Richard Hood............................................ $ 51,418 $ 58,475 $ 55,382 $ 13,996
Albert R. Christiano.................................... 7,200 7,200 8,400 2,100
Den Pac Management, Inc................................. 7,200 7,200 8,400 2,100
</TABLE>
F-52
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- RELATED PARTY TRANSACTIONS (CONTINUED)
There is an intercompany payable to Town Gate East, related through common
ownership, for shared administrative expenses of $3,148, $6,748 and $8,917 at
December 31, 1994 and 1995 and March 31, 1996, respectively. These amounts are
included in accrued expenses.
NOTE G -- EMPLOYEE BENEFIT PLAN
During 1995, the partnership implemented a 401(k) plan whereby all employees
who meet age and length of service requirements may voluntarily defer up to 15%
of wages. The partnership has elected not to make matching contributions under
the plan.
NOTE H -- SUBSEQUENT EVENT
During 1995, the partners agreed to sell the operations and real estate of
Town Gate Manor for an amount in excess of book value. The sale closing is April
1, 1996.
F-53
<PAGE>
Kapson Senior Quarters Facilities
Residents Monthly Activity Calendar
Inside Back Cover (graphics, clockwise)
(1) Kapson Quarter Corp. logo.
(2) Interior of residential unit, including furnishings.
(3) Resident with staff members.
(4) Exterior of a facility.
(5) Residents socializing in indoor common area.
(6) Residents socializing in an outdoor common area.
(7) Exterior of facility.
(8) Residents socializing in an outdoor common area.
(9) Staff members providing services to resident.
(10) Staff member and resident standing.
(11) Residents participating in recreational activities.
(12) Exterior of a facility.
(13) Staff member providing services to a resident.
<PAGE>
Employees performing residential services for residents.
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 19
Dilution....................................... 20
Capitalization................................. 21
Dividend Policy................................ 21
Selected Financial, Operating and Pro Forma
Data.......................................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 25
Business....................................... 33
Management..................................... 51
Certain Transactions........................... 61
Principal and Selling Stockholders............. 63
Description of Capital Stock................... 64
Shares Eligible for Future Sale................ 66
Underwriting................................... 68
Experts........................................ 69
Legal Matters.................................. 69
Additional Information......................... 69
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,550,000 SHARES
KAPSON SENIOR
QUARTERS CORP.
COMMON STOCK
($.01 PAR VALUE)
[LOGO]
SALOMON BROTHERS INC
RAYMOND JAMES & ASSOCIATES, INC.
WHEAT FIRST BUTCHER SINGER
PROSPECTUS
DATED , 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM. 13 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred by the Company
in connection with the issuance and distribution of the securities being
registered, all of which will be paid by the Registrant.
<TABLE>
<S> <C>
SEC registration fee........................................... $ 19,709
NASD fee....................................................... 6,215
Nasdaq entry fee............................................... 35,000
Shattuck Hammond Financial Advisory Fee........................ 976,250
Legal fees and expenses........................................ 350,000
Printing and engraving expenses................................ 125,000
Accounting fees and expenses................................... 400,000
Blue sky fees and expenses..................................... 50,000
Transfer agent and registrar fees.............................. 10,000
Premium on directors and officers liability insurance..........
Miscellaneous.................................................. 150,000
----------
Total...................................................... $
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
"GCL") permits indemnification of directors, officers, employees, and agents of
corporations under certain conditions and subject to certain limitations.
Article Tenth of the Registrant's Certificate of Incorporation provides for
indemnification of the Registrant's officers and directors to the fullest extent
provided by the GCL and other applicable laws as currently in effect and as they
may be amended in the future.
The Company has entered into indemnification agreements with each of its
officers and directors and intends to enter into similar agreements with each of
its future officers and directors. Pursuant to such indemnification agreements,
the Company has agreed to indemnify its officers and directors against certain
liabilities, including liabilities arising out of the offering made by this
Registration Statement.
The Company maintains a standard form of officers' and directors' liability
insurance policy which provides coverage to the officers and directors of the
Company for certain liabilities, including certain liabilities which may arise
out of this Registration Statement.
The Underwriting Agreement filed as Exhibit 1.1 hereto provides for
reciprocal indemnification between the Company and its controlling persons, on
the one hand, and the Underwriters and their controlling persons, on the other
hand, against certain liabilities in connection with this offering, including
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Upon the formation of the Company on June 7, 1996, each of the Kaplans
purchased 100 shares of Common Stock directly from the Company at a cost of
$1.00 per share. These shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement. -
3.1 Certificate of Incorporation of the Registrant.-
3.2 By-laws of the Registrant.-
5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP. -
10.1 Form of Operating Agreement. -
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
10.2 Form of Management Services Agreement. -
<C> <S>
10.3 Form of Kapson Senior Quarters Corp. 1996 Stock Incentive Plan. -
10.4 Form of Registration Rights Agreement among the Registrant, Glenn Kaplan, Wayne L. Kaplan, Evan A.
Kaplan and Herbert Kaplan. -
10.5 Form of Management Agreement between the Kapson Group and Senior Quarters Management Corp.-
10.6 Form of Management Agreement between the Kapson Group and Senior Quarters Management Corp.-
10.7 Management Agreement dated July 15, 1992 between Coachmen Restaurant, Inc. and Senior Quarters
Management Corp.-
10.8 Management Agreement dated , 1993 between Larkfield Gardens Associates, L.P. and Senior
Quarters Management Corp.-
10.9 Management Agreement dated January 21, 1993 between United Community and Housing Development
Corporation and Senior Quarters Management Corp. (This agreement has been superseded by the
agreement filed as Exhibit No. 10.20).-
10.10 Management Agreement dated May 5, 1995 between Clover Lake Homes, Inc. and Senior Quarters
Management Corp.-
10.11 Management Agreement dated June 8, 1995 between Senior Quarters at Forsgate, L.L.C. and Senior
Quarters Management Corp.-
10.12 Management Agreement dated August 1995 between Montville Development, L.L.C. and Senior Quarters
Management Corp.-
10.13 Management Agreement dated September 1995 between Senior Quarters at Glen Riddle L.P. and Senior
Quarters Management Corp.-
10.15 Management Agreement dated January 29, 1996 between Hassett Belfer Senior Housing and Senior
Quarters Management Corp.-
10.16 Management Agreement dated April 1996 between The Mayfair at Glen Cove, LLC and Senior Quarters
Management Corp. (This agreement has been terminated).-
10.17 Management Agreement dated June, 1996 between Kapson Chestnut Ridge Development Corp. and Senior
Quarters Management Corp.-
10.18 Management Agreement dated February 8, 1993 between Pensun Associates and Senior Quarters Management
Corp.-
10.20 Management Agreement dated July 1, 1996 between National Healthplex Inc. and Kapson Management
Corp.-
10.21 Management Agreement dated July 11, 1994 between National Healthplex Inc. and Senior Quarters
Management Corp. (This agreement has been superseded by the agreement filed as Exhibit No. 10.20).-
10.22 Form of Stockholder Agreement among the Registrant, Glenn Kaplan, Wayne L. Kaplan and Evan A.
Kaplan. -
10.23 Form of Employment Agreement between each of Glenn Kaplan, Wayne L. Kaplan and Evan A. Kaplan and
the Registrant. -
10.24 Form of Indemnification Agreement.-
10.25 Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing made March, 1996 by
Kapson Rochester Manor, LLC in favor of Health Care REIT, Inc.-
10.26 Mortgage Note in the sum of $3,890,625.00, dated March, 1996, made by Kapson Rochester Manor, LLC to
the order of Health Care REIT, Inc.-
10.27 Loan Agreement dated March, 1996 between Kapson Rochester Manor, LLC and Health Care REIT, Inc.-
10.28 Form of Health Care REIT, Inc., $140 million Credit Facility Commitment Letter. -
21.1 Subsidiaries of Registrant. -
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Rotenberg & Company LLP.
23.3 Consent of Proskauer Rose Goetz & Mendelsohn LLP (included in Exhibit 5.1). -
24.1 Powers of Attorney (included with signature page). -
27.1 Financial Data Schedule. -
</TABLE>
- - Previously filed
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of a
registrant pursuant to the provisions described in Item 14, 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
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a registrant
of expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
certifies that it has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Woodbury, State of New York, on the 24th day of September,
1996.
KAPSON SENIOR QUARTERS CORP.
By: /s/ EVAN A. KAPLAN
-----------------------------------
Evan A. Kaplan
PRESIDENT AND CHIEF OPERATING
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------- ------------------------
Chairman of the Board of
* Directors and Chief Executive
------------------------------------------- Officer (principal executive September 24, 1996
Glenn Kaplan officer)
Senior Executive Vice
------------------------------------------- President, Vice Chairman and September 24, 1996
Wayne L. Kaplan Secretary and Director
/s/ EVAN A. KAPLAN
------------------------------------------- President, Chief Operating September 24, 1996
Evan A. Kaplan Officer and Director
Vice President, Chief Financial
* Officer and Treasurer
------------------------------------------- (principal financial officer September 24, 1996
John M. Sharpe, Jr. and principal accounting
officer)
*
------------------------------------------- Director September 24, 1996
Bernard J. Korman
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------- ------------------------
*
------------------------------------------- Director September 24, 1996
Gerald Schuster
<C> <S> <C>
*
------------------------------------------- Director September 24, 1996
Joseph G. Beck
*
------------------------------------------- Director September 24, 1996
Risa Lavizzo-Mourey, M.D.
</TABLE>
*By: /s/ EVAN A. KAPLAN
----------------------------------
Evan A. Kaplan
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------- -----
<C> <S> <C>
1.1 Form of Underwriting Agreement. -
3.1 Certificate of Incorporation of the Registrant.-
3.2 By-laws of the Registrant.-
5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP. -
10.1 Form of Operating Agreement. -
10.2 Form of Management Services Agreement. -
10.3 Form of Kapson Senior Quarters Corp. 1996 Stock Incentive Plan. -
10.4 Form of Registration Rights Agreement among the Registrant, Glenn Kaplan, Wayne L. Kaplan,
Evan A. Kaplan and Herbert Kaplan. -
10.5 Form of Management Agreement between the Kapson Group and Senior Quarters Management Corp.-
10.6 Form of Management Agreement between the Kapson Group and Senior Quarters Management Corp.-
10.7 Management Agreement dated July 15, 1992 between Coachmen Restaurant, Inc. and Senior
Quarters Management Corp.-
10.8 Management Agreement dated , 1993 between Larkfield Gardens Associates, L.P. and
Senior Quarters Management Corp.-
10.9 Management Agreement dated January 21, 1993 between United Community and Housing Development
Corporation and Senior Quarters Management Corp. (This agreement has been superseded by the
agreement filed as Exhibit No. 10.20).-
10.10 Management Agreement dated May 5, 1995 between Clover Lake Homes, Inc. and Senior Quarters
Management Corp.-
10.11 Management Agreement dated June 8, 1995 between Senior Quarters at Forsgate, L.L.C. and
Senior Quarters Management Corp.-
10.12 Management Agreement dated August 1995 between Montville Development, L.L.C. and Senior
Quarters Management Corp.-
10.13 Management Agreement dated September 1995 between Senior Quarters at Glen Riddle L.P.
and Senior Quarters Management Corp.-
10.15 Management Agreement dated January 29, 1996 between Hassett Belfer Senior Housing and Senior
Quarters Management Corp.-
10.16 Management Agreement dated April 1996 between The Mayfair at Glen Cove, LLC and Senior
Quarters Management Corp. (This agreement has been terminated).-
10.17 Management Agreement dated June, 1996 between Kapson Chestnut Ridge Development Corp. and
Senior Quarters Management Corp.-
10.18 Management Agreement dated February 8, 1993 between Pensun Associates and Senior Quarters
Management Corp.-
10.20 Management Agreement dated July 1, 1996 between National Healthplex Inc. and Kapson
Management Corp.-
10.21 Management Agreement dated July 11, 1994 between National Healthplex Inc. and Senior
Quarters Management Corp. (This agreement has been superseded by the agreement filed as
Exhibit No. 10.20).-
10.22 Form of Stockholder Agreement among the Registrant, Glenn Kaplan, Wayne L. Kaplan and Evan
A. Kaplan. -
10.23 Form of Employment Agreement between each of Glenn Kaplan, Wayne L. Kaplan and Evan A.
Kaplan and the Registrant. -
10.24 Form of Indemnification Agreement.-
10.25 Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing made March,
1996 by Kapson Rochester Manor, LLC in favor of Health Care REIT, Inc. -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------- -----
10.26 Mortgage Note in the sum of $3,890,625.00, dated March, 1996, made by Kapson Rochester
Manor, LLC to the order of Health Care REIT, Inc. -
<C> <S> <C>
10.27 Loan Agreement dated March, 1996 between Kapson Rochester Manor, LLC and Health Care REIT,
Inc. -
10.28 Form of Health Care REIT, Inc., $140 million Credit Facility Commitment Letter. -
21.1 Subsidiaries of Registrant. -
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Rotenberg & Company LLP.
23.3 Consent of Proskauer Rose Goetz & Mendelsohn LLP (included in Exhibit 5.1).-
24.1 Powers of Attorney (included with signature page). -
27.1 Financial Data Schedule. -
</TABLE>
- - Previously filed
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-5945) of our reports (i) dated June 7, 1996, on our audits of the
combined financial statements of The Kapson Group (the "Predecessor") as of
December 31, 1994 and 1995, and for each of the years in the three year period
ended December 31, 1995, and (ii) dated June 11, 1996, on our audit of the
balance sheet of Kapson Senior Quarters Corp., as of June 10, 1996. We also
consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
New York, New York
September 20, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Kapson Senior
Quarters Corp. on Form S-1 of our reports dated February 21, 1996 and January
29, 1996 relating to the financial statements of Town Gate East (A Partnership)
and Town Gate Manor (A Partnership), respectively appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Rotenberg & Company, LLP
Rochester, New York
September 20, 1996