<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1996
REGISTRATION NO. 333-5945
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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 PAR VALUE $.01
All of the 3,550,000 shares of Common Stock, par value $.01 (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 $12.00 and $14.00 per share. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price.
The Company has applied for quotation of the Common Stock 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 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") believes that it is one of the
largest providers of assisted living services in 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 facilities constituted 96.7% of total revenues in 1995, with
the balance provided by management fees. 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 over skilled nursing facilities
- Assisted living facilities that are designed to provide premium
accommodations and a comprehensive, bundled package of standard services
for a single monthly fee
- Focus on "private-pay" residents, for whom services are paid from private
funds or through private insurance
- 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
3
<PAGE>
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
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 produced significant revenues thus far), including home health care,
in-house pharmacy services and its Extended Care Program, as well as maintaining
its focus on 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 continue to
seek out additional opportunities in other regions of the United States on a
selective basis. 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 containing
3,500 units with 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) the 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 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
4
<PAGE>
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.
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)
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), 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 88,462 shares of Common Stock have already
been issued. See "Management -- 1996 Stock Incentive Plan."
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 "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 3,020 730 1,275 1,794
Depreciation.......................... 1,188 1,180 1,234 1,440 576 912 964
--------- --------- --------- ----------- --------- --------- -----------
Total operating expenses................ 9,506 10,159 11,206 15,373 5,237 8,439 9,828
--------- --------- --------- ----------- --------- --------- -----------
Operating income........................ 3,482 3,595 3,557 2,898 2,019 1,545 1,044
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) (1,912) 281 (1,296) (1,949)
Minority interest in net loss of
combined partnerships.................. -- -- 16 376 -- 371 540
--------- --------- --------- ----------- --------- --------- -----------
Income (loss) before extraordinary
item................................... (69) 107 (353) (1,536) 281 (925) (1,409)
Extraordinary Item...................... -- 4,399 -- -- -- -- --
--------- --------- --------- ----------- --------- --------- -----------
Net Income (loss)....................... (69) 4,506 (353) (1,536) 281 (925) (1,409)
Unaudited pro forma data:
Pro forma benefit (provision) for income
taxes (2).............................. 28 (1,803) 141 614 (112) 370 564
--------- --------- --------- ----------- --------- --------- -----------
Pro forma net income (loss)............. $ (41) $ 2,703 $ (212) $ (922) $ 169 $ (555) $ (845)
--------- --------- --------- ----------- --------- --------- -----------
--------- --------- --------- ----------- --------- --------- -----------
Pro forma net loss per share (3)........ $ (.20) $ (.18)
----------- -----------
----------- -----------
Pro forma weighted average number of
common shares outstanding (3).......... 4,631 4,631
----------- -----------
----------- -----------
Pro forma, as adjusted, net loss per
share (3)(4)........................... $ (.12) $ (.11)
----------- -----------
----------- -----------
Pro forma, as adjusted, weighted
average number of common shares
outstanding (3)(4)..................... 7,700 7,700
----------- -----------
----------- -----------
</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) $ 33,127
Total assets...................................................................... 67,853 102,353
Long-term debt, excluding current portion......................................... 67,816 67,816
Partners'and shareholders' equity (deficit)....................................... (11,107) 26,364
</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) operating fees payable to
the Kaplans as operators for various New York facilities, net of management
fees payable to a subsidiary of the Company; (d) compensation of the
Kaplans and additional general and administrative costs of operating as a
public company; (e) the initial capitalization of the Company; (f) 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 (g) 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
"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 the assumed issuance of common stock at the initial public
offering price of $13.00 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).
(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 $13.00), the Company's pro forma shareholders' equity would
have been $26.4 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 18 months. Other resources include $117.9 million which, as
of the consummation of the Offering, will be available ($9.1 million of which is
scheduled to be drawn down for a specific project) under its 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. 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 ($845,000) for the six months ended June 30, 1996 and ($922,000) 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, have
$117.9 million of credit available (of which $9.1 is scheduled to be drawn down
for a specific project) under its 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. 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
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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. 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 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
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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 that it is in compliance
with all applicable law and regulations; however, there can be no assurance that
such is the case. 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 for-profit corporation
from operating certain types of assisted living facilities (referred to herein
as "licensed facilities"), although recent legislation has been passed by the
New York State legislature (and may be signed by the Governor of that state
shortly) which would permit privately owned for-profit corporations to operate
certain types of 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. 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 licensed facilities in New York are presently
undergoing review, and the legislature recently established a task force to
study long-term care financing alternatives that may have a significant effect
on the Company's New York facilities. 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
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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 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. 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. If recent legislation that has been passed by
the New York State legislature (and may be signed by the Governor of that state
shortly) becomes law, privately owned for-profit corporations would be permitted
to operate certain types of licensed facilities 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 agreement 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. If the operating agreement is terminated by the Company, the
licensed operators, under certain circumstances, will be entitled to liquidated
damages. See "Certain Transactions". 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 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."
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
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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.
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
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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 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.
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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 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
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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 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
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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 will own beneficially in the
aggregate shares with a market value of $53,950,000 (assuming no exercise of the
Underwriters' over-allotment option and an initial public offering price of
$13.00). 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 $3,219,000. 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
16
<PAGE>
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
(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. If one or more of the Kaplans, 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."
17
<PAGE>
DILUTION
Purchasers of Common Stock in the Offering will experience immediate
dilution in net tangible book value per share of Common Stock of $9.58 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 $13.00 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 expects to use approximately $12.0 million of
the net proceeds for all or a portion of the cost of unidentified assisting
living acquisition facilities. 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 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, the pro forma net tangible deficit of the Company's 4,150,000
shares of Common Stock outstanding at June 30, 1996, was $14.4 million or
($3.47) 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 $26.4 million, or $3.42 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 $13.00 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..................... $ 13.00
Pro forma net tangible (deficit) per share before the
Offering....................................................... (3.47)
Increase in net tangible book value per share attributable to
new
investors as adjusted.......................................... 6.89
---------
Pro forma net tangible book value per share as adjusted for the
Offering........................................................... 3.42
---------
Dilution per share to new investors................................. $ 9.58
---------
---------
</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 88,462 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 511,538 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 and the sale of 3,550,000 shares of Common Stock offered by
the Company at an assumed initial public offering price of $13.00 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 7,700,000 shares issued and
outstanding on an adjusted basis................................................. -- 77
Additional paid-in capital.......................................................... -- 26,287
Retained Earnings (accumulated deficit)............................................. (11,107) --
----------- ---------------
Total shareholders' equity (deficit)................................................ (11,107) 26,364
----------- ---------------
Total capitalization................................................................ $ 56,709 $ 94,180
----------- ---------------
----------- ---------------
</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 88,462 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, 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 3,020 730 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 15,373 5,237 8,439
--------- --------- --------- --------- --------- ----------- --------- ---------
Operating income................... 1,308 2,228 3,482 3,595 3,557 2,898 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) (1,912) 281 (1,296)
Minority interest in net loss of
combined partnerships............. -- -- -- -- 16 376 -- 371
--------- --------- --------- --------- --------- ----------- --------- ---------
Income (loss) before extraordinary
item.............................. (2,337) (965) (69) 107 (353) (1,536) 281 (925)
Extraordinary item................. -- -- -- 4,399 -- -- -- --
--------- --------- --------- --------- --------- ----------- --------- ---------
Net Income (loss).............. (2,337) (965) (69) 4,506 (353) (1,536) 281 (925)
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Unaudited pro forma data:
Net Income (loss)................ (2,337) (965) (69) 4,506 (353) (1,536) 281 (925)
Pro forma benefit (provision) for
income taxes (2)................ 935 386 28 (1,803) 141 614 (112) 370
--------- --------- --------- --------- --------- ----------- --------- ---------
Pro forma net income (loss)...... $ (1,402) $ (579) $ (41) $ 2,703 $ (212) $ (922) $ 169 $ (555)
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Pro forma net loss per
share (3)....................... $ (.20)
-----------
-----------
Pro forma weighted average number
of common shares
outstanding (3)................. 4,631
-----------
-----------
Pro forma, as adjusted, net loss
per share (3)(4)................ $ (.12)
Pro forma, as adjusted, weighted
average number of common shares
outstanding (3)(4).............. 7,700
-----------
-----------
<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....... 1,794
Depreciation..................... 964
-----------
Total operating expenses....... 9,828
-----------
Operating income................... 1,044
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... (1,949)
Minority interest in net loss of
combined partnerships............. 540
-----------
Income (loss) before extraordinary
item.............................. (1,409)
Extraordinary item................. --
-----------
Net Income (loss).............. (1,409)
-----------
-----------
Unaudited pro forma data:
Net Income (loss)................ (1,409)
Pro forma benefit (provision) for
income taxes (2)................ 564
-----------
Pro forma net income (loss)...... $ (845)
-----------
-----------
Pro forma net loss per
share (3)....................... $ (.18)
-----------
-----------
Pro forma weighted average number
of common shares
outstanding (3)................. 4,631
-----------
-----------
Pro forma, as adjusted, net loss
per share (3)(4)................ $ (.11)
Pro forma, as adjusted, weighted
average number of common shares
outstanding (3)(4).............. 7,700
-----------
-----------
</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) $ 32,404
Total assets...................... 33,119 31,825 31,381 34,294 54,407 67,853 102,353
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) 26,364
</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) operating fees payable to
the Kaplans as operators for various New York facilities, net of management
fees payable to a subsidiary of the Company; (d) compensation of the
Kaplans and additional general and administrative costs of operating as a
public company; (e) the initial capitalization of the Company; (f) 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 (g) 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
"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 the assumed issuance of common shares at the initial public
offering price of $13.00 to satisfy the aggregate $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 interests in the facilities to the Company
($6,000) and (ii) real estate transfer arising out of the transaction
estimated to be approximately ($250).
(4) Reflects the proposed issuance of all 3,550 shares in connection with the
Offering.
24
<PAGE>
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") believes that it is one of the
largest providers of assisted living services in 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
facilities constituted 96.7% of total revenues in 1995, with the balance
provided by management fees. 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.
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 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
(a 10% interest in Senior Quarters at Glen Riddle and an 11% 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.
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
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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 Lehigh
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)
operating fees payable to the Kaplans as operators for various New York
facilities, net of management fees payable to a subsidiary of the Company; (d)
compensation of the Kaplans and additional general and administrative costs of
operating as a public company; (e) the initial capitalization of the Company;
(f) 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 (g) 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 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
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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 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
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(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 did
not pay federal or state income taxes.
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
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$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, 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.
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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 $33.1 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 $31.2 million of the HCR credit facility has been drawn and/or
allocated to specific projects and is secured by four facilities (Senior
Quarters at Chestnut Ridge, Town Gate Manor, Town Gate East and Senior Quarters
at Briarcliff). 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. 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
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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 $13.00 per share, after deducting estimated underwriting discount and
offering expenses payable by the Company, are approximately $40.8 million ($44.0
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. The Company expects to use approximately $12.0
million of the net proceeds for all or a portion of the cost of unidentified
assisting living development and acquisition projects. Accordingly, the Company
estimates that this portion of the proceeds will be sufficient to fund its
development and acquisition activities for the next 18 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
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 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 foreseeable
future 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.
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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.
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BUSINESS
GENERAL
Kapson Senior Quarters Corp. (the "Company") believes that it is one of the
largest providers of assisted living services in the United States. The Company
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 facilities
constituted 96.7% of the Company's 1995 revenues, with the balance provided by
management fees. 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 for-profit corporation is
not permitted to be the licensed operator of a licensed facility, although
legislation recently has been passed by the New York state legislature (and may
be signed by the Governor of that state shortly) which would permit privately
owned for-profit corporations to operate certain types of licensed facilities.
See "-- Government Regulation." 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. 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
33
<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 remains highly-fragmented, with only
approximately 5% of the industry's units represented by the top 30 industry
participants. 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 years 1990 and 2000 in the United States. Furthermore, according to
projections by the U.S. Bureau of
34
<PAGE>
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 assisted living providers to obtain a
license to operate their facilities and to comply with various
35
<PAGE>
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 foreseeable future focuses
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.
36
<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 with not-for-profit and for-profit institutions
and developers inexperienced 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
38
<PAGE>
be applied to new acquisitions when reviewing these opportunities. 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, and an Assisted Living
Services Agency as part of its Connecticut facility. 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 enable residents to stay at
39
<PAGE>
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.
40
<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)......... 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.
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.
41
<PAGE>
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 experience
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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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
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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
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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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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
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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 for-profit corporation from
operating a licensed facility. Recent legislation, which has been passed by the
New York State legislature, and may be signed by the Governor shortly, would
allow 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, upon the anticipated change in law, a
privately held corporation) 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
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Care Services Agency intends to maintain on-site office space at the Company's
facilities. In addition, 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 is expected to issue a report in 1996. Changes
in applicable law or regulations may result from this report in the near future.
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. The Company 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 currently owns and operates a
licensed ALSA offering such services in the Company's Connecticut managed
residential community; however, the Company has applied for licensure to own and
operate its own ALSA in order to provide all such services in this 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 certain health care
professionals who are investors would not be applicable as the Company does not
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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.
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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 August , 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Glenn Kaplan 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 37 President and Chief Operating Officer; Director
John M. Sharpe, Jr. 43 Vice President, Chief Financial Officer and Treasurer
Joseph G. Beck 42 Director
Bernard J. Korman 64 Director
Risa Lavizzo-Mourey, M.D. 41 Director
Gerald Schuster 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 (ALFAA), the Connecticut Assisted Living
Association (CALA), 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.
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
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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: Mental Health Management, Inc.; The New America High Income Fund; Pep Boys,
Inc.; 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, 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 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."
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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
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.
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,
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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. Prior to or upon consummation of the Offering, the Board
of Directors will establish an Audit Committee that will consist of a majority
of independent directors who are not affiliated with the Kaplans ("Independent
Directors"). The Audit Committee will be established to make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the plans and results of the audit engagement,
approve professional services provided by the independent public accountants,
review the independence of the independent public accountants, consider the
range of audit and non-audit fees and review the adequacy of the Company's
internal accounting controls.
COMPENSATION COMMITTEE. Prior to or upon the consummation of the Offering,
the Board of Directors will establish a Compensation Committee, consisting of a
majority of Independent Directors. The Compensation Committee 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. 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. Prior to or upon consummation of the Offering, the
Board of Directors will establish a Stock Option Committee, consisting solely of
directors who qualify as "Outside Directors" under Section 162(m) of the
Internal Revenue Code of 1986 and as "Non-Employee Directors" under Rule
16b-3(c) of the Securities Exchange Act of 1934, as amended. The Stock Option
Committee will administer any stock-based incentive plans of the Company,
including the 1996 Stock Incentive Plan.
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."
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 $100,000.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION (1)
---------------------------------------- ------------------------------------
OTHER ANNUAL RESTRICTED STOCK SECURITIES
NAME AND PRINCIPAL COMPENSATION AWARD(S) UNDERLYING
POSITION YEAR SALARY ($) 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>
NAME AND PRINCIPAL ALL OTHER
POSITION COMPENSATION
- --------------------------------- --------------
<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
each of 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. 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.
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
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<PAGE>
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 in an amount equal to two years' Base
Salary plus continued medical benefits for two years. In addition, the Executive
shall receive a prorated bonus for the fiscal year of his termination. 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 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 Compensation
Committee of the Board of Directors of the Company which is intended to be
comprised solely of two or more directors
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<PAGE>
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 Compensation 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 Compensation 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 to
make any other change that requires stockholder approval under Rule 16b-3 of the
Exchange Act, the exemption 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 of the State of Delaware to increase the aggregate number of Shares of
Common Stock that may be issued under the Incentive Plan, decrease the minimum
option price of any option, or to 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 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
Compensation Committee.
STOCK OPTIONS. Under the Incentive Plan, the Compensation 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 Compensation Committee will, with regard to each stock
option, determine the number of shares subject to the option, the term of the
option (which
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<PAGE>
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
Compensation 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 Compensation 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 Compensation 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 Compensation Committee. The Compensation
Committee may at any time offer to buy an option previously granted on such
terms and conditions as the Compensation Committee shall establish. The
Compensation 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 Compensation 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 Compensation 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
Compensation 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 Compensation 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
Compensation 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 Compensation 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 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
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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 Compensation
Committee and will have such other terms and conditions as the Compensation
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 Compensation 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 Compensation Committee may designate at the
time of grant or thereafter.
CHANGE IN CONTROL. Subject to the next sentence, unless determined
otherwise by the Compensation 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
Compensation Committee at the time of grant, no acceleration of exercisability
shall occur with regard to certain options that the Compensation 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
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.
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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 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 Lehigh 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 their 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, or (iii) by
the licensed operators upon a change of control in the Company or at any time
after five years. 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."
Recent legislation has, however, has been passed by the New York State
legislature (and may be signed by the Governor of that state shortly) which
would allow 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. If New
York law and regulations are amended to allow the operation of the Company's
licensed facilities by for-profit corporations that are not publicly traded, 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
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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 then, and the Company is
required to use its diligent reasonable efforts to effect such registration.
These rights are subject to 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 $1.15 million (assuming no
exercise of the Underwriters' over-allotment and an initial public offering
price of $13.00 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 June , 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................. 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................. 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. As of June
, 1996, there were 4,150,000 shares of Common Stock issued and outstanding.
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
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the voting stock of the corporation outstanding at the time the transaction
commenced (for the purposes 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
. Its address and telephone number is .
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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, the holders of 4,150,000 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' 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
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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 June , 1996, options to purchase 88,462
shares were issued and outstanding under the Plan, none of which were vested.
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<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 $1.15 million (assuming no exercise of the
Underwriters over-allotment option and an initial public offering price of
$13.00 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-28
Balance Sheet as of June 10, 1996.................................................................... F-29
Notes to Balance Sheet............................................................................... F-30
TOWN GATE EAST
Report of Independent Accountants.................................................................... F-33
Balance Sheets as of December 31, 1994 and 1995 and (unaudited) as of March 31, 1996................. F-34
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-35
Statements of Changes in Partners' Capital for the years
ended December 31, 1993, 1994 and 1995 and (unaudited) as of March 31, 1996......................... F-36
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-37
Reconciliation of Net Income to Net Cash Flows from Operating Activities............................. F-38
Notes to Financial Statements........................................................................ F-39
TOWN GATE MANOR
Report of Independent Auditors....................................................................... F-43
Balance Sheets as of December 31, 1994 and 1995 and (unaudited) as of March 31, 1996................. F-44
Statements of Income for the years ended December 31, 1993, 1994 and 1995 and (unaudited) for the
three months ended March 31, 1996................................................................... F-45
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-46
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-47
Reconciliation of Net Income to Net Cash Flows from Operating Activity............................... F-48
Notes to Financial Statements........................................................................ F-49
</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 entities (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 (Senior
Quarters at East Northport and Senior Quarters at Chestnut Ridge; (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; and 5) the sale of a minority
interest in Senior Quarters at Chestnut Ridge in April 1996. 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 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 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 34,500(e) $ 36,214
Accounts receivable................................................. 95 95
Prepaid expenses and other current assets........................... 348 348
------------- ------------- ------------
Total current assets.............................................. 2,157 34,500 36,657
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 3,176
Investment in joint ventures.......................................... 503 503
Other assets.......................................................... 311 311
------------- ------------- ------------
Total assets...................................................... $ 67,853 $ 34,500 $ 102,353
------------- ------------- ------------
------------- ------------- ------------
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 -- 2,292
------------- ------------- ------------
Commitments and contingencies......................................... -- -- --
Partners' and shareholders' (deficit)................................. (11,107) 11,107(c) --
Common stock.......................................................... -- 77(a) 77
Paid in capital....................................................... -- 26,287(b) 26,287
------------- ------------- ------------
Total partners' and shareholders' equity (deficit).................. (11,107) 37,471 26,364
------------- ------------- ------------
Total liabilities and partners' and shareholders' equity
(deficit)........................................................ $ 67,853 $ 34,500 $ 102,353
------------- ------------- ------------
------------- ------------- ------------
</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 1,193(d) 3,020
Depreciation.......................... 1,234 75 136 1,445 (5)(e) 1,440
--------------- ----------- ----------- --------- ------------- ----------------
Total operating expenses............ 11,206 1,010 1,501 13,717 1,656 15,373
--------------- ----------- ----------- --------- ------------- ----------------
Operating income (loss)............... 3,557 397 645 4,599 (1,701) 2,898
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 (2,275) (1,912)
Minority interest in net loss of
combined partnership................. 16 -- -- 16 360(i) 376
--------------- ----------- ----------- --------- ------------- ----------------
Net income (loss)..................... $ (353) $ 278 $ 454 $ 379 $ (1,915) $ (1,536)
--------------- ----------- ----------- --------- ------------- ----------------
--------------- ----------- ----------- --------- ------------- ----------------
UNAUDITED PRO FORMA DATA
Pro forma benefit for income taxes.... -- -- -- -- 614(h) 614
--------------- ----------- ----------- --------- ------------- ----------------
Pro forma net income (loss)........... $ (353) $ 278 $ 454 $ 379 $ (1,301) $ (922)
--------------- ----------- ----------- --------- ------------- ----------------
--------------- ----------- ----------- --------- ------------- ----------------
Pro forma net loss per common share... $ (.08) $ (.20)
--------------- ----------------
--------------- ----------------
Pro forma weighted average number of
common shares outstanding............ 4,631(j) 4,631(j)
--------------- ----------------
--------------- ----------------
Pro forma, as adjusted, net loss per
share................................ $ (.12)
----------------
----------------
Pro forma, as adjusted, weighted
average number of common shares
outstanding.......................... 7,700(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 1,304 490(d) 1,794
Depreciation............................. 912 20 35 967 (3)(e) 964
------- ----- ----- --------- ------------- ---------------
Total operating expenses............... 8,439 295 368 9,102 726 9,828
------- ----- ----- --------- ------------- ---------------
Operating income (loss).................. 1,545 62 186 1,793 (749) 1,044
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) (852) (1,949)
Minority interest in net loss of combined
partnerships............................ 371 -- -- 371 169(i) 540
------- ----- ----- --------- ------------- ---------------
Net income (loss)........................ $ (925) $ 42 $ 157 $ (726) $ (683) $ (1,409)
------- ----- ----- --------- ------------- ---------------
------- ----- ----- --------- ------------- ---------------
UNAUDITED PRO FORMA DATA:
Pro forma benefit for income taxes....... -- -- -- -- 564(h) 564
------- ----- ----- --------- ------------- ---------------
Pro forma net income (loss).............. $ (925) $ 42 $ 157 $ (726) $ (119) $ (845)
------- ----- ----- --------- ------------- ---------------
------- ----- ----- --------- ------------- ---------------
Pro forma net loss per common share...... $ (.20) $ (.18)
------- ---------------
------- ---------------
Pro forma weighted average number of
common shares outstanding............... 4,631(j) 4,631(j)
------- ---------------
------- ---------------
Pro forma, as adjusted, net loss per
share................................... $ (.11)
---------------
---------------
Pro forma, as adjusted, weighted average
number of common shares outstanding..... 7,700(k)
---------------
---------------
</TABLE>
F-5
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1995
(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
---------
$ 77
---------
---------
(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 $13 per share........ $ 46,114
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)
Carry over of historical cost basis of the net assets of the facilities of the
Predecessor.................................................................. (11,107)
Estimated costs of the offering ($2,200) and underwriters discount ($3,200)... (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)
---------
$ 26,287
---------
---------
</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.................................................. $ 46,150
Less: estimated cost of the offering ($2,200) and Underwriters Discount
($3,200)..................................................................... (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)
---------
$ 34,500
---------
---------
</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
---------
$ 1,193
---------
---------
</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................................. $ 614
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
To record the 49.9% minority interest in the loss of Senior Quarters at Chestnut
(i) Ridge.......................................................................... $ 360
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
(j) Pro forma net loss per share is based upon the pro forma weighted 4,631Shares
average number of common shares issued in the exchange (4,150) plus the
number of shares issued at the assumed initial offering price of $13
necessary to pay the $6,250 distribution to the Kaplans (481)..........
-------
-------
(k) Pro forma, as adjusted, net loss per share is based upon the pro forma, 7,700Shares
as adjusted, weighted average number of common shares issued in the
exchange (4,150) plus the issuance of all 3,550 shares in the initial
offering...............................................................
-------
-------
</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
---------
$ 490
---------
---------
</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............................... $ 564
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
(i) To record the 49.9% minority interest on the net loss of Senior Quarters at $ 169
Chestnut Ridge for the period prior to the sale of such interest in April
1996..........................................................................
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
(j) Pro forma net loss per share is based upon the pro forma weighted 4,631Shares
average number of common shares issued in the exchange (4,150) plus the
number of shares issued at the assumed offering price of $13 necessary
to pay the $6,250 distribution to the Kaplans (481)....................
-------
-------
(k) Pro forma, as adjusted, net loss per share is based upon the pro forma, 7,700Shares
as adjusted, weighted average number of common shares issued in the
exchange (4,150) plus the issuance of all 3,550 shares in the initial
offering...............................................................
-------
-------
</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 loss per share (2)........ -- -- $ (.05) -- $ (.12)
-------------- -------------- -------------- ------------- --------------
-------------- -------------- -------------- ------------- --------------
Pro forma weighted average number of
common shares outstanding (2).......... -- -- 4,630,769 -- 4,630,769
-------------- -------------- -------------- ------------- --------------
-------------- -------------- -------------- ------------- --------------
</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 Sub Chapter 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. Sub Chapter S 100
Senior Quarters at Huntington Station Commco Management Associates, Inc. Sub Chapter S 100
Senior Quarters at Centereach I HK Associates General
Partnership 100
Senior Quarters at Centereach II KapShore Development Corp. Sub Chapter 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 LLC Limited Liability
Company 11
Senior Quarters at Glen Riddle Kapson Glen Riddle Development LLC Limited
Partnership 10
*Senior Quarters at Montville Kapson Montville Limited
Development LLC Partnership 23.75
</TABLE>
- ------------------------
*Ownership percentages were acquired or sold in April 1996 (See Note 5)
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 loss per share for the six months ended June 30, 1996
and the year ended December 31, 1995 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 $13 per share (480,769) and 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.
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 (9.83%). 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 (9.83%). 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. The Predecessor has
treated the minimum payment amount as deferred interest.
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
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)
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. 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.
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)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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.
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.
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)
12. CONCENTRATION OF RISK: (CONTINUED)
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.
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.
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 Compensation
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, 88,462 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.
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 1,699,119
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 $ 36,328
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 $ 100,668
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 $ 1,562,582
------------- ------------- -------------
------------- ------------- -------------
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 9,329
Accrued Expenses.................................................. 20,080 26,064 107
Unearned Resident Care Revenues................................... 2,579 -- --
------------- ------------- -------------
Total Current Liabilities..................................... $ 84,975 $ 110,934 $ 41,236
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 $ 1,168,540
Partners' Capital................................................... 392,654 421,128 394,043
------------- ------------- -------------
Total Liabilities and Partners' Capital....................... $ 1,635,240 $ 1,659,366 $ 1,562,582
------------- ------------- -------------
------------- ------------- -------------
</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 67,300
----------- ----------- ----------- ------------
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.................... $ 987,652 $ 1,116,440 $ 1,404,419 $ 332,901 $ 356,492
Cash Received from Residents.................... (715,576) (766,973) (925,935) (246,751) (346,877)
Cash Paid to Suppliers and Employees............ 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 $ (17,503)
------------ ------------- ------------- ------------ ------------
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) $ (97,550)
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 $ 36,328
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
</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) (32,994)
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 $ (17,503)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</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.
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.
SHARES
KAPSON SENIOR
QUARTERS CORP.
COMMON STOCK
PAR VALUE $.01
[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........................ 1,153,750
Legal fees and expenses........................................
Printing and engraving expenses................................
Accounting fees and expenses...................................
Blue sky fees and expenses..................................... 50,000
Transfer agent and registrar fees.............................. 10,000
Miscellaneous..................................................
----------
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. --
10.2 Form of Management Services Agreement. --
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
10.3 Form of Kapson Senior Quarters Corp. 1996 Stock Incentive Plan.
<C> <S>
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.-
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>
* To be filed by Amendment
- - Previously filed
- -- Refiled herewith
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.
II-2
<PAGE>
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 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 9th day of August, 1996.
KAPSON SENIOR QUARTERS CORP.
By: /s/ WAYNE L. KAPLAN
-----------------------------------
Wayne L. Kaplan
VICE CHAIRMAN OF THE BOARD OF
DIRECTORS AND SENIOR EXECUTIVE
VICE PRESIDENT
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below hereby constitutes and appoints Glenn Kaplan, Wayne L.
Kaplan and Evan A. Kaplan, or each of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his
behalf individually and in any and all capacities any and all amendments
(including post-effective amendments) to a Registration Statement on Form S-1
and to file the same with all exhibits thereto and all other documents in
connection therewith with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do all such other acts and things requisite or necessary to be done, and to
execute all such other documents as they, or either of them, may deem necessary
or desirable in connection with the foregoing, as fully as the undersigned might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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 August 9, 1996
Glenn Kaplan (principal executive officer)
/s/ WAYNE L. KAPLAN
------------------------------------------- Senior Executive Vice President, Vice August 9, 1996
Wayne L. Kaplan Chairman and Secretary and Director
/s/ EVAN A. KAPLAN
------------------------------------------- President, Chief Operating Officer August 9, 1996
Evan A. Kaplan and Director
Vice President, Chief Financial
/s/ JOHN M. SHARPE, JR. Officer and Treasurer (principal
------------------------------------------- financial officer and principal August 9, 1996
John M. Sharpe, Jr. accounting officer)
*
------------------------------------------- Director August 9, 1996
Bernard J. Korman
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------- ------------------
*
------------------------------------------- Director August 9, 1996
Gerald Schuster
<C> <S> <C>
*
------------------------------------------- Director August 9, 1996
Joseph G. Beck
/s/ RISA LAVIZZO-MOUREY, M.D.
------------------------------------------- Director August 9, 1996
Risa Lavizzo-Mourey, M.D.
</TABLE>
*By: /s/ WAYNE L. KAPLAN
----------------------------------
Wayne L. 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).-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------- -----
10.22 Form of Stockholder Agreement among the Registrant, Glenn Kaplan, Wayne L. Kaplan and Evan
A. Kaplan.
<C> <S> <C>
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.-
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>
* To be filed by Amendment
- - Previously filed
- -- Refiled herewith
<PAGE>
CGS&H DRAFT
8/6/96
Kapson Senior Quarters Corp.
3,550,000 Shares*
Common Stock
($0.01 par value)
Underwriting Agreement
New York, New York
, 1996
Salomon Brothers Inc
Raymond James & Associates, Inc.
Wheat, First Securities, Inc.
c/o Salomon Brothers Inc
as Representative of the several Underwriters
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Kapson Senior Quarters Corp., a Delaware corporation (the "Company"),
proposes to sell to the underwriters named in Schedule I hereto (the
"Underwriters"), for whom Salomon Brothers Inc (the "Representative") is acting
as representative, 3,550,000 shares (the "Underwritten Securities") of Common
Stock, $0.01 par value, of the Company ("Common Stock"). The Company and the
persons named in Schedule II hereto (the "Selling Stockholders") also propose to
grant to the Underwriters an option to purchase up to 532,500 additional shares
of Common Stock (the "Option Securities"; the Option Securities, together with
the Underwritten Securities, being hereinafter called the "Securities").
1. REPRESENTATIONS AND WARRANTIES.
(a) The Company and the Selling Stockholders jointly and severally
represent and warrant to, and agree with, each Underwriter as set forth below in
this Section 1. Certain terms used in this Agreement are defined in paragraph
(iii) of this Section 1(a).
(i) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement (file number 333-
05945) on
- -----------------------------
* Plus an option to purchase from Kapson Senior Quarters Corp. and the Selling
Stockholders up to 532,500 additional shares to cover
over-allotments.
<PAGE>
Form S-1, including a related preliminary prospectus, for the
registration under the Securities Act of 1933 (the "Act") of the offering
and sale of the Securities. The Company may have filed one or more
amendments thereto, including the related preliminary prospectus, each of
which has previously been furnished to you. The Company will next file
with the Commission either (A) prior to effectiveness of such registration
statement, a further amendment to such registration statement (including
the form of final prospectus) or (B) after effectiveness of such
registration statement, a final prospectus in accordance with Rules 430A
and 424(b)(1) or (4). In the case of clause (B), the Company has included
in such registration statement, as amended at the Effective Date, all
information (other than Rule 430A Information) required by the Act and the
rules thereunder to be included in the Prospectus with respect to the
Securities and the offering thereof. As filed, such amendment and form of
final prospectus, or such final prospectus, shall contain all Rule 430A
Information, together with all other such required information, with
respect to the Securities and the offering thereof and, except to the
extent the Representative shall agree in writing to a modification, shall
be in all substantive respects in the form furnished to you prior to the
Execution Time or, to the extent not completed at the Execution Time, shall
contain only such specific additional information and other changes (beyond
that contained in the latest Preliminary Prospectus) as the Company has
advised you, prior to the Execution Time, will be included or made therein.
(ii) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in accordance
with Rule 424(b) and on the Closing Date, the Prospectus (and any
supplement thereto) will, comply in all material respects with the
applicable requirements of the Act and the rules thereunder; on the
Effective Date, the Registration Statement did not or will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; and, on the Effective Date, the Prospectus, if not
filed pursuant to Rule 424(b), did not or will not, and on the date of any
filing pursuant to Rule 424(b) and on the Closing Date, the Prospectus
(together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
Company and the Selling Stockholders make no representations or warranties
as to the information contained in or omitted from the Registration
Statement or the Prospectus (or any supplement thereto) in reliance upon
and in conformity with information furnished in writing to the Company by
or on behalf of any Underwriter through the Representative specifically for
inclusion in the Registration Statement or the Prospectus (or any
supplement thereto).
(iii) The terms which follow, when used in this Agreement, shall
have the meanings indicated. The term the "Effective Date" shall mean each
date that the Registration Statement and any post-effective amendment or
amendments thereto became or become effective. "Execution Time" shall mean
the date and time that this Agreement is executed and delivered by the
parties hereto. "Preliminary Prospectus"
2
<PAGE>
shall mean any preliminary prospectus referred to in paragraph (a) above
and any preliminary prospectus included in the Registration Statement at
the Effective Date that omits Rule 430A Information. "Prospectus" shall
mean the prospectus relating to the Securities that is first filed pursuant
to Rule 424(b) after the Execution Time or, if no filing pursuant to Rule
424(b) is required, shall mean the form of final prospectus relating to the
Securities included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean (i) the registration statement referred
to in paragraph (a) above, including exhibits and financial statements, as
amended at the Execution Time (or, if not effective at the Execution Time,
in the form in which it shall become effective) and, in the event any
post-effective amendment thereto becomes effective prior to the Closing
Date (as hereinafter defined), shall also mean such registration statement
as so amended and (ii) in the event any registration statement is filed by
the Company pursuant to Rule 462(b) that relates to the offering and sale
of the Securities, shall also mean such registration statement. Such term
shall include any Rule 430A Information deemed to be included therein at
the Effective Date as provided by Rule 430A. "Rule 424" and "Rule 430A"
refer to such rules under the Act. "Rule 430A Information" means
information with respect to the Securities and the offering thereof
permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A.
(iv) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or organized,
with full corporate power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus, and is duly qualified to do business as a foreign corporation
and is in good standing under the laws of each jurisdiction which requires
such qualification wherein it owns or leases material properties or
conducts material business, except where a failure to be so qualified would
not have a material adverse effect on the condition (financial or
otherwise), earnings, business or properties of the Company and its
subsidiaries taken as a whole; and the Company has full authority
(corporate and other) to enter into this Agreement and to carry out all of
the terms and provisions hereof to be carried out by it.
(v) All of the outstanding shares of capital stock of each of
the Company's subsidiaries have been duly authorized and validly issued and
are fully paid and nonassessable and, except as otherwise set forth in the
Prospectus, are owned by the Company, either directly or through wholly
owned subsidiaries, free and clear of any security interests, liens,
encumbrances, equities or claims.
(vi) The Company's authorized, issued and outstanding
capitalization is set forth in the Prospectus; and the outstanding shares
of capital stock of the Company (including the Option Securities being sold
hereunder by the Selling Stockholders) have been duly authorized and
validly issued and are fully paid and nonassessable.
3
<PAGE>
(vii) The Securities to be sold by the Company hereunder have
been duly authorized for issuance and sale to the Underwriters pursuant to
this Agreement and, when issued and delivered by the Company against
payment therefor in accordance with the terms of this Agreement, will be
duly and validly issued and fully paid and nonassessable; no holders of
outstanding shares of capital stock of the Company are entitled as such to
any preemptive or other rights to subscribe for any of the Securities; and
there are no outstanding options, warrants or other rights calling for the
issuance of, and there are no commitments, plans or arrangements to issue,
any shares of capital stock of the Company or any of its Subsidiaries or
any security convertible into or exchangeable for any shares of capital
stock of the Company or any of its subsidiaries, other than (A)
commitments, plans or arrangements to issue Common Stock of the Company in
order to consummate the transactions contemplated by and described in the
Registration Statement and the Prospectus in order to effect the conveyance
to the Company of the assisted living business of the Predecessor, and (B)
options issued and outstanding under the stock incentive plan adopted on
June 7, 1996 (the "1996 Stock Incentive Plan") to purchase shares of the
Company's capital stock.
(viii) The capital stock of the Company and the Securities
conform to the respective descriptions thereof contained in the Prospectus;
and the Securities have been duly admitted for quotation, subject to
official notice of issuance and evidence of satisfactory distribution, on
the Nasdaq Stock Market National Market.
(ix) The combined financial statements and schedules of the
Company's predecessor, The Kapson Group (the "Predecessor") and the
financial statements and schedules of Town Gate East, a partnership
organized under the laws of the State of New York ("Town Gate East") and
Town Gate Manor, a partnership organized under the laws of the State of New
York ("Town Gate Manor"), included in the Prospectus fairly present the
financial position of the Predecessor, Town Gate East and Town Gate Manor
and the results of their operation and changes in financial condition as of
the dates and periods therein specified; such financial statements and
schedules have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
(except as otherwise noted therein); the selected financial data set forth
under the caption "Summary Financial, Operating and Pro Forma Data" and
"Selected Financial, Operating and Pro Forma Data" in the Prospectus fairly
present on the basis stated therein, the information included therein; and
the pro forma financial statements of the Company and its subsidiaries,
Town Gate East and Town Gate Manor and the related notes thereto included
in the Registration Statement and the Prospectus present fairly in
accordance with generally accepted accounting principles the information
shown therein, have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements and have been
properly compiled on the bases described therein, and the assumptions used
in the preparation thereof are reasonable and the adjustments used therein
are appropriate to give effect to the transactions and circumstances
referred to therein.
4
<PAGE>
(x) Coopers & Lybrand L.L.P., who have certified certain
combined financial statements of the Predecessor and delivered their report
with respect to the audited combined financial statements, schedules and
notes included in the Prospectus filed with the Commission as a part of the
Registration Statement, are independent accountants within the meaning of
the Act and the rules and regulations thereunder.
(xi) Rotenberg & Company LLP, who have certified certain
financial statements of Town Gate East and Town Gate Manor and delivered
their report with respect to the audited financial statements, schedules
and notes of Town Gate East and Town Gate Manor included in the Prospectus
filed with the Commission as a part of the Registration Statement, are
independent accountants and auditors within the meaning of the Act and the
rules and regulations thereunder.
(xii) This Agreement has been duly authorized, executed and
delivered by the Company.
(xiii) No legal or governmental proceedings are pending to which
the Company or any of its subsidiaries is a party in any capacity or to
which any property of the Company or any of its subsidiaries is subject
that are not described in the Prospectus as required by the Act and the
rules thereunder; and no legal or governmental proceedings are pending to
which the Company or any of its subsidiaries is a party in any capacity or
to which any of the properties of the Company or any of its subsidiaries is
subject, nor have any such proceedings been threatened against the Company
or any of its subsidiaries in any capacity or with respect to any of their
respective properties, except for such proceedings that, if the subject of
an unfavorable decision, ruling or finding, would not, singly or in the
aggregate, result in a material adverse change in the condition (financial
or otherwise), earnings, operations, business or properties of the Company
and its subsidiaries taken as a whole.
(xiv) No consent, approval, authorization, registration,
qualification or order of or with any governmental agency or body is
required for the issue or sale of the Securities or for the consummation of
any of the other transactions herein contemplated or for the fulfillment of
the terms hereof, except such as have been obtained and such as may be
required under blue sky laws of any jurisdiction in connection with the
purchase and distribution of the Securities by the Underwriters.
(xv) Neither the issue or sale of the Securities, nor the
consummation of any other transaction herein contemplated nor the
fulfillment of the terms hereof, will conflict with, result in a breach or
violation of, or constitute a default under, any law or regulation or the
charter or by-laws of the Company or the terms of any indemnity, credit
agreement, mortgage, deed of trust, lease or other agreement or instrument
to which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their respective properties is
bound or any judgment, order, decree, rule or regulation of any court,
regulatory body,
5
<PAGE>
administrative agency, governmental body or arbitrator having jurisdiction
over the Company or any of its subsidiaries.
(xvi) Neither the Company nor any subsidiary has (A) taken nor
will it take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Securities or (B) paid or agreed to pay any person any
compensation for soliciting another to purchase any securities of the
Company.
(xvii) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there
has not been (A) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or properties of the Company and
its subsidiaries taken as a whole, (B) any transaction or series of related
transactions that is material to the Company or its subsidiaries, taken as
a whole, except transactions entered into in the ordinary course of
business, (C) any obligation, direct or contingent, incurred by the Company
or any subsidiary that is material to the Company and its subsidiaries,
taken as a whole, except obligations incurred in the ordinary course of
business, (D) any change in the capital stock or outstanding indebtedness
of the Company or its subsidiaries that is material to the Company and its
subsidiaries taken as a whole, (E) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company other than as
described in the Prospectus, or (F) any loss or damage (whether or not
insured) to the property of the Company or its subsidiaries which has been
sustained and which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or properties of
the Company and its subsidiaries taken as a whole.
(xviii) The Company and each of its subsidiaries has good and
marketable title in fee simple to all items of real property and marketable
title to all personal property owned by each of them, in each case free and
clear of any security interests, liens, encumbrances, equities, claims and
other defects, except such as do not materially affect the value of such
property and do not interfere with the use made or to be made of such
property by the Company or such subsidiary, in each case except as
described in or contemplated by the Prospectus; and any real property and
improvements held under lease by the Company and any such subsidiary are
held under valid, subsisting and enforceable leases, with such exceptions
as are not material and do not materially interfere with the use made or
proposed to be made of such property and improvements by the Company or
such subsidiary, in each case except as described in or contemplated by the
Prospectus.
(xix) No labor dispute with the employees of the Company or any
of its subsidiaries exists or is threatened or imminent that could result
in a material adverse change in the condition (financial or otherwise),
earnings, business or properties of the Company and its subsidiaries taken
as a whole, except as described in the Prospectus.
6
<PAGE>
(xx) The Company and its subsidiaries own or possess all
material patents, patent applications, trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
business, and neither the Company nor any such subsidiary has received
notice of infringement of or conflict with asserted rights of any third
party with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change in the condition (financial or
otherwise), earnings, business or properties of the Company and its
subsidiaries taken as a whole, except as described in or contemplated by
the Prospectus.
(xxi) The Company and each of its subsidiaries is insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the business in
which they are engaged; neither the Company nor any such subsidiary has
been refused insurance coverage sought or applied for; and neither the
Company nor any such subsidiary has any reason to believe that it will not
be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, business
or properties of the Company and its subsidiaries taken as a whole, except
as described in or contemplated by the Prospectus.
(xxii) The Company, its subsidiaries and the operators of the
facilities of the Company and its subsidiaries possess all licenses,
certificates, authorizations, permits and approvals issued by the
appropriate federal, state, local and foreign regulatory authorities
necessary to conduct their respective businesses in accordance with their
present operations, except where the failure to possess any of the
foregoing would not have a material adverse effect on any one or more of
the Company's facilities, and neither the Company nor any subsidiary nor
any operator has received any notice of proceedings relating to the
revocation or modification of any license, certificate, authorization,
permit or approval which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition (financial or otherwise), earnings, business or
properties of the Company and its subsidiaries taken as a whole, except as
described in or contemplated by the Prospectus or as set forth on
Schedule III hereto.
(xxiii) The Company is not an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act"),
and will conduct its operations in a manner that will not subject it to
registration as an "investment company" under the Investment Company Act.
(xxiv) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating to
occupational safety and health or to the storage, handling or
transportation of hazardous or toxic materials; and each of the Company and
its subsidiaries has received all permits, licenses or other approvals
7
<PAGE>
required of them under applicable federal and state occupational safety and
health and environmental laws and regulations to conduct their respective
businesses; and the Company and each subsidiary is in compliance with all
terms and conditions of any such permit, license or approval, except, with
respect to each of the foregoing clauses, any such violation of law or
regulation, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals which would not, singly or in the aggregate,
result in a material adverse change in the condition (financial or
otherwise), earnings, business or properties of the Company and its
subsidiaries taken as a whole, except as described in or contemplated by
the Prospectus.
(xxv) Each certificate signed by any officer of the Company and
delivered to the Representative, any Underwriter or counsel for the
Underwriters shall be deemed to be a representation and warranty by the
Company to the Underwriters to the matters covered thereby.
(xxvi) No default exists, and no event has occurred which with
notice or the lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any
indenture, credit agreement, mortgage, deed of trust, lease or other
agreement or instrument to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries or any of their
respective properties is bound or may be affected in any material adverse
respect, except, in the case of such other agreements and instruments,
any default which would not have a material adverse effect on the
condition (financial or otherwise), earnings, business or properties of
the Company or its subsidiaries taken as a whole.
(xxvii) Each of the Company and its subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that (A) transactions are executed in accordance with
management's general or specific authorizations, (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets, (C) access to assets is permitted only in
accordance with management's general or specific authorization, and (D) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxviii) Each of the Company and its subsidiaries has timely
filed all necessary federal, state and foreign income and franchise tax
returns and has paid all taxes shown thereon as due, and there is no tax
deficiency that has been or, to the best of the Company's knowledge, might
be asserted against the Company or its subsidiaries that might have a
material adverse effect on the condition (financial or otherwise),
earnings, operations, business or properties of the Company and its
subsidiaries; and all tax liabilities are adequately provided for on the
books of the Company.
(xxix) Each Selling Stockholder listed in Schedule II hereto and
each director, executive officer and affiliate of the Company has executed
a letter substantially in the form of Exhibit A hereto and true, accurate
and complete copies of
8
<PAGE>
each such letter have been delivered on or prior to the date hereof to the
Representative. The Company has provided to counsel for the Underwriters a
complete and accurate list of all stockholders of the Company and the
number and type of shares held by each stockholder. Each stockholder has
executed a letter substantially in the form of Exhibit A hereto and true,
accurate and complete copies of each such letter have been delivered on or
prior to the date hereof to the Representative.
(xxx) Each of the operating agreements (the "Operating
Agreements") and the management agreements (the "Management Agreements") by
and among the Company and any of its subsidiaries and Glenn Kaplan, Wayne
L. Kaplan and Evan A. Kaplan (the "Kaplans"), and each of the employment
agreements (the "Employment Agreements") between the Company and each of
the Kaplans, as described in or contemplated by the Prospectus, has been
duly authorized, executed and delivered by the Company.
(xxxi) Except as set forth in the Registration Statement and the
Prospectus, there have not been, and there are not proposed, any
transactions or agreements between the Company or the subsidiaries on the
one hand and the officers, directors or shareholders of the Company or any
of the subsidiaries on the other.
(xxxii) To the knowledge of the Company, (A) no officer or
director of the Company is in breach or violation of any employment
agreement, non-competition agreement or other agreement restricting the
nature or scope of employment to which such officer or director is a party;
and (B) neither the current conduct nor the proposed conduct of the
business of the Company or any of its subsidiaries, as described in the
Prospectus, will result in a breach or violation of any such agreement.
(xxxiii) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company or any subsidiary to or for the
benefit of any of the officers, directors or affiliates of the Company or
any subsidiary or any of the members of the families of any of them, except
as disclosed in the Registration Statement and the Prospectus.
(b) Each Selling Stockholder represents and warrants to, and agrees
with, each Underwriter that:
(i) Such Selling Stockholder is the lawful owner of the
Securities to be sold by such Selling Stockholder hereunder and upon sale
and delivery of, and payment for, such Securities, as provided herein, such
Selling Stockholder will convey good and valid title to such Securities,
free and clear of all liens, encumbrances, equities and claims whatsoever.
(ii) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result, under the Securities
Exchange Act of 1934
9
<PAGE>
(the "Exchange Act") or otherwise, in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Securities and has not effected any sales of shares of Common Stock
which, if effected by the issuer, would be required to be disclosed in
response to Item 701 of Regulation S-K.
(iii) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by such
Selling Stockholder of the transactions contemplated herein, except such as
may have been obtained under the Act and such as may be required under the
blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters and such other approvals
as have been obtained.
(iv) Neither the sale of the Securities being sold by such
Selling Stockholder nor the consummation of any other of the transactions
herein contemplated by such Selling Stockholder or the fulfillment of the
terms hereof by such Selling Stockholder will conflict with, result in a
breach or violation of, or constitute a default under any law or the terms
of any indenture or other agreement or instrument to which such Selling
Stockholder is a party or bound, or any judgment, order or decree
applicable to such Selling Stockholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over such Selling Stockholder.
2. PURCHASE AND SALE.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to sell to
each Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $__.__ per share, the amount
of the Underwritten Securities set forth opposite such Underwriter's name in
Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company and the Selling
Stockholders hereby grant an option to the several Underwriters to purchase,
severally and not jointly, up to 532,500 shares of the Option Securities at the
same purchase price per share as the Underwriters shall pay for the Underwritten
Securities. Said option may be exercised only to cover over-allotments in the
sale of the Underwritten Securities by the Underwriters. Said option may be
exercised in whole or in part at any time (but not more than once) on or before
the 30th day after the date of the Prospectus upon written or telegraphic notice
by the Representative to the Company and the Selling Stockholders setting forth
the number of shares of the Option Securities as to which the several
Underwriters are exercising the option and the settlement date. Delivery of
certificates for the shares of Option Securities by the Company and the Selling
Stockholders, and payment therefor to the Company and the Selling Stockholders
shall be made as provided in Section 3 hereof. The maximum number of shares of
the Option Securities to be sold by the Company and each of the Selling
Stockholders is set forth in Schedule II hereto. In the event that the
Underwriters exercise less than their full
10
<PAGE>
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. The number of shares of the Option Securities to be purchased by each
Underwriter shall be the same percentage of the total number of shares of the
Option Securities to be purchased by the several Underwriters as such
Underwriter is purchasing of the Underwritten Securities, subject to such
adjustments as you in your absolute discretion shall make to eliminate any
fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the Underwritten
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third business day prior to
the Closing Date) shall be made at 10:00 AM, New York City time, on ___________,
1996, or such later date (not later than _________, 1996) as the Representative
shall designate, which date and time may be postponed by agreement among the
Representative, the Company and (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third business day prior to
the Closing Date) the Selling Stockholders or as provided in Section 9 hereof
(such date and time of delivery and payment for the Securities being herein
called the "Closing Date"). Delivery of the Securities shall be made to the
Representative for the respective accounts of the several Underwriters against
payment by the several Underwriters through the Representative of the respective
aggregate purchase prices of the Securities being sold by the Company and each
of the Selling Stockholders to or upon the order of the Company and the Selling
Stockholders by certified or official bank check or checks drawn on or by a New
York Clearing House bank and payable in next day funds. Delivery of the
Underwritten Securities and the Option Securities shall be made at such location
as the Representative shall reasonably designate at least one business day in
advance of the Closing Date and payment for such Securities shall be made at the
office of Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New
York. Certificates for the Securities shall be registered in such names and in
such denominations as the Representative may request not less than three full
business days in advance of the Closing Date.
The Company and the Selling Stockholders agree to have the Securities
available for inspection, checking and packaging by the Representative in New
York, New York, not later than 1:00 PM on the business day prior to the Closing
Date.
Each Selling Stockholder will pay all applicable stock transfer taxes,
if any, involved in the transfer to the several Underwriters of the Securities
to be purchased by them from such Selling Stockholder and the respective
Underwriters will pay any additional stock transfer taxes involved in further
transfers.
If the option provided for in Section 2(b) hereof is exercised after
the third business day prior to the Closing Date, the Company and the Selling
Stockholders will deliver (at the expense of the Company) to the Representative,
care of Salomon Brothers Inc, at One New York Plaza, New York, New York, on the
date specified by the Representative (which shall be within three business days
after exercise of said option), certificates for the Option Securities in such
names and denominations as the Representative shall have requested against
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payment of the purchase price thereof to or upon the order of the Company and
the Selling Stockholders by certified or official bank check or checks drawn on
or by a New York Clearing House bank and payable in next day funds. If
settlement for the Option Securities occurs after the Closing Date, the Company
and the Selling Stockholders will deliver to the Representative on the
settlement date for the Option Securities, and the obligation of the
Underwriters to purchase the Option Securities shall be conditioned upon receipt
of, supplemental opinions, certificates and letters confirming as of such date
the opinions, certificates and letters delivered on the Closing Date pursuant to
Section 6 hereof.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. AGREEMENTS.
(a) The Company agrees with the several Underwriters that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of the
Registration Statement or supplement to the Prospectus without your prior
consent. Subject to the foregoing sentence, if the Registration Statement
has become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will cause
the Prospectus, properly completed, and any supplement thereto to be filed
with the Commission pursuant to the applicable paragraph of Rule 424(b)
within the time period prescribed and will provide evidence satisfactory to
the Representative of such timely filing. The Company will promptly advise
the Representative (A) when the Registration Statement, if not effective at
the Execution Time, and any amendment thereto, shall have become effective,
(B) when the Prospectus, and any supplement thereto, shall have been filed
(if required) with the Commission pursuant to Rule 424(b), (C) when, prior
to termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (D) of
any request by the Commission for any amendment of the Registration
Statement or supplement to the Prospectus or for any additional
information, (E) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (F) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of
any such stop order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(ii) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs as a
result of which the
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Prospectus as then supplemented would include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein in the light of the circumstances under which they were
made not misleading, or if it shall be necessary to amend the Registration
Statement or supplement the Prospectus to comply with the Act or the rules
thereunder, the Company promptly will prepare and file with the Commission,
subject to the second sentence of paragraph (a)(i) of this Section 5, an
amendment or supplement which will correct such statement or omission or
effect such compliance.
(iii) As soon as practicable, the Company will make generally
available to its security holders and to the Representative an earnings
statement or statements of the Company and its subsidiaries which will
satisfy the provisions of Section 11(a) of the Act and Rule 158 under the
Act.
(iv) The Company will furnish to the Representative and counsel
for the Underwriters, without charge, signed copies of the Registration
Statement (including exhibits thereto) and to each other Underwriter a copy
of the Registration Statement (without exhibits thereto) and, so long as
delivery of a prospectus by an Underwriter or dealer may be required by the
Act, as many copies of each Preliminary Prospectus and the Prospectus and
any supplement thereto as the Representative may reasonably request. The
Company will furnish or cause to be furnished to the Representative copies
of all reports on Form SR required by Rule 463 under the Act. The Company
will pay the expenses of printing or other production of all documents
relating to the offering.
(v) The Company will arrange for the qualification of the
Securities for sale under the laws of such jurisdictions as the
Representative may designate, will maintain such qualifications in effect
so long as required for the distribution of the Securities, will pay the
fee of the National Association of Securities Dealers, Inc., in connection
with its review of the offering and will pay the fees and expenses of
counsel to the Representative in connection with the qualification of the
Securities for sale under the laws of the jurisdictions so designated by
the Representative.
(vi) The Company and each director, executive officer and
affiliate of the Company will not, for a period of 180 days following the
Execution Time, without the prior written consent of the Representative,
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce the offering of, any shares of Common Stock (other
than the Securities) or any securities convertible into, or exchangeable
for, shares of Common Stock; PROVIDED, HOWEVER, that the Company may (A)
issue Common Stock in order to consummate the transactions contemplated by
and described in the Registration Statement and the Prospectus in order to
effect the conveyance to the Company of the assisted living business of the
Predecessor, (B) issue and sell Common Stock pursuant to any employee stock
option plan, stock ownership plan or dividend reinvestment plan of the
Company in effect at the Execution Time,
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and (C) issue Common Stock issuable upon the conversion of securities or
the exercise of warrants outstanding at the Execution Time and the
directors, executive officers and affiliates of the Company may dispose
of shares of Common Stock as bona fide gifts, including charitable
contributions.
(vii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported in
the Prospectus, if any, concerning the Company's business with Cuba or with
any person or affiliate located in Cuba changes in any material way, the
Company will provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
(b) Each Selling Stockholder agrees with the several Underwriters
that such Selling Stockholder will not, for a period of 180 days following the
Execution Time, without the prior written consent of the Representative, offer,
sell or contract to sell, or otherwise dispose of, directly or indirectly, or
announce the offering of, any shares of Common Stock (other than the Securities)
beneficially owned by such Selling Stockholder, or any securities beneficially
owned by such Selling Stockholder that are convertible into, or exchangeable
for, shares of Common Stock, other than shares of Common Stock disposed of as
bona fide gifts, including charitable contributions.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of
the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company and the Selling Stockholders made in any certificates pursuant to
the provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representative agree in writing to a later time,
the Registration Statement will become effective not later than (i) 6:00 PM, New
York City time, on the date of determination of the public offering price, if
such determination occurred at or prior to 3:00 PM, New York City time, on such
date or (ii) 12:00 Noon, New York City time, on the business day following the
day on which the public offering price was determined, if such determination
occurred after 3:00 PM, New York City time, on such date; if filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and within the
time period required by Rule 424(b); and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or threatened.
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(b) The Company shall have furnished to the Representative the
opinion of Proskauer Rose Goetz & Mendelsohn LLP, counsel for the Company, dated
the Closing Date, to the effect that:
(i) the Company has been duly incorporated and each of the
Company and the subsidiaries is validly existing as a corporation in good
standing under the laws of the jurisdiction in which it is chartered or
organized, with full corporate power and authority to own its properties
and conduct its business as described in the Prospectus, and is duly
qualified to do business as a foreign corporation and is in good standing
under the laws of each jurisdiction listed opposite such entity's name on
Schedule A attached to such counsel's opinion, an officer of each such
corporation having submitted to such counsel a certificate (copies of which
have been provided to the Representative), stating that, in his view, such
jurisdictions are the only jurisdictions in which the real or personal
property owned or leased or business conducted by such corporation is
material to the operations of the Company and its subsidiaries taken as a
whole;
(ii) all the outstanding shares of capital stock of each
subsidiary have been duly and validly authorized and issued and are fully
paid and nonassessable; and, except as otherwise set forth in the
Prospectus, such counsel has no actual knowledge, after due inquiry, that
any of the shares of capital stock of any subsidiary which are held of
record directly or indirectly by the Company are owned subject to any
liens, encumbrances, claims, or security interests;
(iii) the Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms to the
description thereof contained in the Prospectus; the outstanding shares of
Common Stock (including the Option Securities being sold hereunder by the
Selling Stockholders) have been duly and validly authorized and issued and
are fully paid and nonassessable; the Securities to be sold under this
Agreement by the Company have been duly and validly authorized, and, when
issued and delivered to and paid for by the Underwriters pursuant to this
Agreement, will be fully paid and nonassessable; the Securities are duly
admitted for quotation, subject to official notice of issuance and evidence
of satisfactory distribution, on the Nasdaq Stock Market National Market;
the certificates for the Securities are in valid and sufficient form; and
the holders of outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to subscribe for the Underwritten
Securities under the Delaware General Corporation Law, the Certificate of
Incorporation of the Company or any indenture or other agreement or
instrument included as an exhibit to the Registration Statement;
(iv) to the actual knowledge of such counsel, there is no
pending or threatened action, suit or proceeding before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any subsidiary or to which any of the property of the Company or
any subsidiary is subject that is of a character required to be disclosed
in the Registration Statement which is not adequately
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disclosed in the Prospectus, and there is no franchise, contract or other
document of a character required to be described in the Registration
Statement or Prospectus, or to be filed as an exhibit, which is not
described or filed as required;
(v) the statements in the Prospectus under the headings "Risk
Factors --Operating Agreements; Management Agreements and --Government
Regulation," "Business--Government Regulations," "Management-
-Indemnification and Limitation of Liability, --401(k) Plan, --1996 Stock
Incentive Plan, and --Employment Agreements," "Certain Transactions,"
"Principal and Selling Stockholders," "Description of Capital Stock,"
"Legal Proceedings" and "Shares Eligible for Future Sale" insofar as such
statements constitute a summary of legal matters, documents or proceedings
referred to therein, fairly summarize the information called for with
respect to such legal matters, documents and proceedings;
(vi) each of the Operating Agreements, the Management Agreements
and the Employment Agreements has been duly authorized by all necessary
corporate action, validly executed and delivered by each of the parties
thereto and constitutes a legal, valid and binding obligation of each
party, subject to bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws affecting or relating to the
enforcement of creditors' rights generally and general equitable
principles;
(vii) the Operating Agreements and the Management Agreements
comply with all applicable federal and New York State laws and regulations;
(viii) each of the Company, its subsidiaries and Glenn Kaplan,
Wayne Kaplan and Evan Kaplan (together the "Kaplans") possess the licenses,
certificates, authorizations, permits and other approvals which they are
required to possess, respectively, by the New York State Department of
Social Services and the New York State Department of Health, to operate the
facilities of the Company in accordance with their present operations, and
such counsel knows of no other federal or New York State licenses,
certificates, authorizations, permits and other approvals (other than local
zoning, land use and general business and corporate laws, rules and
regulations not specifically related to assisted living facility
operation), required by the Company, its subsidiaries or the Kaplans to
operate the facilities of the Company in accordance with their present
operations;
(ix) the Registration Statement has become effective under the
Act; any required filing of the Prospectus, and of any supplements thereto,
pursuant to Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b); to the actual knowledge of such counsel, no
stop order suspending the effectiveness of the Registration Statement has
been issued, no proceedings for that purpose have been instituted or
threatened and the Registration Statement and the Prospectus (other than
the financial statements and other financial and statistical information
contained therein as to which such counsel need express no opinion)
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comply as to form in all material respects with the applicable requirements
of the Act and the rules thereunder;
(x) this Agreement has been duly authorized, executed and
delivered by the Company;
(xi) no consent, approval, authorization or order of any federal
or New York State court or governmental agency or body is required for the
consummation of the transactions contemplated herein, except such as have
been obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and distribution
of the Securities by the Underwriters and such other approvals (specified
in such opinion) as have been obtained;
(xii) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions herein contemplated nor the
fulfillment of the terms hereof will conflict with, result in a breach or
violation of, or constitute a default under any federal or New York State
law, the Delaware General Corporation Law or the charter or by-laws of the
Company or any of the subsidiaries or the terms of any indenture or other
agreement or instrument actually known to such counsel and to which the
Company or any of the subsidiaries is a party or bound or any judgment,
order or decree actually known to such counsel to be applicable to the
Company or any of the subsidiaries of any federal or New York State court,
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over the Company or any of its subsidiaries;
(xiii) except as described in or contemplated by the Prospectus,
such counsel has no actual knowledge that any holders of securities of the
Company have rights to the registration of such securities under the
Registration Statement; and
(xiv) the Company is not now, and after sale of the Securities
to be sold under this Agreement by the Company and application of the net
proceeds from such sale as described in the Prospectus under the caption
"Use of Proceeds" will not be, an "investment company" within the meaning
of the Investment Company Act.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State of
New York, the United States of America or the corporation laws of the State of
Delaware, to the extent they deem proper and specified in such opinion, upon the
opinion of other counsel of good standing whom they believe to be reliable and
who are satisfactory to counsel for the Underwriters, (B) as to matters of fact,
to the extent they deem proper, on certificates of responsible officers of the
Company and public officials, and (C) as to the licenses, certificates,
authorizations, permits and other approvals referred to in subparagraph (viii)
of this paragraph (b), on a certificate of the Company, provided that such
counsel has examined originals or copies of each such license, certificate,
authorization, permit or approval without independently verifying whether any
of the foregoing were duly issued or continue to be in effect. References to
the Prospectus in this paragraph (b) include any supplements thereto at the
Closing Date.
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In addition, such counsel shall furnish to the Representative a letter
in the form of Exhibit B hereto.
(c) The Selling Stockholders shall have furnished to the
Representative the opinion of Proskauer Rose Goetz & Mendelsohn LLP, counsel for
the Selling Stockholders, dated the Closing Date, to the effect that:
(i) this Agreement has been duly executed and delivered by each
Selling Stockholder and each Selling Stockholder, subject to paragraph (ii)
immediately below, has full legal right and authority to sell, transfer and
deliver in the manner provided in this Agreement the Securities being sold
by such Selling Stockholder hereunder, subject to bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws
affecting or relating to the enforcement of creditors' rights generally and
general equitable principles;
(ii) upon delivery on behalf of each of the Selling Stockholders
to the several Underwriters of certificates for the Securities being sold
hereunder by such Selling Stockholder against payment therefor as provided
herein, the several Underwriters will acquire all the rights of such
Selling Stockholder to such Securities and will acquire such Securities
free and clear of any "adverse claim" (as such term is used in Section 8-
302 of the Uniform Commercial Code as in effect in the State of New York),
assuming the Underwriters acquire such shares in good faith and without
notice of any such "adverse claim";
(iii) no consent, approval, authorization or order of any
federal or New York State court or governmental agency or body is required
for the consummation by any Selling Stockholder of the transactions
contemplated herein, except such as may have been obtained under the Act
and such as may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the Securities by the
Underwriters and such other approvals (specified in such opinion) as have
been obtained; and
(vi) neither the sale of the Securities being sold by any
Selling Stockholder nor the consummation of any other of the transactions
herein contemplated by any Selling Stockholder or the fulfillment of the
terms hereof by any Selling Stockholder will conflict with, result in a
breach or violation of, or constitute a default under any law or the terms
of any indenture or other agreement or instrument actually known to such
counsel and to which any Selling Stockholder is a party or bound, or any
judgment, order or decree actually known to such counsel to be applicable
to any Selling Stockholder of any federal or New York State court,
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over any Selling Stockholder.
In rendering such opinion, such counsel may rely as to matters of
fact, to the extent they deem proper, on certificates of responsible officers of
the Company.
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(d) The Representative shall have received from Cleary, Gottlieb,
Steen & Hamilton, counsel for the Underwriters, such opinion or opinions, dated
the Closing Date, with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospectus (together with any supplement thereto)
and other related matters as the Representative may reasonably require, and the
Company and each Selling Stockholder shall have furnished to such counsel such
documents as they reasonably request for the purpose of enabling them to pass
upon such matters.
(e) The Company shall have furnished to the Representative a
certificate of the Company, signed by the Chairman of the Board or the President
and the principal financial or accounting officer of the Company, dated the
Closing Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectus, any supplements to the
Prospectus and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date and the
Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or, to the Company's knowledge, threatened; and
(iii) since the date of the most recent financial statements
included in the Prospectus (exclusive of any supplement thereto), there has
been no material adverse change in the condition (financial or other),
earnings, business or properties of the Company and its subsidiaries,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(f) Each Selling Stockholder shall have furnished to the
Representative a certificate, signed by such Selling Stockholder, dated the
Closing Date, to the effect that the signer of such certificate has carefully
examined the Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that the representations and warranties of
such Selling Stockholder in this Agreement are true and correct in all material
respects on and as of the Closing Date to the same effect as if made on the
Closing Date.
(g) At the Execution Time and at the Closing Date, Coopers & Lybrand
L.L.P. shall have furnished to the Representative a letter or letters, dated
respectively as of the Execution Time and as of the Closing Date, in form and
substance satisfactory to the Representative, confirming that they are
independent accountants within the meaning of the Act and the respective
applicable published rules and regulations thereunder; and that they have
performed a review of the unaudited interim financial information of the
Predecessor as
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of June 30, 1996 and for the six-month period ended June 30, 1995 and 1996 and
the unaudited pro forma financial statements as of, and stating in effect that:
(i) in their opinion the audited combined financial statements
and schedules included in the Registration Statement and the Prospectus and
reported on by them comply in form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company, its Predecessor and its
subsidiaries; carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing standards) which
would not necessarily reveal matters of significance with respect to the
comments set forth in such letters; a reading of the minutes of the
meetings of the partners, holders of stock or other interests, directors
and the executive, audit and compensation committees of the Company, its
Predecessor and its subsidiaries and inquiries of certain officials of the
Company, its Predecessor and its subsidiaries who have or have had the
responsibility for financial and accounting matters as to transactions and
events subsequent to December 31, 1995, nothing came to their attention
which caused them to believe that:
(A) any unaudited financial statements included in the
Registration Statement and the Prospectus do not comply in form in all
material respects with applicable accounting requirements of the Act
and with the published rules and regulations of the Commission with
respect to registration statements on Form S-1; or said unaudited
financial statements are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent with
that of the audited financial statements included in the Registration
Statement and the Prospectus; or
(A) with respect to the period subsequent to December 31,
1995, there were any changes, at a specified date not more than three
business days prior to the date of the letter, in the long-term debt
of the Company and its subsidiaries or capital stock or decreases in
total shareholders' equity of the Company and its subsidiaries as
compared with the amounts shown on the June 30, 1996 combined balance
sheet of the Predecessor included in the Registration Statement and
the Prospectus, or from the period July 1, 1996, to such specified
date, there were any decrease, as compared with the corresponding
period in the preceding year, in total revenues or earnings before
provision for income taxes or in net earnings of the Company and its
subsidiaries, except in all instances for changes or decreases set
forth in each letter, in which case the letter shall be accompanied by
an explanation by the Company as to the significance thereof unless
said explanation is not deemed necessary by the Representative;
(iii) they have performed certain other specified procedures as
a result of which they determined that certain information of an
accounting, financial or
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statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of the
Company, its Predecessor and its subsidiaries) set forth in the
Registration Statement and the Prospectus, including the information set
forth under the captions "Summary Financial, Operating and Pro Forma Data"
and "Selected Financial, Operating and Pro Forma Data" in the Prospectus,
agrees with the accounting records of the Company, its Predecessor and its
subsidiaries, excluding any questions of legal interpretation; and
(iv) they have read the unaudited pro forma financial statements
included in the Registration Statement and the Prospectus; carried out certain
specified procedures; inquired of certain officials of the Company, its
Predecessor and its subsidiaries, who have or have had responsibility for
financial and accounting matters; and proved the arithmetic accuracy of the
application of the pro forma adjustments to the historical amounts in the pro
forma financial statements.
References to the Prospectus in this paragraph (g) include any
supplement thereto at the date of the letter.
(h) At the Execution Time and at the Closing Date, Rotenberg &
Company LLP shall have furnished to the Representative a letter or letters,
dated respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Representative, confirming that they are
independent accountants and auditors within the meaning of the Act and the
respective applicable published rules and regulations thereunder; and that they
have performed a review of the unaudited interim financial information of Town
Gate East and Town Gate Manor for the three-month period ended March 31, 1996,
and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration Statement and
the Prospectus and reported on by them comply in form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company, its Predecessor and its
subsidiaries; carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing standards) which
would not necessarily reveal matters of significance with respect to the
comments set forth in such letters; and inquiries of certain officials of
Town Gate East and Town Gate Manor who have or have had the responsibility
for financial and accounting matters as to transactions and events
subsequent to December 31, 1995, nothing came to their attention which
caused them to believe that:
(A) any unaudited financial statements of Town Gate East
and Town Gate Manor included in the Registration Statement and the
Prospectus do not comply in form in all material respects with
applicable accounting requirements of the Act and with the
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published rules and regulations of the Commission with respect to
registration statements on Form S-1; or said unaudited financial
statements are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration
Statement and the Prospectus; and
References to the Prospectus in this paragraph (h) include any
supplement thereto at the date of the letter.
(i) The Representative also shall have received from Coopers &
Lybrand L.L.P. a letter stating that the Company's system of internal accounting
controls taken as a whole is sufficient to meet the broad objectives of internal
accounting control insofar as those objectives pertain to the prevention or
detection of errors or irregularities in amounts that would be material in
relation to the financial statements of the Company and its subsidiaries.
(j) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and
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the Prospectus (exclusive of any supplement thereto), there shall not have
been (i) any change or decrease specified in the letter or letters referred
to in paragraphs (g) and (h) of this Section 6 or (ii) any change, or any
development involving a prospective change, in or affecting the business or
properties of the Company and its subsidiaries the effect of which, in any
case referred to in clause (i) or (ii) above, is, in the judgment of the
Representative, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the Registration Statement (exclusive of any amendment
thereof) and the Prospectus (exclusive of any supplement thereto).
(k) At the Execution Time, the Company shall have furnished to the
Representative a letter substantially in the form of Exhibit A hereto from each
executive officer, director and affiliate of the Company addressed to the
Representative, in which each such person agrees not to offer, sell or contract
to sell, or otherwise dispose of, directly or indirectly, or announce an
offering of, any shares of Common Stock beneficially owned by such person or any
securities convertible into, or exchangeable for, shares of Common Stock for a
period of 180 days following the Execution Time without the prior written
consent of the Representative, other than shares of Common Stock disposed of as
bona fide gifts, including charitable contributions.
(l) Prior to the Closing Date, the Company and each Selling
Stockholder shall have furnished to the Representative such further information,
certificates and documents as the Representative may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representative and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representative. Notice of such
cancellation shall be given to the Company and each Selling Stockholder in
writing or by telephone or telegraph confirmed in writing.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company or any Selling
Stockholder to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the proposed purchase and sale of the
Securities.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Selling Stockholders jointly and severally
agree to indemnify and hold harmless each Underwriter, the directors, officers,
employees and
23
<PAGE>
agents of each Underwriter, and each person who controls any Underwriter within
the meaning of either the Act or the Exchange Act against any and all losses,
claims, damages or liabilities, joint or several, to which they or any of them
may become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the registration statement for the registration of the
Securities as originally filed or in any amendment thereof, or in any
Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
Company and the Selling Stockholders will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representative specifically for inclusion therein; and PROVIDED FURTHER that
as to the Prospectus this indemnity agreement shall not inure to the benefit of
any Underwriter, its officers, employees or any person controlling that
Underwriter on account of any loss, claim, damage, liability or action arising
from the sale of Securities to any person by that Underwriter if that
Underwriter failed to send or give a copy of the Prospectus, or an amendment or
supplement thereto, to that person within the time required by the Act, and the
untrue statement or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact in the Prospectus was corrected in the
amendment or supplement thereto, unless such failure resulted from non-
compliance by the Company with Section 5(a)(iv). This indemnity agreement will
be in addition to any liability which the Company or the Selling Stockholders
may otherwise have.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of either the Act or the Exchange Act and each Selling Stockholder, to
the same extent as the foregoing indemnity from the Company to each Underwriter,
but only with reference to written information relating to such Underwriter
furnished to the Company by or on behalf of such Underwriter through the
Representative specifically for inclusion in the documents referred to in the
foregoing indemnity or with respect to any loss, claim, damage, liability or
action arising from the sale of Securities to any person by an Underwriter if
that Underwriter failed to send or give a copy of the Prospectus, or an
amendment or supplement thereto, to that person within the time required by the
Act, and the untrue statement or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact in the Prospectus was
corrected in the amendment or supplement thereto, unless such failure resulted
from non-compliance by the Company with Section 5(a)(iv). This indemnity
agreement will be in addition to any liability which any Underwriter may
otherwise have. The Company and each Selling Stockholder each acknowledge that
the statements set forth in the last paragraph of the cover page and under the
24
<PAGE>
heading "Underwriting" in any Preliminary Prospectus and the Prospectus
constitute the only information furnished in writing by or on behalf of the
several Underwriters for inclusion in any Preliminary Prospectus or the
Prospectus, and you, as the Representative, confirm that such statements are
correct.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
any liability under paragraph (a) or (b) above unless and to the extent it did
not otherwise learn of such action and such failure results in the forfeiture by
the indemnifying party of substantial rights and defenses and (ii) will not, in
any event, relieve the indemnifying party from any obligations to any
indemnified party other than the indemnification obligation provided in
paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint
counsel of the indemnifying party's choice at the indemnifying party's expense
to represent the indemnified party in any action for which indemnification is
sought (in which case the indemnifying party shall not thereafter be responsible
for the fees and expenses of any separate counsel retained by the indemnified
party or parties except as set forth below); PROVIDED, HOWEVER, that such
counsel shall be satisfactory to the indemnified party. Notwithstanding the
indemnifying party's election to appoint counsel to represent the indemnified
party in an action, the indemnified party shall have the right to employ
separate counsel (including local counsel), and the indemnifying party shall
bear the reasonable fees, costs and expenses of such separate counsel if (i) the
use of counsel chosen by the indemnifying party to represent the indemnified
party would present such counsel with a conflict of interest, (ii) the actual or
potential defendants in, or targets of, any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to those
available to the indemnifying party, (iii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of the institution of
such action or (iv) the indemnifying party shall authorize the indemnified party
to employ separate counsel at the expense of the indemnifying party; PROVIDED,
HOWEVER, that in no event shall the indemnifying party bear the fees, costs and
expenses of more than one firm of the attorneys (in addition to one firm of
attorneys as local counsel in each necessary jurisdiction) for all indemnified
parties. An indemnifying party will not, without the prior written consent of
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Selling Stockholders,
jointly and severally, and the Underwriters
25
<PAGE>
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the Company,
one or more of the Selling Stockholders and one or more of the Underwriters may
be subject in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and by the
Underwriters on the other from the offering of the Securities; PROVIDED,
HOWEVER, that in no case shall any Underwriter (except as may be provided in any
agreement among underwriters relating to the offering of the Securities) be
responsible for any amount in excess of the underwriting discount or commission
applicable to the Securities purchased by such Underwriter hereunder. If the
allocation provided by the immediately preceding sentence is unavailable for any
reason, the Company and the Selling Stockholders, jointly and severally, and the
Underwriters shall contribute in such proportion as is appropriate to reflect
not only such relative benefits but also the relative fault of the Company and
the Selling Stockholders on the one hand and of the Underwriters on the other in
connection with the statements or omissions which resulted in such Losses as
well as any other relevant equitable considerations. Benefits received by the
Company and the Selling Stockholders shall be deemed to be equal to the total
net proceeds from the offering (before deducting expenses), and benefits
received by the Underwriters shall be deemed to be equal to the total
underwriting discounts and commissions, in each case as set forth on the cover
page of the Prospectus. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information provided
by the Company, the Selling Stockholders or the Underwriters. The Company, the
Selling Stockholders and the Underwriters agree that it would not be just and
equitable if contribution were determined by PRO RATA allocation or any other
method of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this paragraph (d), no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 8,
each person who controls an Underwriter within the meaning of either the Act or
the Exchange Act and each director, officer, employee and agent of an
Underwriter shall have the same rights to contribution as such Underwriter, and
each person who controls the Company within the meaning of either the Act or the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to the applicable terms and
conditions of this paragraph (d).
(e) The liability of each Selling Stockholder under such Selling
Stockholder's representations and warranties contained in Section 1 hereof and
under the indemnity and contribution agreements contained in this Section 8
shall be limited to an amount equal to the initial public offering price of the
Securities sold by such Selling Stockholder to the Underwriters. The Company
and the Selling Stockholders may agree, as among themselves and without limiting
the rights of the Underwriters under this Agreement, as to the respective
amounts of such liability for which they each shall be responsible.
9. DEFAULT BY AN UNDERWRITER. If any one or more Underwriters shall fail
to purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or
26
<PAGE>
Underwriters hereunder and such failure to purchase shall constitute a default
in the performance of its or their obligations under this Agreement, the
remaining Underwriters shall be obligated severally to take up and pay for (in
the respective proportions which the amount of Securities set forth opposite
their names in Schedule I hereto bears to the aggregate amount of Securities set
forth opposite the names of all the remaining Underwriters) the Securities which
the defaulting Underwriter or Underwriters agreed but failed to purchase;
PROVIDED, HOWEVER, that in the event that the aggregate amount of Securities
which the defaulting Underwriter or Underwriters agreed but failed to purchase
shall exceed 10% of the aggregate amount of Securities set forth in Schedule I
hereto, the remaining Underwriters shall have the right to purchase all, but
shall not be under any obligation to purchase any, of the Securities, and if
such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter, the
Selling Stockholders or the Company. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding seven days, as the Representative shall determine
in order that the required changes in the Registration Statement and the
Prospectus or in any other documents or arrangements may be effected. Nothing
contained in this Agreement shall relieve any defaulting Underwriter of its
liability, if any, to the Company, the Selling Stockholders and any
nondefaulting Underwriter for damages occasioned by its default hereunder.
10. TERMINATION. This Agreement shall be subject to termination in the
absolute discretion of the Representative, by notice given to the Company prior
to delivery of and payment for the Securities, if prior to such time (i) trading
in the Company's Common Stock shall have been suspended by the Commission or
trading in securities generally on the New York Stock Exchange or the Nasdaq
National Market shall have been suspended or limited or minimum prices shall
have been established on such Exchange or National Market System, (ii) a banking
moratorium shall have been declared by either Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the judgment of the Representative, impracticable or inadvisable to
proceed with the offering or delivery of the Securities as contemplated by the
Prospectus.
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each Selling Stockholder and of the Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter,
any Selling Stockholder or the Company or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive delivery
of and payment for the Securities. The provisions of Sections 7 and 8 hereof
shall survive the termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Representative, will be mailed,
delivered or telegraphed and confirmed to them, care of Salomon Brothers Inc, at
Seven World Trade Center, New York,
27
<PAGE>
New York 10048; or, if sent to the Company, will be mailed, delivered or
telegraphed and confirmed to it at 242 Crossways Park West, Woodbury, New York
11797, attention of Glenn Kaplan; or, if sent to the Selling Stockholders, will
be mailed, delivered or telegraphed and confirmed to the Selling Stockholders at
242 Crossways Park West, Woodbury, New York 11797.
13. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14. APPLICABLE LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
28
<PAGE>
15. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, and all of which taken together shall
constitute one and the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several Underwriters.
Very truly yours
Kapson Senior Quarters Corp.
By:
-------------------------
-----------------------------
Glenn Kaplan
-----------------------------
Wayne L. Kaplan
-----------------------------
Evan A. Kaplan
The foregoing Agreement is hereby
confirmed and accepted as of the date first
written above
Salomon Brothers Inc.
Raymond James & Associates, Inc.
Wheat, First Securities, Inc.
By: Salomon Brothers Inc.
By:
______________________________________
Vice President
For themselves and the other several
Underwriters named in Schedule I to the
foregoing Agreement
29
<PAGE>
SCHEDULE I
NUMBER OF SHARES OF
UNDERWRITTEN SECURITIES
UNDERWRITER TO BE PURCHASED
- --------------- ------------------------
Salomon Brothers Inc . . . . . . . . . . . .
Raymond James & Associates, Inc. . . . . . .
Wheat, First Securities, Inc.. . . . . . . .
-------------
Total 3,550,000
-------------
-------------
<PAGE>
SCHEDULE II
MAXIMUM NUMBER OF
SHARES OF OPTION
NAME SECURITIES TO BE SOLD
- -------------- ------------------------
Kapson Senior Quarters Corp. . . . . . . . . 266,250
Glenn Kaplan.. . . . . . . . . . . . . . . . 88,750
Wayne L. Kaplan. . . . . . . . . . . . . . . 88,750
Evan A. Kaplan . . . . . . . . . . . . . . . 88,750
--------------
Total 532,500
--------------
--------------
<PAGE>
SCHEDULE III
EXCEPTIONS UNDER SECTION 1(a)(xxii)
1. Licenses for certain new facilities (i.e., Senior Quarters at
Lynbrook and Senior Quarters at Glen Riddle) for which rental offices have been
opened, but which are not yet occupied, have been applied for and have not yet
been received.
2. Applications have been filed to upgrade Senior Quarters at
Jamesburg ("Jamesburg") and Senior Quarters at Cranford ("Cranford") from a
"Class C Boarding Home" to an "Assisted Living Residence/Comprehensive Personal
Care Home" in the case of Jamesburg and a "Comprehensive Personal Care Home" in
the case of Cranford.
3. An application is pending with respect to Senior Quarters at
Stamford to upgrade the facility from an "Independent Living Facility" to an
"Assisted Living Services Agency".
<PAGE>
EXHIBIT A
[Letterhead of executive officer, director or affiliate of Kapson
Senior Quarters Corp.]
Kapson Senior Quarters Corp.
PUBLIC OFFERING OF COMMON STOCK
___________, 1996
Salomon Brothers Inc
Raymond James & Associates, Inc.
Wheat, First Securities, Inc.
c/o Salomon Brothers Inc
as Representative of the several Underwriters
Seven World Trade Center
New York, New York 10048
Dear Sirs:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between Kapson Senior
Quarters Corp., a Delaware corporation (the "Company"), certain Selling
Stockholders named therein and each of you as Representative of a group of
Underwriters named therein, relating to an underwritten public offering of
Common Stock, $0.01 par value ("Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned agrees not to offer, sell or contract to
sell, or otherwise dispose of, directly or indirectly, or announce an offering
of, any shares of Common Stock beneficially owned by the undersigned or any
securities convertible into, or exchangeable for, shares of Common Stock for a
period of 180 days following the day on which the Underwriting Agreement is
executed without your prior written consent, other than shares of Common Stock
disposed of as bona fide gifts, including charitable contributions.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall likewise be terminated.
Yours very truly,
[Signature of executive officer,
director or affiliate]
[Name and address of executive officer,
director or affiliate]
<PAGE>
EXHIBIT B
_________________ __, 1996
Salomon Brothers Inc
Raymond James & Associates, Inc.
Wheat, First Securities, Inc.
c/o Salomon Brothers Inc
as Representative of the several Underwriters
Seven World Trade Center
New York, New York 10048
Re: KAPSON SENIOR QUARTERS CORP.
Ladies and Gentlemen:
We have acted as special counsel to Kapson Senior Quarters Corp., a
Delaware corporation (the "Company") in connection with the purchases by the
several underwriters (the "Underwriters") named in Schedule I to the
Underwriting Agreement, dated _____ __, 1996, among the Company, certain selling
stockholders named therein (the "Selling Stockholders"), and you, as
representatives of the Underwriters, of shares of the Company's Common Stock,
par value $0.01 per share (the "Common Stock"), from the Company and the Selling
Stockholders. Capitalized terms used and not defined herein shall have the
meanings ascribed to them in the Underwriting Agreement.
In that capacity, we participated in conferences with certain officers
of, and with the accountants for, the Company concerning the preparation of (a)
the Registration Statement and (b) the Prospectus. Certain of the documents
incorporated by reference in the Registration Statement and Prospectus were
prepared and filed by the Company.
Although we have made certain inquiries and investigations in
connection with the preparation of the Registration Statement and the
Prospectus, we did not independently verify the accuracy or completeness of the
statements made in the Registration Statement or the Prospectus and the
limitations inherent in the role of outside counsel are such that we cannot and
do not assume responsibility for or pass on the accuracy and completeness of
such statements, except insofar as such statements relate to us and except to
the extent set forth in the clause following the first semicolon in the first
sentence of paragraph (iii) and in paragraph (v) of our opinion to you dated the
date hereof. Subject to the foregoing, we can state to you that (other than
financial statements and schedules and other information of a statistical,
accounting, or financial nature which are or should be contained therein as to
which we express no view): (i) the Registration Statement and the Prospectus
comply as to form in all material respects with the requirements of the
Securities Act and the applicable rules and
<PAGE>
regulations of the Commission thereunder, and (ii) our work in connection with
this matter did not disclose any information that caused us to believe that the
Registration Statement, at the time the Registration Statement became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus, at the date thereof or hereof, included
or includes an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
Very truly yours,
Proskauer Rose Goetz & Mendelsohn LLP
By:__________________________________
Exhibit B-2
<PAGE>
EXHIBIT 10.1
OPERATING AGREEMENT
DATED ___________ ____, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. RESPONSIBILITIES OF OPERATORS . . . . . . . . . . . . . . . . . . . . . -1-
i. OPERATIONAL POLICIES AND FORMS . . . . . . . . . . . . . . . . . -1-
ii. CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
iii. INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
iv. REGULATORY COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . -2-
v. EQUIPMENT AND IMPROVEMENTS . . . . . . . . . . . . . . . . . . . -2-
vi. ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
vii. REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3-
viii. BANK ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . . -3-
ix. PERSONNEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . -3-
x. SUPPLIES AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . . -4-
xi. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . -4-
xii. ANNUAL BUDGETS . . . . . . . . . . . . . . . . . . . . . . . . . -4-
(1) PREPARATION AND SUBMISSION. . . . . . . . . . . . . . . . -4-
(2) ADOPTION. . . . . . . . . . . . . . . . . . . . . . . . . -4-
(3) EFFORTS TO OPERATE WITHIN ANNUAL BUDGET . . . . . . . . . -5-
xiii. COLLECTION OF ACCOUNTS . . . . . . . . . . . . . . . . . . . . . -5-
xiv. CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-
2. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -6-
3. TERM OF AGREEMENT; EFFECT OF TERMINATION. . . . . . . . . . . . . . . . -6-
4. EVENTS OF DEFAULT AND REMEDIES. . . . . . . . . . . . . . . . . . . . . -7-
5. FACILITY OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
a. NO GUARANTEE OF PROFITABILITY. . . . . . . . . . . . . . . . . . -8-
b. STANDARD OF PERFORMANCE; ACTING WITHIN BUDGET. . . . . . . . . . -8-
c. FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . . -8-
6. WITHDRAWAL OF FUNDS BY OPERATORS. . . . . . . . . . . . . . . . . . . . -8-
7. FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-
8. ASSIGNMENT; DELEGATION. . . . . . . . . . . . . . . . . . . . . . . . . -9-
a. OPERATING AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . -9-
b. DELEGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-
9. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-
-i-
<PAGE>
10. RELATIONSHIP OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . .-10-
11. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .-10-
12. CONTRACT MODIFICATIONS FOR PROSPECTIVE LEGAL EVENTS . . . . . . . . . .-10-
13. CAPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-10-
14. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-10-
15. CUMULATIVE: NO WAIVER. . . . . . . . . . . . . . . . . . . . . . . . .-10-
16. AUTHORIZATION FOR AGREEMENT . . . . . . . . . . . . . . . . . . . . . .-11-
17. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-11-
-ii-
<PAGE>
OPERATING AGREEMENT
This Operating Agreement is made as of the ____ day of ___________, 1996,
between Kapson Senior Quarters Corp., a Delaware corporation ("Owner"), and
Glenn Kaplan, Wayne Kaplan and Evan Kaplan (collectively, "Operators").
WHEREAS, Owner is the owner of the adult-care facility described on
SCHEDULE A hereto (the "Facility");
WHEREAS, Operators are duly licensed to operate the Facility, are
experienced and qualified in the field of operating adult-care facilities such
as the Facility, and Owner desires to engage Operators to operate the Facility;
WHEREAS, Operators are willing to operate the Facility, on the terms and
subject to the conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the foregoing, the mutual covenants
contained herein and for other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties do hereby agree as
follows:
1. RESPONSIBILITIES OF OPERATORS:
A. Owner hereby engages Operators to operate the Facility, and
Operators hereby accept such engagement and agree to operate the Facility, at
Owner's expense, so as to provide all services required by applicable law and
regulation and the terms and conditions set forth in this Agreement. During
the term of this Agreement, Operators shall have full authority to operate
and manage the Facility as an adult-care facility in accordance with
applicable law and regulation and the terms and conditions hereof, and shall
have full and complete control and reign over, and use of, the entire
Facility, including its common areas. Without limiting the generality of the
foregoing, Operators shall have full authority and responsibility as follows:
i. OPERATIONAL POLICIES AND FORMS. Subject to the Annual
Budgets (as defined in Section 1.A.xi hereof), Operators shall establish and
implement such operational policies and procedures, and develop such new
policies and procedures, as they may deem necessary to insure the
establishment and maintenance of operational standards appropriate for the
nature of the Facility.
ii. CHARGES. Operators shall establish the schedules of
charges, including any and all special charges for services rendered at the
Facility.
iii. INFORMATION. Operators shall develop any informational
material, mass media releases, and other related publicity materials, that
they deem necessary for the operation of the Facility.
<PAGE>
iv. REGULATORY COMPLIANCE. Operators shall use their
reasonable best efforts to maintain all licenses, permits, qualifications and
approvals from any applicable governmental or regulatory authority required
for the operation of the Facility, to operate the Facility in compliance with
all applicable laws and regulations, and to comply with such laws and
regulations in performing Operators' obligations under this Agreement. In
addition, Operators shall supervise and coordinate the preparation and filing
of (and, where operators are required to do so under applicable law or
regulation, file) all reports or other information required by New York State
Department of Social Services, New York State Housing Finance Agency and
other New York State or other governmental agencies having jurisdiction over
the Facility and shall deliver copies of all such reports to Owner
simultaneously with their filing. Operators shall cooperate with
governmental inspection and enforcement activities.
v. EQUIPMENT AND IMPROVEMENTS. Subject to the Annual
Budgets, Operators shall, on behalf of Owner, acquire or effect the
acquisition of equipment and improvements which are needed to maintain
or upgrade the quality, to replace obsolete or run-down equipment, or to
correct any other survey deficiencies which may be cited during the term
of this Agreement, and shall make or engage third parties to make all such
repairs, replacements and maintenance and shall cause to be acquired all
necessary equipment, including replacement equipment.
vi. ACCOUNTING. Operators shall supervise and coordinate
accounting support to the Facility, including the following:
A. A monthly balance sheet and statement of operations for
the Facility, to be submitted to Owner within thirty (30) days after the end
of each calendar month;
B. Resident billing records;
C. Accounts receivable and collection records;
D. Accounts payable records;
E. All payroll functions, including, preparation of payroll
checks, establishment of depository accounts for withholding taxes, payment
of such taxes (at Owner's sole expense), filing of payroll reports and the
issuance of W-2 forms to all employees;
F. A complete general ledger for the purposes of recording
and summarizing all transactions for the Facility;
G. The preparation and filing of all necessary reports as
required by applicable governmental authorities and the simultaneous
provision of copies thereof to the Owner. Operators shall file all such
reports as are required to be filed by Operators.
All accounting procedures and systems utilized in providing said support
shall be in accordance with the operating capital and cash programs developed
by Operators, which programs shall conform to generally accepted accounting
principles and shall not materially distort income or
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loss. Nothing herein shall preclude Operators from engaging a third party
(in addition to Subsidiary, as defined in Section 5(a) hereof) to assist it
in the performance of the accounting duties provided for herein.
vii. REPORTS. Operators shall supervise and coordinate the
preparation of any reasonable operational information which may from time to
time be specifically requested by Owner, including any information needed to
assist Owner in completing its tax returns and in complying with any
reporting obligations imposed by any mortgagees or lessors of the Facility.
In addition: (i) within thirty (30) days after the end of each calendar
month, Operators shall supervise and coordinate the preparation and the
delivery to Owner of an unaudited balance sheet of the Facility, dated the
last day of such month, and an unaudited statement of income and expenses for
such month relating to the operation of the Facility and (ii) within ninety
(90) days after the end of the fiscal year of the Facility, unaudited
financial statements including a balance sheet of the Facility dated the last
day of said fiscal year and a statement of income and expense for the year
then ended relating to the operation of the Facility. In addition, Operators
shall supervise and coordinate the preparation and the delivery to Owner of
monthly occupancy reports and related information with respect to the
Facility. All books, forms and records in connection with the operation of
the Facility are Operators' property.
viii. BANK ACCOUNTS. Operators shall establish an account and
shall deposit therein all money received during the term of this Agreement in
the course of the operation of the Facility. Such account may be part of a
central cash management system encompassing all adult-care facilities of
Owner for which the Operators serve as licensed operators. Withdrawals and
payments from this account shall be made only on checks signed by one or more
of the Operators or by a person or persons designated by Operators. Owner
shall be given notice as to the identity of authorized signatories. Subject
to paragraph (2) of Section 1.A.xii, all expenses incurred in the operation
of the Facility in accordance with the terms of the Annual Budgets,
including, but not limited to, Facility mortgage or lease payments, payroll
and employee benefits and payment of Fees, shall be paid by check drawn on
this account. Monthly payments shall be made out of this account first to
pay any debt service or rent due with respect to the Facility, next to pay
the Facility operating expenses in such order of priority as Operators deem
appropriate to the operation of the Facility (other than the Fees), and,
thereafter, to pay the Fees. Any Fees which are not paid when due as a
result of an insufficiency of revenues from the Facility to cover the same
shall accrue and shall be due and payable promptly by Owner.
ix. PERSONNEL. Operators shall have full power and
authority to recruit, hire, train, promote, direct, discipline and fire all
Facility personnel, including the Administrator of the Facility; establish
salary levels, personnel policies and employee benefits; and establish
employee performance standards, all as Operators determine to be necessary or
desirable during the term of this Agreement to ensure the efficient operation
of all departments within, and all services offered by, the Facility. All of
the foregoing obligations shall be undertaken in accordance with the Annual
Budgets and applicable law and regulations. All of the Facility personnel
shall be the employees of Owner, unless otherwise agreed by Owner and
Operators, and
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all salary, bonuses, fringe benefits, payroll taxes and related expenses
payable to or in respect of the Facility's personnel shall be expenses of the
Facility.
x. SUPPLIES AND EQUIPMENT. Operators shall purchase, on
behalf of Owner, supplies and non-capital equipment needed to operate the
Facility within the budgetary limits set forth in the Annual Budgets.
xi. LEGAL PROCEEDINGS. Operators shall, through legal
counsel designated by Operator, direct all legal matters and proceedings that
are within the scope of Operators' authority pursuant to this Agreement,
including without limitation, instituting any necessary legal actions or
proceedings to collect obligations owing to the Facility, canceling or
terminating any contract or agreement for breach thereof or default
thereunder, and otherwise enforce the obligations of the residents, sponsors,
licensees, customers and other users of the Facility. Without limiting the
generality of the foregoing, Operators are authorized to settle, in the name
and on behalf of the Owner and on such terms and conditions as Operators may
deem to be in the best interests of the Facility, any and all claims or
demands arising out of, or in connection with, the operation of the Facility,
whether or not legal action has been instituted, provided that such
settlement does not exceed $20,000 for each such individual claim or demand.
All such amounts shall be expenses of the Facility. Operators will give
notice promptly to Owner of all demands and claims and all settlements and
legal actions, but the failure to give such notice shall not affect the
preceding provisions of this paragraph.
xii. ANNUAL BUDGETS.
(1) PREPARATION AND SUBMISSION. Owner and Operators
acknowledge that they have agreed upon the budget for the Facility through
December 31, 1996. At least ninety (90) days prior to the end of December
31, 1996 and each subsequent calendar year that commences during the term of
this Agreement, Operators shall submit to Owner a proposed annual budget for
the Facility projecting the revenues available and funds required during such
fiscal year in order to operate the Facility and to make capital improvements
necessary or desirable in order to keep the Facility's physical plant in good
condition and repair. The proposed annual budget shall be based upon data
and information then available to Operators and shall include, without
limitation, estimated salaries and fringe benefits for all personnel groups,
projected staffing patterns for the Facility, estimates of required purchases
for supplies, inventory, food and similar items, and an estimate of the level
of rates and charges sufficient to generate revenue necessary to operate the
Facility and make the capital improvements projected in such budget. The
proposed annual budget shall be an estimate of revenues and costs, and Owner
and Operators acknowledge that (x) projected revenue may not be actually
received and (y) projected costs may be exceeded by actual expenses and
capital expenditures incurred in connection with the operation and
maintenance of the Facility. By submitting such a projected budget,
Operators will not be deemed to be providing a guarantee or warranty as to
the projected revenue, expenses or capital expenditures of the Facility.
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(2) ADOPTION. The Facility budget for the period ending
December 31, 1996 referred to in the immediately preceding paragraph and each
annual budget as finally established in accordance with this paragraph (2)
(including as it may thereafter be revised from time to time during a
calendar year pursuant to the written agreement of Owner and Operators), as
the same may be modified by Owner and Operator, shall constitute an "Annual
Budget" for all purposes under this Agreement. Owner shall, within fifteen
(15) days following receipt of a proposed annual budget proposal, notify
Operators of either Owner's approval of such proposed annual budget or those
items of which Owner approves and those items of which Owner disapproves. In
the event that Owner does not either approve or disapprove of, in total or in
part, such proposed annual budget in writing within such 15 day period, then
such proposed annual budget shall be deemed approved by Owner and shall be
the Annual Budget for such calendar year. If Owner disapproves of the
proposed annual budget either in total or in part within such 15 day period,
then Owner and Operators shall have thirty (30) days from the date of Owner's
disapproval notice to formulate a mutually agreeable Annual Budget. If the
parties are unable to reach an agreement within said thirty (30) day period,
then the Annual Budget for the immediately preceding calendar year, including
any such prior Annual Budget determined in accordance with this sentence,
increased by the greater of 5% and the percentage increase in the Consumer
Price Index -- Urban Wage Earners (or, if such index is no longer published,
such other index as is determined by Operators in good faith to be
comparable) during the 12 month period ended on November 30th of such
preceeding year, shall constitute the Annual Budget pending the final
adoption of an Annual Budget in accordance with the next sentence; provided,
however, that the budgeted items for the categories of Heat, Light, Power,
Insurance and Real Estate Taxes shall be deemed increased as required to
reflect actual expenses for the succeeding calendar year).
(3) EFFORTS TO OPERATE WITHIN ANNUAL BUDGET. Operators agree
to use their reasonable best efforts to operate the Facility in accordance
with the Annual Budgets. Subject to the foregoing limitation, Owner shall be
responsible on a periodic basis, as and when needed, for all expenses and
capital expenditures incurred in connection with the operation and
maintenance of the Facility, including, without limitation, Fees and cost
overruns which exceed the projections in the then current Annual Budget;
provided, however, that (except as provided in the next sentence) Owner shall
not be responsible for cost overruns which exceed the relevant amount
provided for in such Annual Budget by more than 10%, if the incurrence of
such overruns was subject to the reasonable control of the Operators.
Notwithstanding anything in this Agreement, if Operators determine in good
faith that the incurrence of any expenditure is required in order to comply
with applicable law or regulations or to provide services in accordance with
the adult-care facilities industry's then prevailing standards in the area in
which the Facility is located, then Operators shall be entitled to make such
expenditures, and all such expenditures shall be deemed, for all purposes of
this Agreement, to be in accordance with the then current Annual Budget.
xiii. COLLECTION OF ACCOUNTS. Operators shall issue bills and
collect accounts and monies owed for goods and services furnished by the
Facility, including, but not limited to, enforcing the rights of Owner and
the Facility as creditor under any contract or in
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connection with the rendering of any services. Any actions taken by
Operators to collect said accounts receivable shall be in accordance with the
applicable laws, rules and regulations governing the collection of accounts
receivable.
xiv. CONTRACTS. Operators shall negotiate, enter into,
secure, cancel and/or terminate, such agreements and contracts which
Operators may deem necessary or advisable for the operation of the Facility,
including, without limitation, the furnishing of concessions, supplies,
utilities, extermination, refuse removal and other services. Where lawful,
said agreements and contracts will be entered into in the name of and on
behalf of Owner.
B. EXCLUSIVE REPRESENTATIVE. It is understood and agreed that
Operator shall be the exclusive representative of Owner for purposes of
communicating and dealing directly with the regulatory authorities,
governmental agencies, employees, independent contractors, suppliers,
residents, sponsors, licensees, customers and guests of the Facility. Any
communications from Owner to such persons or entities or authorities shall be
directed through Operator. Owner currently maintains and will continue to
maintain contact relationships with the above-mentioned persons and entities.
2. INSURANCE: Operators shall arrange for and maintain all necessary
and proper hazard insurance covering the Facility, including the furniture,
fixtures and equipment situated thereon, all necessary and proper malpractice
and public liability insurance for Operators' and Owner's protection and for
the protection of Operators' and Owner's officers, partners, agents and the
Facility's personnel. Operators shall also arrange for and maintain all
employee health and worker's compensation insurance for the Facility's
personnel. Any insurance provided pursuant to this paragraph shall comply
with the requirements of any applicable Facility mortgage or lease and, with
the exception of the insurance maintained by Operators for their own
protection, shall be an expense of the Facility.
3. PROPRIETARY INTEREST: The systems, methods, procedures and
controls employed by Operators and any written materials or brochures
developed by Operators to document the same are to remain the property of
Operators and are not, at any time during or after the term of this
Agreement, to be utilized, distributed, copied or otherwise employed or
acquired by Owner, except as authorized by Operators.
4. TERM OF AGREEMENT; EFFECT OF TERMINATION: The term of this
Agreement shall commence on the date hereof and shall terminate on the
twenty-fifth anniversary of the date hereof, unless sooner terminated as
hereinafter provided in Section 5 or in this Section 4 or as otherwise
agreed in writing, unless extended by the mutual agreement of Owner and
Operators. This Agreement may be terminated (i) by Owner upon the death or
continuing disability of all of the Operators or (ii) by Operators upon
(A) 90 days prior written notice at any time after the fifth anniversary
of this Agreement or (B) the occurrance of a Change in Control
of the Owner; provided, however, that in the event of a termination by
Operators pursuant to clause (A), Operators shall cooperate with and assist
Owner in engaging a replacement licensed operator for the Facility. Upon
any termination of this Agreement pursuant to the immediately preceding
sentence, the parties hereto shall have no further obligations or liabilities
other than the right of Operators or their personal representatives or estates
to receive Fees through the date of termination, except that,
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<PAGE>
upon the expiration or earlier termination of this Agreement for any reason,
the parties shall cooperate (at Owner's expense) to minimize the impact of
the change on the residents of the Facility, and during the period for which
Operators provide services or assist in the operation of the Facility in
connection therewith they shall be entitled to receive the Fees provided for
herein.
For purposes of this Agreement, "disability" shall mean the inability to
provide services hereunder due to illness, injury or other medical reasons
for a period of more than 180 consecutive days (except as provided in the
next sentence), and a "Change in Control" of the Owner shall be deemed to
have occurred if any person or group (within the meaning of Section 13(d)(3)
of the Securities Exchange Act of 1934 (the "Exchange Act") or any successor
provision) shall acquire beneficial ownership (determined in accordance with
Rule 13d-3 promulgated under the Exchange Act or any successor provision) of
securities of Owner representing both: (i) at least 30% of the total
outstanding voting power of securities of Owner entitled to vote for the
election of directors of Owner and (ii) a greater percentage of such voting
power than is owned at such time in the aggregate by Operators and their
affiliates and members of their immediate families. If two of the Operators
are disabled and, while such disabilities are continuing, the third Operator
becomes unable to provide services hereunder due to illness, injury or other
medical reasons for a period of 90 consecutive days, the third Operator shall
be deemed to be disabled for purposes of this Section 4.
5. EVENTS OF DEFAULT AND REMEDIES:
(a) DEFAULTS. Each of the following shall constitute an Event of
Default hereunder:
(1) If Owner shall fail to pay or allow payment of any installment
of the Fees due to Operators in accordance with Section 7 hereof for a period
of seven (7) days after written notice of such default from Operators.
(2) If either Owner, on the one hand, or the Operators,
collectively, on the other, fail to perform in any material respect any term,
provision, or covenant of this Agreement (other than as set forth in the
immediately preceding paragraph) and (i) such failure continues after written
notice from the other party or parties specifying such failure to perform,
unless such failure cannot reasonably be cured within such 30-day period, or
(ii) the defaulting party fails to endeavor vigorously and continuously to
cure such default as promptly as is practicable. It is understood and agreed
that Operators' obligations under this Agreement may be performed by one or
more of Glenn Kaplan, Wayne Kaplan and Evan Kaplan, and that performance of
such obligations by one or more of such individuals shall constitute
performance by the Operators.
(3) If an Event of Default (as defined therein) shall be committed
by Operators under the Management Services Agreement (the "Management
Services Agreement") of even date between Operators and a wholly-owned
subsidiary of Owner ("Subsidiary"), relating to the Facility.
(4) If an Event of Default (as defined therein) shall be committed
by Subsidiary under the Management Services Agreement.
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(5) If Owner is dissolved or liquidated, applies for or consents
to the appointment of a receiver, trustee or liquidator of all or a
substantial part of its assets, files a voluntary petition in bankruptcy or
is the subject of an involuntary bankruptcy filing, makes a general
assignment for the benefit of creditors, or files a petition or an answer
seeking reorganization or arrangement with creditors or to take advantage of
any insolvency law, or if an order, judgment or decree shall be entered by
any court of competent jurisdiction, on the application of a creditor,
adjudicating Owner bankrupt or insolvent or approving a petition seeking
reorganization of Owner or appointing a receiver, trustee or liquidator for
such party of all or a substantial part of its assets, and such order,
judgment or decree shall continue unstayed and in effect for any period of
sixty (60) consecutive days;
(b) REMEDIES. At any time after the occurrence and during the
continuance of an Event of Default, the party who has not committed or
suffered the Event of Default (with any Event of Default of Subsidiary being
deemed to be an Event of Default by Owner for this purpose) may, at its or
their option, terminate this Agreement by giving written notice to the other
party or parties and, except as provided in this Agreement, shall be entitled
to exercise all rights and remedies available under applicable law; provided,
however, that Owner may cause the effective date of any termination by
Operators to be deferred for up to ninety (90) days to afford Owner the
opportunity to engage a replacement operator. Without limiting the generality
of the foregoing, if Owner is the defaulting party, or if Owner shall
terminate the Agreement other than as a result of an Event of Default caused by
Operator, then Owner shall pay Operator, within thirty (30) days following
the date of termination, the sum of: (x) all unpaid Fees accrued through the
date of termination and all unpaid amounts for which Operators are then
entitled to receive reimbursement under this Agreement, and (y) as liquidated
damages and not as a penalty, the product of an amount equal to five (5%)
percent of the average monthly gross revenues of the Facility for the twelve
months immediately preceding the date of termination (less any amounts
thereof that Operators would have been obligated to pay to Manager under the
Management Services Agreement pertaining to the Facility) and the lesser of
(A) 24 and (B) the number of months remaining in the term of this Agreement
immediately prior to such termination. If this Agreement is terminated by
Operators pursuant to Section 5 (a)(1) or the immediately preceding sentence,
and Operators incur legal fees in connection with the enforcement of their
rights to such fees, Owner shall pay all reasonable attornies' fees and other
expenses incurred by Operators in connection with such enforcement. In the
event of any breach of this Agreement by Operator, including any breach
resulting in an Event of Default, Owner's sole remedy shall be to terminate
this Agreement in accordance with the terms hereof, and Owner shall have no
other liability hereunder.
6. FACILITY OPERATIONS:
a. NO GUARANTEE OF PROFITABILITY. Operator does not guarantee
that operation of the Facility will be profitable, but Operator shall use its
best efforts to operate the Facility in as cost effective and profitable
manner as possible consistent with maintaining operations in accordance with
the adult care facilities industry's then prevailing standards in the area in
which the Facility is located.
b. STANDARD OF PERFORMANCE; ACTING WITHIN BUDGET. In performing
its obligations under this Agreement, Operators shall use their reasonable
best efforts and act in good faith and with professionalism in accordance
with the Annual Budgets and the prevailing standards of the adult-care
facilities industry in the area in which the Facility is located.
c. FORCE MAJEURE: The parties will not be deemed to be in
violation of this Agreement if they are prevented from performing any of
their respective obligations hereunder
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for any reason beyond its control, including, without limitation, strikes,
shortages, war, acts of God, or any statute, regulation or rule of federal,
state or local government or agency thereof.
7. WITHDRAWAL OF FUNDS BY OPERATORS:
Owner and Operators acknowledge and agree that the efficient
operation of the Facility requires that Operators have ready access to the
capital required therefor. Accordingly, unless otherwise agreed by Owner and
Operators, Owner agrees not to withdraw any funds from the Facility's bank
accounts reasonably believed by Operator to be required for the proper
operation of the Facility or maintenance of appropriate reserves with respect
thereto.
8. FEES:
During the term of this Agreement, (or any period thereafter while
Operator continues to provide services or assist in the operation of the
Facility as contemplated by Section 4) Operators shall be entitled to
receive fees (the "Fees") equal to five (5%) percent of the gross revenues of
the Facility during each month or portion thereof occurring during such term.
Fees shall be paid on a monthly basis simultaneously with the delivery by
Operators to Owner of the monthly statements provided for in Section 1.A.vii
hereof.
9. ASSIGNMENT; DELEGATION:
a. OPERATING AGREEMENT: This Agreement shall not be assigned
(including by operation of law, whether by merger or consolidation (excluding
a merger effected solely for the purpose of changing Owner's jurisdiction of
incorporation that does not affect the stock ownership of Owner in any
material respect) or otherwise) by Owner, on the one hand, or any of the
Operators, on the other, without the prior written consent of the other party
or parties; provided, however, that to the extent permitted by applicable
laws and regulations, and subject to the receipt of all required licenses,
permits, approvals and authorizations of applicable governmental agencies,
this Agreement may be assigned by Operators to one or more corporations or
other legal entities all the shares (and, in the case of legal entities other
than corporations, all the equity ownership and voting control) of which are
owned by the Operators, in which event the Operators shall have no further
duty, obligation or liability under this Agreement.
b. DELEGATION. Owner authorizes Operator to enter into the
Management Services Agreement and consents to the delegation of the
performance of certain services as contemplated thereby. In the event that
the Management Services Agreement shall terminate prior to the termination of
this Agreement other than as a result of the commission of any Event of
Default thereunder by Operators, Operators may enter into one or more
agreements with any other third party or parties providing for delegations of
the performance of Operators' duties hereunder, provided that Operators
determine in good faith that such third party or parties are qualified to
perform such services and provided further that Operators retain authority to
promulgate all policies and procedures regarding operation of the Facility
and the right to direct such third parties in the performance of their
responsibilities. Any agreement between Operators and any such third party
shall be on such terms and conditions as Operators may agree, provided that
such terms and conditions do not violate the terms and conditions of this
Agreement.
10. NOTICES: All notices required or permitted hereunder shall in
writing by hand delivery, by registered or certified mail, postage prepaid,
by overnight delivery or by facsimile transmission (with receipt confirmed
with the recipient). Notices given by Operators may be
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signed by any of the Kaplans. Notices shall be delivered or mailed to the
parties at the following addresses or at such other places as either party
shall designate in writing.
To Owner: Servicer Corporation
Kaplan Senior Quarters Corp.
242 Crossways Park West
Woodbury, New York 11797
Phone:(516) 921-8900
Fax:
Attention:
To Operators: ___________________________
___________________________
___________________________
Phone:____________
Fax:____________
Attention:____________
11. RELATIONSHIP OF THE PARTIES: The relationship of Operators to
Owner in connection with this Agreement shall be that of independent
contractors and all acts performed by Operators during the term hereof shall
be deemed to be performed in their capacity as independent contractors, and,
to the fullest extent permitted under applicable law, the Operators shall not
be deemed to have any fiduciary duties to Owner or its stockholders in
connection with their provision of services hereunder or any matters arising
out of or related thereto. Nothing contained in this Agreement is intended
to or shall be construed to give rise to or create a partnership or joint
venture or lease between Owner, its successors and assigns on the one hand,
and Operators and their assigns on the other hand.
12. ENTIRE AGREEMENT: This Agreement and any documents executed in
connection herewith contain the entire agreement among the parties and shall
be binding upon their respective successors and assigns, and shall be
construed in accordance with the laws of the State of New York. This
Agreement may not be modified or amended except by written instrument signed
by the parties hereto.
13. CONTRACT MODIFICATIONS FOR PROSPECTIVE LEGAL EVENTS:
In the event any state or federal laws or regulations, now
existing or enacted or promulgated after the effective date of this
Agreement, are interpreted by judicial decision, a regulatory agency or legal
counsel of both parties in such a manner as to indicate that the structure
of this Agreement may be in violation of such laws or regulations, Owner and
Operators agree to cooperate in restructuring their relationship and this
Agreement, provided that any such restructuring shall, to the maximum extent
possible, preserve the underlying economic and financial arrangements between
Owner and Operators. The parties agree that such amendment may require
reorganization of Owner, or Operators, or both, and may require either or
both parties to obtain appropriate regulatory licenses and approvals. In the
event that under New York law and regulations, it shall become permissible
for the Company to be and act as the licensed operator of the Facility, the
Company and Operators shall, during the ninety (90) days following the
occurrence of any such event, use their good faith efforts to negotiate with
regard to the establishment of a new management arrangement with respect to
the Facility, pursuant to which, among other things: (i) the Company shall
become the licensed operator of the Company; (ii) Operators shall continue to
receive the same compensation in return for substantially the same services
theretofore provided to the Facility; and (iii) Operators shall no longer
have personal liability for the operations of the Facility. The Company and
Operators agree that the foregoing is not a binding obligation to consummate
any transactions contemplated by, or discussed during negotiations conducted
under, this Section, it being understood any such transactions shall be
entered into at the sole and absolute discretion of the Company and Operators.
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14. CAPTIONS: The captions used herein are for convenience of
reference only and shall not be construed in any manner to limit or modify
any of the terms hereof.
15. SEVERABILITY: In the event one or more of the provisions contained
in this Agreement is deemed to be invalid, illegal or unenforceable in any
respect under applicable law, the validity, legality and enforceability of
the remaining provisions hereof shall not in any way be impaired thereby.
16. CUMULATIVE: NO WAIVER: No right or remedy herein conferred upon
or reserved to any of the parties hereto is intended to be exclusive of any
other right or remedy, and each and every right and remedy shall be
cumulative and in addition to any other right or remedy given hereunder, or
now or hereafter legally existing upon the occurrence of an Event of Default
hereunder. The failure of any party hereto to insist at any time upon the
strict observance or performance of any of the provisions of this Agreement
or to exercise any right or remedy as provided in this Agreement shall not
impair any such right or remedy or be construed as a waiver or relinquishment
thereof with respect to subsequent defaults. Every right and remedy given by
this Agreement to the respective parties hereto may be exercised from time to
time and as often as may be deemed expedient by such parties.
17. AUTHORIZATION FOR AGREEMENT: The execution and performance of this
Agreement by Owner and Operators have been duly authorized by all necessary
laws, resolutions or corporate actions, and this Agreement constitutes the
valid and enforceable obligations of Owner and Operator in accordance with
its terms.
18. COUNTERPARTS: This Agreement may be executed in any number of
counterparts, each of which shall be an original, and each such counterpart
shall together constitute but one and the same Agreement.
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IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be
duly executed, as of the day and year first above written.
Owner: KAPSON SENIOR QUARTERS CORP.
By:
------------------------
Name:
Title:
Operators:
------------------------
Glenn Kaplan
------------------------
Wayne Kaplan
------------------------
Evan Kaplan
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SCHEDULE A
FACILITY
NAME:
ADDRESS:
TYPE:
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EXHIBIT 10.2
MANAGEMENT SERVICES AGREEMENT
DATED ___________ ____, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
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1. RESPONSIBILITIES OF OPERATORS . . . . . . . . . . . . . . . . . . . . . -1-
i. OPERATIONAL POLICIES AND FORMS . . . . . . . . . . . . . . . . . -1-
ii. CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
iii. INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
iv. REGULATORY COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . -2-
v. EQUIPMENT AND IMPROVEMENTS . . . . . . . . . . . . . . . . . . . -2-
vi. ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-
vii. REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3-
viii. BANK ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . . -3-
ix. PERSONNEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . -3-
x. SUPPLIES AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . . -4-
xi. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . -4-
xii. ANNUAL BUDGETS . . . . . . . . . . . . . . . . . . . . . . . . . -4-
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-
xiii. COLLECTION OF ACCOUNTS. . . . . . . . . . . . . . . . . . . . . -4-
xiv. CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . -4-
2. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-
3. TERM OF AGREEMENT; EFFECT OF TERMINATION: . . . . . . . . . . . . . . -5-
4. EVENTS OF DEFAULT AND REMEDIES. . . . . . . . . . . . . . . . . . . . . -5-
5. FACILITY OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . -6-
A. STANDARD OF PERFORMANCE; ACTING WITHIN BUDGET. . . . . . . . . . -6-
B. FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . . -6-
6. FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
7. ASSIGNMENT; DELEGATION. . . . . . . . . . . . . . . . . . . . . . . . . -7-
A. MANAGEMENT SERVICES AGREEMENT. . . . . . . . . . . . . . . . . . -7-
B. DELEGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
8. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
9. RELATIONSHIP OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . -8-
10. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
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11. CAPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
12. SEVERABILITY: . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
13. CUMULATIVE: NO WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . -8-
14. PROSPECTIVE LEGAL EVENTS CONTRACT MODIFICATIONS FOR PROSPECTIVE LEGAL
EVENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-
15. AUTHORIZATION FOR AGREEMENT . . . . . . . . . . . . . . . . . . . . . . -9-
16. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-
-ii-
<PAGE>
MANAGEMENT SERVICES AGREEMENT
This Management Services Agreement is made as of the ____ day of
___________, 1996, between Glenn Kaplan, Wayne Kaplan and Evan Kaplan
(collectively, "Operators"), and ____________________, a Delaware corporation
("Manager").
WHEREAS, Operators are the licensed operators of the adult-care facility
described on SCHEDULE A hereto (the "Facility"), which is owned [managed] by
Kapson Senior Quarters Corp., a Delaware corporation ("Owner");
WHEREAS, Manager is qualified in the field of managing adult-care
facilities such as the Facility, and Operators desire to engage Manager to
provide services in connection with the operation of the Facility, pursuant to
Operators' supervision and direction, on the terms and subject to the conditions
set forth in this Agreement;
WHEREAS, Manager is willing to provide such services, on the terms and
subject to the conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the foregoing, the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties do hereby agree as
follows:
1. RESPONSIBILITIES OF OPERATORS.
A. Operators hereby engage Manager to provide management and
consulting services to the Facility, and Manager hereby accepts such engagement
and agrees to provide such services at Owner's expense, upon the terms and
conditions set forth in this Agreement. During the term of this Agreement,
Manager shall provide the services set forth below, all of which shall be
subject to the supervision, review and approval of Operators, it being
understood and agreed, however, that notwithstanding any other provision of this
Agreement, Operators remain responsible for operation of the facility in
accordance with applicable law and regulations and shall retain the right, power
and authority to directly perform any such services, to issue directives to
Manager with respect to such services, and establish policies and procedures
with respect to any or all of the matters covered by this Agreement, and all
such directives and policies shall be binding upon, and complied with by,
Manager.
i. OPERATIONAL POLICIES AND FORMS. Subject to the Annual
Budgets (as defined in the Operating Agreement of even date between Owner and
Operators with respect to the Facility (as it may be extended or amended from
time to time, the "Operating Agreement") Manager shall recommend to Operators
and, upon Operators' approval, establish, implement such operational policies
and procedures as are approved by Operators, and develop such new policies and
procedures, as it may deem necessary to insure the establishment and maintenance
of operational standards appropriate for the nature of the Facility.
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ii. CHARGES. Manager shall recommend to Operators schedules of
charges, including any and all special charges for services rendered at the
Facility.
iii. INFORMATION. Manager shall develop any informational
material, mass media releases, and other related publicity materials, that it
deems necessary for the operation of the Facility.
iv. REGULATORY COMPLIANCE. Manager shall use its reasonable best
efforts to assist Operators in maintaining all licenses, permits, qualifications
and approvals from any applicable governmental or regulatory authority required
for the operation of the Facility, to operate the Facility in compliance with
all applicable laws and regulations, and to comply with such laws and
regulations in performing Manager's obligations under this Agreement. In
addition, Manager shall provide all information required by applicable
governmental agencies, and shall cooperate with governmental inspection and
enforcement activities.
v. EQUIPMENT AND IMPROVEMENTS. Subject to the Annual Budgets,
Manager shall recommend, and, if approved by Operators, acquire or effect, on
behalf of Owner, the equipment and improvements that it determines are needed to
maintain or upgrade the quality, to replace obsolete or run-down equipment, or
to correct any other survey deficiencies which may be cited during the term of
this Agreement. Manager shall make all such repairs and maintenance approved by
Operators in a workmanlike and lien-free manner.
vi. ACCOUNTING. Managers shall arrange for and supervise
accounting support to the Facility, including the following:
a) A monthly balance sheet and statement of operations
for the Facility, to be submitted to Owner within thirty (30) days after the end
of each calendar month;
b) Resident billing records;
c) Accounts receivable and collection records;
d) Accounts payable records;
e) All payroll functions, including, preparation of
payroll checks, establishment of depository accounts for withholding taxes,
payment of such taxes, filing of payroll reports and the issuance of W-2 forms
to all employees;
f) A complete general ledger for the purposes of
recording and summarizing all transactions for the Facility;
g) The preparation and filing of all necessary reports as
required by applicable governmental authorities and simultaneously provide a
copy to the Operators.
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All accounting procedures and systems utilized in providing said support shall
be in accordance with the operating capital and cash programs developed by
Operators, which programs shall conform to generally accepted accounting
principles and shall not materially distort income or loss. Nothing herein
shall preclude Operators from engaging a third party (in addition to Manager) to
assist it in the performance of the accounting duties provided for herein.
vii. REPORTS. Manager shall prepare and provide to Operators any
information that is required to be furnished by Operators to Owner under the
Operating Agreement and any other reasonable operational information which may
from time to time be specifically requested by Operators, including any
information needed to assist Operators in completing their tax returns and in
complying with any reporting obligations imposed by any regulatory agencies or
mortgagees or lessors of the Facility. In addition: (i) within thirty (30) days
after the end of each calendar month, Manager shall provide Operators and Owner
with an unaudited balance sheet of the Facility, dated the last day of such
month, and an unaudited statement of income and expenses for such month relating
to the operation of the Facility and (ii) within ninety (90) days after the end
of the fiscal year of the Facility, Manager shall provide Operators and Owner
with unaudited financial statements including a balance sheet of the Facility
dated the last day of said fiscal year and a statement of income and expense for
the year then ended relating to the operation of the Facility. In addition,
Manager shall prepare and send to Operators and Owner monthly occupancy reports
and related information with respect to the Facility. All books, records, forms
and reports in connection with operation of the Facility shall be Operators'
property.
viii. BANK ACCOUNTS. Manager shall establish accounts at such bank
as Operators may designate from time to time and shall deposit therein all money
received during the term of this Agreement in the course of the operation of the
Facility. Withdrawals and payments from this account shall be made only on
checks signed by one or more of the Operators or a person or persons designated
by Operators. Manager shall be given notice as to the identity of authorized
signatories. All expenses incurred in the operation of the Facility shall be
paid in accordance with the Operating Agreement.
ix. PERSONNEL. Manager shall recruit, hire, train, promote,
direct, discipline and fire all Facility personnel including the Administrator
of the Facility, establish salary levels, personnel policies and employee
benefits; and establish employee performance standards, all as Manager
determines to be necessary or desirable during the term of this Agreement to
ensure the efficient operation of all departments within, and all services
offered by, the Facility. All of the foregoing obligations shall be undertaken
in accordance with the Annual Budgets, Operators' authority and control, and
applicable law and regulations. All of the Facility personnel shall be the
employees of Owner, unless otherwise agreed by Owner and Operators (and Manager
if such personnel shall be employees of Manager), and all salary, bonuses,
fringe benefits, payroll taxes and related expenses payable to or in respect of
the Facility's personnel shall be expenses of the Facility.
x. SUPPLIES AND EQUIPMENT. Manager shall purchase supplies and
non-capital equipment needed to operate the Facility within the budgetary limits
set forth in the Annual
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<PAGE>
Budgets. In purchasing said supplies and equipment, if possible, Manager shall
take advantage of any national or group purchasing agreements to which Manager
or Operators or any of their affiliates may be a party.
xi. LEGAL PROCEEDINGS. Manager shall monitor and, pursuant to
Operator's direction, act with respect to, all legal matters and proceedings
that are within the scope of Manager's authority pursuant to this Agreement,
including without limitation, any necessary legal actions or proceedings to
collect obligations owing to the Facility, the cancellation or termination of
any contract or agreement for breach thereof or default thereunder, and other
actions necessary enforce the obligations of the residents, sponsors, licensees,
customers and other users of the Facility. Manager shall give notice promptly
to Operators of all demands, claims and all legal actions.
xii. ANNUAL BUDGETS. PREPARATION. Manager shall timely prepare
and deliver to Operators for their review and submission to Owner proposed
annual budgets for the Facilities. Such proposed annual budgets shall be
prepared in accordance with the Operating Agreement. Manager and Operators
acknowledge that (x) projected revenue may not be actually received and (y)
projected costs may be exceeded by actual expenses and capital expenditures
incurred in connection with the operation and maintenance of the Facility. By
submitting such a projected budget, Manager will not be deemed to be providing
a guarantee or warranty as to the projected revenue, expenses or capital
expenditures of the Facility.
xiii. COLLECTION OF ACCOUNTS. Manager shall issue bills and
collect account and monies for goods and services furnished by the Facility,
including, but not limited to, enforcing the rights of Operators, Owner and the
Facility as creditor under any contract or in connection with the rendering of
any services. Any actions taken by Manager to collect said accounts receivable
shall be in accordance with the applicable laws, rules and regulations governing
the collection of accounts receivable and shall require the specific consent of
Operators in each instance.
xiv. CONTRACTS. Manager shall negotiate, and prepare for
execution or cancellation and/or termination such agreements and contracts which
Operators may deem necessary or advisable for the operation of the Facility,
including, without limitation, the furnishing of concessions, supplies,
utilities, extermination, refuse removal and other services; provided, however,
that any such agreement or contract shall require the prior written consent of
the Operators. Manager shall be entitled to utilize any entities affiliated
with Manager to provide these services, provided that the rates and prices
therefor are competitive and Manager obtains the prior written consent of
Operators.
2. INSURANCE: Manager shall arrange for and maintain all necessary
and proper hazard insurance covering the Facility, including the furniture,
fixtures and equipment situated thereon, all necessary and proper malpractice
and public liability insurance for Manager's, Operators' and Owner's protection
and for the protection of Manager's, Operators' and Owner's officers, partners,
agents and the Facility's personnel. Subject to the prior written approval of
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Operators, Manager shall also arrange for and maintain all employee health and
worker's compensation insurance for the Facility's personnel. Any insurance
provided pursuant to this paragraph shall comply with the requirements of any
applicable Facility mortgage or lease and, with the exception of the insurance
maintained by Manager for its own protection, shall be an expense of the
Facility.
3. TERM OF AGREEMENT; EFFECT OF TERMINATION: The term of this
Agreement shall commence on the date hereof and shall terminate on the date of
termination of the Operating Agreement, as it may be extended from time to time
by Owner and Operators (other than as a result of an Event of Default, as
defined therein), unless sooner terminated as hereinafter provided in this
Section 3 or Section 4. This Agreement may be terminated: (i) in accordance
with Section 4, (ii) by Manager upon the death or continuing disability of all
of Operators, or (iii) by Operators by giving at least 30 days' prior written
notice to Manager at any time after the occurrence of a Change in Control of
Owner. Upon any termination of this Agreement other than pursuant to
Section 4, the parties hereto shall have no further obligations or liabilities
hereunder except for the respective right of Operators or their respective
personal representatives, estates, successors or assigns to receive fees
through the date of termination, except that upon the expiration or earlier
termination of this Agreement for any reason, the parties shall cooperate (at
Owner's expense) to minimize the impact of the change on the residents. To the
extent that Manager provides management services to Operators hereunder in
connection therewith, Manager should be entitled to receive fees in accordance
with Section 6 hereof through the effective date of termination of this
Agreement. For purposes of this Agreement, "disability" shall mean the
inability to provide services hereunder due to illness, injury or other medical
reasons for a period of more than 180 consecutive days, and a "Change in
Control" of the Owner shall be deemed to have occurred if any person or group
(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
(the "Exchange Act") or any successor provision) shall acquire beneficial
ownership (determined in accordance with Rule 13d-3 promulgated under the
Exchange Act or any successor provision) of securities of Owner representing
both: (i) at least 30% of the total outstanding voting power of securities of
Owner entitled to vote for the election of directors of Owner and (ii) a
greater percentage of such voting power than is owned at such time in the
aggregate by Operators and their affiliates and members of their immediate
families.
4. EVENTS OF DEFAULT AND REMEDIES:
(a) DEFAULTS. Each of the following shall constitute an Event of
Default hereunder:
(1) If the Operating Agreement is terminated by Owner as a result
of an Event of Default (as defined therein) committed by Operators.
(2) If the Operating Agreement is terminated by Operators as a
result of an Event of Default (as defined therein) committed by Owner.
(3) If either Manager, on the one hand, or the Operators,
collectively, on the other, fail to perform in any material respect any term,
provision, or covenant of this Agreement and such failure (i) continues after
written notice from the other party or parties specifying such
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failure to perform for a period of thirty (30) days unless such failure cannot
reasonably be cured within such 30-day period, (ii) the defaulting party
fails to endeavor vigorously and continuously to cure such default as promptly
as is practicable; it being understood and agreed that Operators' obligations
under this Agreement may be performed by one or more of Glenn Kaplan, Wayne
Kaplan and Evan Kaplan, and that performance of such obligations by one or more
of such individuals shall constitute performance by the Operators.
(4) If an Event of Default (as defined therein) shall be
committed by Operators under any other agreement under which Manager provides
services to Operators with respect to any other adult-care facility for which
the Operators act as the licensed operators.
(5) If an Event of Default (as defined therein) shall be
committed or suffered (x) by Owner under any agreement other than the Operating
Agreement pursuant to which Operators act as the licensed operators of a
facility of the Owner or (y) by Manager under any other agreement pursuant to
which Manager provides management services for any adult-care facility (whether
or not owned by Owner) for which Operators act as the licensed operators.
(6) If Manager is dissolved or liquidated, applies for or
consents to the appointment of a receiver, trustee or liquidator of all or a
substantial part of its assets, files a voluntary petition in bankruptcy or is
the subject of an involuntary bankruptcy filing, makes a general assignment for
the benefit of creditors, or files a petition or an answer seeking
reorganization or arrangement with creditors or to take advantage of any
insolvency law, or if an order, judgment or decree shall be entered by any court
of competent jurisdiction, on the application of a creditor, adjudicating
Manager bankrupt or insolvent or approving a petition seeking reorganization of
Manager or appointing a receiver, trustee or liquidator for such party of all or
a substantial part of its assets, and such order, judgment or decree shall
continue unstayed and in effect for any period of sixty (60) consecutive days.
(b) REMEDIES. At any time after the occurrence and during the
continuance of an Event of Default, the party who has not committed or suffered
the Event of Default (with any Event of Default of Owner being deemed to be an
Event of Default by Manager for this purpose) may, at its or their option,
terminate this Agreement by giving written notice to the other party or parties
and shall be entitled to exercise all rights and remedies available under
applicable law; provided, however, that Operators shall have no obligation or
liabilities to the Manager following termination of this Agreement by
Operator or Manager except for fees payable to Manager under Section 3 based
on fees actually paid to Operator pursuant to the Operating Agreement with
respect to the Facility.
5. FACILITY OPERATIONS
A. STANDARD OF PERFORMANCE; ACTING WITHIN BUDGET. In performing
its obligations under this Agreement, Manager shall use its reasonable best
efforts and act in good faith and with professionalism in accordance with the
Annual Budgets and the prevailing standards of the adult-care facilities
industry in the area in which the Facility is located.
B. FORCE MAJEURE: The parties will not be deemed to be in
violation of this Agreement if they are prevented from performing any of their
respective obligations hereunder
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<PAGE>
for any reason beyond its control, including, without limitation, strikes,
shortages, war, acts of God, or any statute, regulation or rule of federal,
state or local government or agency thereof.
6. FEES
During the term of this Agreement, Manager shall be entitled to
receive fees equal to (i) 30% of the fees actually paid to Operators under the
Operating Agreement with respect to the Facility and each other agreement
pursuant to which the Manager provides management services to Operators in
connection with the operation of adult-care facilities that are based on the
gross revenues of such facilities until the aggregate amount of such revenues
with respect to which Operators receive such fees equals $23,040,000, and
thereafter 96% of such fees, and (ii) 96% of all fees received by Operators in
connection with the operation of the facilities described in clause (i) that
are not based on the gross revenues of such facilities. For purposes of
calculating the $23,040,000 provided for in clause (i) of the preceding
sentence, to the extent that Operators receive certain minimum fees in lieu of
the fees that would otherwise be payable in respect of such gross revenues, the
facilities shall be deemed to have had gross revenues in an amount sufficient
to have generated such minimum fees. Such portion of Operators' Fees shall be
paid to Manager contemporaneously with the payment of such fees to Operator.
7. ASSIGNMENT; DELEGATION
A. MANAGEMENT SERVICES AGREEMENT: This Agreement shall not be
assigned (including by operation of law, whether by merger or consolidation
(excluding a merger effected solely for the purpose of changing Manager's
jurisdiction of incorporation that does not affect the stock ownership of
Manager in any material respect) or otherwise) by Manager, on the one hand, or
any of the Operators, on the other, without the prior written consent of the
other party or parties; provided, however, that to the extent permitted by
applicable laws and regulations, and subject to the receipt of all required
licenses, permits, approvals and authorizations of applicable governmental
agencies, this Agreement may be assigned by Operators to one or more
corporations or other legal entities all the shares (and, in the case of
legal entities other than corporations, all the equity ownership and voting
control) of which are owned by the Operators, in which event the Operators
shall have no further duty, obligation or liability under this Agreement.
B. DELEGATION. Notwithstanding any other provision of this
Agreement to the contrary, Operators hereby delegate to Manager only those
powers, duties or responsibilities set forth herein. All other powers and
duties remain with the Operators. The Manager shall not exercise any powers,
duties or responsibilities that it is prohibited by applicable law or
regulations from exercising.
8. NOTICES: All notices required or permitted hereunder shall in
writing by hand delivery, by registered or certified mail, postage prepaid, by
overnight delivery or by facsimile transmission (with receipt confirmed with the
recipient). Notices given by Operators may be signed by any of the Kaplans.
Notices shall be delivered or mailed to the parties at the following addresses
or at such other places as either party shall designate in writing.
To Manager: [ ]
c/o Kapson Senior Quarters Corp.
242 Crossways Park West
Woodbury, New York 11797
Phone:(516) 921-8900
Fax:
Attention:
To Operators: ___________________________
___________________________
___________________________
Phone:____________
Fax:____________
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Attention:____________
9. RELATIONSHIP OF THE PARTIES. The relationship of Manager to
Operators in connection with this Agreement shall be that of independent
contractors and all acts performed by Manager during the term hereof shall be
deemed to be performed in its capacity as independent contractors, and, to the
fullest extent permitted under applicable law, the Operators shall not be deemed
to have any fiduciary duties to Manager or its stockholders in connection with
Managers' provision of services hereunder or any matters arising out of or
related thereto. Nothing contained in this Agreement is intended to or shall be
construed to give rise to or create a partnership or joint venture or lease
between Manager, its successors and assigns on the one hand, and Operators and
their assigns on the other hand.
10. ENTIRE AGREEMENT: This Agreement and any documents executed in
connection herewith contain the entire agreement among the parties and shall be
binding upon their respective successors and assigns, and shall be construed in
accordance with the laws of the State of New York. This Agreement may not be
modified or amended except by written instrument signed by the parties hereto.
11. CAPTIONS: The captions used herein are for convenience of reference
only and shall not be construed in any manner to limit or modify any of the
terms hereof.
12. SEVERABILITY: In the event one or more of the provisions contained
in this Agreement is deemed to be invalid, illegal or unenforceable in any
respect under applicable law, the validity, legality and enforceability of the
remaining provisions hereof shall not in any way be impaired thereby.
13. CUMULATIVE: NO WAIVER: No right or remedy herein conferred upon or
reserved to any of the parties hereto is intended to be exclusive of any other
right or remedy, and each and every right and remedy shall be cumulative and in
addition to any other right or remedy given hereunder, or now or hereafter
legally existing upon the occurrence of an Event of Default hereunder. The
failure of any party hereto to insist at any time upon the strict observance or
performance of any of the provisions of this Agreement or to exercise any right
or remedy as provided in this Agreement shall not impair any such right or
remedy or be construed as a waiver or relinquishment thereof with respect to
subsequent defaults. Every right and remedy given by this Agreement to the
respective parties hereto may be exercised from time to time and as often as may
be deemed expedient by such parties.
14. PROSPECTIVE LEGAL EVENTS. CONTRACT MODIFICATIONS FOR PROSPECTIVE
LEGAL EVENTS. In the event any state or federal laws or regulations, now
existing or enacted or promulgated after the effective date of this Agreement,
are interpreted by judicial decision, a regulatory agency or legal counsel of
both parties in such a manner as to indicate that the structure of this
Agreement may be in violation of such laws or regulations, Manager and Operators
shall amend this Agreement, to the maximum extent possible, to preserve the
underlying economic and financial arrangements between Manager and Operators.
The parties agree that such amendment may
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require reorganization of Manager or Operators, or both, and may require either
or both parties to obtain appropriate regulatory licenses and approvals. If an
amendment is not possible, either party shall have the right to terminate this
Agreement upon thirty (30) days' written notice to the other.
15. AUTHORIZATION FOR AGREEMENT: The execution and performance of this
Agreement by Manager and Operators have been duly authorized by all necessary
laws, resolutions or corporate actions, and this Agreement constitutes the valid
and enforceable obligations of Manager and Operators in accordance with its
terms.
16. COUNTERPARTS: This Agreement may be executed in any number of
counterparts, each of which shall be an original, and each such counterpart
shall together constitute but one and the same Agreement.
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IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be
duly executed, as of the day and year first above written.
Manager: [ ]
By:
------------------------
Name:
Title:
Operators:
------------------------
Glenn Kaplan
------------------------
Wayne Kaplan
------------------------
Evan Kaplan
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SCHEDULE A
FACILITY
NAME:
ADDRESS:
TYPE:
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<PAGE>
EXHIBIT 10.3
KAPSON SENIOR QUARTERS CORP.
1996 STOCK INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE III. ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE IV. SHARE AND OTHER LIMITATIONS . . . . . . . . . . . . . . . . . 7
ARTICLE V. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VI. EMPLOYEE STOCK OPTION GRANTS. . . . . . . . . . . . . . . . . 10
ARTICLE VII. RESTRICTED STOCK AWARDS . . . . . . . . . . . . . . . . . . . 14
ARTICLE VIII. STOCK APPRECIATION RIGHTS . . . . . . . . . . . . . . . . . . 16
ARTICLE IX. NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS . . . . . . . . . . 20
ARTICLE X. NON-TRANSFERABILITY . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE XI. CHANGE IN CONTROL PROVISIONS. . . . . . . . . . . . . . . . . 23
ARTICLE XII. TERMINATION OR AMENDMENT OF THE PLAN. . . . . . . . . . . . . 25
ARTICLE XIII. UNFUNDED PLAN . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE XIV. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE XV. TERM OF PLAN. . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE XVI. NAME OF PLAN. . . . . . . . . . . . . . . . . . . . . . . . . 29
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KAPSON SENIOR QUARTERS CORP.
1996 STOCK INCENTIVE PLAN
ARTICLE I.
PURPOSE
The purpose of this Kapson Senior Quarters Corp. 1996 Stock Incentive Plan,
(the "Plan"), is to enhance the profitability and value of Kapson Senior
Quarters Corp. (the "Company") for the benefit of its stockholders by enabling
the Company (i) to offer employees of the Company and its Subsidiaries 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 Company's stockholders. The Plan was initially
effective on the Effective Date and has been further amended and restated into
this form as of such date to reflect changes in Rule 16b-3 and to make certain
other clarifications and changes.
ARTICLE II.
DEFINITIONS
For purposes of this Plan, the following terms shall have the following
meanings:
2.1. "Award" shall mean any award under this Plan of any Stock
Option, Stock Appreciation Right or Restricted Stock. All Awards shall be
confirmed by, and subject to the terms of, a written agreement executed by
the Company and the Participant.
2.2. "Board" shall mean the Board of Directors of the Company.
2.3. "Cause" shall mean, with respect to a Participant's Termination
of Employment, unless otherwise determined by the Committee at grant, or,
if no rights of the Participant are reduced, thereafter, termination due to
a Participant's dishonesty, fraud, insubordination, willful misconduct,
refusal to perform services (for any reason other than illness or
incapacity) or materially unsatisfactory performance of his or her duties
for the Company as determined by the Committee in its sole discretion.
With respect to a Participant's
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Termination of Directorship, Cause shall mean an act or failure to act that
constitutes "cause" for removal of a director under applicable Delaware
law.
2.4. "Change in Control" shall have the meaning set forth in
Article XI.
2.5. "Code" shall mean the Internal Revenue Code of 1986, as amended.
Any reference to any section of the Code shall also be a reference to any
successor provision.
2.6. "Committee" shall mean a committee of the Board appointed from
time to time by the Board. To the extent determined by the Board, such
committee shall consist of two or more non-employee directors, each of whom
shall be a non-employee director as defined in Rule 16b-3 and an outside
director as defined under Section 162(m) of the Code. To the extent that
no Committee exists which has the authority to administer the Plan, the
functions of the Committee shall be exercised by the Board. If for any
reason the appointed Committee does not meet the requirements of Rule 16b-3
or Section 162(m) of the Code, such noncompliance with the requirements of
Rule 16b-3 or Section 162(m) of the Code shall not affect the validity of
the awards, grants, interpretations or other actions of the Committee.
2.7. "Common Stock" means the Common Stock, $.01 par value per share,
of the Company.
2.8. "Disability" shall mean total and permanent disability, as
defined in Section 22(e)(3) of the Code.
2.9. "Effective Date" shall mean June 7, 1996.
2.10. "Eligible Employees" shall mean the employees of the Company
and its Subsidiaries who are eligible pursuant to Section 5.1 to be granted
Awards under this Plan.
2.11. "Exchange Act" shall mean the Securities Exchange Act of 1934.
2.12. "Fair Market Value" for purposes of this Plan, unless otherwise
required by any applicable provision of the Code or any regulations issued
thereunder, shall mean, as of any date, the last sales price reported for
the Common Stock on the applicable date (i) as reported by the principal
national securities exchange in the United States on which it is then
traded, or (ii) if not traded on any such national securities exchange, as
quoted on an automated quotation system sponsored by the National
Association of Securities Dealers. If the Common Stock is not readily
tradable on a national securities exchange or any system sponsored by the
National Association of Securities Dealers, its
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Fair Market Value shall be set in good faith by the Committee on the advice
of a registered investment adviser (as defined under the Investment
Advisers Act of 1940). For purposes of the grant of any Award, the
applicable date shall be the date for which the last sales price is
available at the time of grant. For purposes of the exercise of any Stock
Appreciation Right, the applicable date shall be the date a notice of
exercise is received by the Committee or if not a day on which the
applicable market is open, the next day that it is open.
2.13. "Good Reason" shall mean, with respect to a Participant's
Termination of Employment unless otherwise determined by the Committee at
grant, or, if no rights of the Participant are reduced, thereafter, a
voluntary termination due to "good reason," as the Committee, in its sole
discretion, decides to treat as a Good Reason termination.
2.14. "Incentive Stock Option" shall mean any Stock Option awarded
under this Plan intended to be and designated as an "Incentive Stock
Option" within the meaning of Section 422 of the Code.
2.15. "Non-Qualified Stock Option" shall mean any Stock Option
awarded under this Plan that is not an Incentive Stock Option.
2.16. "Participant" shall mean the following persons to whom an Award
has been made pursuant to this Plan: Eligible Employees of the Company and
its Subsidiaries non-employee directors of the Company; provided, however,
that non-employee directors shall be Participants for purposes of the Plan
solely with respect to awards of Stock Options pursuant to Article IX.
2.17. "Restricted Stock" shall mean an award of shares of Common
Stock under the Plan that is subject to restrictions under Article VII.
2.18. "Restriction Period" shall have the meaning set forth in
Subsection 7.3(a) with respect to Restricted Stock for Eligible Employees.
2.19. "Retirement" with respect to a Participant's Termination of
Employment shall mean a Termination of Employment without Cause from the
Company by a Participant who has attained (i) at least age sixty-five (65);
or (ii) such earlier date after age fifty-five (55) as approved by the
Committee with regard to such Participant. With respect to a Participant's
Termination of Directorship, Retirement shall mean the failure to stand for
reelection or the failure to be reelected after a Participant has attained
age sixty-five (65).
2.20. "Rule 16b-3" shall mean Rule 16b-3 under Section 16(b) of the
Exchange Act as then in effect or any successor provisions.
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2.21. "Section 162(m) of the Code" shall mean the exception for
performance-based compensation under Section 162(m) of the Code and any
Treasury regulations thereunder.
2.22. "Stock Appreciation Right" shall mean the right pursuant to an
Award granted under Article IX. A Tandem Stock Appreciation Right shall
mean the right to surrender to the Company all (or a portion) of a Stock
Option in exchange for an amount in cash or stock equal to the excess of
(i) the Fair Market Value, on the date such Stock Option (or such portion
thereof) is surrendered, of the Common Stock covered by such Stock Option
(or such portion thereof), over (ii) the aggregate exercise price of such
Stock Option (or such portion thereof). A Non-Tandem Stock Appreciation
Right shall mean the right to receive an amount in cash or stock equal to
the excess of (x) the Fair Market Value of a share of Common Stock on of
the date such right is exercised, over (y) the aggregate exercise price of
such right, otherwise than on surrender of a Stock Option.
2.23. "Stock Option" or "Option" shall mean any Option to purchase
shares of Common Stock granted to Eligible Employees pursuant to Article
VI.
2.24. "Subsidiary" shall mean any corporation that is defined as a
subsidiary corporation in Section 424(f) of the Code.
2.25. "Ten Percent Stockholder" shall mean a person owning Common
Stock of the Company possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company as defined in
Section 422 of the Code.
2.26. "Termination of Directorship" shall mean, with respect to a
non-employee director, that the non-employee director has ceased to be a
director of the Company.
2.27. "Termination of Employment" shall mean (i) a termination of
service (for reasons other than a military or personal leave of absence
granted by the Company) of a Participant from the Company and its
Subsidiaries; or (ii) when an entity which is employing a Participant
ceases to be a Subsidiary, unless the Participant thereupon becomes
employed by the Company or another Subsidiary.
2.28. "Transfer" or "Transferred" shall mean anticipate, alienate,
attach, sell, assign, pledge, encumber, charge or otherwise transfer.
2.29. "Withholding Election" shall have the meaning set forth in
Section 14.4.
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ARTICLE III.
ADMINISTRATION
3.1. THE COMMITTEE. The Plan shall be administered and interpreted by the
Committee.
3.2. AWARDS. The Committee shall have full authority to grant, pursuant
to the terms of this Plan, (i) Stock Options, (ii) Stock Appreciation Rights,
both Tandem and Non-Tandem and (iii) Restricted Stock to Eligible Employees.
Stock Options shall be granted to non-employee directors of the Company pursuant
to Article IX. In particular, the Committee shall have the authority:
(a) to select the Eligible Employees to whom Stock Options, Stock
Appreciation Rights and Restricted Stock may from time to time be granted
hereunder;
(b) to determine whether and to what extent Stock Options, Stock
Appreciation Rights and Restricted Stock or any combination thereof, are to
be granted hereunder to one or more Eligible Employees;
(c) to determine, in accordance with the terms of this Plan, the
number of shares of Common Stock to be covered by each Award to an Eligible
Employee granted hereunder;
(d) to determine the terms and conditions, not inconsistent with the
terms of this Plan, of any Award granted hereunder to an Eligible Employee
(including, but not limited to, the share price, any restriction or
limitation, any vesting schedule or acceleration thereof, or any forfeiture
restrictions or waiver thereof, regarding any Stock Option or other Award,
and the shares of Common Stock relating thereto, based on such factors, if
any, as the Committee shall determine, in its sole discretion);
(e) to determine whether and under what circumstances a Stock Option
may be settled in cash, Common Stock and/or Restricted Stock under
Subsection 6.3(d);
(f) to determine whether, to what extent and under what circumstances
to provide loans (which shall be on a recourse basis and shall bear a
reasonable rate of interest) to Eligible Employees in order to exercise
Options under the Plan;
(g) to determine whether a Stock Appreciation Right is Tandem or Non-
Tandem; and
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(h) to determine whether to require an Eligible Employee, as a
condition of the granting of any Award, to not sell or otherwise dispose of
shares acquired pursuant to the exercise of an Option or as an Award for a
period of time as determined by the Committee, in its sole discretion,
following the date of the acquisition of such Option or Award.
3.3. GUIDELINES. Subject to Article XII hereof, the Committee shall have
the authority to adopt, alter and repeal such administrative rules, guidelines
and practices governing this Plan and perform all acts, including the delegation
of its administrative responsibilities, as it shall, from time to time, deem
advisable; to construe and interpret the terms and provisions of this Plan and
any Award issued under this Plan (and any agreements relating thereto); and to
otherwise supervise the administration of this Plan. The Committee may correct
any defect, supply any omission or reconcile any inconsistency in this Plan or
in any agreement relating thereto in the manner and to the extent it shall deem
necessary to carry this Plan into effect, but only to the extent any such action
would be permitted under the applicable provisions of both Rule 16b-3 and
Section 162(m) of the Code. The Committee may adopt special guidelines and
provisions for persons who are residing in, or subject to, the taxes of,
countries other than the United States to comply with applicable tax and
securities laws. To the extent applicable, this Plan is intended to comply with
Section 162(m) of the Code and the applicable requirements of Rule 16b-3 and
shall be limited, construed and interpreted in a manner so as to comply
therewith.
3.4. DECISIONS FINAL. Any decision, interpretation or other action made
or taken in good faith by or at the direction of the Company, the Board, or the
Committee (or any of its members) arising out of or in connection with the Plan
shall be within the absolute discretion of all and each of them, as the case may
be, and shall be final, binding and conclusive on the Company and all employees
and Participants and their respective heirs, executors, administrators,
successors and assigns.
3.5. RELIANCE ON COUNSEL. The Company, the Board or the Committee may
consult with legal counsel, who may be counsel for the Company or other counsel,
with respect to its obligations or duties hereunder, or with respect to any
action or proceeding or any question of law, and shall not be liable with
respect to any action taken or omitted by it in good faith pursuant to the
advice of such counsel.
3.6. PROCEDURES. If the Committee is appointed, the Board shall designate
one of the members of the Committee as chairman and the Committee shall hold
meetings, subject to the By-Laws of the Company, at such times and places as it
shall deem advisable. A majority of the Committee members shall constitute a
quorum. All determinations of the Committee shall be made by a majority of its
members. Any decision or determination reduced to writing and signed by all
Committee members in accordance with the By-Laws of the Company shall be fully
effective as if it had been made by a vote at a meeting duly called and held.
The Committee shall keep minutes
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of its meetings and shall make such rules and regulations for the conduct of its
business as it shall deem advisable.
3.7. DESIGNATION OF CONSULTANTS -- LIABILITY.
(a) The Committee may designate employees of the Company and
professional advisors to assist the Committee in the administration of the
Plan and may grant authority to employees to execute agreements or other
documents on behalf of the Committee.
(b) The Committee may employ such legal counsel, consultants and
agents as it may deem desirable for the administration of the Plan and may
rely upon any opinion received from any such counsel or consultant and any
computation received from any such consultant or agent. Expenses incurred
by the Committee or Board in the engagement of any such counsel, consultant
or agent shall be paid by the Company. The Committee, its members and any
person designated pursuant to paragraph (a) above shall not be liable for
any action or determination made in good faith with respect to the Plan.
To the maximum extent permitted by applicable law, no officer of the
Company or member or former member of the Committee or of the Board shall
be liable for any action or determination made in good faith with respect
to the Plan or any Award granted under it. To the maximum extent permitted
by applicable law and the Certificate of Incorporation and By-Laws of the
Company and to the extent not covered by insurance, each officer and member
or former member of the Committee or of the Board shall be indemnified and
held harmless by the Company against any cost or expense (including
reasonable fees of counsel reasonably acceptable to the Company) or
liability (including any sum paid in settlement of a claim with the
approval of the Company), and advanced amounts necessary to pay the
foregoing at the earliest time and to the fullest extent permitted, arising
out of any act or omission to act in connection with the Plan, except to
the extent arising out of such officer's, member's or former member's own
fraud or bad faith. Such indemnification shall be in addition to any
rights of indemnification the officers, directors or members or former
officers, directors or members may have under applicable law or under the
Certificate of Incorporation or By-Laws of the Company or Subsidiary.
Notwithstanding anything else herein, this indemnification will not apply
to the actions or determinations made by an individual with regard to
Awards granted to him or her under this Plan.
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ARTICLE IV.
SHARE AND OTHER LIMITATIONS
4.1. SHARES.
(a) GENERAL LIMITATION. The aggregate number of shares of Common
Stock which may be issued or used for reference purposes under this Plan or
with respect to which other Awards may be granted shall not exceed 600,000
shares (subject to any increase or decrease pursuant to Section 4.2) which
may be either authorized and unissued Common Stock or Common Stock held in
or acquired for the treasury of the Company. If any Option or Stock
Appreciation Right granted under this Plan expires, terminates or is
cancelled for any reason without having been exercised in full or, with
respect to Options, the Company repurchases any Option pursuant to Section
6.3(f), the number of shares of Common Stock underlying the repurchased
Option, and/or the number of shares of Common Stock underlying any
unexercised Stock Appreciation Right or Option shall again be available for
the purposes of Awards under the Plan. If a Tandem Stock Appreciation
Right or a limited Stock Appreciation Right is granted in tandem with an
Option, such grant shall only apply once against the maximum number of
shares of Common Stock which may be issued under this Plan.
(b) INDIVIDUAL PARTICIPANT LIMITATIONS. (i) The maximum number of
shares of Common Stock subject to any Option which may be granted under
this Plan to each Participant shall not exceed 50,000 shares (subject to
any increase or decrease pursuant to Section 4.2) during each fiscal year
of the Company.
(ii) There are no annual individual Participant limitations on
Restricted Stock.
(iii) The maximum number of shares of Common Stock subject to
any Stock Appreciation Right which may be granted under this Plan to each
Participant shall not exceed 50,000 shares (subject to any increase or
decrease pursuant to Section 4.2) during each fiscal year of the Company.
If a Tandem Stock Appreciation Right or limited Stock Appreciation Right is
granted in tandem with an Option it shall apply against the Eligible
Employee's individual share limitations for both Stock Appreciation Rights
and Options.
4.2. CHANGES.
(a) The existence of the Plan and the Awards granted hereunder shall
not affect in any way the right or power of the Board or the stockholders
of the
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Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company or Subsidiary, any
issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting Common Stock, the dissolution or liquidation of the Company or
Subsidiary, any sale or transfer of all or part of its assets or business
or any other corporate act or proceeding.
(b) In the event of any such change in the capital structure or
business of the Company by reason of any stock dividend or distribution,
stock split or reverse stock split, recapitalization, reorganization,
merger, consolidation, split-up, combination or exchange of shares,
distribution with respect to its outstanding Common Stock or capital stock
other than Common Stock, sale or transfer of all or part of its assets or
business, reclassification of its capital stock, or any similar change
affecting the Company's capital structure or business, and the Committee
determines an adjustment is appropriate under the Plan, then the aggregate
number and kind of shares which thereafter may be issued under this Plan,
the number and kind of shares or other property (including cash) to be
issued upon exercise of an outstanding Option or other Awards granted
under this Plan and the purchase price thereof shall be appropriately
adjusted consistent with such change in such manner as the Committee may
deem equitable to prevent substantial dilution or enlargement of the
rights granted to, or available for, Participants under this Plan,
or as otherwise necessary to reflect the change, and any such adjustment
determined by the Committee shall be binding and conclusive on the Company
and all Participants and employees and their respective heirs, executors,
administrators, successors and assigns.
(c) Fractional shares of Common Stock resulting from any adjustment
in Options or Awards pursuant to Section 4.2(a) or (b) shall be aggregated
until, and eliminated at, the time of exercise by rounding-down for
fractions less than one-half (1/2) and rounding-up for fractions equal to
or greater than one-half (1/2). No cash settlements shall be made with
respect to fractional shares eliminated by rounding. Notice of any
adjustment shall be given by the Committee to each Participant whose Option
or Award has been adjusted and such adjustment (whether or not such notice
is given) shall be effective and binding for all purposes of the Plan.
(d) In the event of a merger or consolidation in which the Company is
not the surviving entity or in the event of any transaction that results in
the acquisition of substantially all of the Company's outstanding Common
Stock by a single person or entity or by a group of persons and/or entities
acting in concert, or in the event of the sale or transfer of all of the
Company's assets (all of the foregoing being referred to as "Acquisition
Events"), then the Committee may, in its sole discretion, terminate all
outstanding Options and Stock Appreciation Rights of Eligible Employees,
effective as of the date of the
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Acquisition Event, by delivering notice of termination to each such
Participant at least twenty (20) days prior to the date of consummation of
the Acquisition Event; provided, that during the period from the date on
which such notice of termination is delivered to the consummation of the
Acquisition Event, each such Participant shall have the right to exercise
in full all of his or her Options and Stock Appreciation Rights that are
then outstanding (without regard to any limitations on exercisability
otherwise contained in the Option or Award Agreements) but contingent on
occurrence of the Acquisition Event, and, provided that, if the Acquisition
Event does not take place within a specified period after giving such
notice for any reason whatsoever, the notice and exercise shall be null and
void.
Notwithstanding the foregoing and solely to the extent required by
Section 16 of the Exchange Act, at the discretion of the Committee, the
provisions contained in this subsection shall be adjusted as they apply to
Options and Stock Appreciation Rights granted to Eligible Employees within
six (6) months before the occurrence of an Acquisition Event if the holder
of such Award is subject to the reporting requirements of Section 16(a) of
the Exchange Act in such manner as determined by the Committee, including
without limitation, terminating Options and Stock Appreciation Rights at
specific dates after the Acquisition Event, in order to give the holder the
benefit of the Option.
If an Acquisition Event occurs, to the extent the Committee does not
terminate the outstanding Options and Stock Appreciation Rights pursuant to
this Section 4.2(d), then the provisions of Section 4.2(b) shall apply.
4.3. PURCHASE PRICE. Notwithstanding any provision of this Plan to the
contrary, if authorized but previously unissued shares of Common Stock are
issued under this Plan, such shares shall not be issued for a consideration
which is less than as permitted under applicable law.
ARTICLE V.
ELIGIBILITY
5.1. All employees of the Company and its Subsidiaries are eligible to be
granted Options, Stock Appreciation Rights and Restricted Stock under this Plan.
Eligibility under this Plan shall be determined by the Committee.
5.2. Non-employee directors of the Company are only eligible to receive an
Award of Stock Options in accordance with Article IX of the Plan.
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ARTICLE VI.
EMPLOYEE STOCK OPTION GRANTS
6.1. OPTIONS. Each Stock Option granted hereunder shall be one of two
types: (i) an Incentive Stock Option intended to satisfy the requirements of
Section 422 of the Code or (ii) a Non-Qualified Stock Option.
6.2. GRANTS. The Committee shall have the authority to grant to any
Eligible Employee one or more Incentive Stock Options, Non-Qualified Stock
Options, or both types of Stock Options (in each case with or without Stock
Appreciation Rights). To the extent that any Stock Option does not qualify as
an Incentive Stock Option (whether because of its provisions or the time or
manner of its exercise or otherwise), such Stock Option or the portion thereof
which does not qualify, shall constitute a separate Non-Qualified Stock Option.
6.3. TERMS OF OPTIONS. Options granted under this Plan shall be subject
to the following terms and conditions, and shall be in such form and contain
such additional terms and conditions, not inconsistent with the terms of this
Plan, as the Committee shall deem desirable:
(a) OPTION PRICE. The option price per share of Common Stock
purchasable under an Incentive Stock Option shall be determined by the
Committee at the time of grant but shall not be less than 100% of the Fair
Market Value of the share of Common Stock at the time of grant; provided,
however, if an Incentive Stock Option is granted to a Ten Percent
Stockholder, the purchase price shall be no less than 110% of the Fair
Market Value of the Common Stock. The purchase price of shares of Common
Stock subject to a Non-Qualified Stock Option shall be determined by the
Committee but shall not be less than the 100% of the Fair Market Value of
the Common Stock at the time of grant. Notwithstanding the foregoing, if
an Option is modified, extended or renewed and, thereby, deemed to be the
issuance of a new Option under the Code, the exercise price of an Option
may continue to be the original exercise price even if less than the Fair
Market Value of the Common Stock at the time of such modification,
extension or renewal.
(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than ten (10)
years after the date the Option is granted, provided, however, the term of
an Incentive Stock Option granted to a Ten Percent Stockholder may not
exceed five (5) years.
(c) EXERCISABILITY. Stock Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by
the Committee at grant. If the Committee provides, in its discretion, that
any Stock
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Option is exercisable subject to certain limitations (including, without
limitation, that it is exercisable only in installments or within certain
time periods), the Committee may waive such limitations on the
exercisability at any time at or after grant in whole or in part
(including, without limitation, that the Committee may waive the
installment exercise provisions or accelerate the time at which Options may
be exercised), based on such factors, if any, as the Committee shall
determine, in its sole discretion.
(d) METHOD OF EXERCISE. Subject to whatever installment exercise and
waiting period provisions apply under subsection (c) above, Stock Options
may be exercised in whole or in part at any time during the Option term, by
giving written notice of exercise to the Company specifying the number of
shares to be purchased. Such notice shall be accompanied by payment in
full of the purchase price in such form, or such other arrangement for the
satisfaction of the purchase price, as the Committee may accept. If and to
the extent determined by the Committee in its sole discretion at or after
grant, payment in full or in part may also be made in the form of Common
Stock withheld from the shares to be received on the exercise of a Stock
Option hereunder, Common Stock owned by the Participant (and for which the
Participant has good title free and clear of any liens and encumbrances) or
Restricted Stock based, in each case, on the Fair Market Value of the
Common Stock on the payment date as determined by the Committee (without
regard to any forfeiture restrictions applicable to such Restricted Stock).
No shares of Common Stock shall be issued until payment, as provided
herein, therefor has been made or provided for. If payment in full or in
part has been made in the form of Restricted Stock, an equivalent number of
shares of Common Stock issued on exercise of the Option shall be subject to
the same restrictions and conditions, during the remainder of the
Restriction Period, applicable to the Restricted Stock surrendered
therefor.
(e) INCENTIVE STOCK OPTION LIMITATIONS. To the extent that the
aggregate Fair Market Value (determined as of the time of grant) of the
Common Stock with respect to which Incentive Stock Options are exercisable
for the first time by an Eligible Employee during any calendar year under
the Plan and/or any other stock option plan of the Company or any
Subsidiary or parent corporation (within the meaning of Section 424(e) of
the Code) exceeds $100,000, such Options shall be treated as Options which
are not Incentive Stock Options.
Should the foregoing provision not be necessary in order for the Stock
Options to qualify as Incentive Stock Options, or should any additional
provisions be required, the Committee may amend the Plan accordingly,
without the necessity of obtaining the approval of the stockholders of the
Company.
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(f) BUY OUT AND SETTLEMENT PROVISIONS. The Committee may at any time
on behalf of the Company offer to buy out an Option previously granted,
based on such terms and conditions as the Committee shall establish and
communicate to the Participant at the time that such offer is made.
(g) FORM, MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to
the terms and conditions and within the limitations of the Plan, an Option
shall be evidenced by such form of agreement or grant as is approved by the
Committee, and the Committee may modify, extend or renew outstanding
Options granted under the Plan (provided that the rights of a Participant
are not reduced without his consent), or accept the surrender of
outstanding Options (up to the extent not theretofore exercised) and
authorize the granting of new Options in substitution therefor (to the
extent not theretofore exercised).
(h) OTHER TERMS AND CONDITIONS. Options may contain such other
provisions, which shall not be inconsistent with any of the foregoing terms
of the Plan, as the Committee shall deem appropriate including, without
limitation, permitting "reloads" such that the same number of Options are
granted as the number of Options exercised, shares used to pay for the
exercise price of Options or shares used to pay withholding taxes
("Reloads"). With respect to Reloads, the exercise price of the new Stock
Option shall be the Fair Market Value on the date of the "reload" and the
term of the Stock Option shall be the same as the remaining term of the
Options that are exercised, if applicable, or such other exercise price and
term as determined by the Committee.
6.4. TERMINATION OF EMPLOYMENT. The following rules apply with regard to
Options upon the Termination of Employment of a Participant:
(a) TERMINATION BY REASON OF DEATH. If a Participant's Termination
of Employment is by reason of death, any Stock Option held by such
Participant, unless otherwise determined by the Committee at grant or, if
no rights of the Participant's estate are reduced, thereafter, may be
exercised, to the extent exercisable at the Participant's death, by the
legal representative of the estate, at any time within a period of one (1)
year from the date of such death, but in no event beyond the expiration of
the stated term of such Stock Option.
(b) TERMINATION BY REASON OF DISABILITY. If a Participant's
Termination of Employment is by reason of Disability, any Stock Option held
by such Participant, unless otherwise determined by the Committee at grant
or, if no rights of the Participant are reduced, thereafter, may be
exercised, to the extent exercisable at the Participant's termination, by
the Participant (or the legal representative of the Participant's estate if
the Participant dies after termination) at any time within a period of one
(1) year from the date of such termination, but in no event beyond the
expiration of the stated term of such Stock Option.
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(c) TERMINATION BY REASON OF RETIREMENT. If a Participant's
Termination of Employment is by reason of Retirement, any Stock Option held
by such Participant, unless otherwise determined by the Committee at grant,
or, if no rights of the Participant are reduced, thereafter, shall be fully
vested and may thereafter be exercised by the Participant at any time
within a period of one (1) year from the date of such termination, but in
no event beyond the expiration of the stated term of such Stock Option;
provided, however, that, if the Participant dies within such exercise
period, any unexercised Stock Option held by such Participant shall
thereafter be exercisable, to the extent to which it was exercisable at the
time of death, for a period of one (1) year (or such other period as the
Committee may specify at grant or, if no rights of the Participant's estate
are reduced, thereafter) from the date of such death, but in no event
beyond the expiration of the stated term of such Stock Option.
(d) INVOLUNTARY TERMINATION WITHOUT CAUSE OR TERMINATION FOR GOOD
REASON. If a Participant's Termination of Employment is by involuntary
termination without Cause or for Good Reason, any Stock Option held by such
Participant, unless otherwise determined by the Committee at grant or, if
no rights of the Participant are reduced, thereafter, may be exercised, to
the extent exercisable at termination, by the Participant at any time
within a period of ninety (90) days from the date of such termination, but
in no event beyond the expiration of the stated term of such Stock Option.
(e) TERMINATION WITHOUT GOOD REASON. If a Participant's Termination
of Employment is voluntary but without Good Reason and occurs prior to, or
more than ninety (90) days after, the occurrence of an event which would be
grounds for Termination of Employment by the Company for Cause (without
regard to any notice or cure period requirements), any Stock Option held by
such Participant, unless otherwise determined by the Committee at grant or,
if no rights of the Participant are reduced, thereafter, may be exercised,
to the extent exercisable at termination, by the Participant at any time
within a period of thirty (30) days from the date of such termination, but
in no event beyond the expiration of the stated term of such Stock Option.
(f) OTHER TERMINATION. Unless otherwise determined by the Committee
at grant or, if no rights of the Participant are reduced, thereafter, if a
Participant's Termination of Employment is for any reason other than death,
Disability, Retirement, Good Reason, involuntary termination without Cause
or voluntary termination as provided in subsection (e) above, any Stock
Option held by such Participant shall thereupon terminate and expire as of
the date of termination, provided that (unless the Committee determines a
different period upon grant or, if, no rights of the Participant are
reduced, thereafter) in the event the termination is for Cause or is a
voluntary termination without Good Reason within ninety (90) days after
occurrence of an event which would be grounds for Termination of Employment
by the Company for Cause (without regard to
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any notice or cure period requirement), any Stock Option held by the
Participant at the time of occurrence of the event which would be grounds
for Termination of Employment by the Company for Cause shall be deemed to
have terminated and expired upon occurrence of the event which would be
grounds for Termination of Employment by the Company for Cause.
ARTICLE VII.
RESTRICTED STOCK AWARDS
7.1. AWARDS OF RESTRICTED STOCK. Shares of Restricted Stock may be issued
to Eligible Employees either alone or in addition to other Awards granted under
the Plan. The Committee shall determine the eligible persons to whom, and the
time or times at which, grants of Restricted Stock will be made, the number of
shares to be awarded, the price (if any) to be paid by the recipient (subject to
Section 7.2), the time or times within which such Awards may be subject to
forfeiture, the vesting schedule and rights to acceleration thereof, and all
other terms and conditions of the Awards.
7.2. AWARDS AND CERTIFICATES. The prospective Participant selected to
receive a Restricted Stock Award shall not have any rights with respect to such
Award, unless and until such Participant has delivered a fully executed copy of
the Restricted Stock Award agreement evidencing the Award to the Company and has
otherwise complied with the applicable terms and conditions of such Award.
Further, such Award shall be subject to the following conditions:
(a) PURCHASE PRICE. The purchase price of Restricted Stock shall be
fixed by the Committee. Subject to Section 4.3, the purchase price for
shares of Restricted Stock may be zero to the extent permitted by
applicable law, and, to the extent not so permitted, such purchase price
may not be less than par value.
(b) ACCEPTANCE. Awards of Restricted Stock must be accepted within a
period of sixty (60) days (or such shorter period as the Committee may
specify at grant) after the Award date, by executing a Restricted Stock
Award agreement and by paying whatever price (if any) the Committee has
designated thereunder.
(c) LEGEND. Each Participant receiving a Restricted Stock Award
shall be issued a stock certificate in respect of such shares of Restricted
Stock, unless the Committee elects to use another system, such as book
entries by the transfer agent, as evidencing ownership of a Restricted
Stock Award. Such certificate shall be registered in the name of such
Participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such Award, substantially in the
following form:
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"The anticipation, alienation, attachment, sale, transfer, assignment,
pledge, encumbrance or charge of the shares of stock represented hereby are
subject to the terms and conditions (including forfeiture) of the Kapson
Senior Quarters Corp. (the "Company") 1996 Stock Incentive Plan and an
Agreement entered into between the registered owner and the Company, dated
________. Copies of such Plan and Agreement are on file at the principal
office of the Company."
(d) CUSTODY. The Committee may require that any stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock Award, the Participant shall have delivered a duly signed
stock power, endorsed in blank, relating to the Common Stock covered by
such Award.
7.3. RESTRICTIONS AND CONDITIONS ON RESTRICTED STOCK AWARDS. The shares
of Restricted Stock awarded pursuant to this Plan shall be subject to Article X
and the following restrictions and conditions:
(a) RESTRICTION PERIOD; VESTING AND ACCELERATION OF VESTING. The
Participant shall not be permitted to Transfer shares of Restricted Stock
awarded under this Plan during a period set by the Committee (the
"Restriction Period") commencing with the date of such Award, as set forth
in the Restricted Stock Award agreement and such agreement shall set forth
a vesting schedule and any events which would accelerate vesting of the
shares of Restricted Stock. Within these limits, based on service, or
other criteria determined by the Committee, the Committee may provide for
the lapse of such restrictions in installments in whole or in part, or may
accelerate the vesting of all or any part of any Restricted Stock Award.
(b) RIGHTS AS STOCKHOLDER. Except as provided in this subsection (b)
and subsection (a) above and as otherwise determined by the Committee, the
Participant shall have, with respect to the shares of Restricted Stock, all
of the rights of a holder of shares of Common Stock of the Company
including, without limitation, the right to receive any dividends, the
right to vote such shares and, subject to and conditioned upon the full
vesting of shares of Restricted Stock, the right to tender such shares.
Notwithstanding the foregoing, the payment of dividends shall be deferred
until, and conditioned upon, the expiration of the applicable Restriction
Period, unless the Committee, in its sole discretion, specifies otherwise
at the time of the Award.
(c) LAPSE OF RESTRICTIONS. If and when the Restriction Period
expires without a prior forfeiture of the Restricted Stock subject to such
Restriction Period, the certificates for such shares shall be delivered to
the Participant. All legends shall be removed from said certificates at
the time of delivery to the Participant except as otherwise required by
applicable law.
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7.4. TERMINATION OF EMPLOYMENT FOR RESTRICTED STOCK. Subject to the
applicable provisions of the Restricted Stock Award agreement and this Plan,
upon a Participant's Termination of Employment for any reason during the
relevant Restriction Period, all Restricted Stock still subject to restriction
will vest or be forfeited in accordance with the terms and conditions
established by the Committee at grant or thereafter.
ARTICLE VIII.
STOCK APPRECIATION RIGHTS
8.1. TANDEM STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be
granted in conjunction with all or part of any Stock Option (a "Reference Stock
Option") granted under this Plan ("Tandem Stock Appreciation Rights"). In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Reference Stock Option. In the case of an
Incentive Stock Option, such rights may be granted only at the time of the grant
of such Reference Stock Option.
8.2. TERMS AND CONDITIONS OF TANDEM STOCK APPRECIATION RIGHTS. Tandem
Stock Appreciation Rights shall be subject to such terms and conditions, not
inconsistent with the provisions of this Plan, as shall be determined from time
to time by the Committee, including Article X and the following:
(a) TERM. A Tandem Stock Appreciation Right or applicable portion
thereof granted with respect to a Reference Stock Option shall terminate
and no longer be exercisable upon the termination or exercise of the
Reference Stock Option, except that, unless otherwise determined by the
Committee, in its sole discretion, at the time of grant, a Tandem Stock
Appreciation Right granted with respect to less than the full number of
shares covered by the Reference Stock Option shall not be reduced until and
then only to the extent the exercise or termination of the Reference Stock
Option causes the number of shares covered by the Tandem Stock Appreciation
Right to exceed the number of shares remaining available and unexercised
under the Reference Stock Option.
(b) EXERCISABILITY. Tandem Stock Appreciation Rights shall be
exercisable only at such time or times and to the extent that the Reference
Stock Options to which they relate shall be exercisable in accordance with
the provisions of Article VI and this Article VIII.
(c) METHOD OF EXERCISE. A Tandem Stock Appreciation Right may be
exercised by an optionee by surrendering the applicable portion of the
Reference Stock Option. Upon such exercise and surrender, the Participant
shall be entitled to receive an amount determined in the manner prescribed
in this Section 8.2. Stock Options which have been so surrendered, in
whole or in
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part, shall no longer be exercisable to the extent the related Tandem Stock
Appreciation Rights have been exercised.
(d) PAYMENT. Upon the exercise of a Tandem Stock Appreciation Right
a Participant shall be entitled to receive up to, but no more than, an
amount in cash and/or Common Stock (as chosen by the Committee in its sole
discretion) equal in value to the excess of the Fair Market Value of one
share of Common Stock over the option price per share specified in the
Reference Stock Option multiplied by the number of shares in respect of
which the Tandem Stock Appreciation Right shall have been exercised, with
the Committee having the right to determine the form of payment.
(e) DEEMED EXERCISE OF REFERENCE STOCK OPTION. Upon the exercise of
a Tandem Stock Appreciation Right, the Reference Stock Option or part
thereof to which such Stock Appreciation Right is related shall be deemed
to have been exercised for the purpose of the limitation set forth in
Article IV of the Plan on the number of shares of Common Stock to be issued
under the Plan.
8.3. NON-TANDEM STOCK APPRECIATION RIGHTS. Non-Tandem Stock Appreciation
Rights may also be granted without reference to any Stock Options granted under
this Plan.
8.4. TERMS AND CONDITIONS OF NON-TANDEM STOCK APPRECIATION RIGHTS. Non-
Tandem Stock Appreciation Rights shall be subject to such terms and conditions,
not inconsistent with the provisions of this Plan, as shall be determined from
time to time by the Committee, including Article X and the following:
(a) TERM. The term of each Non-Tandem Stock Appreciation Right shall
be fixed by the Committee, but shall not be greater than ten (10) years
after the date the right is granted.
(b) EXERCISABILITY. Non-Tandem Stock Appreciation Rights shall be
exercisable at such time or times and subject to such terms and conditions
as shall be determined by the Committee at grant. If the Committee
provides, in its discretion, that any such right is exercisable subject to
certain limitations (including, without limitation, that it is exercisable
only in installments or within certain time periods), the Committee may
waive such limitation on the exercisability at any time at or after grant
in whole or in part (including, without limitation, that the Committee may
waive the installment exercise provisions or accelerate the time at which
rights may be exercised), based on such factors, if any, as the Committee
shall determine, in its sole discretion.
(c) METHOD OF EXERCISE. Subject to whatever installment exercise and
waiting period provisions apply under subsection (b) above, Non-Tandem
Stock Appreciation Rights may be exercised in whole or in part at any time
during
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the option term, by giving written notice of exercise to the Company
specifying the number of Non-Tandem Stock Appreciation Rights to be
exercised.
(d) PAYMENT. Upon the exercise of a Non-Tandem Stock Appreciation
Right a Participant shall be entitled to receive, for each right exercised,
up to, but no more than, an amount in cash and/or Common Stock (as chosen
by the Committee in its sole discretion) equal in value to the excess of
the Fair Market Value of one share of Common Stock on the date the right is
exercised over the Fair Market Value of one (1) share of Common Stock on
the date the right was awarded to the Participant.
8.5. LIMITED STOCK APPRECIATION RIGHTS. The Committee may, in its sole
discretion, grant Tandem and Non-Tandem Stock Appreciation Rights either as a
general Stock Appreciation Right or as a limited Stock Appreciation Right.
Limited Stock Appreciation Rights may be exercised only upon the occurrence of a
Change in Control or such other event as the Committee may, in its sole
discretion, designate at the time of grant or thereafter. Upon the exercise of
limited Stock Appreciation Rights, except as otherwise provided in an Award
agreement, the Participant shall receive in cash or Common Stock, as determined
by the Committee, an amount equal to the amount (1) set forth in Section 8.2(d)
with respect to Tandem Stock Appreciation Rights or (2) set forth in Section
8.4(d) with respect to Non-Tandem Stock Appreciation Rights.
8.6. TERMINATION OF EMPLOYMENT. The following rules apply with regard to
Stock Appreciation Rights upon the Termination of Employment of a Participant.
(a) TERMINATION BY DEATH. If a Participant's Termination of
Employment is by reason of death, any Stock Appreciation Right held by such
Participant, unless otherwise determined by the Committee at grant or if no
rights of the Participant's estate are reduced, thereafter, may be
exercised, to the extent exercisable at the Participant's death, by the
legal representative of the estate, at any time within a period of one (1)
year from the date of such death or until the expiration of the stated term
of such Stock Appreciation Right, whichever period is the shorter.
(b) TERMINATION BY REASON OF DISABILITY. If a Participant's
Termination of Employment is by reason of Disability, any Stock
Appreciation Right held by such participant, unless otherwise determined by
the Committee at grant or, if no rights of the Participant are reduced,
thereafter, may be exercised, to the extent exercisable at the
Participant's termination, by the Participant (or the legal representative
of the Participant's estate if the Participant dies after termination) at
any time within a period of one (1) year from the date of such termination
or until the expiration of the stated term of such Stock Appreciation
Right, whichever period is the shorter.
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(c) TERMINATION BY REASON OF RETIREMENT. If a Participant's
Termination of Employment is by reason of Retirement, any Stock
Appreciation Right held by such Participant, unless otherwise determined by
the Committee at grant or, if no rights of the Participant are reduced,
thereafter, shall be fully vested and may thereafter be exercised by the
Participant at any time within a period of one (1) year from the date of
such termination or until the expiration of the stated term of such right,
whichever period is the shorter; provided, however, that, if the
Participant dies within such one (1) year period, any unexercised Non-
Tandem Stock Appreciation Right held by such Participant shall thereafter
be exercisable, to the extent to which it was exercisable at the time of
death, for a period of one (1) year (or such other period as the Committee
may specify at grant or if no rights of the Participant are reduced,
thereafter) from the date of such death or until the expiration of the
stated term of such right, whichever period is the shorter.
(d) INVOLUNTARY TERMINATION WITHOUT CAUSE OR TERMINATION FOR GOOD
REASON. If a Participant's Termination of Employment is by involuntary
termination without Cause or for Good Reason, any Stock Appreciation Right
held by such participant, unless otherwise determined by the Committee at
grant or if no rights of the participant are reduced, thereafter, may be
exercised, to the extent exercisable at termination, by the Participant at
any time within a period of ninety (90) days from the date of such
termination or until the expiration of the stated term of such right,
whichever period is shorter.
(e) TERMINATION WITHOUT GOOD REASON. If a Participant's Termination
of Employment is voluntary but without Good Reason and occurs prior to, or
more than ninety (90) days after, the occurrence of an event which would be
grounds for Termination of Employment by the Company for Cause (without
regard to any notice or cure period requirements), any Stock Appreciation
Right held by such Participant, unless greater or lesser exercise rights
are provided by the Committee at the time of grant or, if no rights of the
participant are reduced, thereafter, may be exercised, to the extent
exercisable at termination, by the Participant at any time within a period
of thirty (30) days from the date of such termination, but in no event
beyond the expiration of the stated term of such Stock Appreciation Right.
(f) OTHER TERMINATION. Unless otherwise determined by the Committee
at grant, or, if no rights of the Participant are reduced thereafter, if a
Participant's Termination of Employment is for any reason other than death,
Disability, Retirement, Good Reason, involuntary termination without Cause
or voluntary termination as provided in subsection (e) above, any Stock
Appreciation Right held by such Participant shall thereupon terminate or
expire as of the date of termination, provided, that (unless the Committee
determines a different period upon grant, or, if no rights of the
Participant are reduced, thereafter) in the event the termination is for
Cause or is a voluntary
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termination as provided in subsection (e) above, within ninety (90) days
after occurrence of an event which would be grounds for Termination of
Employment by the Company for Cause (without regard to any notice or cure
period requirement), any Stock Appreciation Right held by the Participant
at the time of the occurrence of the event which would be grounds for
Termination of Employment by the Company for Cause shall be deemed to have
terminated and expired upon occurrence of the event which would be grounds
for Termination of Employment by the Company for Cause.
ARTICLE IX.
NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS
9.1. OPTIONS. The terms of this Article IX shall apply only to Options
granted to non-employee directors.
9.2. GRANTS. Without further action by the Board or the stockholders of
the Company, each non-employee director shall:
(a) subject to the terms of the Plan, be granted Options to purchase
10,000 shares of Common Stock upon (1) the date on which the offering price
in connection with the initial public offering of the Common Stock (the
"Offering") is agreed upon between the Company and the underwriters (the
"Price to the Public); or (2) if later, as of the date the non-employee
director begins service as a director on the Board;
(b) notwithstanding the foregoing, if the Offering is not consummated
by November 1, 1996, no Options shall thereafter be granted and any Options
previously granted under Section 9.1(a) above shall become null and void.
9.3. NON-QUALIFIED STOCK OPTIONS. Stock Options granted under this
Article IX shall be Non-Qualified Stock Options.
9.4. TERMS OF OPTIONS. Options granted under this Article shall be
subject to the following terms and conditions and shall be in such form and
contain such additional terms and conditions, not inconsistent with terms of
this Plan, as the Committee shall deem desirable:
(a) OPTION PRICE. The purchase price per share deliverable upon the
exercise of an Option granted pursuant to Section 9.2(a)(1) shall be the
Price to the Public and the purchase price per share deliverable upon the
exercise of an Option granted pursuant to Section 9.2(a)(2) shall be 100%
of the Fair Market
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Value of such Common Stock at the time of the grant of the Option (the
"Purchase Price"), or the par value of the Common Stock, whichever is
greater.
(b) EXERCISABILITY. Except as otherwise provided herein, twenty-five
percent (25%) of any Option granted under this Article IX shall be
exercisable on or after each of the four anniversaries following the date
of grant. All Options shall fully vest upon a Change in Control.
(c) METHOD FOR EXERCISE. A non-employee director electing to
exercise one or more Options shall give written notice of exercise to the
Company specifying the number of shares to be purchased. Common Stock
purchased pursuant to the exercise of Options shall be paid for at the time
of exercise in cash or by delivery of unencumbered Common Stock owned by
the non-employee director or a combination thereof or by such other method
as approved by the Board.
(d) OPTION TERM. Except as otherwise provided herein, if not
previously exercised each Option shall expire upon the tenth anniversary of
the date of the grant thereof.
9.5. TERMINATION OF DIRECTORSHIP. The following rules apply with regard
to Options upon the Termination of Directorship:
(a) DEATH, DISABILITY OR OTHERWISE CEASING TO BE A DIRECTOR OTHER
THAN FOR CAUSE. Except as otherwise provided herein, upon the Termination
of Directorship, on account of Disability, death, Retirement, resignation,
failure to stand for reelection or failure to be reelected or otherwise
other than as set forth in (b) below, all outstanding Options then
exercisable and not exercised by the Participant prior to such Termination
of Directorship shall remain exercisable, to the extent exercisable at the
Termination of Directorship, by the Participant or, in the case of death,
by the Participant's estate or by the person given authority to exercise
such Options by his or her will or by operation of law, for the remainder
of the stated term of such Options.
(b) CAUSE. Upon removal, failure to stand for reelection or failure
to be renominated for Cause, or if the Company obtains or discovers
information after Termination of Directorship that such Participant had
engaged in conduct that would have justified a removal for Cause during
such directorship, all outstanding Options of such Participant shall
immediately terminate and shall be null and void.
(c) CANCELLATION OF OPTIONS. No Options that were not exercisable
during the period such person serves as a director shall thereafter become
exercisable upon a Termination of Directorship for any reason or no reason
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whatsoever, and such Options shall terminate and become null and void upon
a Termination of Directorship.
9.6. CHANGES. (a) The Awards to a non-employee director shall be subject
to Sections 4.2(a), (b) and (c) of the Plan and this Section 9.6, but shall
not be subject to Section 4.2(d).
(b) If the Company shall not be the surviving corporation in any
merger or consolidation, or if the Company is to be dissolved or
liquidated, then, unless the surviving corporation assumes the Options or
substitutes new Options which are determined by the Board in its sole
discretion to be substantially similar in nature and equivalent in terms
and value for Options then outstanding, upon the effective date of such
merger, consolidation, liquidation or dissolution, any unexercised Options
shall expire without additional compensation to the holder thereof;
provided, that, the Committee shall deliver notice to each non-employee
director at least twenty (20) days prior to the date of consummation of
such merger, consolidation, dissolution or liquidation which would result
in the expiration of the Options and during the period from the date on
which such notice of termination is delivered to the consummation of the
merger, consolidation, dissolution or liquidation, such Participant shall
have the right to exercise in full effective as of such consummation all
Options that are then outstanding (without regard to limitations on
exercise otherwise contained in the Options) but contingent on occurrence
of the merger, consolidation, dissolution or liquidation, and, provided
that, if the contemplated transaction does not take place within a ninety
(90) day period after giving such notice for any reason whatsoever, the
notice, accelerated vesting and exercise shall be null and void and, if and
when appropriate, new notice shall be given as aforesaid.
ARTICLE X.
NON-TRANSFERABILITY
No Stock Option or Stock Appreciation Right shall be Transferable by the
Participant otherwise than by will or by the laws of descent and distribution.
All Stock Options and all Stock Appreciation Rights shall be exercisable, during
the Participant's lifetime, only by the Participant. Tandem Stock Appreciation
Rights shall be Transferable, to the extent permitted above, only with the
underlying Stock Option. Shares of Restricted Stock under Article VII may not
be Transferred prior to the date on which shares are issued, or, if later, the
date on which any applicable restriction lapses. No Award shall, except as
otherwise specifically provided by law or herein, be Transferable in any manner,
and any attempt to Transfer any such Award shall be void, and no such Award
shall in any manner be liable for or subject to the debts, contracts,
liabilities, engagements or torts of any person who shall be entitled to such
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Award, nor shall it be subject to attachment or legal process for or against
such person.
ARTICLE XI.
CHANGE IN CONTROL PROVISIONS
11.1. BENEFITS. In the event of a Change in Control of the Company (as
defined below), except as otherwise provided by the Committee upon the grant of
an Award, the Participant shall be entitled to the following benefits:
(a) Subject to paragraph (c) below with regard to Options granted to
Eligible Employees, all outstanding Options and the related Tandem Stock
Appreciation Rights and Non-Tandem Stock Appreciation Rights of such
Participant granted prior to the Change in Control shall be fully vested
and immediately exercisable in their entirety. The Committee, in its sole
discretion, may provide for the purchase of any such Stock Options by the
Company for an amount of cash equal to the excess of the Change in Control
price (as defined below) of the shares of Common Stock covered by such
Stock Options, over the aggregate exercise price of such Stock Options.
For purposes of this Section 11.1, Change in Control price shall mean the
higher of (i) the highest price per share of Common Stock paid in any
transaction related to a Change in Control of the Company, or (ii) the
highest Fair Market Value per share of Common Stock at any time during the
sixty (60) day period preceding a Change in Control.
(b) The restrictions to which any shares of Restricted Stock of such
Participant granted prior to the Change in Control are subject shall lapse
as if the applicable Restriction Period had ended upon such Change in
Control.
(c) Notwithstanding anything to the contrary herein, unless the
Committee provides otherwise at the time an Option is granted to an
Eligible Employee hereunder or thereafter, no acceleration of
exercisability shall occur with respect to such Option if the Committee
reasonably determines in good faith, prior to the occurrence of the Change
in Control, that the Options shall be honored or assumed, or new rights
substituted therefor (each such honored, assumed or substituted option
hereinafter called an "Alternative Option"), by a Participant's employer
(or the parent or a subsidiary of such employer) immediately following the
Change in Control, provided that any such Alternative Option must meet the
following criteria:
(i) the Alternative Option must be based on stock which is
traded on an established securities market, or which will be so traded
within thirty (30) days of the Change in Control;
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(ii) the Alternative Option must provide such Participant with
rights and entitlements substantially equivalent to or better than the
rights, terms and conditions applicable under such Option, including, but
not limited to, an identical or better exercise schedule; and
(iii) the Alternative Option must have economic value
substantially equivalent to the value of such Option (determined at the
time of the Change in Control).
For purposes of Incentive Stock Options, any assumed or substituted
Option shall comply with the requirements of Treasury regulation Section
1.425-1 (and any amendments thereto).
(d) Notwithstanding anything else herein, the Committee may, in its
sole discretion, provide for accelerated vesting of an Award (other than a
grant to a non-employee director pursuant to Article IX hereof), upon a
Termination of Employment during the Pre-Change in Control Period. Unless
otherwise determined by the Committee, the Pre-Change in Control Period
shall be the one hundred eighty (180) day period prior to a Change in
Control.
11.2. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have
occurred:
(a) upon any "person" as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, any trustee or other
fiduciary holding securities under any employee benefit plan of the
Company, any company owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportions as their ownership of
Common Stock of the Company, or as a group or individually Glenn Kaplan,
Wayne Kaplan or Evan Kaplan, their siblings, their spouses and their issue
and any trusts for the benefit of any of them), becoming the owner (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of
the combined voting power of the Company's then outstanding securities
(including, without limitation, securities owned at the time of any
increase in ownership);
(b) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors, and any new
director (other than a director designated by a person who has entered into
an agreement with the Company to effect a transaction described in
paragraph (a), (c), or (d) of this section) or a director whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other than
the Board of Directors of the Company whose election by
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the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the directors
then still in office who either were directors at the beginning of the
two-year period or whose election or nomination for election was previously
so approved, cease for any reason to constitute at least a majority of the
Board of Directors;
(c) upon the merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than fifty
percent (50%) of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such merger
or consolidation; provided, however, that a merger or consolidation
effected to implement a recapitalization of the Company (or similar
transaction) in which no person (other than those covered by the exceptions
in (a) above) acquires more than twenty-five percent (25%) of the combined
voting power of the Company's then outstanding securities shall not
constitute a Change in Control of the Company; or
(d) upon the stockholder's of the Company approval of a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets other than the sale of all or substantially all of the assets of the
Company to a person or persons who beneficially own, directly or
indirectly, at least fifty percent (50%) or more of the combined voting
power of the outstanding voting securities of the Company at the time of
the sale.
ARTICLE XII.
TERMINATION OR AMENDMENT OF THE PLAN
12.1 TERMINATION OR AMENDMENT. Notwithstanding any other provision of
this Plan, the Board may at any time, and from time to time, amend, in whole or
in part, any or all of the provisions of the Plan, or suspend or terminate it
entirely, retroactively or otherwise; provided, however, that, unless otherwise
required by law or specifically provided herein, the rights of a Participant
with respect to Awards granted prior to such amendment, suspension or
termination, may not be impaired without the consent of such Participant and,
provided further, without the approval of the stockholders of the Company in
accordance with the laws of the state of Delaware, to the extent required by the
applicable provisions of Rule 16b-3 or under Section 162(m) of the Code, or to
the extent applicable to Incentive Stock Options, Section 422 of the Code, no
amendment may be made which would (i) increase the aggregate number of shares of
Common Stock that may be issued under this Plan; (ii)
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<PAGE>
increase the maximum individual Participant limitations for a fiscal year under
Section 4.1(b); (iii) change the classification of employees and non-employee
directors eligible to receive Awards under this Plan; (iv) decrease the minimum
option price of any Stock Option; (v) extend the maximum option period under
Section 6.3; (vi) change any rights under the Plan with regard to non-employee
directors; or (vii) require stockholder approval in order for the Plan to
continue to comply with the applicable provisions of Rule 16b-3 or Section
162(m) of the Code or, to the extent applicable to Incentive Stock Options,
Section 422 of the Code. In no event may the Plan be amended without the
approval of the stockholders of the Company in accordance with the applicable
laws of the State of Delaware to increase the aggregate number of shares of
Common Stock that may be issued under the Plan, decrease the minimum option
price of any Stock Option, or to 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.
Except with respect to the award of Stock Options to non-employee directors
under Article IX, the Committee may amend the terms of any Award theretofore
granted, prospectively or retroactively, but, subject to Article IV above or as
otherwise specifically provided herein, no such amendment or other action by the
Committee shall impair the rights of any holder without the holder's consent.
ARTICLE XIII.
UNFUNDED PLAN
13.1. UNFUNDED STATUS OF PLAN. This Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any payments as to
which a Participant has a fixed and vested interest but which are not yet made
to a Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company.
ARTICLE XIV.
GENERAL PROVISIONS
14.1. LEGEND. The Committee may require each person receiving shares
pursuant to an Award under the Plan to represent to and agree with the Company
in writing that the Participant is acquiring the shares without a view to
distribution thereof. In addition to any legend required by this Plan, the
certificates for such shares may include any legend which the Committee deems
appropriate to reflect any restrictions on Transfer.
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All certificates for shares of Common Stock delivered under the Plan shall
be subject to such stock transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Common
Stock is then listed or any national securities association system upon whose
system the Common Stock is then quoted, any applicable Federal or state
securities law, and any applicable corporate law, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
14.2. OTHER PLANS. Nothing contained in this Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases.
14.3. NO RIGHT TO EMPLOYMENT/DIRECTORSHIP. Neither this Plan nor the
grant of any Award hereunder shall give any Participant or other employee any
right with respect to continuance of employment by the Company or any
Subsidiary, nor shall they be a limitation in any way on the right of the
Company or any Subsidiary by which an employee is employed to terminate his
employment at any time. Neither this Plan nor the grant of any Award hereunder
shall impose any obligations on the Company to retain any Participant as a
director nor shall it impose on the part of any Participant any obligation to
remain as a director of the Company.
14.4. WITHHOLDING OF TAXES. The Company shall have the right to deduct
from any payment to be made to a Participant, or to otherwise require, prior to
the issuance or delivery of any shares of Common Stock or the payment of any
cash hereunder, payment by the Participant of, any Federal, state or local taxes
required by law to be withheld. Upon the vesting of Restricted Stock, or upon
making an election under Code Section 83(b), a Participant shall pay all
required withholding to the Company.
The Committee may permit any such withholding obligation with regard to any
Participant to be satisfied by reducing the number of shares of Common Stock
otherwise deliverable or by delivering shares of Common Stock already owned.
Any fraction of a share of Common Stock required to satisfy such tax obligations
shall be disregarded and the amount due shall be paid instead in cash by the
Participant.
14.5. LISTING AND OTHER CONDITIONS.
(a) As long as the Common Stock is listed on a national securities
exchange or system sponsored by a national securities association, the
issue of any shares of Common Stock pursuant to an Award shall be
conditioned upon such shares being listed on such exchange or system. The
Company shall have no obligation to issue such shares unless and until such
shares are so listed, and the right to exercise any Option with respect to
such shares shall be suspended until such listing has been effected.
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(b) If at any time counsel to the Company shall be of the opinion
that any sale or delivery of shares of Common Stock pursuant to an Award is
or may in the circumstances be unlawful or result in the imposition of
excise taxes on the Company under the statutes, rules or regulations of any
applicable jurisdiction, the Company shall have no obligation to make such
sale or delivery, or to make any application or to effect or to maintain
any qualification or registration under the Securities Act of 1933, as
amended, or otherwise with respect to shares of Common Stock or Awards, and
the right to exercise any Option shall be suspended until, in the opinion
of said counsel, such sale or delivery shall be lawful or will not result
in the imposition of excise taxes on the Company.
(c) Upon termination of any period of suspension under this Section
14.5, any Award affected by such suspension which shall not then have
expired or terminated shall be reinstated as to all shares available before
such suspension and as to shares which would otherwise have become
available during the period of such suspension, but no such suspension
shall extend the term of any Option.
14.6. GOVERNING LAW. This Plan shall be governed and construed in
accordance with the laws of the State of Delaware (regardless of the law that
might otherwise govern under applicable Delaware principles of conflict of
laws).
14.7. CONSTRUCTION. Wherever any words are used in this Plan in the
masculine gender they shall be construed as though they were also used in the
feminine gender in all cases where they would so apply, and wherever any words
are used herein in the singular form they shall be construed as though they were
also used in the plural form in all cases where they would so apply.
14.8. OTHER BENEFITS. No Award payment under this Plan shall be deemed
compensation for purposes of computing benefits under any retirement plan of the
Company or its subsidiaries nor affect any benefits under any other benefit plan
now or subsequently in effect under which the availability or amount of benefits
is related to the level of compensation.
14.9. COSTS. The Company shall bear all expenses included in
administering this Plan, including expenses of issuing Common Stock pursuant to
any Awards hereunder.
14.10. NO RIGHT TO SAME BENEFITS. The provisions of Awards need not be
the same with respect to each Participant, and such Awards to individual
Participants need not be the same in subsequent years.
14.11. DEATH/DISABILITY. The Committee may in its discretion require the
transferee of a Participant to supply it with written notice of the
Participant's death or
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Disability and to supply it with a copy of the will (in the case of the
Participant's death) or such other evidence as the Committee deems necessary to
establish the validity of the transfer of an Award. The Committee may also
require that the agreement of the transferee to be bound by all of the terms and
conditions of the Plan.
14.12. SECTION 16(b) OF THE EXCHANGE ACT. All elections and transactions
under the Plan by persons subject to Section 16 of the Exchange Act involving
shares of Common Stock are intended to comply with any applicable condition
under Rule 16b-3. The Committee may establish and adopt written administrative
guidelines, designed to facilitate compliance with Section 16(b) of the Exchange
Act, as it may deem necessary or proper for the administration and operation of
the Plan and the transaction of business thereunder.
14.13. SEVERABILITY OF PROVISIONS. If any provision of the Plan shall be
held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions hereof, and the Plan shall be construed and enforced
as if such provisions had not been included.
14.14. HEADINGS AND CAPTIONS. The headings and captions herein are
provided for reference and convenience only, shall not be considered part of the
Plan, and shall not be employed in the construction of the Plan.
ARTICLE XV.
TERM OF PLAN
No Award shall be granted pursuant to the Plan on or after the tenth
anniversary of the earlier of the date the Plan is adopted or the date of
stockholder approval, but Awards granted prior to such tenth anniversary may
extend beyond that date.
ARTICLE XVI.
NAME OF PLAN
This Plan shall be known as the Kapson Senior Quarters Corp. 1996 Stock
Incentive Plan.
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EXHIBIT 10.4
REGISTRATION RIGHTS AGREEMENT
AMONG
KAPSON SENIOR QUARTERS CORP.
AND
GLENN KAPLAN, WAYNE L. KAPLAN, EVAN A. KAPLAN AND HERBERT KAPLAN
Dated as of August__, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Required Registration . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Incidental Registration . . . . . . . . . . . . . . . . . . . . . . . . 3
4. Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . 4
5. Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6. Indemnification and Contribution. . . . . . . . . . . . . . . . . . . . 6
7. Market Stand-Off Agreement. . . . . . . . . . . . . . . . . . . . . . . 8
8. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
<PAGE>
REGISTRATION RIGHTS AGREEMENT
Registration Rights Agreement, dated as of ____ ____, 1996, among
KAPSON SENIOR QUARTERS CORP., a Delaware corporation (the "COMPANY"), Glenn
Kaplan ("GLENN"), Wayne L. Kaplan ("WAYNE"), Evan A. Kaplan ("EVAN") and Herbert
Kaplan ("HERBERT") (Messrs. Kaplan, Kaplan, Kaplan and Kaplan, from time to
time, hereinafter referred to individually as a "HOLDER" are collectively as the
"HOLDERS").
W I T N E S S E T H:
WHEREAS, the Company and the Holders have entered into a Stockholders
Agreement (the "STOCKHOLDERS AGREEMENT"), dated August ___ 1996, pursuant to
which the Company has agreed, among other things, to issue and sell to the
Holders, and the Holders have agreed to purchase from the Company, 4,150,000
shares of the Company's Common Stock, par value $.01 per share (the "COMMON
STOCK");
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants and agreements contained herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is agreed as follows:
1. DEFINITIONS. Unless otherwise defined herein, the following
shall have the following respective meanings (such meanings being equally
applicable to both the singular and plural form of the terms defined):
"AGREEMENT" means this Registration Rights Agreement, including all
amendments, modifications and supplements and any exhibits or schedules to any
of the foregoing, and shall refer to the Agreement as the same may be in effect
at the time such reference becomes operative.
"COMMON STOCK" has the meaning given to it in the recital hereto.
"NASD" means the National Association of Securities Dealers, Inc., or
any successor corporation thereto.
"STOCKHOLDERS AGREEMENT" has the meaning given to it in the recital
hereto.
"REGISTERING SECURITY HOLDER" has the meaning given to it in Section
3.
"REGISTRABLE SECURITIES" means all outstanding shares of Common Stock
as of the date hereof and any securities issued or issuable with respect to any
of such shares of Common Stock (a) by way of stock dividend or stock split or
(b) in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization or (c) otherwise; PROVIDED, HOWEVER, that
such securities shall cease to be Registrable Securities when (i) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been disposed
of in accordance with such registration statement, (ii) they shall have been
distributed to the public pursuant to Rule 144 (or any successor provision)
under the Securities Act, (iii) they shall have been otherwise transferred, new
certificates for them not bearing a legend restricting further transfer shall
have been delivered by the Company and subsequent disposition of them shall
<PAGE>
not require registration or qualification of them under the Securities Act or
any similar state law then in force, or (iv) they shall have ceased to be
outstanding.
"REGISTRATION REQUEST" has the meaning given to it in Section 2.
2. REQUIRED REGISTRATION. From and after the effective date of the
Company's Initial Public Offering, after receipt of a written request (a
"REGISTRATION REQUEST") from one or more Holders requesting that the Company
effect the registration of Registrable Securities under the Securities Act and
specifying the intended method or methods of disposition thereof, the Company
shall promptly notify all holders of Registrable Securities in writing of the
receipt of such request and each such holder may elect (by written notice sent
to the Company within ten days from the date of such holder's receipt of the
aforementioned Company's notice) to have all or any part of its Registrable
Securities included in such registration thereof pursuant to this Section 2.
Thereupon the Company shall use its best efforts to effect the registration
under the Securities Act of all shares of Registrable Securities which the
Company has been so requested to register by such holders for sale, all to the
extent required to permit the disposition (in accordance with the intended
method or methods thereof, as aforesaid) of the Registrable Securities so
registered; PROVIDED, HOWEVER, that, subject to the provisions of the
immediately following sentence, the Company shall not be required to effect more
than two registration statements of Registrable Securities pursuant to this
Section 2. In order to count as an "effected" registration statement, such
registration statement shall not have been withdrawn and all shares registered
pursuant to it (excluding any overallotment shares) shall have been sold. The
Company shall have the right to defer the filing of any registration statement
requested pursuant to this Section 2 for a period not to exceed ninety (90) days
from the date of expiration of the expiration of the ten-day election period, if
in the good faith determination of the Board of Directors of the Company the
filing of such registration statement would be seriously detrimental to the
Company.
3. INCIDENTAL REGISTRATION. If Company at any time proposes to file
on its behalf and/or on behalf of any of its security holders (the "REGISTERING
SECURITY HOLDERS") a Registration Statement under the Securities Act on any form
(other than a Registration Statement on Form S-4 or S-8 or any successor form
for securities to be offered in a transaction of the type referred to in Rule
145 under the Securities Act or to employees of the Company pursuant to any
employee benefit plan, respectively) for the general registration of securities
to be sold for cash with respect to any class of equity security (as defined in
Section 3(a)(11) of the Securities Exchange Act) of the Company, it will give
written notice to all holders of Registrable Securities at least 30 days before
the initial filing with the Commission of such Registration Statement, which
notice shall set forth the intended method of disposition of the securities
proposed to be registered by the Company. The notice shall offer to include in
such filing the aggregate number of shares of Registrable Securities as such
holders may request.
Each holder of any such Registrable Securities desiring to have
Registrable Securities registered under this Section 3 shall advise the Company
in writing within 10 days after the date of receipt of such offer from the
Company, setting forth the amount of such Registrable Securities for which
registration is requested. The Company shall thereupon include in such filing
the number of shares of Registrable Securities for which registration is so
requested, subject to the next sentence, and shall use its best efforts to
effect registration under the Securities Act of such shares. If the managing
underwriter of a proposed public
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offering shall advise the Company in writing that, in its opinion, the
distribution of the Registrable Securities requested to be included in the
registration concurrently with the securities being registered by the Company or
such registering security holder would materially and adversely affect the
distribution of such securities by the Company or such registering security
holder, then all selling security holders (other than the Company) shall reduce
the amount of securities each intended to distribute through such offering on a
pro rata basis.
4. REGISTRATION PROCEDURES. If the Company is required by the
provisions of Section 2 or 3 to use its best efforts to effect the registration
of any of its securities under the Securities Act, the Company will:
(a) prepare and file with the Commission a Registration
Statement with respect to such securities and use its best efforts to cause such
Registration Statement to become and remain effective for a period of time
required for the disposition of such securities by the holders thereof, but not
to exceed 180 days;
(b) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective and
to comply with the provisions of the Securities Act with respect to the sale or
other disposition of all securities covered by such Registration Statement until
the earlier of such time as all of such securities have been disposed of in a
public offering or the expiration of 180 days;
(c) furnish to such selling security holders such number of
copies of a summary prospectus or other prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents, as such selling security holders may reasonably request;
(d) use its best efforts to register or qualify the securities
covered by such Registration Statement under such other securities or blue sky
laws of such jurisdictions within the United States and Puerto Rico as each
holder of such securities shall request (PROVIDED, HOWEVER, that the Company
shall not be obligated to qualify as a foreign corporation to do business under
the laws of any jurisdiction in which it is not then qualified or to file any
general consent to service of process), and do such other reasonable acts and
things as may be required of it to enable such holder to consummate the
disposition in such jurisdiction of the securities covered by such Registration
Statement;
(e) furnish, in connection with any registration of Registrable
Securities, on the date that such shares of Registrable Securities are delivered
to the underwriters for sale pursuant to such registration or, if such
Registrable Securities are not being sold through underwriters, on the date that
the Registration Statement with respect to such shares of Registrable Securities
becomes effective, (1) an opinion, dated such date, of the independent counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, if any, and if such Registrable Securities are not being sold
through underwriters, then to the holders making such request, in customary form
and covering matters of the type customarily covered in such legal opinions; and
(2) a comfort letter dated such date, from the independent certified public
accountants of the Company, addressed to the underwriters, if any, and if such
Registrable Securities are not being sold
4
<PAGE>
through underwriters, then to the holder(s) of Registrable Securities being
registered and, if such accountants refuse to deliver such letter to such
holder(s), then to the Company in a customary form and covering matters of the
type customarily covered by such comfort letters and as the underwriters or such
holder(s) shall reasonably request. Such opinion of counsel shall additionally
cover such other legal matters with respect to the registration in respect of
which such opinion is being given as such holder(s) of Registrable Securities
may reasonably request consistent with opinions customarily provided in similar
transactions. Such letter from the independent certified public accountants
shall additionally cover such other financial matters (including information as
to the period ending not more than 5 business days prior to the date of such
letter) with respect to the registration in respect of which such letter is
being given as such holders of the Registrable Securities being so registered
may reasonably request consistent with comfort letters customarily provided in
similar transactions;
(f) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such Registrable
Securities; and
(g) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, but not later than 18 months after
the effective date of the Registration Statement, an earnings statement covering
the period of at least 12 months beginning with the first full month after the
effective date of such Registration Statement, which earnings statements shall
satisfy the provisions of Section 11(a) of the Securities Act.
It shall be a condition precedent to the obligation of the Company to
take any action pursuant to this Agreement in respect of the securities which
are to be registered at the request of any holder of Registrable Securities that
such holder shall furnish to the Company such information regarding the
securities held by such holder and the intended method of disposition thereof as
the Company shall reasonably request and as shall be required under the
Securities Act in connection with the action taken by the Company.
5. EXPENSES. All expenses incurred in complying with this
Agreement, including, without limitation, all registration and filing fees
(including all expenses incident to filing with the NASD), printing expenses,
fees and disbursements of counsel for the Company, expenses of any special
audits incident to or required by any such registration and expenses of
complying with the securities or blue sky laws of any jurisdictions pursuant to
Section 4(d), shall be paid by the Company, except that
(a) The Company shall not be liable for any fees, discounts or
commissions to any underwriter in respect of the securities sold by such holder
of Registrable Securities; and
(b) The Company shall not be liable for any fees or expenses of
counsel to the selling security holders (other than one (1) counsel for the
selling security holders as a group); and
(c) the Holders shall be responsible for payment of any fees of
independent accountants related to the registration of their Shares over and
above annual audit fees, fees for audits of separate financial statements of
business acquired by the
5
<PAGE>
Company required to satisfy its Exchange Act reporting requirements and fees
associated with registration of securities of the Company for sale by the
Company or by stockholders other than the Holders, including but not limited to
fees for review of interim financial statements, "comfort letters" addressed to
persons other than the Holders and services performed in connection with the
consent of independent accountants to the use of their reports in the
registration statement.
6. INDEMNIFICATION AND CONTRIBUTION. (a) In the event of any
registration of any Registrable Securities under the Securities Act pursuant to
this Agreement, the Company shall indemnify and hold harmless the holder of such
Registrable Securities, such holder's directors and officers, and each other
Person (including each underwriter) who participated in the offering of such
Registrable Securities and each other Person, if any, who controls such holder
or such participating Person within the meaning of the Securities Act, against
any losses, claims, damages or liabilities, joint or several, to which such
holder or any such director or officer or participating Person or controlling
Person may become subject under the Securities Act or any other statute or at
common law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any alleged untrue
statement of any material fact contained in any Registration Statement under
which such securities were registered under the Securities Act, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or (ii) any alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and shall reimburse such holder or such director, officer or participating
Person or controlling Person for any legal or any other expenses reasonably
incurred by such holder or such director, officer or participating Person or
controlling Person in connection with investigating or defending any such loss,
claim, damage, liability or action; PROVIDED, HOWEVER, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon any alleged untrue statement or
alleged omission made in such Registration Statement, preliminary prospectus,
prospectus or amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by such holder specifically for use
therein, and PROVIDED FURTHER, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon the failure of a Selling Holder to deliver a prospectus in
compliance with applicable securities law. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
holder or such director, officer or participating Person or controlling Person,
and shall survive the transfer of such securities by such holder.
(b) In the event of any registration of any Registrable
Securities under the Securities Act pursuant to this Agreement, each Selling
Holder of Registrable Securities severally and not jointly shall indemnify and
hold harmless the Company, its directors and officers, and each other Person
(including each underwriter) who participated in the offering of such
Registrable Securities and each other Person, if any, who controls the Company
or such participating Person within the meaning of the Securities Act, against
any losses, claims, damages or liabilities, joint or several, to which the
Company or any such director or officer or participating Person or controlling
Person may become subject under the Securities Act or any other statute or at
common law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any alleged untrue statement
of any material fact contained in any Registration Statement under which such
securities were registered under the Securities Act, any preliminary prospectus
or final
6
<PAGE>
prospectus contained therein, or any amendment or supplement thereto, where such
statement is in conformity with written information provided by such Holder
expressly for use therein, or where such losses, claims, damages or liability
arise out of or are based upon the failure of a Selling Holder to deliver a
prospectus in compliance with applicable securities law, and, in any such case,
the Selling Holder shall reimburse the Company or such director, officer or
participating Person or controlling Person for any legal or any other expenses
reasonably incurred by the Company or such director, officer or participating
Person or controlling Person in connection with investigating or defending any
such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that such
Holder shall not be liable for any amounts in excess of the net proceeds
received by such Holder for the sale of its shares. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf of
the Company or such director, officer or participating Person or controlling
Person, and shall survive the transfer of such securities by such holder.
(c) If the indemnification provided for in this Section 6 is
unavailable to an indemnified party hereunder in respect of any losses, claims,
damages, liabilities or expenses referred to therein, then the indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and indemnified parties in
connection with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and indemnified parties shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified parties, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(c) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within
7
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the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not also guilty of such fraudulent
misrepresentation.
7. MARKET STAND-OFF AGREEMENT. Notwithstanding any other provision
of this Agreement, if requested by an underwriter of securities of the Company
each holder of Registrable Securities shall not sell or otherwise transfer or
dispose of any equity securities of the Company held by such holder during the
90 day period following the effective date of a Registration Statement other
than pursuant to such Registration Statement.
8. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. This agreement supersedes all
prior agreements regarding registration rights between the Company and any of
the parties hereto and all such prior agreements are deemed terminated hereby.
The Company is a party to no other agreements regarding registration rights.
The Company will not hereafter enter into any agreement with respect to its
securities which is inconsistent with the rights granted to the holders of
Registrable Securities in this Agreement. The Company may enter into agreements
other than this Agreement pursuant to which the holders of the Company's
securities are granted registration rights; PROVIDED, HOWEVER, that any such
agreement shall provide that, in the event that an underwriter determines that
the distribution of all securities requested to be included in the registration
would materially and adversely affect the distributions of such securities by
the Company or a registering security holder hereunder, the security holders
party to such other agreement shall reduce the number of their securities
proposed to be registered (to zero, if necessary), prior to any selling security
holder hereunder reducing the number of its securities proposed to be
registered.
(b) REMEDIES. Each holder of Registrable Securities, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.
(c) AMENDMENTS AND WAIVERS. Except as otherwise provided
herein, the provisions of this Agreement may not be amended, modified or
supplemented, and waivers or consents to departure from the provisions hereof
may not be given unless Company has obtained the written consent of each of the
Holders.
(d) NOTICES. Any notice, demand, request, consent, approval,
declaration, delivery or other communication hereunder to be made pursuant to
the provisions of this Agreement shall be sufficiently given or made if in
writing and (i) delivered in person with receipt acknowledged, (ii) sent by
registered or certified mail, return receipt requested, postage prepaid, (iii)
sent by overnight courier with guaranteed next-day delivery, or (iv) sent by
telex or telecopier, in each case addressed as follows:
(i) If to the Holders, to them at:
Kapson Senior Quarters Corp.
242 Crossways Park West
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Woodbury, NY 11797
Fax: (516) 921-8998
(ii) If to the Company:
Kapson Senior Quarters Corp.
242 Crossways Park West
Woodbury, NY 11797
Attention: Glenn Kaplan
Fax: (516) 921-8998
with a copy to:
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036
Attention: Arnold J. Levine, Esq.
Fax: (212) 969-2900
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally
delivered, with receipt acknowledged, or three (3) Business Days after the same
shall have been deposited in the United States mail, one business day after sent
by overnight courier or on the day telexed or telecopied.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon (i) the successors of each of the parties hereto
and (ii) the assigns of the holders of Registrable Securities including any
Person to whom Registrable Securities are transferred.
(f) HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York (i.e.,
without regard to its conflicts of law rules).
(h) SEVERABILITY. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
(i) ENTIRE AGREEMENT. This Agreement, together with the
Purchase Agreement and Stockholders Agreement, represents the complete agreement
and understanding of the parties hereto in respect of the subject matter
contained herein and therein. This Agreement supersedes all prior agreements
and understandings between the parties with respect to the subject matter
hereof. Notwithstanding anything herein to the
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<PAGE>
contrary, this Agreement shall not become effective until the Closing under the
Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date first above written.
KAPSON SENIOR QUARTERS CORP.
By: ___________________________
Name:
Title:
_______________________________
GLENN KAPLAN
_______________________________
WAYNE L. KAPLAN
_______________________________
EVAN A. KAPLAN
_______________________________
HERBERT KAPLAN
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<PAGE>
STOCKHOLDER AGREEMENT
Agreement dated as of __________, 1996 among Glenn Kaplan, Wayne
Kaplan and Evan Kaplan (each, a "Stockholder" and, collectively the
"Stockholders") and Kapson Senior Quarters Corp. (the "Corporation").
Each of the Stockholders currently owns the number of shares of the
Common Stock, par value $.01 (the "Common Stock"), of the Corporation set forth
opposite the name of that Stockholder on Schedule A to this Agreement. The
parties desire to make certain arrangements, which they agree are reasonable,
relating to the shares of Common Stock now held or hereafter acquired by the
Stockholders.
It is therefore agreed as follows:
1. RESTRICTIONS ON TRANSFER OF SHARES; PERMITTED TRANSFERS.
1.1 TRANSFERS TO BE MADE ONLY AS PERMITTED BY THIS AGREEMENT.
(a) None of the Stockholders may sell, assign or grant an option
with respect to (collectively, "transfer") any shares of Common Stock presently
owned or hereafter acquired by him, including by operation of law, except as
specifically permitted or required by the provisions of this Agreement or
<PAGE>
pursuant to the prior written consent of the remaining Stockholders or
Stockholder then living (which consent may be withheld in their or his
discretion), and any purported transfer or encumbrance of any shares of Common
Stock in violation of this Agreement shall be void and shall not be recognized
by the Corporation. No Family Transferee (as defined in Section 2.1(d)) may
transfer any shares of Common Stock that were acquired by such Family Transferee
either in accordance with or in violation of this Agreement, including shares
acquired as a dividend on, or otherwise in respect of, shares of Common Stock so
acquired (collectively, the "Transferee Shares") except as specifically
permitted or required by the provisions of this Agreement or pursuant to the
prior written consent of the then living Stockholders (which consent may be
withheld in the discretion of such Stockholders). No pledge of Common Stock by
any Stockholder or Family Transferee shall be made without the written consent
of the remaining Stockholders unless pledgee agrees in writing to be bound by
the provisions of this Agreement, including, without limitation, the provisions
granting right of first refusal to the other Stockholders.
(b) None of the Stockholders may transfer any shares of Common
Stock during the six month period following the Initial Public Offering of
shares of the Corporation without the written consent of all of the remaining
Stockholders.
(c) Notwithstanding anything in this Agreement to the contrary,
neither (i) the sale by any of the Stockholders of
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<PAGE>
shares of Common Stock to the underwriters of the Corporation's initial public
offering pursuant to the exercise by such underwriters of their over-allotment
option nor (ii) the shares of Common Stock so sold shall be subject to this
Agreement.
1.2 LEGEND ON CERTIFICATES. All certificates representing
shares of Common Stock held by a Stockholder or Family Transferee shall bear a
legend substantially as follows:
"The Shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
Shares may not be sold, transferred, pledged or hypothecated in
the absence of an effective registration statement under the
Securities Act of 1933, as amended, or an opinion of counsel to
the Corporation that registration is not required under that Act.
"Transfer of the shares represented by this certificate is
restricted by an agreement dated ________________, 1996, a copy
of which is on file at the office of the Corporation. Any
purported transfer in violation of that agreement is void and
will not be recognized by the Corporation's transfer agent."
2. PERMITTED TRANSFERS OF SHARES.
2.1 TRANSFERS TO FAMILY TRANSFEREES.
(a) A Stockholder may transfer shares of Common Stock to a
Family Transferee or another Stockholder, whether such transfer is for or
without consideration. If a Stockholder dies and his shares of Common Stock are
transferred by testamentary bequest or by operation of the laws of descent and
distribution
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<PAGE>
to any person other than a Family Transferee or another Stockholder, the
transfer of such shares of Common Stock shall nevertheless be deemed a valid
transfer under this Section 2.1(a) if such shares are transferred, whether for
or without consideration, to a Family Transferee or another Stockholder within
90 days (or such longer period as the parties hereto other than the Corporation
may agree in writing) after the death of such Stockholder. Pending the transfer
of such shares during the foregoing 90 day period, and thereafter, if such
shares are not transferred within such period to a Family Transferee, the person
to whom such shares were transferred by testamentary bequest or by operation of
the laws of descent and distribution shall be deemed to be bound by all of the
terms and conditions of this Agreement as if such person were a Family
Transferee of the deceased Stockholder. The remaining Stockholders or
Stockholder (as the case may be) then living shall each have the irrevocable
option, but not the obligation, for a period of 30 days commencing at the end of
the foregoing 90 day period, to purchase, upon written notice: (i) any of such
shares of Common Stock that have not been transferred to a Family Transferee or
another Stockholder within such foregoing period, and (ii) any of such shares of
Common Stock from any Family Transferee, if such Family Transferee has not
agreed in writing, either prior to or within the foregoing 90 day period, to be
bound by all the terms and conditions of this Agreement as a Family Transferee
of the deceased Stockholder. If such Stockholders elect to exercise their
respective options, in the aggregate, with respect to a
4
<PAGE>
greater number of shares than are subject to such options, the number of shares
subject to each Stockholder's notice of exercise shall be deemed to be reduced
proportionately.
(b) A Family Transferee of a Stockholder may transfer Transferee
Shares to such Stockholder or to any other Family Transferee of such Stockholder
(an "Eligible Family Transferee"), whether such transfer is for or without
consideration. If a Family Transferee dies and such Family Transferee's
Transferee Shares are transferred by testamentary bequest or by operation of the
laws of descent and distribution to any person other than such Stockholder or an
Eligible Family Transferee, the transfer of such Transferee Shares shall
nevertheless be deemed a valid transfer under this Section 2.1(b) if such shares
are transferred, whether for or without consideration, to such Stockholder or
any Eligible Family Transferee within 90 days (or such longer period as the
parties hereto other than the Corporation may agree) after the death of the
deceased Family Transferee. Pending the transfer of such Transferee Shares
during the foregoing 90 day period, and thereafter if such shares are not
transferred within such period to such Stockholder or an Eligible Family
Transferee, the person to whom such shares were transferred by testamentary
bequest or by operation of the laws of descent and distribution shall be deemed
to be bound by all the terms and conditions of this Agreement as if such person
were an Eligible Family Transferee. The Stockholders or Stockholder (as the
case may be) then living
5
<PAGE>
shall each have the irrevocable option, but not the obligation, for a period of
30 days commencing at the end of the foregoing 90 day period, to purchase, upon
written notice: (i) any of such Transferee Shares that have not been
transferred within such foregoing period to the Stockholder of whom the decedent
was a Family Transferee or an Eligible Family Transferee, and (ii) any of such
shares from any Eligible Family Transferee if such Eligible Family Transferee
has not agreed in writing, either prior to or within the foregoing 90 day
period, to be bound by all of the terms and conditions of this Agreement as a
Family Transferee of the Stockholder of whom the decedent was a Family
Transferee. If such Stockholders exercise their options, in the aggregate, with
respect to a greater number of shares than are subject to such options, the
number of shares subject to each Stockholder's notice of exercise shall be
deemed to be reduced proportionately; provided, however, that the Stockholder of
whom the decedent was a Family Transferee shall be entitled to purchase the full
number of shares with respect to which he exercises his option.
(c) Any purchase of shares of Common Stock pursuant to the
exercise of any option provided for in this Section 2.1 shall be for a purchase
price per share equal to the average Closing Price (as defined below) of the
Common Stock during the 20 consecutive trading day period immediately preceding
the date notice of exercise is given by the purchasing Stockholder. The closing
of such purchase shall occur in
6
<PAGE>
accordance with Section 3.1 hereof. The "Closing Price" of a share of Common
Stock on any date shall be determined as follows: (i) If the Common Stock is
listed or admitted to trading on such date on a national securities exchange or
quoted on the National Market of the National Association of Securities Dealers'
Automated Quotation System ("NASDAQ"), the closing price of a share of Common
Stock as reported on the relevant composite transaction tape, if applicable, or
on the principal such exchange (determined by trading volume in the Common
Stock) or through the National Market, as the case may be, on such date; or (ii)
If the Common Stock is not listed or quoted as described in the preceding
clause, but bid and asked prices are quoted through NASDAQ, the mean between the
closing bid and asked prices as quoted through NASDAQ on such date; or (iii) If
the Common Stock is publicly traded but is not listed or quoted as described in
clauses (i) or (ii) above, by such other method as the Corporation's Board of
Directors determines in good faith to be reasonable and consistent with
applicable law; or (iv) If the Common Stock is not publicly traded, such amount
as is set by the Corporation's Board of Directors in good faith.
(d) For purposes of this Agreement, a "Family Transferee" of a
Stockholder shall mean: (i) the spouse of such Stockholder, any parent of such
Stockholder, any lineal descendant (which shall include an individual adopted
before fourteen years of age) of such Stockholder or any spouse of any such
lineal descendant; (ii) the estate of a Stockholder, so long
7
<PAGE>
as each executor of such estate is an individual specified in clause (i); (iii)
any corporation, partnership or limited liability company or other legal entity
owned by one or more of the individuals specified in clause (i); or (iv) any
trust that is controlled by, and is substantially for the benefit of,
individuals specified in clause (i).
2.2 FIRST REFUSAL RIGHTS.
(a) Any Stockholder may sell all or part of his shares of Common
Stock, and any Family Transferee may sell all or part of such Family
Transferee's Transferee Shares, in each case pursuant to a bona fide offer from
a third party (including, without limitation, an underwriter in connection with
a public offering), by giving notice of the proposed sale to the Stockholder or
Stockholders then living (other than, in the case of a proposed sale by a
Stockholder, the selling Stockholder), setting forth the name and address of the
prospective purchaser, the proposed purchase price per share (which must be
payable solely in cash) and the other material terms and conditions of the
offer. Each Stockholder who receives such notice shall have the option,
exercisable by written notice given to the selling Stockholder or Family
Transferee and the remaining Stockholders (if any) within 30 days after receipt
of notice of the proposed third party sale, to purchase all, but not less than
all, of the shares proposed to be sold for the purchase price set forth in such
notice. If more than one Stockholder elects to exercise his option, each
electing Stockholder shall be deemed to have
8
<PAGE>
exercised his option with respect to his pro rata share of the shares of Common
Stock proposed to be sold (either one-half or one-third, as the case may be);
provided, however, that in the case of a sale by a Family Transferee, the
Stockholder of whom such person is a Family Transferee shall be entitled to
purchase up to all the shares proposed to be sold. If none of the then living
Stockholders exercises his option, the Selling Stockholder or Family Transferee
may, at any time within 60 days after the expiration of such options, sell all,
but not less than all, of the shares proposed to be sold to the third party
named in the seller's notice, at a price not less than that set forth in such
notice and otherwise upon the terms and conditions set forth therein. If such
sale is not made within such 60-day period, all of such shares shall again be
subject to this Section 2.2. Notwithstanding any other provision contained in
this Section 2.2(a), a Stockholder may not sell all or part of his shares of
Common Stock pursuant to this Section 2.2(a) unless the prospective purchaser
shall have offered, in writing, which offer shall remain open for a period of
not less than 10 days, to purchase from the remaining Stockholders and their
respective Family Transferees all or part of the Common Stock owned by them for
the same price and on the same terms and conditions and with respect to the same
proportion of Common Stock owned by them as such prospective purchaser shall
have offered to purchase stock from the Stockholders in question.
9
<PAGE>
(b) A Stockholder may sell shares of Common Stock, and a Family
Transferee may sell Transferee Shares, in unsolicited brokers' transactions (as
such term is defined in Rule 144 promulgated under the Securities Exchange Act
of 1934) on the NASDAQ National Market or on the principal securities exchange
on which common stock is then traded, as the case may be, by giving written
notice of such proposed sale (including the number of shares to be sold) to the
Stockholder or Stockholders then living (other than, in the case of a proposed
sale by a Stockholder, the selling Stockholder). Each Stockholder who receives
such notice shall have the option, exercisable by written notice to the selling
Stockholder or Family Transferee (as the case may be) and the remaining
Stockholders, if any, within 30 days of the receipt of notice of the proposed
sale, to purchase any or all of the shares proposed to be sold at per share
price equal to the average Closing Price of the Common Stock for the 20
consecutive trading days immediately preceding the date on which the acquiring
Stockholder gives such written notice of exercise of such option. The closing
of any purchase of shares pursuant to the exercise of such option shall be made
in accordance with Section 3.1 hereof. If the exercising Stockholders exercise
their options for more shares, in the aggregate, than the selling person
proposes to sell, the number of shares with respect to which each such
Stockholder is deemed to have exercised his option shall be reduced
proportionately; provided, however, that in the case of a proposed sale by a
Family Transferee, the Stockholder of whom the seller is a Family
10
<PAGE>
Transferee shall be entitled to purchase the full number of shares with respect
to which he exercises his option.
3. PURCHASE PRICE; CLOSING; TERMS OF PAYMENT.
3.1 CLOSING OF PURCHASE. Except as otherwise agreed by the
parties thereto, the closing of any purchase and sale of shares under this
Agreement shall be held at the principal office of the Corporation on a date and
at a time designated by the purchaser or purchasers upon not less than 5 days'
written notice to the seller, but in any event not less than 10 days or more
than 60 days after the termination of the option exercise period which gave rise
to said sale, except that if the purchase is being made as a result of a
Stockholder's or Family Transferee's death and any purchaser owned insurance on
the life of the decedent, the closing may be delayed until the proceeds of such
policy are received. At the closing, the seller shall deliver to the purchaser
or purchasers, as the case may be, a certificate or certificates for the shares
of Common Stock being sold to such purchaser, duly endorsed for transfer and
with all required transfer tax stamps attached, and the purchaser or purchasers,
as the case may be, shall deliver a check in the amount of the purchase price
payable to such purchaser. If the sale is a result of a Stockholder's or Family
Transferee's death, the seller shall also deliver appropriate estate tax
waivers. Notwithstanding anything in this Agreement to the contrary, the seller
shall not be obligated to consummate the sale of any shares of Common Stock
pursuant to Section 2.2(a) unless the sale
11
<PAGE>
of all of the shares to be purchased pursuant thereto is consummated
simultaneously therewith.
3.2 PAYMENT OF INDEBTEDNESS. If at the date of the closing the
seller owes any amount to a purchaser, such purchaser may offset the amount of
the indebtedness against the purchase price.
4. VOTING OF SHARES. So long as all three stockholders are active
in the Corporation, each Stockholder shall vote and give consents with respect
to all of the shares of Common Stock beneficially owned by him, and each Family
Transferee shall vote and give written consents with respect to all Transferee
Shares owned by such Family Transferee (collectively, the "Subject Shares"), as
a block in accordance with the directions given by any two of the three
Stockholders. If at any time there are two, but not three, Stockholders active
as officers or directors of the Corporation, such active Stockholders and Family
Transferees, with respect to such Stockholders, shall vote and give written
consents with respect to all such shares owned by them. All of the Subject
Shares shall be voted for the election of (and each Stockholder or Family
Transferee serving as a director of the Corporation shall vote in such capacity
in favor of the nomination of) each Stockholder as a director of the Corporation
as long as such Stockholder or his Family Transferees owns any shares of Common
Stock or such Stockholder is active as an employee of the Corporation.
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<PAGE>
5. MISCELLANEOUS.
5.1 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York without
regard to principles of conflict of law, except to the extent otherwise governed
by the General Corporation Law of the State of Delaware.
5.2 REMEDIES. The Stockholders will be irreparably damaged in
the event that this Agreement is not specifically enforced. If any dispute
arises concerning or relating to this Agreement or any Transfer or voting of
shares of Common Stock under this Agreement, an injunction may be issued
restraining any transfer or other disposition pending the determination of the
controversy, without any bond or other security being required. If any dispute
arises concerning or relating to this Agreement or any right or obligation to
purchase, sell or vote any shares of Common Stock under this Agreement, such
right or obligation shall be enforceable in a court of equity by a decree of
specific performance, without any bond or other security being required. Such
remedy shall be cumulative and not exclusive, and shall be in addition to any
other remedy which the parties may have.
5.3 ASSIGNMENT. The rights and obligations of the parties
hereto shall not be assignable except as expressly provided herein. The
provisions of this Agreement shall be binding upon the Corporation, each
Stockholder, each Family
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<PAGE>
Transferee and each third party that is required (or deemed hereunder) to be
bound hereby.
5.4 NOTICES. Any notice or other communication under this
Agreement shall be in writing and shall be considered given when delivered
personally or mailed by certified or registered mail, return receipt requested,
sent by overnight delivery by a nationally recognized service, or sent by
facsimile (with receipt confirmed by the recipient) to the parties at the
following addresses (or at such other address as a party may
specify by notice to the other parties):
Glenn Kaplan
232 Sitka Court
Woodbury, New York 11797
Wayne Kaplan
11 Yardley Drive
Dix Hills, New York 11746
Evan Kaplan
7 Chiswell Drive
Melville, New York 11747
Kapson Senior Quarters Corp.
242 Crossways Park West
Woodbury, New York 11797
5.5 COMPLETE AGREEMENT; AMENDMENT.
(a) This Agreement contains a complete statement of all the
arrangements between the parties with respect to its subject matter, supersedes
all existing agreements between them concerning that subject matter, and cannot
be amended or terminated orally. If any provision of this Agreement is invalid,
illegal or unenforceable, the balance of this Agreement
14
<PAGE>
shall remain in effect and if any provision is inapplicable to any party or
circumstance, it shall nevertheless remain applicable to all other parties and
circumstances, provided that the parties shall negotiate in good faith with
respect to an equitable modification of the provision of application thereof
held to be invalid, illegal or unenforceable.
(b) This Agreement may be amended, in compliance with any
provision hereof waived, only by a written instrument duly executed by the
Corporation and each then living Stockholder who, together with his Family
Transferees, beneficially owns at least 20% of the Subject Shares; provided,
however, that any amendment of this Agreement shall require the written consent
of the Corporation or a Family Transferee if such amendment would materially
increase the obligations or liabilities of the Corporation or such Family
Transferee hereunder.
5.6 FURTHER ASSURANCE. Each of the parties to this Agreement
shall take all such action as may be necessary to carry out the provisions of
this Agreement.
5.7 HEADINGS. The headings in this Agreement are solely for
convenience of reference and shall not affect its interpretation.
5.8 TERMINATION. Unless earlier terminated by the written
consent of each then living Stockholder who, together with his Family
Transferees, beneficially owns at least 20% of the aggregate shares of Common
Stock then subject to this
15
<PAGE>
Agreement, this Agreement shall terminate upon the death of the last living
Stockholder.
IN WITNESS WHEREOF, the undersigned have executed this Stockholders
Agreement as of the date first set forth above.
---------------------------------------
Glenn Kaplan
---------------------------------------
Wayne Kaplan
---------------------------------------
Evan Kaplan
KAPSON SENIOR QUARTERS CORP.
By:------------------------------------
Name:
Title:
<PAGE>
AGREEMENT
Agreement made as of the ___ day of __________, 1996, by and between
Kapson Senior Quarters Corp., a Delaware corporation, with its principal place
of business at 242 Crossways Park West, Woodbury, New York 11797 (the
"Company"), and ______________, residing at __________________________________
(the "Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ Executive as its
and Executive is willing to serve in such capacities;
and
WHEREAS, the Company and Executive desire to set forth the terms and
conditions of such employment.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, the Company and Executive agree as
follows:
1. EMPLOYMENT.
(a) The Company hereby agrees to employ Executive, and Executive
agrees to be employed by the Company, on the terms and conditions herein
contained as its _____________________________. Executive shall report to the
Board of Directors of the Company (the "Board") as ___ and shall have such
duties, authority and responsibilities commensurate
<PAGE>
with such position for similarly sized public companies. In addition, if
elected as Chairman of the Board, Executive shall serve in such capacity.
(b) During the Term of Employment, the Company hereby agrees to
recommend Executive to be elected as a member of the Board.
(c) Executive shall devote substantially all of his business time,
energy, skill and efforts to the performance of his duties hereunder and shall
faithfully serve the Company. The foregoing shall not prevent Executive from
participating in not-for-profit activities, from managing his passive personal
investments or from serving on up to two (2) boards of directors of for-profit
entities that do not compete with the Company, provided that these activities
do not materially interfere with Executive's obligations hereunder. In addition,
Executive may spend such time as he reasonably believes required to perform his
obligations to the Company pursuant to any Operating Agreements (as defined
below). Such activities are not within the scope of Executive's duties and
obligations under this Agreement and, accordingly, when functioning in
connection with any Operating Agreements, the Executive shall have no fiduciary
duty to the Company as a result of his position with the Company.
(d) Upon the request of the Board, Executive shall also serve as a
director or officer of subsidiaries in positions commensurate with his position
with the Company without additional compensation. If any compensation is paid
Executive by such subsidiaries, they shall be a credit against amounts due
hereunder.
2
<PAGE>
2. TERM OF EMPLOYMENT.
(a) Except for earlier termination as provided in Section 7 hereof or
as extended in this Section 2, Executive's employment under this Agreement (the
"Employment Term") shall be for a term of five (5) years commencing on the
consummation of the initial public offering of the Company's Common Stock (the
"Commencement Date"). The Employment Term shall be automatically renewed for
successive one-year terms unless either party gives written notice to the other
at least six months prior to the expiration of the then Employment Term of such
party's election to terminate Executive's employment hereunder effective at the
end of the then current Employment Term.
(b) Notwithstanding anything else herein, the provisions of
Sections 9 and 10 hereof shall survive and remain in effect notwithstanding the
termination of the Employment Term or a breach by the Company or Executive of
this Agreement or any of its terms.
3. COMPENSATION.
(a) As compensation for his services under this Agreement, the
Company shall pay Executive a base salary at a rate of at least $213,000 per
year. Such base salary shall be payable in accordance with the Company's normal
payroll practices. Executive's base salary shall be reviewed annually by the
Company and shall be increased as of the first day of each fiscal year by no
less than the increase in the Consumer Price Index - Urban Wage Earners (or, in
the event such index is no longer published, such other index as is determined
in good faith to be comparable by the Board) from the penultimate month prior to
3
<PAGE>
the beginning of the fiscal year being completed to the penultimate month of the
fiscal year being completed (as so increased, "Base Salary").
(b) In addition to the Base Salary, the Company may, in its sole
discretion, pay Executive bonuses from time to time and provide for additional
compensation.
4. BENEFITS AND FRINGES.
(a) During the Employment Term, Executive shall be entitled to such
benefits and fringes, if any, as are generally provided from time to time by the
Company to its senior executive officers, including pension, retirement,
savings, welfare and other employee benefit plans and arrangements.
(b) The Company shall, during the Employment Term, provide Executive
with a leased automobile at a level and under arrangements commensurate with the
practice of Executive's predecessor employer.
(c) The Company shall, during the Employment Term, pay any initiation
fees, dues or other fees for Executive's membership in a club of Executive's
choice. Executive shall be responsible for any income tax due as a result of
Executive's personal use of such club. The Company, to the extent permitted by
law, shall not treat the business use as compensation to the Executive.
(d) The Company shall, during the Employment Term, provide long term
disability coverage for Executive providing for a benefit of at least sixty-five
(65%) of
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Executive's Base Salary based on his own occupation or comparable occupation
level and with a waiting period of not longer than six (6) months ("Long Term
Disability Coverage").
(e) Except as otherwise specifically provided herein, the Executive
shall be responsible for the tax consequences of all benefits and fringes.
5. EXPENSES.
The Company shall reimburse Executive in accordance with its expense
reimbursement policy as in effect from time to time for all reasonable expenses
incurred by Executive in connection with the performance of his duties under
this Agreement upon the presentation by Executive of an itemized account of such
expenses and appropriate receipts.
6. VACATION.
During the Employment Term, Executive shall be entitled to vacation in
accordance with the Company's practices, provided that Executive shall be
entitled to at least four (4) weeks paid vacation in each full calendar year.
7. TERMINATION.
(a) Executive's employment under this Agreement and the
Employment Term shall terminate upon any of the following events:
(i) Automatically on the date of Executive's death.
(ii) Upon written notice given by the Company to
Executive if Executive is unable to substantially perform his material duties
hereunder for one hundred
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eighty (180) continuous days during any period of three hundred sixty (360)
consecutive days by reason of physical or mental incapacity.
(iii) Upon written notice by the Company to Executive
for Cause. Cause shall mean (A) Executive being convicted of (or pleading nolo
contendere to) a felony (other than a traffic violation);(B) refusal of the
Executive to attempt to perform his obligations under this Agreement, or follow
any direction of the Board consistent with this Agreement, which in either
case is not remedied within ten (10) business days after receipt by Executive
of written notice from the Company specifying the details thereof, provided
the refusal to follow a direction shall not be Cause if Executive in good
faith believes that such direction is not legal, ethical or moral or not
within the scope of his duties pursuant to this Agreement and promptly notifies
the Board in writing of such belief;(C) Executive's gross misconduct or
wilful malfeasance with regard to the business, assets or employees of the
Company which in either event has a material adverse effect on the Company and
its subsidiaries in the aggregate; or (D) any other breach by Executive of a
material provision of this Agreement that remains uncured for twenty (20)
business days after written notice thereof is given to Executive or such
longer period as may reasonably be required to remedy the default, provided
that the Executive endeavors in good faith to remedy the default.
(iv) Upon written notice by the Company without Cause.
(v) Upon the voluntary resignation of Executive
without Good Reason upon at least sixty (60) days prior written notice to the
Company (which the Company may in its sole discretion make effective earlier),
provided such notice shall not be given by Executive prior to the fifth
anniversary of the Commencement Date.
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(vi) Upon the date specified in the written
resignation of Executive for Good Reason stating with specificity the details
of the Good Reason, if the stated Good Reason is not cured within twenty (20)
days of the giving of such notice. Such date of termination shall be not
less than thirty (30) days and not more than ninety (90) days after the date
of notice. Notice of Good Reason shall be given within one hundred eighty
(180) days of occurrence of the Good Reason event. "Good Reason" shall mean
(A) any reduction in title or a material reduction in authority, duties or
responsibilities (except temporarily during any period of physical or mental
illness); (B) failure to elect Executive to the Board (and as Chairman of the
Board); (C) relocation of the Company's principal place of business more than
thirty (30) miles from the Company's current principal place of business;
(D) the Company giving the Executive notice of nonrenewal pursuant to Section
2(a) hereof; (E) any other material breach of any provision of this Agreement
by the Company; (F) a Change in Control of the Company (as defined in
Exhibit A hereto); (G) any termination by the Company or its
subsidiaries of any present or future operating or management agreement (an
"Operating Agreement") with the Executive (as operator of one of the Company's
facilities) other than as a result of an event of default by Executive
thereunder or any termination of such Operating Agreement by the Executive as
a result of an event of default by Company or its subsidiary or affiliate
corporations thereunder.
(vii) The retirement of Executive by the Company at or
after his sixty-fifth (65th) birthday to the extent such termination would be
legally permissible without violation of applicable age discrimination laws
(provided that if a termination asserted under this subsection (a)(vii) does not
qualify as such it shall be deemed a termination under subsection (a)(vi)
above).
(b) Upon termination of the Employment Term, Executive shall be
promptly paid any unpaid salary and accrued vacation through his date of
termination and reimbursement for any expenses incurred in connection with the
official business of the Company prior to his date of termination which he would
be otherwise entitled to
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reimbursement for in accordance with the Company's policies on the reimbursement
of business expenses and any benefits or amounts under any benefit or equity
plan in accordance with the terms of said plan and any fringe benefits due for
the period prior to such termination. In addition, he shall be paid any
declared, but unpaid bonus.
(c) If Executive's employment is terminated by the Company
without Cause or if the Executive terminates his employment pursuant to
subsection (a)(vi) above, Executive shall receive:
(i) severance pay in an amount equal to (A) two (2)
times Executive's Base Salary on the date of his termination, payable in a lump
sum within thirty (30) days after such termination, plus (B) a bonus payment
equal to the product of (x) a fraction, the numerator of which is the bonus paid
or payable to Executive for the fiscal year prior to the fiscal year of
termination of Executive's employment and the denominator of which is his Base
Salary for such prior fiscal year, (y) his Base Salary for the fiscal year of
the termination (prior to any improper reduction by the Company) and (z) the
percentage of days in the fiscal year which occurred prior to his date of
termination; and
(ii) continued medical coverage for a period of two (2)
years following termination of Executive's employment.
(iii) if the Operating Agreements are also terminated
pursuant to Section 7(g) below, the Executive shall also be entitled to
receive an additional amount hereunder equal to twice his pro rata share of
(i) the aggregate fees earned by the operators (the "Operators") of any adult
care facilities under such Operating Agreements in respect of the gross
revenues of such facilities during the twelve months immediately preceding
such termination less (ii) the aggregate amount of such fees that Operators
were required to pay to the Company or any subsidiary of the Company for
providing management services to Operators in respect of such facilities, and
less (iii) any liquidated damages paid to the Executive under such Operating
Agreements.
(d) If Executive's termination is pursuant to subsection (a)(i)
above, Executive's Beneficiary (as defined in the next sentence) shall continue
to receive payments of Executive's Base Salary, at the same time such amounts
would have been paid if Executive was still an employee of the Company for a
period of six (6) months following Executive's death. For purposes of this
provision, Executive's Beneficiary shall be
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Executive's spouse; if Executive is not married on his date of death,
Executive's children, per stirpes; and otherwise, Executive's estate.
(e) If Executive's termination is pursuant to subsection (a)(ii)
above, Executive shall be entitled to receive for the six (6) month period
following the termination of Executive's employment, at the same time as it
would have been paid if he was an employee of the Company, his Base Salary less
any amounts actually received by him pursuant to Long Term Disability Coverage
for the matching pay period. After such six (6) months, Executive shall only be
entitled to any amounts due him under the Long Term Disability Coverage.
(f) All amounts payable pursuant to this Section 7 shall be
subject to required withholding. The Company shall have no other obligations to
Executive as a result of his termination.
(g) Notwithstanding any provision contained in this Agreement
or any Operating Agreement to the contrary, Executive may, by written notice
given within thirty (30) days of the date of Executive's resignation for Good
Reason or the termination of his employment by the Company without Cause, elect
to terminate his engagement as one of the Operators of any adult care facilities
pursuant to any Operating Agreement, and in such event Executive shall receive
the payment specified in Section 7(c)(iii) above and Executive shall have no
obligations or liabilities under such agreements after the date of such
election; provided, however, that Executive shall cooperate with the Company
following such termination in the manner and to the extent, and shall be paid
by the Company, as provided for in the applicable Operating Agreement.
(h) Notwithstanding any other provision of this Agreement or
any Operating Agreement to the contrary, Executive shall be entitled to
terminate his obligations and liabilities under the Operating Agreements if
Executive's employment under this Agreement terminates for any reason
(including, without limitation for Cause); provided, however, that Executive
shall not be entitled to the additional payment under this Agreement provided
for in Section 7(c)(iii) unless the Operating Agreements are terminated
pursuant to Section 7(g) above. Any provision in this Agreement which relates
to any Operating Agreement shall be controlling regardless of any provision
to the contrary in the Operating Agreements.
8. NO MITIGATION; NO SET-OFF.
In the event of any termination of employment covered by Section 7(c),
Executive shall be under no obligation to seek other employment and, in such
case, there shall be no offset against any amounts due Executive under this
Agreement on account of any remuneration attributable to any subsequent
employment that Executive may obtain. Any amounts due under Section 7 are
inclusive, and in lieu of, any amounts payable under any other salary
continuation or cash severance arrangement of the Company and to the extent paid
or provided under any other such arrangement shall be offset from the amount due
under Section 7.
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9. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
(a) Executive acknowledges that as a result of his employment by
the Company, Executive will obtain secret and confidential information as to the
Company, that the Company will suffer substantial damage, which would be
difficult to ascertain, if Executive shall enter into Competition, as defined
below, with the Company and that because of the nature of the information that
will be known to Executive it is necessary for the Company to be protected by
the prohibition against Competition set forth herein, as well as the
Confidentiality restrictions set forth herein. Executive acknowledges that the
provisions of this Agreement are reasonable and necessary for the protection of
the business of the Company and that part of the compensation paid under this
Agreement is in consideration for the agreements in this Section 9.
(b) Competition shall mean participating directly in any
capacity in the day-to-day direct supervision or operations of any assisted
living facility within a ten (10) mile radius of any facility operated by the
Company.
If any restriction set forth with regard to Competition is found by
any court of competent jurisdiction, or an arbitrator, to be unenforceable
because it extends for too long a period of time or over too great a range of
activities or in too broad a geographic area, it shall be interpreted to extend
over the maximum period of time, range of activities or geographic area as to
which it may be enforceable.
(c) During and after the Employment Term, Executive shall not
use for his own benefit or any other person or entity other than the Company any
secret or
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confidential information, knowledge or data relating to the Company and its
business, (i) obtained by Executive during his employment by the Company and
(ii) not otherwise public knowledge or known within the Company's industry.
Executive shall not, without prior written consent of the Company, unless
compelled pursuant to the order of a court or other governmental or legal body
having jurisdiction over such matter, communicate or divulge any such
information, knowledge or data to anyone other than the Company and those
designated by it. In the event Executive is compelled by order of a court or
other governmental or legal body to communicate or divulge any such information,
knowledge or data to anyone other than the Company and those designated by it,
Executive shall promptly notify the Company of any such order and shall
cooperate fully with the Company, at Company expense, in obtaining a protective
order.
(d) Upon termination of Executive's employment with the Company
and its affiliated entities, or at any other time as the Company may request,
Executive will promptly deliver to the Company all documents (whether prepared
by the Company, an affiliated entity, Executive or a third party) relating to
the Company or an affiliated entity or any of their businesses or property which
Executive may possess or have under his direction or control, provided, however,
in the event of a termination by the Company without Cause, the Executive may
continue to have the use of his automobile for thirty (30) days under the then
existing arrangement.
(e) During the period of his actual employment by the Company
and its affiliated entities and for one (1) year thereafter, Executive will not
enter into Competition with the Company or its affiliated entities, except if
the Company's terminates his employment hereunder without Cause or he
terminates such employment for Good Reason.
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(f) In the event of a breach or threatened breach of this
Section 9, Executive acknowledges that the Company will be caused irreparable
injury and that money damages may not be an adequate remedy and agree that the
Company shall be entitled to injunctive relief (in addition to its other
remedies at law) to have the provisions of this Section 9 enforced.
10. INDEMNIFICATION.
During the Employment Term and thereafter, the Company shall indemnify
Executive to the fullest extent permitted by law against any judgments, fines,
amounts paid in settlement and reasonable expenses (including attorneys' fees),
and advance amounts necessary to pay the foregoing at the earliest time and to
the fullest extent permitted by law, in connection with any claim, action or
proceeding (whether civil or criminal) 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, it being understood that Executive is not
entitled hereunder to be indemnified for liabilities and expenses incurred by
Executive as Operator of any facilities owned in whole or part by the Company
or any of its affiliates. This indemnification shall be in addition to, and
not in lieu of, any other indemnification Executive shall be entitled to
pursuant to the Company's Certificate of Incorporation or By-laws or otherwise.
Following Executive's termination of employment, the Company shall continue to
cover 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.
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11. EXECUTIVE REPRESENTATION
Executive represents and warrants that he is under no contractual or
other limitation from entering into this Agreement and performing his
obligations hereunder.
12. ENTIRE AGREEMENT; MODIFICATION.
This Agreement constitutes the full and complete understanding of the
parties hereto and will supersede all prior agreements and understandings, oral
or written, with respect to the subject matter hereof. Each party to this
Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by either party, or anyone acting
on behalf of either party, which are not embodied herein and that no other
agreement, statement or promise not contained in this Agreement shall be valid
or binding. This Agreement may not be modified or amended except by an
instrument in writing signed by the party against whom or which enforcement may
be sought.
13. SEVERABILITY.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms of provisions of
this Agreement in any other jurisdiction.
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14. WAIVER OF BREACH.
The waiver by any party of a breach of any provisions of this
Agreement, which waiver must be in writing to be effective, shall not operate as
or be construed as a waiver of any subsequent breach.
15. NOTICES.
All notices hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, or one (1) day after sending by express
mail or other "overnight mail service," or three (3) days after sending by
certified or registered mail, postage prepaid, return receipt requested. Notice
shall be sent as follows: if to Executive, to the address as listed in the
Company's records; and if to the Company, to the Company at its office as set
forth at the head of this Agreement, to the attention of the Chief Financial
Officer with a copy to Proskauer Rose Goetz & Mendelsohn, at 1585 Broadway, New
York, New York 10036, Attn: Arnold J. Levine, Esq. Either party may change the
notice address by notice given as aforesaid.
16. ASSIGNABILITY; BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of
Executive and Executive's legal representatives, heirs and distributees, and
shall be binding upon and inure to the benefit of the Company, its successors
and assigns. This Agreement may not be assigned by Executive. This Agreement
may not be assigned by the Company except in connection with a merger or a sale
by the Company of all or substantially all of its assets and
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then only provided the assignee specifically assumes in writing all of the
Company's obligations hereunder.
17. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement, other than injunctive relief under Section 9(f) (provided that
Executive may bring an arbitration to recover legal fees in connection with such
injunctive activities under the last sentence of this Section 17) shall be
settled exclusively by arbitration, conducted before a panel of three
arbitrators in New York, New York, in accordance with the rules of the American
Arbitration Association then in effect, and judgment may be entered on the
arbitrators' award in any court having jurisdiction. The decision of the
arbitrators shall be final and binding on the parties. The parties shall
equally divide all costs of the American Arbitration Association and the
arbitrators, except that the arbitrators shall direct the Company to reimburse
Executive's portion of the cost on the same basis as set forth in the next
sentence with regard to legal fees. Each party shall bear its own legal fees
in any dispute except that, in the event the Executive prevails on any
material issue, the arbitrators shall award the Executive his legal fees
attributable to all matters other than frivolous positions taken by the
Executive (as determined by the arbitrators).
18. GOVERNING LAW.
All issues pertaining to the validity, construction, execution
and performance of this Agreement shall be construed and governed in accordance
with the laws
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of the State of New York, without giving effect to the conflict or choice of law
provisions thereof.
19. HEADINGS.
The headings in this Agreement are intended solely for convenience or
reference and shall be given no effect in the construction or interpretation of
this Agreement.
20. COUNTERPARTS.
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original but all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and Executive has hereunto set his hand as of the date first set forth
above.
KAPSON SENIOR QUARTERS CORP.
By:
-------------------------------------------
Name:
Title:
-------------------------------------------------
[Executive]
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EXHIBIT A
For purposes of this Agreement, a Change in Control of the Company shall be
deemed to have occurred if: (x) any person (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), including a "group" as defined in Section 13(d)(3) of the
Exchange Act, but excluding the group consisting of Executive, his siblings, his
and their spouses and issue, any trusts for the benefit of any of the foregoing
(the "Executive Group"), becomes the beneficial owner of shares of common stock
of the Company having at least thirty percent (30%) of the total number of votes
that may be cast for the election of directors of the Company and which is
greater than the total number of votes (other than through or in connection with
any benefit plan of the Company or its subsidiaries) owned by the Executive
Group; (y) the merger or other business combination of the Company, sale of all
or substantially all of the Company's assets or combination of the foregoing
transactions (a "Transaction"), other than a Transaction immediately following
which the shareholders of the Company immediately prior to the Transaction
continue to have a majority of the voting power in the resulting entity
(excluding for this purpose any shareholder owning directly or indirectly more
than ten percent (10%) of the shares of the other company involved in the
Transaction); or (z) within any twenty-four (24) month period beginning on or
after the date hereof, the persons who were directors of the Company immediately
before the beginning of such period (the "Incumbent Directors") shall cease (for
any reason other than death or the resignation of the Executive or his siblings)
to constitute at least a majority of the Board or the board of directors of any
successor to the Company, provided that, any director who was not a director as
of the date hereof shall be deemed to be
<PAGE>
an Incumbent Director if such director was elected to the Board by, or on the
recommendation of or with the approval of, at least two-thirds of the directors
who then qualified as Incumbent Directors either actually or by prior operation
of this provision, unless such election, recommendation or approval was the
result of an actual or threatened election contest of the type contemplated by
Regulation 14a-11 promulgated under the Exchange Act or any successor provision.
<PAGE>
EXHIBIT 21.1
Subsidiaries
1. Commco Management Associates, Inc.; incorporated and doing business in the
State of New York under the name "Commco Management Associates, Inc."
2. Kap Shore Development Corp.; incorporated and doing business in the State
of New York under the name "Kap Shore Development Corp."
3. Kapson Briarcliff Manor, LLC; organized and doing business the the State of
New York under the name "Kapson Briarcliff Manor, LLC."
4. Kapson Chestnut Ridge Development Corp.; incorporated and doing business in
the State of New York under the name "Kapson Chestnut Ridge Development
Corp."
5. Kapson Glen Riddle Development Corp.; incorporated and doing business in
the State of Pennsylvania under the name "Kapson Glen Riddle Development
Corp."
6. Kapson Jamesburg Development Corp.; incorporated and doing business in the
State of New Jersey under the name "Kapson Jamesburg Development Corp."
7. Kapson Management Corp.; incorporated and doing business in the State of
New York under the name "Kapson Management Corp."
8. Kapson Montville LLC; organized and doing business the the State of New
York under the name "Kapson Montville, LLC."
9. Kapson Northport Development Corp.; incorporated and doing business in the
State of New York under the name "Kapson Northport Development Corp."
10. Kapson Patterson LLC; organized and doing business the the State of New
York under the name "Kapson Patterson, LLC."
11. Kapson Rochester LLC; organized and doing business the the State of New
York under the name "Kapson Rochester, LLC."
12. Kapson Rochester Manor LLC; organized and doing business the the State of
New York under the name "Kapson Rochester Manor, LLC."
13. Kapson Stamford Development Corp.; incorporated and doing business in the
State of Connecticut under the name "Kapson Stamford Development Corp."
14. Senior Quarters Management Corp.; incorporated and doing business in the
State of New York under the name "Senior Quarters Management Corp."
<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 dated June 7, 1996, and June 11, 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 the balance sheet of
Kapson Senior Quarters Corp., as of June 10, 1996, respectively. We also consent
to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
--------------------------------
Coopers & Lybrand L.L.P.
New York, New York
August 9, 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
August 9, 1996