<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 1996
REGISTRATION NO. 333-5945
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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") is a leading provider of
assisted living services in the northeastern region of the United States, and
has owned, managed and/or operated assisted living facilities since 1972.
Assisted living facilities provide a residential alternative for elderly senior
citizens who need or desire assistance with their activities of daily living and
certain home health care services, in a non-institutional environment. A
majority of the Company's assisted living facilities are operated under the
"Senior Quarters" trademark.
The Company owns, manages and/or operates 15 assisted living facilities with
an aggregate of 1,623 units and a capacity for 2,392 residents, located in New
York, New Jersey, Connecticut and Pennsylvania. Of these facilities, the Company
owns all or a portion of eleven facilities (six facilities are wholly owned and
five partially owned, with partial ownership interests ranging from 10.0% to
50.1%) with an aggregate of 1,145 units and a capacity for 1,749 residents.
Revenues from these eleven facilities constituted 96.7% of total revenues in
1995, with the balance provided by management fees from the four facilities
owned by unaffiliated third parties. In addition, the Company currently has
under pre-construction development seven assisted living facilities in these
states with an expected aggregate of 948 units and a capacity for 1,146
residents. At June 30, 1996, the Company's facilities that were stabilized
(i.e., in operation for at least twelve months) had a weighted average occupancy
rate of 99.0%, with many of them maintaining waiting lists. Furthermore, such
facilities have operated at a 98.0% occupancy rate for the past five calendar
years.
The Company believes that it is characterized by the following:
- A pioneer in assisted living in the northeastern United States since 1972,
and a preeminent provider of assisted living services in the State of New
York, the state with the second highest elderly population in the United
States
- Well-positioned to capitalize on the considerable growth opportunities in
the assisted living industry presented by strong demographic trends,
cost-containment initiatives, long-term care facility supply and demand
imbalances and quality of life advantages
- Assisted living facilities that are designed to provide premium
accommodations and a comprehensive, bundled package of standard services
for a single monthly fee
- Focused on "private-pay" residents who pay through private insurance or
funds
- Large facilities, with a prototype facility consisting of 125 units and a
capacity for 200 residents, that produce cost-efficiencies and enhance
operating margins
- Three senior executives with combined experience of over 50 years in the
assisted living industry and a management team (the members of which have
on average been with the Company for approximately 10 years) with the
demonstrated ability necessary to (i) implement the Company's growth
strategy, (ii) operate assisted living facilities in the State of New York
(traditionally one of the states in which assisted living is most heavily
regulated), and (iii) operate licensed home health care services agencies
so as to enable the Company to provide home health care services at many
of its facilities
3
<PAGE>
The Company's operating philosophy is to provide services and care which
meet the individual needs of its residents, and to enhance their physical and
mental well-being, thereby allowing them to live longer and to "age in place."
The Company's facilities are designed to provide premium accommodations and a
comprehensive, bundled package of standard services for a single monthly fee.
These facilities offer, on a 24-hour basis, personal, supportive and home health
care services appropriate for their residents in a home-like setting, which
allow residents to maintain their independence and quality of life. Furthermore,
many of the Company's facilities, through its Extended Care Program, also offer
additional specialized care and services to residents in the beginning stages of
Alzheimer's disease, dementia and other cognitive impairments. At June 30, 1996,
the average monthly fee for standard services at the Company's facilities was
approximately $2,980 per unit.
The Company's growth strategy focuses on the expansion of its existing
portfolio through the development, acquisition and conversion of additional
assisted living facilities, the expansion of its ancillary services (which have
not yet produced significant revenues), including home health care, in-house
pharmacy services and its Extended Care Program, as well as cost-efficient
facilities management. The Company's primary focus is the northeastern United
States, where it intends to maintain its position as a leading assisted living
provider. In the future, the Company will continue to selectively seek
additional opportunities in other regions of the United States. Since 1985, the
Company has developed ten assisted living facilities and acquired all, or an
interest in, three others. The Company anticipates that, by utilizing its
infrastructure and assisted living experience, it will develop or acquire an
additional 30 facilities with 3,500 units and a capacity for 4,100 residents by
the end of 1999.
The Company believes its assisted living business benefits from the
following significant demographic trends, cost-containment initiatives, and
long-term care facility supply and demand imbalances: (i) the continued aging of
the United States population, resulting in increasing demand for care of the
elderly; (ii) 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
liability for operating these facilities. With respect to such facilities, the
Kaplans have engaged a wholly owned subsidiary of the Company to perform the
day-to-day operations of the facilities in a manner that the Company believes is
consistent with New York law and regulations.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.............. 3,550,000 shares (1)
Common Stock outstanding after the
Offering......................... 7,700,000 shares (1)(2)(3)
Use of Proceeds................... The Company will use the net proceeds of the Offering
for the development and acquisition of assisted living
facilities (including seven facilities currently in
various stages of pre-construction development), to pay
to the Kaplans $6.0 million (the approximate tax
liability expected to be incurred by them from
transactions pertaining to the transfer of certain
facilities to the Company), to pay all real estate
transfer taxes arising from these transactions
(estimated to be approximately $250,000), to acquire the
remaining interest in one of its partially owned
facilities, and for working capital and general
corporate purposes.
Proposed Nasdaq National Market
Symbol........................... "KPSQ"
</TABLE>
- ------------------------
(1) Excludes 532,500 shares of Common Stock subject to the Underwriters'
over-allotment option granted by the Company and the Selling Stockholders.
The Company will not receive any proceeds from the sale of any shares by the
Selling Stockholders, which will occur only if the over-allotment option is
exercised. See "Principal and Selling Stockholders."
(2) Excludes 600,000 shares of Common Stock reserved for issuance and available
for grant under the Kapson Senior Quarters Corp. 1996 Stock Incentive Plan,
under which options to purchase 88,462 shares of Common Stock have already
been issued. See "Management -- 1996 Stock Incentive Plan."
(3) Excludes approximately 50,000 shares that the Company expects to issue in
connection with the purchase of the 50% interest it does not already own in
one of its facilities.
5
<PAGE>
SUMMARY FINANCIAL, OPERATING AND PRO FORMA DATA
The following table sets forth certain historical financial and operating
data as of and for each of the three years ended December 31, 1995 and the six
months ended June 30, 1995 and 1996 for The Kapson Group (the "Predecessor"),
and certain pro forma financial data and operating data as of and for the six
months ended June 30, 1996 and for the year ended December 31, 1995 for the
Company as described in footnote (1) below. The Predecessor represents a
combination of the businesses of partnerships, Subchapter S corporations and
limited liability companies which, as of June 30, 1996, consisted of six wholly
owned, two majority-owned and three minority-owned assisted living facilities,
and two entities that provided managerial services to five related and four
unrelated entities. The businesses of the Predecessor are being acquired by the
Company in connection with the Offering. The financial data below should be read
in conjunction with, and is qualified in its entirety by reference to, the
combined financial statements of the Predecessor, including the notes thereto,
and the information in "Pro Forma Financial Information" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ---------------------------------
PREDECESSOR PRO FORMA PREDECESSOR PRO FORMA
------------------------------- ----------- -------------------- -----------
1993 1994 1995 1995 (1) 1995 1996 1996 (1)
--------- --------- --------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Assisted living revenues.............. $ 12,628 $ 13,349 $ 14,275 $ 17,828 $ 7,024 $ 9,529 $ 10,440
Management fees....................... 248 348 443 443 209 432 432
Other -- affiliates................... 112 57 45 -- 23 23 --
--------- --------- --------- ----------- --------- --------- -----------
Total revenues.......................... 12,988 13,754 14,763 18,271 7,256 9,984 10,872
--------- --------- --------- ----------- --------- --------- -----------
Operating Expenses:
Assisted living operating expenses.... 7,591 7,837 8,314 10,913 3,931 6,252 7,070
General and administrative............ 727 1,142 1,658 3,096 730 1,275 1,832
Depreciation.......................... 1,188 1,180 1,234 1,440 576 912 964
--------- --------- --------- ----------- --------- --------- -----------
Total operating expenses................ 9,506 10,159 11,206 15,449 5,237 8,439 9,866
--------- --------- --------- ----------- --------- --------- -----------
Operating income........................ 3,482 3,595 3,557 2,822 2,019 1,545 1,006
Interest expense, net................. (3,541) (3,487) (3,892) (4,780) (1,739) (2,861) (3,013)
Other income (expense), net........... (10) (1) (34) (30) 1 20 20
--------- --------- --------- ----------- --------- --------- -----------
Income (loss) before minority interest
and extraordinary item................. (69) 107 (369) (1,988) 281 (1,296) (1,987)
Minority interest in net loss of
combined partnerships.................. -- -- 16 360 -- 371 271
--------- --------- --------- ----------- --------- --------- -----------
Income (loss) before extraordinary
item................................... (69) 107 (353) (1,628) 281 (925) (1,716)
Extraordinary Item...................... -- 4,399 -- -- -- -- --
--------- --------- --------- ----------- --------- --------- -----------
Net Income (loss)....................... (69) 4,506 (353) (1,628) 281 (925) (1,716)
Unaudited pro forma data:
Pro forma benefit (provision) for income
taxes (2).............................. 28 (1,803) 141 651 (112) 370 686
--------- --------- --------- ----------- --------- --------- -----------
Pro forma net income (loss)............. $ (41) $ 2,703 $ (212) $ (977) $ 169 $ (555) $ (1,030)
--------- --------- --------- ----------- --------- --------- -----------
--------- --------- --------- ----------- --------- --------- -----------
Pro forma net loss per share (3)........ $ (.20) $ (.21)
----------- -----------
----------- -----------
Pro forma weighted average number of
common shares outstanding (3).......... 4,831 4,831
----------- -----------
----------- -----------
Pro forma, as adjusted, net loss per
share (3)(4)........................... $ (.13) $ (.13)
----------- -----------
----------- -----------
Pro forma, as adjusted, weighted
average number of common shares
outstanding (3)(4)..................... 7,750 7,750
----------- -----------
----------- -----------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
PREDECESSOR PREDECESSOR
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Assisted living units owned, managed and/or operated (end of period)... 661 661 862 661 1,623
Assisted living resident capacity (end of period)...................... 1,143 1,143 1,403 1,143 2,392
Weighted average occupancy of fully-stabilized assisted living
facilities............................................................ 98% 98% 98% 99% 99%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
PRO FORMA AS
PREDECESSOR ADJUSTED
1996 1996(1)(3)(4)
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................................................... $ (4,344) $ 31,177
Total assets...................................................................... 67,853 101,540
Long-term debt, excluding current portion......................................... 67,816 67,816
Partners'and shareholders' equity (deficit)....................................... (11,107) 27,014
</TABLE>
- ------------------------
(1) The pro forma statements of operations data for the year ended December 31,
1995 and the six months ended June 30, 1996 gives effect to (a) the
acquisition on April 1, 1996 by the Predecessor of the operations of Town
Gate Manor (Rochester, New York) and Town Gate East (Penfield, New York);
(b) the April 1996 acquisition of the 49.9% interest in Senior Quarters at
Chestnut Ridge by an unrelated third party; (c) the pending acquisition of
the 50% interest it does not already own in the entity which owns Senior
Quarters at East Northport from an unrelated party for $2,600. The purchase
price is payable from Offering proceeds ($1,950) and the issuance of 50
shares of common stock at an assumed initial public offering price of
$13.00 per share ($650); (d) operating fees payable to the Kaplans as
operators for various New York facilities, net of management fees payable
to a subsidiary of the Company; (e) compensation of the Kaplans and
additional general and administrative costs of operating as a public
company; (f) the initial capitalization of the Company; (g) the issuance of
4,150 shares of the Company's common stock as consideration for the
conveyance of all of the Predecessor's assets relating to its assisted
living business; and (h) the elimination of net indebtedness and interest
payable to an uncombined affiliate of the Predecessor all as if the
transactions had occurred as of January 1, 1995. The pro forma balance
sheet as of June 30, 1996 gives effect to these transactions as if they
occurred on that date, except for the transactions in (a) and (b) which are
included in the historical combined balance sheet at June 30, 1996. See
"Pro Forma Financial Information."
(2) Includes a pro forma income tax adjustment for federal and state income
taxes to reflect the Predecessor as a C corporation. See Note 2 to the
Combined Financial Statements of the Predecessor.
(3) Reflects (a) the assumed issuance of common stock at an initial public
offering price of $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) and (b) the expected issuance of 50 shares of common
stock expected to be issued in connection with the agreement to purchase
the 50% interest it does not already own in the entity which owns Senior
Quarters at East Northport, at an assumed initial public offering price of
$13.00 per share, to satisfy a portion ($650,000) of the total $2,600
purchase price.
(4) Reflects the proposed issuance of all 3,550 shares in connection with the
Offering.
7
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the factors set forth below
together with the other information contained in this Prospectus before making a
decision to purchase the Common Stock.
CAPITAL REQUIREMENTS; PARTNERS' AND SHAREHOLDERS' DEFICIT
At June 30, 1996, the Predecessor had Partners' and Shareholders' deficit of
$11.1 million and negative working capital of $4.3 million. After giving effect
to the receipt and application of the net proceeds of the Offering (assuming no
exercise of the Underwriters' over-allotment option and an initial public
offering price of $13.00), the Company's pro forma shareholders' equity would
have been $27.0 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 ($1,030,000) for the six months ended June 30, 1996 and ($977,000) for the
year ended December 31, 1995. In addition, for the six months ended June 30,
1996, net cash used in operations was ($1,077,000). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations." As a result of its development activities and plans, the Company
anticipates that it will incur a net loss for the balance of 1996. Furthermore,
if the Company continues to experience negative cash flow from operations, or if
it does not achieve its development objectives, or if newly developed assisted
living facilities do not achieve break-even operating results within the time
expected, or if development or construction or operating expenses exceed
expectations, the Company's financial condition will be further impacted. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
INDEBTEDNESS AND OTHER OBLIGATIONS OF THE COMPANY
Upon completion of the Offering, the Company will have outstanding long-term
debt of $67.8 million, $15.5 million of which bears interest at variable rates.
In addition, the Company will, as of the consummation of the Offering, 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. Furthermore, the Company's growth strategy contemplates
developing and/or acquiring approximately 30 facilities by the end of 1999 at an
aggregate cost of $405 million. A portion of such funds may be financed through
additional indebtedness. As a result, the Company's cash flow will continue to
be adversely impacted by debt service, and there is a risk that the Company may
be unable to generate sufficient cash flow from operations to cover required
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interest and principal payments, particularly if variable interest rates and,
consequently, interest payments, increase. If the Company were unable to meet
interest or principal payments in the future, there can be no assurance that
sufficient financing would be available to cover the insufficiency or, if
available, the financing would be on terms acceptable to the Company. In the
absence of financing, the Company's ability to make scheduled principal and
interest payments on its indebtedness or to respond to changing business and
economic conditions to fund scheduled investments, cash contributions and
capital expenditures to make future acquisitions or developments and to absorb
adverse operating results would be adversely affected. Any payment or other
default by the Company with respect to any of its indebtedness could cause the
lender to foreclose on the facility or facilities securing such indebtedness and
could impair the Company's right to receive payments under the management
contracts relating to those facilities. Further, because of cross-default and
cross-collateralization provisions in certain of the Company's mortgages, a
default by the Company on any of its payment obligations could adversely affect
a significant number of the Company's other properties. Accordingly, any payment
or other default by the Company could have an adverse effect on the Company's
business, financial condition, results of operations and prospects. In addition,
the terms of certain of the Company's indebtedness have imposed, and may in the
future impose, constraints on the Company's operations, including constraints on
its ability to open new facilities in close proximity to, or otherwise compete
with, existing facilities, constraints on its ability to increase its management
fees or vary the level of services that it provides to residents, and a
requirement under the Company's facility with HCR that the Company or the
Kaplans be the licensed operators of the Company's facilities, where required by
law. Furthermore, the Company may in the future utilize tax-exempt bond
financing. Such bonds usually impose various restrictions, conditions and
requirements, including requirements that a certain percentage of residential
units in facilities financed by such bonds be made available to persons with
below median income. Bond compliance requirements may have the effect of
limiting the Company's income from the bond-financed properties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
UNCERTAIN ABILITY TO ACHIEVE AND/OR MANAGE RAPID GROWTH
The Company intends to pursue a rapid growth strategy, the success of which
will depend upon a large number of factors, many of which are beyond the
Company's control. See "Business -- Growth Strategy -- Development and
Acquisition." At the present time the Company is a party to a limited number of
agreements related to specific facilities to be developed, and there can be no
assurance that these facilities will be successfully completed or that
additional facilities will be developed. Factors that will affect the success of
the Company's growth strategy include the Company's ability to locate suitable
sites, its ability to obtain appropriate zoning, land use, building, occupancy
or other governmental permits, authorizations, licenses and approvals, the risk
that construction may not proceed according to plan or that its cost may exceed
estimates, the risk that occupancy rates may not reach anticipated levels, and
risks relating to the competitive environment for development and/or
acquisitions. Furthermore, even if the Company were to develop or acquire new
facilities, its ability to achieve managed growth will be dependent upon a
number of factors, including its ability to hire, train and assimilate
management and other employees and its ability to adapt its purchasing,
management information and other systems to accommodate its expanded operations.
See "Business -- Growth Strategy -- Development and Acquisition." If the Company
is unable to implement its growth strategy successfully, of which there can be
no assurance, its business, financial condition, results of operations and
prospects could be adversely affected.
DISCRETIONARY USE OF PROCEEDS
A substantial portion of the net proceeds of the Offering is expected to be
used to partially finance the development and acquisition of facilities,
including the projects referred to elsewhere in this Prospectus that are
currently in various stages of pre-construction development. At the present
time, the 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
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discretion in identifying potential sites for development and existing
facilities for acquisition. Accordingly, the Company will have broad discretion
in using the net proceeds of the Offering. See "Use of Proceeds" and "Business
- -- Growth Strategy -- Development and Acquisition."
DEPENDENCE ON SENIOR MANAGEMENT; OTHER PERSONNEL
The Company depends upon the continued services of Glenn Kaplan, its
Chairman and Chief Executive Officer; Evan Kaplan, its President and Chief
Operating Officer; and Wayne Kaplan, its Vice Chairman and Senior Executive Vice
President. The Company has entered into a five-year employment agreement which
is renewable automatically for successive one-year periods with each of these
individuals. See "Management -- Employment Agreements." The Company's dependence
on these three individuals is increased by the fact that, primarily because of
legal requirements in New York, substantially all of the Company's facilities in
New York are operated by them individually. See "-- Operating Agreements;
Management Agreements" and "Certain Transactions." Accordingly, the loss of the
services of any of these three individuals could have an adverse effect on the
Company's business, financial condition, results of operations and prospects.
In addition, the Company competes with other providers of long-term care in
attracting and retaining senior management and other personnel responsible for
various management functions, as well as the day-to-day operations of the
Company's facilities. The Company is dependent upon the available pool of such
personnel. A shortage of qualified personnel may require the Company to enhance
its wage and benefits package in order to compete. There can be no assurance the
Company's labor costs will not increase, or that, if they do increase, they can
be matched by corresponding increases in its revenues.
GOVERNMENT REGULATION
The health care industry is subject to extensive federal and state
regulation and frequent regulatory change. See "Business -- Government
Regulation." The Company's facilities are and will continue to be subject to
varying degrees of regulation by health and/or social service agencies and other
regulatory authorities in the various states and localities in which the Company
operates or intends to operate. The Company believes, based on its experience in
conducting an assisted living business since 1972 and its consequent knowledge
of applicable law and regulations, that it is in compliance with all applicable
law and regulations; however, there can be no assurance that such is the case.
The Company's belief is not based on advice or an opinion of counsel; however,
counsel was engaged to prepare the operating and management agreements
pertaining to the Company's New York licensed facilities. See "--Operating
Agreements; Management Agreements." The success of the Company will be dependent
upon its ability to satisfy applicable law and regulations and to procure and
maintain required licenses and registrations. Changes in applicable laws and
regulations, or in the interpretations thereof, could have an adverse effect on
methods and costs of doing business, and amounts of reimbursement from
governmental and other payors.
Although a number of states have not adopted specific assisted living
regulations, in New York, where a majority of the Company's present facilities
is located, an array of statutes and regulations govern assisted living
facilities and the provision of home health care services in such facilities.
These laws include licensure restrictions that prohibit a publicly traded
for-profit corporation from operating certain types of assisted living
facilities (referred to herein as "licensed facilities"). See "-- Operating
Agreements; Management Agreements" and "Business -- Government Regulation." Such
facilities include facilities that are designated by the State as Adult Homes or
Assisted Living Program facilities ("ALP facilities"). Accordingly, the Company
is not the licensed operator of any of its New York licensed facilities. As
mentioned above, the Company believes that its management relationship with the
licensed operators complies with all applicable law and regulations, although it
has not sought or obtained any ruling from regulatory agencies to that effect.
The Company has been advised that regulations relating to licensed facilities in
New York are presently undergoing review. A task force established by the
legislature to study long-term care financing alternatives recently issued its
report, which, among other things, encourages the development of assisted living
facilities and consideration of assisted living and other
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long-term care services and programs that could be attractive to for-profit
entities. If existing law and regulations were interpreted as, or amended with
the effect of, prohibiting the Company's management relationship with the
licensed operators, there could be an adverse effect on the Company's business,
financial condition, results of operations and prospects. See "-- Operating
Agreements; Management Agreements."
As part of the Company's two ALP facilities, the Kaplans operate the Kapson
Licensed Home Care Services Agency, a partnership that is licensed in some New
York counties. See "Business -- Government Regulation -- New York." Since the
Kapson Licensed Home Care Services Agency provides and, as required by
applicable law and regulations, will continue, even after the Company obtains a
home care services agency license, to provide services that are reimbursed by
Medicaid for Medicaid-covered residents in the Company's New York ALP
facilities, the Kaplans are, and the Company (through its provision of
management services to the ALP facilities) may be, subject to federal and state
Medicaid fraud and abuse laws and regulations, including anti-kickback
provisions. In particular, those laws may prohibit certain health care
professionals from holding an ownership or financial interest in a company that
provides or manages home health care or pharmaceutical services to which health
care professionals refer Medicare or Medicaid patients. New York State has
similar laws and regulations that restrict such financial relationships with
entities that provide pharmaceuticals. See "Business -- Government Regulation."
OPERATING AGREEMENTS; MANAGEMENT AGREEMENTS
Under applicable New York law and regulations, a publicly traded for-profit
corporation is not permitted to be the licensed operator of a licensed facility.
Therefore, the Kaplans individually are the licensed operators of all the
Company's licensed facilities in New York, except for one which is operated by
its not-for-profit owner and have responsibility for the day-to-day operations
of the Company's facilities in New York to ensure that these facilities are
operated in accordance with applicable New York law and regulations. These
facilities are operated pursuant to either an operating agreement between the
Company and the licensed operators or the pre-existing agreement with the
applicable third party owner of the facility that has been assigned to the
licensed operators by the Company. The licensed operators have, in turn, engaged
a wholly owned subsidiary of the Company to provide certain management services
to each such facility. As a result of recently enacted legislation, privately
owned for-profit corporations are permitted to operate certain types of licensed
facilities in New York, and the Kaplans may form one or more corporations to
operate the Company's licensed facilities. See "Business -- Government
Regulation" and "Certain Transactions." The Kaplans are entitled, pursuant to
the operating agreements, to assign such agreements to any for-profit
corporation that is wholly owned by them.
With respect to the Company's licensed facilities of which the Kaplans are
the licensed operators, the operating agreements between the Company and the
licensed operators have a term of 25 years and provide for an operating fee; the
pre-existing agreements with third party owners generally have a term of five
years and also provide for an operating fee and, in some instances, an incentive
fee based on the performance of the facility. The operating agreements may be
terminated by either the Company or the licensed operators under certain
circumstances. The Company may terminate the agreement upon the occurrence of
certain events of default or upon the death or disability of all the licensed
operators. If the operating agreement is terminated by the Company other than
for an event of default by the licensed operators, the licensed operators will
be entitled to liquidated damages equal to twice the licensed operators' fees
under the applicable operating agreement (net of fees payable under the
applicable management agreement) over the preceding twelve months. See "Certain
Transactions -- Arrangements Regarding Operation of Certain Facilities". In
addition, the employment agreement with each Kaplan provides that each Kaplan
may withdraw as a licensed operator if he ceases to be an employee of the
Company for any reason. See "Management -- Employment Agreements." Each
management 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,
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provides for a management fee equal to a portion of the licensed operators' fee,
and may be terminated by either the Company's wholly owned subsidiary or the
licensed operators under certain circumstances. See "Certain
Transactions--Arrangements Regarding Operation of Certain Facilities."
In order to comply with applicable law and regulations, each management
agreement, by its own terms, does not confer upon the Company's wholly owned
subsidiary control over the facility. It specifically provides that the licensed
operators shall retain the authority and power, among other things, to hire and
discharge persons working at the licensed entity, maintain and control the books
and records of the licensed entity, to incur any liability on behalf of the
licensed entity, and to adopt or enforce policies regarding the operation of the
licensed entity. The management agreements provide that the Company's wholly
owned subsidiary shall perform such services as may be requested by the licensed
operators, including the following: establishing the schedules of charges;
administration of personnel matters; the development of publicity materials; the
maintenance of all required licenses, permits, qualifications and approvals and
otherwise ensuring that the operation of the facility is in compliance with all
applicable laws and regulations; accounting support; maintenance and upgrading
of the facility; and contract administration, all subject to the direction and
control of the licensed operators.
Accordingly, in accordance with New York law and regulations, the licensed
operators will maintain site control and responsibility for day-to-day
operations of the facility. In the case of the New York ALP facilities, the
licensed operators are responsible for both the licensed Adult Home portion of
the facility and the licensed home care services agency servicing the facility.
In addition, the licensed operators will remain responsible for the overall
compliance of the facility with applicable law and regulations. Moreover, in
accordance with New York law and regulations, the operating agreements between
the licensed operators and the Company, the management agreements between the
licensed operators and the Company's wholly owned subsidiary, and the employment
agreements between each of the Kaplans and the Company provide that the licensed
operators act independently of the Company and/or its wholly owned subsidiary
and, in the performance of their obligations as the licensed operators of the
applicable facility, are explicitly relieved of any fiduciary obligation to the
Company and its stockholders. As the Company is not itself the licensed operator
of these facilities, it is highly dependent on the Kaplans as the licensed
operators, and its agreements with them, in order to generate revenue in New
York State. The Company is therefore limited in its ability to exercise control
over these facilities.
See "-- Conflicts of Interest."
There can be no assurance that these agreements will not be terminated by
the licensed operators of the applicable facility or the Company, or as a result
of a change in the applicable law or regulations or the interpretation thereof
by the appropriate state agencies. Any termination of these agreements would be
subject to applicable state law and regulations, which may restrict the options
of the Company in dealing with the applicable facility. Although the Company
believes that it is in compliance with applicable law and regulations, the
Kaplans, as licensed operators of each such facility, have agreed that they
would cooperate with the Company in restructuring the current arrangement with
respect to the operation and management of that facility if the need should
arise. Any termination of an operating agreement or a management agreement, for
any reason whatsoever, could have an adverse effect on the Company's business,
financial condition, results of operations and prospects.
This basic structure, and substantially similar agreements, are also used
with respect to one New York facility that is an independent living facility
which, as such, is not a licensed facility. The effect and risks are
substantially the same as those described above, except that New York law and
regulations with respect to licensed facilities are not applicable to this
management arrangement.
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.
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With few exceptions, the only residents for whom the Company's facilities
accept SSI payments as the residential fee are Medicaid-eligible residents in
the Company's two New York ALP facilities. Currently, less than 1% of the
Company's revenue is derived from SSI payments. The Company anticipates that,
upon stabilization of its New York ALP and other facilities, approximately 11%
of the Company's revenue will be derived from SSI payments. Residential fees
from these residents could be subject to delay. There can be no assurance that
the Company's proportionate percentage of revenue related to the facilities'
receipts based on SSI rates will not increase, or that the amounts paid under
SSI programs will not be decreased or subject to delay.
The Company derives revenues from Medicaid only for the home care services
provided to Medicaid beneficiaries residing in the Company's two New York ALP
facilities. Medicaid program payments could be subject to delay. Further, since
the payment for home care services in such facilities is a fixed per patient per
day amount based on an anticipated range of services for the resident's assessed
level of care, the Company is at risk for the cost of services within the
anticipated range even if beyond the amount paid by Medicaid. The Company has
committed to 380 Medicaid beds, and applicable law and regulations forbid a
reduction in the beds committed to Medicaid beneficiaries in the Assisted Living
Program without further state approval, which may or may not be granted.
Currently, less than 2% of the Company's revenue is derived from the Medicaid
program. The Company anticipates that, upon stabilization of its New York ALP
and other facilities, approximately 20% of the Company's revenue will be derived
from the Medicaid program. There can be no assurance that the Company's
proportionate percentage of revenue related to the facilities' receipts from
Medicaid will not increase, or that the amounts paid by Medicaid will not be
further limited or subject to delay.
On occasion, in order to meet budgetary demands, the government has delayed
payments to beneficiaries of government programs such as Medicaid. In addition,
possible limitations on amounts paid may result from proposed federal and state
legislation. See "-- Potential Impact of Proposed Legislation Regarding Medicaid
Funding." There can be no assurance that acceptance of SSI-based fees, the
provision of services to Medicaid beneficiaries or changes in the applicable SSI
or Medicaid programs and/or applicable law and regulations will not adversely
affect the business, financial condition, results of operations and prospects of
the Company. See "-- Potential Impact of Proposed Legislation Regarding Medicaid
Funding" and "Business -- Government Regulation."
GEOGRAPHIC CONCENTRATION
Since a majority of the Company's current facilities are located within the
New York metropolitan area, the Company will be more susceptible to changes in
general economic factors affecting the health care industry or the laws
governing, and regulatory environment in, the New York metropolitan area because
any such change or act could affect a high percentage of the Company's
facilities. There can be no assurance that such geographic concentration will
not have an adverse effect on the Company's business, financial condition,
results of operations and prospects. See "Business."
COMPETITION
The long-term care industry is highly competitive and the Company expects
that the assisted living industry will become more competitive in the future.
The Company competes with numerous local, regional and national companies
providing long-term care alternatives such as home health care services
agencies, life care communities, skilled nursing facilities, community-based
service programs, retirement communities and convalescent centers. The Company
expects that as the assisted living industry receives increased attention,
competition will grow, and that new market entrants will include companies
focusing primarily on assisted living. Assisted living providers compete for
residents primarily on the basis of quality of service, price, reputation,
physical appearance and location of the living 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
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significantly larger and have, or may obtain, greater financial resources than
those of the Company. There can be no assurance that the Company will not
encounter increased competition in the future, which could limit its ability to
attract residents or expand its business and thereby have an adverse effect on
the Company's business, financial condition, results of operations and
prospects.
POTENTIAL IMPACT OF PROPOSED LEGISLATION REGARDING MEDICAID FUNDING
The United States Congress is considering legislation which may change
substantially the amount of federal funding available for the Medicaid program,
the method by which such funds are distributed to the states and the extent of
state control over such funds. It is not possible to predict whether and when
legislation relating to Medicaid will be passed, and, if passed, what features
such legislation will contain or whether the President would sign such
legislation. The Company cannot make any assessment as to the ultimate timing
and impact that any pending health care proposals may have on the assisted
living, nursing facility and rehabilitation care industries, or on the health
care industry in general. In addition, changes in Medicaid funding have been
proposed in New York State which, alone or in combination with changes in
federal funding, may have a significant impact on the New York Assisted Living
Program as it presently functions or on future funding. Similar changes may take
place in other states in which the Company operates. No assurance can be given
that any such changes will not have an adverse effect on the business, financial
condition, results of operations or prospects of the Company.
BUSINESS RISKS COMMON TO ASSISTED LIVING OPERATIONS
LIABILITY AND INSURANCE. The provision of assisted living and other
services for residents entails an inherent risk of liability. In recent years,
participants in the long-term care industry have become subject to an increasing
number of lawsuits alleging malpractice or related legal theories, many of which
involve large claims and significant defense costs. In addition, the Company
intends to apply for registration as a pharmacy in New York. Participants in the
pharmacy industry may be subject to potential liability for negligence and other
claims. The Company currently maintains liability insurance intended to cover
such claims and the Company believes that its insurance is in keeping with
industry standards and appropriate in relation to the Company's assisted living
and, in the future, pharmacy business. There can be no assurance, however, that
claims in excess of the Company's insurance coverage or claims not covered by
the Company's insurance coverage (E.G., claims for punitive damages) will not
arise. A successful claim against the Company not covered by or in excess of the
Company's insurance coverage could have an adverse effect upon the Company's
business, financial condition, results of operations and prospects. Claims
against the Company, regardless of their merit or eventual outcome, may also
have an adverse effect upon the Company's ability to attract residents or expand
its business, and would require management to devote time to matters unrelated
to the operation of the Company's business. In addition, the Company's insurance
policies must be renewed annually. There can be no assurance that the Company
will be able to maintain liability insurance coverage in the future or that, if
such coverage is available, it will be available on acceptable terms.
ESTABLISHING AND MAINTAINING RENTAL RATES AT PROFITABLE LEVELS. There can
be no assurance that the Company's facilities will continue to be substantially
occupied at current rental rates. If operating expenses increase due to factors
such as the cost of labor, food or energy, government regulation or various
uninsurable risks, the local rental market may limit the extent to which rents
may be increased. Because rent increases generally can only be implemented at
the time of expiration of leases, rental increases may lag behind increases in
operating expenses.
REVENUE FROM FACILITIES. Revenue from the Company's facilities (whether
owned, managed and/or operated by the Company) is dependent upon the performance
of those facilities. The performance of substantially all of the Company's New
York facilities will depend in part on the Kaplans individually 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
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areas where such facilities are located, and the real estate market generally.
The failure of the Company to generate sufficient revenue and cash flow could
result in an inability to meet future principal and interest payments in respect
of its indebtedness.
GENERAL REAL ESTATE RISKS. The performance of the Company's facilities is
influenced by factors affecting real estate investments generally, including the
general economic climate and local conditions, such as an oversupply of, or a
reduction in demand for, similar facilities. Other factors include the
attractiveness of properties to residents, zoning, rent control, environmental
quality regulations or other regulatory restrictions, competition from other
forms of housing and the ability of the Company to provide adequate maintenance
and insurance and to control operating costs, including maintenance, insurance
premiums and real estate taxes. Real estate investments also are affected by
such factors as applicable laws, including tax laws, interest rates and the
availability of financing. In addition, real estate investments are relatively
illiquid and, therefore, limit the ability of the Company to vary its portfolio
promptly in response to changes in economic or other conditions.
CONSTRUCTION/CONVERSION RISKS. Certain construction and conversion risks
are beyond the Company's control and could cause the cost of, and the time
required to complete, construction or conversion to exceed estimates. These
risks include but are not limited to force majeure, labor disputes, adverse
weather, acts of God, limited supply of materials and labor, and other unknown
contingencies. If existing buildings are to be converted into assisted living
facilities, costs of conversion may be more difficult to assess and control than
with respect to the construction of a new facility. The Company's cash flow
could be adversely affected if construction or conversion is not commenced or
completed, or if there are unpaid subcontractors or suppliers, or if required
occupancy permits are not issued in a timely manner. See "Business -- Growth
Strategy -- Development and Acquisition."
POSSIBLE ENVIRONMENTAL LIABILITIES. The Company's facilities and the
operations thereof are subject to various federal, state and local environmental
and worker health and safety laws and regulations. These laws and regulations
generally relate to these facilities' solid, medical, special waste handling and
disposal practices and work place health and safety. Although the Company
believes that its facilities are in substantial compliance with these laws and
regulations, there can be no assurance that they are or will remain in
compliance, that penalties or fines may not be imposed for non-compliance or
that new, more stringent environmental and worker health and safety laws and
regulations will not be adopted, any of which could have an adverse effect on
the Company's business, financial condition, results of operations or prospects.
In addition, under these environmental laws and regulations, liability could be
imposed on the facilities or the Company for the costs of, among other things,
investigating, remediating and/or monitoring contamination that may be found to
exist in the environment at off-site disposal sites where waste from the
Company's facilities has been disposed of and from contamination at the
Company's facilities or properties. Although the Company is unaware of any
contamination at any of its facilities or properties requiring remediation,
contamination could result from, for example, a leaking underground heating fuel
storage tank, a spill of cleaning fluids and materials or the presence of
asbestos-containing materials in its facilities. The presence of such
contamination at any of the Company's facilities or properties could also
subject the Company to lawsuits by or liability to neighbors, residents of the
facilities, and workers who may have been injured or damaged by any such
contamination. Moreover, if contamination is found to exist, the Company's
ability to sell or lease the facility or property or to borrow money using that
facility or property as collateral could be adversely affected.
RESTRICTIONS IMPOSED BY LAWS BENEFITING DISABLED PERSONS. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state and
local laws exist which also may require modifications to existing and planned
properties to create access to the properties by disabled persons. While the
Company believes that its facilities are substantially in 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
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costs would be incurred by the Company. Further legislation may impose
additional burdens or restrictions with respect to access by disabled persons,
the costs of compliance with which could be substantial.
CONFLICTS OF INTEREST
Pursuant to employment agreements with the Company, each of Glenn Kaplan,
Wayne Kaplan and Evan Kaplan have agreed to devote substantially all of his
business time, energy, skill and efforts to the performance of his duties under
the agreement and to faithfully serve the Company, subject to the performance of
his obligations as operator of one or more of the Company's facilities in his
individual capacity. These employment agreements contain non-compete provisions
by which the Kaplans agree not to compete with the assisted living business of
the Company in any area within a ten-mile radius of one of the Company's
facilities for a period of one year after the termination of the applicable
employment agreement for any reason other than the non-renewal thereof by the
Company on substantially the same terms. In the past, the Kaplans (who are
officers and directors of the Company) have directly or indirectly selected,
bought, sold and owned real estate investments for their own accounts and they
may continue to do so with respect to investments not involving the provision of
assisted living services. In addition, in order to meet the requirement under
applicable New York regulations that a licensed facility located in New York be
operated by one or more individuals or general partnerships composed of
individuals, in each case having site control over any such facility, the
Kaplans are the licensed operators of substantially all of the Company's New
York facilities, and, therefore, will have site control over those facilities.
See "-- Operating Agreements; Management Agreements." These activities and
ownership interests create actual or potential conflicts of interest on the part
of the Kaplans. The Board of Directors of the Company has adopted a policy that
all future transactions between the Company and its officers, directors,
principal stockholders and their affiliates will be subject to approval of a
majority of the independent and disinterested outside directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties. See "Certain Transactions." Joseph G. Beck, a director of the
Company, is a principal, executive committee member and shareholder of Shattuck
Hammond Partners Inc., which provided investment banking and financial advisory
services to the Predecessor, and will continue to provide such services to the
Company. See "Certain Transactions -- Shattuck Hammond Fee" and "Underwriting."
CONTROL BY PRINCIPAL STOCKHOLDERS; ANTI-TAKEOVER MEASURES
After the Offering, the three senior executives of the Company, the Kaplans,
will beneficially own in aggregate 53.9% (48.8% if the Underwriters'
over-allotment option is exercised in full) of the Company's issued and
outstanding Common Stock. As a result, the Kaplans may be able to substantially
influence many matters required to be submitted to the stockholders for
approval, including, without limitation, the election of directors. This
concentration of voting power and the right of first refusal each Kaplan has
with respect to the other Kaplans' shares of Common Stock pursuant to a
stockholders' agreement between the Kaplans and the Company may, among other
things, have the effect of delaying or preventing a change in control of the
Company. See "Certain Transactions" and "Principal and Selling Stockholders." In
the event of any such change of control, each Kaplan may have the right to
receive payments from the Company if his employment is terminated either by him
or the Company. See "Management -- Employment Agreements." The Kaplans will
also, as licensed operators of a majority of the Company's facilities, have site
control over those facilities. See "-- Operating Agreements; Management
Agreements." In addition, the Company's certificate of incorporation provides
for authorized but unissued Preferred Stock, the terms of which may be fixed by
the Board of Directors, and also provides, among other things, that the Board of
Directors will be classified. Such provisions could also have the effect of
delaying, deferring or preventing a change of control of the Company.
BENEFITS TO AFFILIATES
The Kaplans will realize substantial benefits from the Offering. In
particular, the Kaplans, who beneficially own in the aggregate 4,150,000 shares
of Common Stock, upon completion of the Offering will own beneficially in the
aggregate shares with a market value of $53,950,000 (assuming no exercise
16
<PAGE>
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 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
17
<PAGE>
"restricted securities" after one year rather than the current two years (and
two years rather than three years for "non-affiliates" who desire to trade free
of other Rule 144 restrictions). If such proposed amendment were enacted, the
"restricted securities" described above would become freely tradeable (subject
to any applicable contractual restrictions) at correspondingly earlier dates. In
addition, each of the Kaplans and their father, Herbert Kaplan, who in the
aggregate beneficially own 4,150,000 shares of Common Stock, have certain
rights, including demand rights, with respect to the registration of such shares
of Common Stock for sale to the public, subject to their agreement with the
Underwriters, and, upon consummation of an agreement regarding the Company's
acquisition of the interest it does not already own in one of its facilities,
another stockholder will have certain registration rights with respect to 50,000
shares. If one or more of the Kaplans or the other stockholder, by exercising
their registration rights, cause a large number of shares to be sold in the
public market, such sales could have an adverse effect on the market price for
the Company's Common Stock. See "Shares Eligible For Future Sale,"
"Underwriting," and "Certain Transactions -- Registration Rights."
ABSENCE OF PUBLIC MARKET AND DETERMINATION OF INITIAL PUBLIC OFFERING PRICE
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "KPSQ." Prior to the Offering, there has been
no market for the Common Stock and there can be no assurance that an active
public market for the Common Stock will develop or continue after the Offering.
The initial public offering price will be determined by negotiations among the
Company, the Selling Stockholders, and the representatives of the Underwriters.
The negotiated initial public offering price may not be indicative of the market
price for the Common Stock after the Offering. See "Underwriting."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate
dilution in net tangible book value per share of Common Stock of $9.51 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 also expects to
use approximately $2.0 million (together with newly issued stock with an
approximate value of $650,000, assuming an initial public offering price of
$13.00 per share) to acquire the 50% interest that it does not already own in
the entity which owns Senior Quarters at East Northport. The Company will use
the balance of the net proceeds to fund additional currently unspecified
developments and acquisitions and for working capital to be used primarily for
pre-development and pre-acquisition costs the Company anticipates incurring in
connection with its development and acquisition program and general corporate
purposes. See "Business -- Growth Strategies -- Development and Acquisition." If
the Underwriters' over-allotment option is exercised, the Company will not
receive any of the proceeds from the sale of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders."
Pending the uses outlined above, funds will be placed into short-term
investments such as governmental obligations, bank certificates of deposit,
banker's acceptances, repurchase agreements, short-term debt obligations, money
market funds, and interest-bearing accounts.
19
<PAGE>
DILUTION
On a pro forma basis, assuming the Predecessor contributed its interest in
the Company's facilities for, among other things, 4,150,000 shares of Common
Stock and giving effect to the pro forma distribution to partners and
shareholders of $6.25 million and affiliate debt that will not be an obligation
of the Company and the issuance of 50,000 shares of Common Stock in connection
with the purchase of the 50% interest it does not already own in the entity that
owns Senior Quarters at East Northport, at an assumed initial public offering
price of $13.00 per share, the pro forma net tangible deficit of the Company's
4,200,000 shares of Common Stock outstanding at June 30, 1996, was $13.7 million
or ($3.27) 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 $27.0 million, or $3.49 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....................................................... (3.27)
Increase in net tangible book value per share attributable to
new
investors as adjusted.......................................... 6.76
---------
Pro forma net tangible book value per share as adjusted for the
Offering........................................................... 3.49
---------
Dilution per share to new investors................................. $ 9.51
---------
---------
</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, the issuance of 50,000 shares of Common Stock in
connection with the purchase of the 50% interest that it does not already own in
the entity that owns Senior Quarters at East Northport, and the sale of
3,550,000 shares of Common Stock offered by the Company at an assumed initial
public offering price of $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 7,750,000 shares issued and
outstanding on an adjusted basis................................................. -- 78
Additional paid-in capital.......................................................... -- 26,936
Retained Earnings (accumulated deficit)............................................. (11,107) --
----------- ---------------
Total shareholders' equity (deficit)................................................ (11,107) 27,014
----------- ---------------
Total capitalization................................................................ $ 56,709 $ 94,830
----------- ---------------
----------- ---------------
</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, the pending acquisition of the 50% interest
that it does not already own in the entity that owns Senior Quarters at East
Northport, and the transactions contemplated in connection with the Offering as
described in Note 1, below. The unaudited pro forma statements of operations for
the year ended December 31, 1995 and the six months ended June 30, 1996 were
prepared as if the transactions had occurred as of January 1, 1995. The
unaudited pro forma balance sheet as of June 30, 1996 was prepared as if the
transactions occurred at that date, except for the acquisition of Town Gate
Manor and Town Gate East and the disposition of the 49.9% interest in Senior
Quarters at Chestnut Ridge, which are already reflected in the historical June
30, 1996 balance sheet. In the opinion of management of the Company, all
adjustments necessary to present fairly such pro forma financial data have been
made based on the proposed terms and structure of the transactions. This
unaudited pro forma financial data is not necessarily indicative of what actual
results would have been if the transactions had occurred at the beginning of the
respective periods nor do they purport to indicate results of future operations
of the Company.
22
<PAGE>
SELECTED FINANCIAL, OPERATING AND PRO FORMA DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ --------------------
PRO
PREDECESSOR FORMA PREDECESSOR
----------------------------------------------------- ----------- --------------------
1991 1992 1993 1994 1995 1995 (1) 1995 1996
--------- --------- --------- --------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Assisted living revenues......... $ 10,126 $ 11,553 $ 12,628 $ 13,349 $ 14,275 $ 17,828 $ 7,024 $ 9,529
Management fee................... 332 24 248 348 443 443 209 432
Other -- affiliates.............. -- 242 112 57 45 -- 23 23
--------- --------- --------- --------- --------- ----------- --------- ---------
Total revenues................. 10,458 11,819 12,988 13,754 14,763 18,271 7,256 9,984
--------- --------- --------- --------- --------- ----------- --------- ---------
Operating Expenses:
Assisted living operating
expenses........................ 6,514 7,289 7,591 7,837 8,314 10,913 3,931 6,252
General and administrative....... 1,338 1,038 727 1,142 1,658 3,096 730 1,275
Depreciation..................... 1,298 1,264 1,188 1,180 1,234 1,440 576 912
--------- --------- --------- --------- --------- ----------- --------- ---------
Total operating expenses....... 9,150 9,591 9,506 10,159 11,206 15,449 5,237 8,439
--------- --------- --------- --------- --------- ----------- --------- ---------
Operating income................... 1,308 2,228 3,482 3,595 3,557 2,822 2,019 1,545
Interest income.................... 23 22 12 8 44 48 21 104
Interest expense................... (3,655) (3,344) (3,417) (3,288) (3,732) (4,828) (1,655) (2,844)
Interest expense -- affiliates..... (25) (151) (136) (207) (204) -- (105) (121)
Equity in income from joint
ventures.......................... -- -- -- -- -- -- -- 28
Other income (expense), net........ 12 280 (10) (1) (34) (30) 1 (8)
--------- --------- --------- --------- --------- ----------- --------- ---------
Income (loss) before minority
interest and extraordinary item... (2,337) (965) (69) 107 (369) (1,988) 281 (1,296)
Minority interest in net loss of
combined partnerships............. -- -- -- -- 16 360 -- 371
--------- --------- --------- --------- --------- ----------- --------- ---------
Income (loss) before extraordinary
item.............................. (2,337) (965) (69) 107 (353) (1,628) 281 (925)
Extraordinary item................. -- -- -- 4,399 -- -- -- --
--------- --------- --------- --------- --------- ----------- --------- ---------
Net Income (loss).............. (2,337) (965) (69) 4,506 (353) (1,628) 281 (925)
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Unaudited pro forma data:
Net Income (loss)................ (2,337) (965) (69) 4,506 (353) (1,628) 281 (925)
Pro forma benefit (provision) for
income taxes (2)................ 935 386 28 (1,803) 141 651 (112) 370
--------- --------- --------- --------- --------- ----------- --------- ---------
Pro forma net income (loss)...... $ (1,402) $ (579) $ (41) $ 2,703 $ (212) $ (977) $ 169 $ (555)
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Pro forma net loss per
share (3)....................... $ (.20)
-----------
-----------
Pro forma weighted average number
of common shares
outstanding (3)................. 4,831
-----------
-----------
Pro forma, as adjusted, net loss
per share (3)(4)................ $ (.13)
-----------
-----------
Pro forma, as adjusted, weighted
average number of common shares
outstanding (3)(4).............. 7,750
-----------
-----------
<CAPTION>
PRO
FORMA
-----------
1996(1)
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Assisted living revenues......... $ 10,440
Management fee................... 432
Other -- affiliates.............. --
-----------
Total revenues................. 10,872
-----------
Operating Expenses:
Assisted living operating
expenses........................ 7,070
General and administrative....... 1,832
Depreciation..................... 964
-----------
Total operating expenses....... 9,866
-----------
Operating income................... 1,006
Interest income.................... 105
Interest expense................... (3,118)
Interest expense -- affiliates..... --
Equity in income from joint
ventures.......................... 28
Other income (expense), net........ (8)
-----------
Income (loss) before minority
interest and extraordinary item... (1,987)
Minority interest in net loss of
combined partnerships............. 271
-----------
Income (loss) before extraordinary
item.............................. (1,716)
Extraordinary item................. --
-----------
Net Income (loss).............. (1,716)
-----------
-----------
Unaudited pro forma data:
Net Income (loss)................ (1,716)
Pro forma benefit (provision) for
income taxes (2)................ 686
-----------
Pro forma net income (loss)...... $ (1,030)
-----------
-----------
Pro forma net loss per
share (3)....................... $ (.21)
-----------
-----------
Pro forma weighted average number
of common shares
outstanding (3)................. 4,831
-----------
-----------
Pro forma, as adjusted, net loss
per share (3)(4)................ $ (.13)
-----------
-----------
Pro forma, as adjusted, weighted
average number of common shares
outstanding (3)(4).............. 7,750
-----------
-----------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------- ---------
PREDECESSOR PREDECESSOR
----------------------------------------------------- ---------
1991 1992 1993 1994 1995 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Assisted living units owned, managed and/or operated (end
of period).............................................. 393 393 661 661 862 661
Assisted living resident capacity (end of period)........ 784 784 1,143 1,143 1,403 1,143
Weighted average occupancy of fully-stabilized assisted
living facilities....................................... 99% 99% 98% 98% 98% 99%
<CAPTION>
1996
---------
<S> <C>
SELECTED OPERATING DATA:
Assisted living units owned, managed and/or operated (end
of period).............................................. 1,623
Assisted living resident capacity (end of period)........ 2,392
Weighted average occupancy of fully-stabilized assisted
living facilities....................................... 99%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------- -----------------------------
PREDECESSOR PREDECESSOR PRO FORMA AS
----------------------------------------------------- ------------- ADJUSTED
1991 1992 1993 1994 1995 1996 1996 (1)(3)(4)
--------- --------- --------- --------- --------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......... $ (24,392) $ (11,233) $ (22,603) $ (17,712) $ (3,596) $ (5,067) $ 31,177
Total assets...................... 33,119 31,825 31,381 34,294 54,407 67,853 101,540
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) 27,014
</TABLE>
- ------------------------
(1) The pro forma statement of operations data for the year ended December 31,
1995 and the six months ended June 30, 1996 gives effect to (a) the
acquisition on April 1, 1996 by the Predecessor of the operations of Town
Gate Manor (Rochester, New York) and Town Gate East (Penfield, New York);
(b) the April 1996 acquisition of the 49.9% interest in Senior Quarters at
Chestnut Ridge by an unrelated third party; (c) the pending acquisition of
the 50% interest that the Company does not already own in the entity which
owns in Senior Quarters of East Northport that the Company does not already
own from an unrelated party for $2,600. The purchase price is payable from
Offering proceeds ($1,950) and the issuance of 50 shares of common stock at
an assumed initial public offering price of $13.00 per share ($650); (d)
operating fees payable to the Kaplans as operators for various New York
facilities, net of management fees payable to a subsidiary of the Company;
(e) compensation of the Kaplans and additional general and administrative
costs of operating as a public company; (f) the initial capitalization of
the Company; (g) the issuance of 4,150 shares of the Company's common stock
as consideration for the conveyance of all of the Predecessor's assets
relating to its assisted living business; and (h) the elimination of net
indebtedness and interest payable to an uncombined affiliate of the
Predecessor all as if the transactions had occurred as of January 1, 1995.
The pro forma balance sheet as of June 30, 1996 gives effect to these
transactions as if they occurred on that date except for the transactions
in (a) and (b) which are included in the historical combined balance sheet
at June 30, 1996. See "Pro Forma Financial Information."
(2) Includes a pro forma income tax adjustment for federal and state income
taxes to reflect the Predecessor as a C corporation. See Note 2 to the
Combined Financial Statements of the Predecessor.
(3) Reflects (a) the assumed issuance of common shares at an initial public
offering price of $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 interests in the facilities to the Company ($6,000) and (ii)
real estate transfer arising out of the transaction estimated to be
approximately ($250) and (b) the expected issuance of 50 shares of common
stock issued in connection with the purchase of the 50% interest that the
Company does already own in the entity which owns Senior Quarters at East
Northport, at an assumed initial public offering price of $13.00 per share,
to satisfy a portion ($650,000) of the total $2,600 purchase price.
(4) Reflects the proposed issuance of all 3,550 shares in connection with the
Offering.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE ON FORWARD-LOOKING STATEMENTS
Certain information contained in this Prospectus are forward-looking
statements. Factors set forth in "Risk Factors" could affect the Company's
actual results and could cause the Company's actual results to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company in this Prospectus. Prospective investors in the shares of the
Company's Common Stock offered hereby should carefully consider the factors set
forth in "Risk Factors," in addition to the other information appearing in this
Prospectus.
OVERVIEW
Kapson Senior Quarters Corp. (the "Company") is a leading provider of
assisted living services in the northeastern region of the United States, and
has owned, managed and/or operated assisted living facilities since 1972.
Assisted living facilities are an increasingly popular form of senior housing
which generally provide a residential alternative for elderly senior citizens
who need or desire help with their activities of daily living and certain home
health care services, in a non-institutional environment. Many of the
Predecessor's facilities also provide, through its Extended Care Program,
additional specialized care and services to residents in the beginning stages of
Alzheimer's disease, dementia and other cognitive impairments. The Company owns,
manages and/or operates 15 assisted living facilities, having in the aggregate
1,623 units with a capacity for 2,392 residents, a majority of which facilities
are located in New York; the remaining facilities are located in New Jersey,
Connecticut and Pennsylvania. Of these facilities, the Company owns all or a
portion of eleven facilities (six facilities are wholly owned and five partially
owned, with partial ownership interests ranging from 10.0% to 50.1%) with an
aggregate of 1,145 units and a capacity for 1,749 residents. Revenues from these
eleven facilities constituted 96.7% of total revenues in 1995, with the balance
provided by management fees from the four facilities owned by unaffiliated third
parties. In addition, the Company currently has under pre-construction
development seven assisted living facilities with an expected aggregate of 948
units and a capacity for 1,146 residents. Prior to the Offering, the Company's
facilities were owned, managed and/or operated by one or more S corporations,
limited partnerships or limited liability companies of the Company's
predecessor, The Kapson Group (the "Predecessor"). The Kapson Group is a general
partnership of which Glenn Kaplan, Wayne Kaplan and Evan Kaplan (collectively,
the "Kaplans") are the sole equal partners.
In August 1996, the Company entered into an agreement to acquire the 50%
interest it does not already own in the entity which owns Senior Quarters at
East Northport for a purchase price of $2.6 million. Approximately $1.95 million
of the purchase price is payable in cash expected to be paid from the proceeds
of the Offering and approximately $650,000 is payable in shares of Common Stock
of the Company.
The historical financial statements of the Predecessor represent the
combined historical results of operations and financial condition of: (i) four
facilities that were wholly owned by the Predecessor (Senior Quarters at
Stamford, Senior Quarters at Huntington Station, Senior Quarters at Centereach
I, and Senior Quarters at Centereach II); (ii) two wholly owned facilities of
the Predecessor that were acquired on April 1, 1996 (Town Gate Manor and Town
Gate East); (iii) one facility that was wholly owned by the Predecessor but in
which a 49.9% interest was sold to an unrelated third party in April 1996
(Senior Quarters at Chestnut Ridge); (iv) an entity through which the
Predecessor controlled a 50% interest (and in August, 1996 agreed to acquire the
remaining 50% interest) in a newly-developed facility in East Northport, New
York (Senior Quarters at East Northport) which began operations on March 15,
1996; (v) an entity through which the Company owned a 23.75% minority interest
in Change Bridge Inn; (vi) two entities through which the Predecessor owned a
minority interest in facilities that were under construction (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.
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On June 7, 1996, the Company was formed in order to consolidate and expand
the assisted living business of the Predecessor. At or prior to the consummation
of the Offering, the Predecessor shall have transferred to the Company the
following: (i) certain wholly owned subsidiaries of the Predecessor that own the
entire fee in the land and building underlying six facilities (Town Gate East,
Town Gate Manor, Senior Quarters at Huntington Station, Senior Quarters at
Centereach I, Senior Quarters at Centereach II, and Senior Quarters at
Stamford); (ii) certain wholly owned subsidiaries of the Predecessor that own,
directly or indirectly, less than the entire fee in the land and building
underlying five facilities (23.75% of Change Bridge Inn, 50.1% of Senior
Quarters at Chestnut Ridge, 50% of Senior Quarters at East Northport, 10% of
Senior Quarters at Jamesburg, and 11% of Senior Quarters at Glen Riddle); (iii)
two wholly owned subsidiaries of the Predecessor that provided management
services for all the foregoing facilities, in addition to four facilities in
which the Predecessor did not have an equity interest (Castle Gardens, The
Regency at Glen Cove, Senior Quarters at Lynbrook, and Senior Quarters at
Cranford); (iv) the Predecessor's interests in pre-construction development
projects for seven facilities (located in Patterson, NY; Albany, NY; Briarcliff
Manor, NY; Tinton Falls, NJ; Riverdale, NY; Westchester County, NY; and 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)
the pending acquisition of the 50% interest that it does not already own in the
entity which owns Senior Quarters at East Northport; (d) operating fees payable
to the Kaplans as operators for various New York facilities, net of management
fees payable to a subsidiary of the Company; (e) compensation of the Kaplans and
additional general and administrative costs of operating as a public company;
(f) the initial capitalization of the Company; (g) the issuance of 4,150,000
shares of the Company's common stock as consideration for the conveyance of all
of the Predecessor's assets relating to its assisted living business; and (h)
the elimination of net indebtedness and interest payable to an uncombined
affiliate of the Predecessor, all as if the transactions had occurred as of
January 1, 1995 and June 30, 1996, respectively, except for the transactions in
(a) and (b) above, which are included in the historical balance sheet as of June
30, 1996. They also give effect to a pro forma income tax adjustment for federal
and state income taxes to reflect the Predecessor as a C corporation. As the
Company is newly formed, all references in this Prospectus to the Company in
connection with historical financial data or otherwise include the Predecessor.
The revenues of the Company are derived primarily from two sources: (i)
revenue from assisted living services, and (ii) management and/or operating fees
for the management and/or operation of facilities owned in whole or part by
third parties. Historically, most revenues consisted of assisted living
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service revenue which comprised 96.7% of gross revenues in 1995. The Company
expects that revenues from ancillary services that it provides to the residents
of its facilities, such as home health care and the Extended Care Program (which
have not been significant to date), will increase as a percentage of total
revenue as the Company seeks to expand the number of such services that it
offers at its facilities.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
REVENUES. Assisted living revenues increased to $9.5 million for the six
months ended June 30, 1996, compared to $7.0 million for the six months ended
June 30, 1995, an increase of 35.7%. The increase is attributable to: (i) the
opening of Senior Quarters at Chestnut Ridge on September 1, 1995 and Senior
Quarters at East Northport on March 15, 1996 which contributed revenue of
$827,000 and $744,000, respectively; and (ii) the acquisition of Town Gate East
and Town Gate Manor on April 1, 1996 which contributed combined revenue of
$947,000. Excluding Senior Quarters at Chestnut Ridge, Senior Quarters at East
Northport, Town Gate East and Town Gate Manor, assisted living revenues were
approximately equivalent for the six months ended June 30, 1996 and 1995.
Management believes that assisted living revenues for the six months ended June
30, 1996 were negatively impacted by inclement weather experienced during the
first quarter of 1996 which resulted in decreased occupancy at certain of the
Company's facilities, which was approximately offset by fee increases.
Management fee revenue increased to $432,000 for the six months ended June 30,
1996, compared to $209,000 for the six months ended June 30, 1995, an increase
of 106.7%. The increase was primarily attributable to Change Bridge Inn, Senior
Quarters at Jamesburg, Castle Gardens, Senior Quarters at Lynbrook and Senior
Quarters at Glen Riddle which the Company assumed management responsibility for
on August 8, 1995, February 1, 1996, January 1, 1996, June 1, 1996, and June 19,
1996, respectively.
OPERATING EXPENSES. Assisted living operating expenses increased to $6.3
million for the six months ended June 30, 1996, compared to $3.9 million for the
six months ended June 30, 1995, an increase of 59.0%. As a percentage of
assisted living revenues, assisted living operating expenses were 65.6% and
56.0% for the six months ended June 30, 1996 and 1995, respectively. The
increase in assisted living operating expenses as a percentage of assisted
living revenues is primarily attributable to the opening of Senior Quarters at
Chestnut Ridge and Senior Quarters at East Northport on September 1, 1995 and
March 15, 1996, respectively. As is consistent with the Company's experience
during the "rent-up" of a new facility, assisted living operating expenses as a
percentage of assisted living revenues are higher than they are for a facility
which is operating at or near full occupancy. Excluding Senior Quarters at
Chestnut Ridge and Senior Quarters at East Northport, assisted living operating
expenses as a percentage of assisted living revenues would have been 59.6% and
55.3% for the six months ended June 30, 1996 and 1995, respectively. The
increase in assisted living operating expenses as a percentage of assisted
living revenues during the six months ended June 30, 1996 is also attributable
to: (i) inclement winter weather during the first quarter of 1996 which
adversely affected revenues and increased operating expenses; and (ii) increased
payroll and employee benefits related to start-up costs for one of the Company's
ALP facilities and the introduction of the Company's Extended Care Program at
another facility. General and administrative expense was $1.3 million for the
six months ended June 30, 1996, compared to $730,000 for the six months ended
June 30, 1995. As a percentage of total revenues, general and administrative
expense was 12.8% and 10.1% for the six months ended June 30, 1996 and 1995,
respectively. The increase is primarily the result of: (i) $389,000 related to
higher payroll and employee benefit costs in connection with a strategic
decision by the Company to invest in its management and facility development
capabilities in order to support future growth through development, acquisition
and management of additional facilities; and (ii) costs related to the opening
of Senior Quarters at Chestnut Ridge and Senior Quarters at East Northport and
preparations for the opening of the Senior Quarters at Lynbrook, Senior Quarters
at Patterson, Senior Quarters at Jamesburg and Senior Quarters at Glen Riddle.
INTEREST EXPENSE. Interest expense was $2.8 million for the six months
ended June 30, 1996, compared to $1.7 million for the six months ended June 30,
1995, an increase of 71.8%. The increase is
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attributable to: (i) the opening of Senior Quarters at Chestnut Ridge and Senior
Quarters at East Northport facilities on September 1, 1995 and March 15, 1996,
respectively; and (ii) the acquisition of Town Gate East and Town Gate Manor on
April 1, 1996. Interest expense with respect to Senior Quarters at Chestnut
Ridge and Senior Quarters at East Northport was capitalized prior to their
opening.
NET INCOME (LOSS). Net income (loss) was ($925,000) for the six months
ended June 30, 1996, compared to $281,000 for the six months ended June 30,
1995. The decrease in net income is primarily the result of the opening of
Senior Quarters at Chestnut Ridge and Senior Quarters at East Northport and, to
a lesser extent, higher payroll and benefit costs in connection with the
Company's expansion plans. Excluding Senior Quarters at Chestnut Ridge and
Senior Quarters at East Northport, net income (loss) would have been ($59,000)
and $495,000 for the six months ended June 30, 1996 and 1995, respectively. The
Company was not required to and did not pay federal or state income taxes. The
minority interest for the six months ended June 30, 1996 is related to the
partial ownership of Senior Quarters at East Northport and Senior Quarters at
Chestnut Ridge by unrelated third parties.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.
REVENUES. Assisted living revenues increased to $14.3 million for the year
ended December 31, 1995, compared to $13.3 million for the year ended December
31, 1994, an increase of 6.9%. The increase is attributable primarily to
increased rental rates and to the opening of Senior Quarters at Chestnut Ridge
on September 1, 1995, which contributed revenue of approximately $283,000.
Excluding Senior Quarters at Chestnut Ridge, assisted living revenues increased
4.8%. Management fee revenue increased to $443,000 for the year ended December
31, 1995, compared to $348,000 for the year ended December 31, 1994, an increase
of 27.3%. The increase was primarily attributable to Senior Quarters at
Cranford, a facility managed by the Company which opened in late 1993 and for
which revenue increased significantly in 1995 due to a full year of stabilized
occupancy.
OPERATING EXPENSES. Assisted living operating expenses increased to $8.3
million for the year ended December 31, 1995, compared to $7.8 million for the
year ended December 31, 1994, an increase of 6.1%. As a percentage of assisted
living revenues, assisted living operating expenses were 58.2% and 58.7% for the
years ended December 31, 1995 and 1994, respectively. Excluding: (i) pre-opening
expenses and negative margins during the "rent-up" period for Senior Quarters at
Chestnut Ridge; and (ii) a one-time tax refund related to a real estate tax
grievance, assisted living operating expenses would be 57.1% of assisted living
revenues for the year ended December 31, 1995. General and administrative
expense was $1.7 million for the year ended December 31, 1995, compared to $1.1
million for the year ended December 31, 1994, an increase of 45.3%. As a
percentage of total revenues, general and administrative expense was 11.2% and
8.3% for the years ended December 31, 1995 and 1994, respectively. The increase
is primarily the result of: (i) approximately $160,000 related to higher payroll
and employee benefit costs in connection with a strategic decision by the
Company to invest in its management and facility development capabilities in
order to support future growth; and (ii) approximately $228,000 of general and
administrative expenses related to the Company's expansion, including Senior
Quarters at Chestnut Ridge, Change Bridge Inn and Castle Gardens.
INTEREST EXPENSE. Interest expense was $3.7 million for the year ended
December 31, 1995, compared to $3.3 million for the year ended December 31,
1994, an increase of 13.5%. The increase is primarily attributable to the
opening of Senior Quarters at Chestnut Ridge at which point interest expense
with respect to this facility was no longer capitalized.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. Income (loss) before extraordinary
item was ($353,000) for the year ended December 31, 1995, compared to $107,000
for the year ended December 31, 1994. The decrease in net income is primarily
the result of the opening of Senior Quarters at Chestnut Ridge and higher
payroll costs in connection with the Company's expansion plans. The Company did
not pay federal or state income taxes.
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EXTRAORDINARY ITEM. For the year ended December 31, 1994, the Company
recorded an extraordinary gain of $4.4 million. This gain resulted from a
settlement with various lenders to satisfy certain outstanding mortgage notes
payable and accrued interest payable at a $4.4 million discount. The Predecessor
simultaneously refinanced this debt with other lenders at then prevailing market
rates.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993.
REVENUES. Assisted living revenues increased to $13.4 million for the year
ended December 31, 1994, compared to $12.6 million for the year ended December
31, 1993, an increase of 5.7%. The increase is attributable primarily to
increased rental rates. Management fee revenue increased to $348,000 for the
year ended December 31, 1994, compared to $248,000 for the year ended December
31, 1993, an increase of 40.4%. The increase was primarily attributable to The
Regency at Glen Cove, a facility which the Company assumed management
responsibility for in 1993 and received a full year of management fees in 1994.
OPERATING EXPENSES. Assisted living operating expenses increased to $7.8
million for the year ended December 31, 1994, compared to $7.6 million for the
year ended December 31, 1993, an increase of 3.2%. As a percentage of assisted
living revenues, assisted living operating expenses were 58.7% and 60.1% for the
years ended December 31, 1994 and 1993, respectively. During 1994, however, the
decrease was limited by the fact that the Company experienced an increase in its
employee health care benefit costs as a percentage of wages and salaries. In
response to this increase, on July 1, 1995, the Company changed its health care
benefit program to offer a more cost-effective managed care option and, as a
result, employee health care benefit costs as a percentage of wages and salaries
decreased. General and administrative expense was $1.1 million for the year
ended December 31, 1994, compared to $727,000 for the year ended December 31,
1993, an increase of 57.0%. As a percentage of total revenues, general and
administrative expense was 8.3% and 5.6% for the years ended December 31, 1994
and 1993, respectively. The increase is primarily the result of hiring of
additional personnel to support anticipated growth.
INTEREST EXPENSE. Interest expense was $3.3 million for the year ended
December 31, 1994, compared to $3.4 million for the year ended December 31,
1993.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. Income (loss) before extraordinary
item was $107,000 for the year ended December 31, 1994, compared to ($69,000)
for the year ended December 31, 1993. The increase is primarily due to improved
operating margins, and reduced interest payments which were partially offset by
higher interest expense to affiliates.
EXTRAORDINARY ITEM. For the year ended December 31, 1994, the Company
recorded an extraordinary gain of $4.4 million. This gain resulted from a
settlement with various lenders to satisfy certain outstanding mortgage notes
payable and accrued interest payable at a $4.4 million discount. The predecessor
simultaneously refinanced this debt with other lenders at then prevailing market
rates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was ($1.1 million) for
the six months ended June 30, 1996, compared to $513,000 for the six months
ended June 30, 1995. The decrease is primarily attributable to: (i) a net loss
for the six months ended June 30, 1996, compared to net income for the six
months ended June 30, 1995; (ii) a minority interest in the net loss of a
partnership owning Senior Quarters at East Northport; and (iii) a decrease in
accounts payable and accrued expenses. Net cash provided by operating activities
was $3.1 million, $1.7 million and $1.9 million for the years ended December 31,
1995, 1994 and 1993, respectively. The increase in 1995, compared to 1994 is
primarily attributable to an increase in accounts payable and accrued expenses.
Net cash used in investing activities was $14.4 million for the six months
ended June 30, 1996, compared to $8.2 million for the six months ended June 30,
1995. Net cash used in investing activities was $17.6 million, $468,000 and
$505,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Substantially all of the cash used in investing activities for the six months
ended June 30,
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1996 and 1995 and the year ended December 31, 1995 was for the development
and/or acquisition of new facilities (which was partially offset by the sale of
a minority interest in Senior Quarters at Chestnut Ridge for $1.2 million)
during the six months ended June 30, 1996, compared to facility improvements and
equipment purchased and an increase in restricted mortgage escrow funds during
the years ended December 31, 1994 and 1993. Net cash used in investing
activities for the year ended December 31, 1994 was offset by the sale of a
minority interest in Senior Quarters at East Northport for $1.5 million. Net
cash used in investing activities was funded primarily through long-term debt
and cash provided by operations.
Net cash provided by financing activities was $13.8 million for the six
months ended June 30, 1996, compared to $7.5 million for the six months ended
June 30, 1995. Net cash provided by financing activities primarily consists of
the proceeds of long-term debt offset by principal repayments of long-term debt
and distributions to partners and shareholders. The increase for the six months
ended June 30, 1996 is primarily the result of long-term debt associated with
the completion and opening of Senior Quarters at East Northport and the
acquisition of Town Gate Manor and Town Gate East. Net cash provided by (used
in) financing activities was $16.0 million, ($661,000) and ($963,000) for the
years ended December 31, 1995, 1994, and 1993, respectively. The increase in
1995, compared to 1994, is primarily the result of long-term debt associated
with Senior Quarters at East Northport. Net cash used in financing activities
was negative in 1994 and 1993 as a result of payments on long-term debt and
deferred financing costs incurred by the Company and shareholder and partner
distributions.
Historically, the Company has operated with significant working capital
deficits primarily as a consequence of current liabilities owed to an uncombined
affiliate of the Predecessor as well as certain financing activities. The
working capital deficit for the Company was $4.3 million at June 30, 1996 and
$3.6 million and $17.7 million at December 31, 1995 and 1994, respectively.
Excluding current liabilities owed to an affiliate of the Company (which will
not be an obligation of the Company), the Company's working capital position
would have been a deficit of $1.4 million at June 30, 1996 and $296,000 and
$14.6 million at December 31, 1995 and 1994, respectively. At December 31, 1994,
the Company's working capital position was adversely impacted by the $15.0
million current portion of long-term debt. Such current portion of long-term
debt was $246,000 at December 31, 1995. On a pro forma basis, which reflects a
$6.0 million payment to partners and stockholders and an assumption of a
liability currently estimated to be approximately $250,000, the Company's
working capital deficit at June 30, 1996, was $10.6 million. Following the
Offering and the application of the estimated net proceeds therefrom, the
Company will have pro forma working capital of $31.2 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
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payable. While the Company expects to refinance such debt with the existing
lender or with another financing source, there can be no assurance that the
Company will be able to obtain such refinancing on terms acceptable to the
Company, which could result in an adverse effect on the Company's operating
results and financial condition.
With respect to current indebtedness on Senior Quarters at Huntington
Station and Senior Quarters at Stamford, which matures in February 1999, the
lending arrangements contain an equity participation feature payable at maturity
in an amount which is the greater of (a) $480,000 or (b) 25% of appraised market
value over $17.5 million. The Company is negotiating to remove the equity
participation features of these loans, but there can be no assurance that such
negotiations will be successful.
The net proceeds to the Company from the Offering, at an assumed offering
price of $13.00 per share, after deducting estimated underwriting discount and
offering expenses payable by the Company, are approximately $38.8 million ($42.0
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
also expects to use approximately $1.95 million (together with newly issued
stock with an approximate value of $650,000) to acquire the 50% interest that it
does not already own in the entity which owns Senior Quarters at East Northport.
The Company will use the balance of the net proceeds to fund additional
currently unspecified development and acquisitions and for working capital to be
used primarily for pre-development and pre-acquisition costs the Company
anticipates incurring in connection with its development and acquisition program
and general corporate purposes. See "Use of Proceeds" and "Certain
Transactions." Pending the uses outlined above, funds will be placed into
short-term investment such as governmental obligations, bank certificates of
deposit, banker's acceptances, repurchase agreements, short-term debt
obligations, money market funds, and interest bearing accounts.
The Company's growth strategy contemplates developing and/or acquiring
approximately 30 facilities containing in the aggregate 3,500 units and a
capacity for 4,100 residents by the end of 1999. The Company intends to either
develop facilities by constructing new facilities or converting existing
buildings into new facilities, or acquiring existing facilities. Over the past
three years, the average cost for the development or acquisition of a new
facility has ranged from $8.0 million to $22.0 million, with an average of $13.5
million. Based on this average, the 30 facilities that the Company contemplates
developing through 1999 will cost an aggregate of $405 million. The Company's
primary focus is the northeastern United States, which is traditionally one of
the most expensive areas for development because of a variety of factors,
including, but not limited to, the cost of land, construction, zoning and
regulatory compliance.
The Company intends to finance its growth strategy for the next three to
five years through a variety of sources, including the proceeds of the Offering,
bank and other financing, long-term operating leases with REITs, future debt or
equity offerings, joint ventures and other sources. To a limited extent, the
Company may also use other forms of financing such as taxable or tax-exempt
long-term debt, including publicly issued debt. Because the Company intends to
use such financing for its properties, the amount of its indebtedness may
increase as the Company pursues its growth strategy. As a result of existing and
future indebtedness, a substantial portion of the Company's cash flow will be
devoted to debt service. There can be no assurance that the Company will
generate sufficient cash flow from operations to cover required interest and
principal payments. If the Company were unable to meet interest and principal
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<PAGE>
payments, it could be required to seek renegotiation of such payments with its
lenders or obtain additional equity or debt financing. There can be no
assurance, however, that such efforts will be successful or timely or that the
terms of any such financing or refinancing would be acceptable to the Company.
Further, in the event of future financings and refinancings, increases in
prevailing interest rates could increase the Company's debt service obligations.
IMPACT OF CERTAIN ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123), which prescribes a new method of accounting for stock-based
compensation that determined compensation expense based on fair value measured
at the grant date. SFAS No. 123 gives companies that grant stock options or
other equity instruments to employees the option of either adopting the new
rules or continuing current accounting; however, disclosure would be required of
the pro forma amounts as if the new rules had been adopted. SFAS No. 123 is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company has not yet decided whether to adopt the new
method of accounting.
IMPACT OF INFLATION AND CHANGING PRICES
Assisted living revenue and management fees from assisted living facilities
are the primary sources of revenue earned by the Company. These properties are
affected by rental rates which are highly dependent upon market conditions and
the competitive environments where the facilities are located. Employee
compensation is the principal cost element of property operations. Although
there can be no assurance it will continue to do so, the Company has been able
historically to offset the effects of inflation on salaries and other operating
expenses by increasing rental rates.
32
<PAGE>
BUSINESS
GENERAL
Kapson Senior Quarters Corp. (the "Company") is a leading provider of
assisted living services in the northeastern region of the United States. 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 eleven
facilities constituted 96.7% of the Company's 1995 revenues, with the balance
provided by management fees from the four facilities owned by unaffiliated third
parties. In addition, the Company currently has under pre-construction
development seven assisted living facilities in these states with an expected
aggregate of 948 units and a capacity for 1,146 residents. The average age of
residents at the Company's facilities is approximately 85, and the average
length of stay is 24 months. At June 30, 1996, the Company's facilities that
were stabilized (I.E., in operation for at least twelve months) had a weighted
average occupancy rate of 99.0%, with many of them maintaining waiting lists.
Furthermore, such facilities have operated at a 98.0% occupancy rate for the
past five calendar years. Management attributes its success in maintaining high
monthly fees and occupancy levels to a number of factors, such as the premium
nature of its facilities; the comprehensive bundling of standard services as
part of a single package and the quality of those services; referrals from
former residents, their families and health care professionals; and the long
tenure and low turnover of its staff, which produces strong relationships with
the residents and their families.
Under applicable New York law and regulations, a publicly traded for-profit
corporation is not permitted to be the licensed operator of a licensed facility,
although legislation recently enacted in New York permits privately owned
for-profit corporations to operate certain types of licensed facilities. See "--
Government Regulation." The Kaplans individually are the licensed operators of
all the Company's licensed facilities in New York (except for one which is
operated by its not-for-profit owner), and the Kaplans may in the future form
one or more corporations to operate these facilities. These facilities are
operated pursuant to either an operating agreement between the Company and the
licensed operators or the pre-existing agreement with the applicable third party
owner of the facility that has been assigned to the licensed operators by the
Company. The licensed operators have, in turn, engaged a wholly owned subsidiary
of the Company to provide certain management services to each such facility.
This
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<PAGE>
basic structure, and substantially similar agreements, are also used with
respect to one New York facility that is an independent living facility which,
as such, is not a licensed facility. See "Certain Transactions -- Arrangements
Regarding Operation of Certain Facilities."
The Company was formed in order to consolidate and expand the assisted
living facility business of The Kapson Group, a New York general partnership of
which the sole equal partners are the Kaplans, who are brothers. In connection
with the Offering, a series of transactions designed to consolidate The Kapson
Group's assisted living facility business in the Company are being entered into.
See "Business -- Government Regulation" and "Certain Transactions." The address
of the Company's headquarters is 242 Crossways Park West, Woodbury, New York
11797. Its telephone number is (516) 921-8900 and its facsimile number is (516)
921-8998. The Company is a Delaware corporation incorporated on June 7, 1996.
THE ASSISTED LIVING INDUSTRY
THE ASSISTED LIVING MARKET. The long-term care industry encompasses a wide
continuum of services and residential arrangements for elderly senior citizens.
Skilled nursing facilities provide the highest level of care and are designed
for elderly senior citizens who need chronic nursing and medical attention and
are not able to live on their own. Further, skilled nursing facilities tend to
be one of the most expensive alternatives while providing elderly senior
citizens with limited independence and a diminished quality of life. On the
other end of the continuum is home-based care, which typically is provided in an
individual's private residence. While this alternative allows the elderly
individual to "age in place" in his or her home and, in certain instances, can
provide most of the services available at a skilled nursing facility, it does
not foster any sense of community or the ability to participate in group
activities.
Assisted living facilities generally are designed to fill the gap in the
middle of this continuum. Assisted living facilities have been described by the
Assisted Living Facilities Association of America ("ALFAA") as providing a
special combination of housing and personal, supportive and home health care
services designed to respond to the individual needs of those who need or desire
help with their activities of daily living, including personal care and
household management. According to ALFAA, residents of assisted living
facilities are generally in their eighties. Services in an assisted living
facility are generally available 24 hours a day to meet the scheduled and
unscheduled needs of residents, thereby promoting maximum dignity and
independence.
The assisted living industry is highly-fragmented, with only approximately
5% of the industry's beds represented by the top 30 industry participants based
on 1995 studies. However, the Company believes that substantial industry
consolidation is underway. At present, the industry is characterized by
participants who operate only a limited number of facilities and who frequently
can offer only basic assistance with a limited number of activities of daily
living. The Company believes that it is characterized by the following: (i) the
ability to offer premium accommodations and a comprehensive bundle of standard
services for a single inclusive monthly fee; (ii) sophisticated, professional
management structures and highly-trained employees; (iii) a cost-efficient,
user-specific prototype facility; (iv) experience in providing home health care
services; and (v) the proven ability to operate in a highly regulated
environment such as that in the State of New York.
TRENDS AFFECTING THE INDUSTRY. The Company believes its assisted living
business benefits from the following demographic trends, cost-containment
initiatives, long-term care facility supply and demand imbalances and quality of
life advantages affecting the long-term care industry:
AGING POPULATION. The continued aging of the United States population
results in increased demand for care of elderly senior citizens. This group
represents one of the fastest growing segments of the population, and requires a
disproportionately high percentage of health care services. According to U.S.
Bureau of the Census data, the number of people in the United States aged 75 and
older increased by approximately 47% from 1981 to 1995, growing from 10.1
million to 14.8 million. The segment of the population over 85 years of age,
which comprises the largest group of residents at the Company's facilities, is
projected, according to U.S. Census data, to increase by approximately 42%
between the
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<PAGE>
years 1990 and 2000 in the United States. Furthermore, according to projections
by the U.S. Bureau of the Census, by the year 2010, six million members of the
United States population will be aged 85 years or over, and, according to the
Agency for Health and Policy Research, an estimated 57% of these individuals
will need help with one or more activities of daily living. The Company believes
that the aforementioned statistics and the significant growth of the elderly
population in comparison to the general population, as depicted in the graph
below, will contribute to continued strong demand for assisted living services.
PROJECTED PERCENTAGE CHANGE IN THE ELDERLY POPULATION OF THE UNITED STATES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
85+ 75-84 GENERAL POPULATION
<S> <C> <C> <C>
1980 0.0% 0.0% 0.0%
1990 34.9% 29.5% 9.8%
2000 93.4% 59.8% 19.4%
2010 166.0% 69.0% 23.9%
2020 210.6% 98.4% 26.8%
</TABLE>
Source: U.S. Bureau of the Census.
CHANGING FAMILY DYNAMICS. Changing family dynamics increase the likelihood
that families will utilize the assisted living alternative. Because of the
growing number of two-income households as well as the increased geographical
separation of elderly family members from their children and grandchildren, many
families (especially those with children at home) are not able to care for their
elderly relatives in their homes. Historically, unpaid women (typically
daughters or daughters-in-law) have represented a large portion of the
care-givers of the non-institutionalized elderly. Consequently, due to the
increased number of women in the labor force, there has been a reduction in the
supply of in-home family care-givers. Other factors, including the increase in
single-parent households, as well as wider geographic dispersion of families,
have contributed to the growing inability of families to care for their elderly
relatives in the home.
INCREASED AFFLUENCE OF THE ELDERLY. The net worth of elderly senior
citizens has increased and, consequently, many can better afford to pay for
third-party care. Many seniors have accumulated equity through savings plans as
well as home ownership. According to U.S. Bureau of the Census data, the median
net worth of householders aged 75 or more has increased from $55,178 in 1984 and
$61,491 in 1988 and $76,541 in 1991 to $77,654 in 1993 in the United States.
LIMITATION ON THE SUPPLY OF LONG-TERM CARE FACILITIES. State regulation and
the growing number of persons over the age of 75 may, in some areas, create an
imbalance between the supply and demand for assisted living services. The
majority of states in the United States (including New York) have enacted
certificate of need or similar legislation which generally limits the
construction of new skilled nursing facilities and the addition of beds or
services in existing skilled nursing facilities. High construction costs,
limitations on government reimbursement for the full cost of construction, and
start-up time and expenses also act to constrain growth in the supply of such
facilities. Such legislation benefits the assisted living industry by limiting
the supply of skilled nursing beds available for elderly senior citizens.
Certificates of need are not required for assisted living facilities in most
states, although some states do require
35
<PAGE>
assisted living providers to obtain a license to operate their facilities and to
comply with various regulations regarding building requirements and operating
procedures. Furthermore, states often impose additional requirements on specific
types of assisted living facilities over and above standard congregate care
requirements, making it increasingly difficult for potential industry
participants who are not familiar with applicable regulatory requirements to
open new facilities. New York requires both a public needs assessment and
licensure for certain types of assisting living facilities. Further, the limited
pool of experienced assisted living staff and management, as well as the costs
and start-up expenses to construct an assisted living facility, provide an
additional entry barrier for the assisted living business. However, the Company
competes with numerous local, regional and national companies providing assisted
living services and other long-term care alternatives. The Company expects that,
as assisted living receives increased attention, competition will grow. See "--
Competition."
COST-CONTAINMENT PRESSURES; PUSH-DOWN EFFECT. In response to rapidly rising
health care costs, both government and private pay sources have adopted
cost-containment measures that have encouraged reduced lengths of stay in
hospitals and skilled nursing facilities. Moreover, cost factors are placing
pressure on skilled nursing facilities to shift their focus toward more intense
levels of care which enables them to charge higher fees, thus creating a
shortage of facilities where skilled but less intensive care is available. The
result of these forces is that patients are being "pushed down" from hospitals
and skilled nursing facilities to assisted living facilities. For example, the
State of New York enacted its Assisted Living Program as a cost-effective
long-term care alternative mainly for Medicaid beneficiaries who are eligible
for placement in a skilled nursing facility. The rate paid by Medicaid for the
home care services for Medicaid beneficiaries in an Assisted Living Program is
50% of the rate that would be paid for the same services in a skilled nursing
facility in the same geographical area.
QUALITY OF LIFE ADVANTAGES. The Company believes that assisted living is
becoming a preferred choice over skilled nursing homes for elderly senior
citizens and their families. This preference can be attributed to the ability of
residents of assisted living facilities to "age in place" in a residential
group-setting, thereby promoting independence, dignity and an improved quality
of life.
GROWTH STRATEGY
OVERVIEW. The Company's growth strategy for the next three to five years
will focus on the expansion of its existing portfolio through the development
and acquisition of additional assisted living facilities, the expansion of its
ancillary services, such as home health care services, in-house pharmacy
services and its Extended Care Program, and maintaining its focus on
cost-efficient facilities management. The Company also intends to continue to
capitalize on public recognition of the "Senior Quarters" trademark to
distinguish itself from competitors.
The Company's primary focus is the northeastern United States where it
intends to maintain its position as a leading assisted living provider. The
Company also will seek to develop or acquire facilities in other areas of the
United States in which it believes it will be able to create a sizable presence.
The Company believes that by concentrating or "clustering" its facilities in
target areas with desirable demographics, it can increase the efficiency of its
management resources and achieve broad economies of scale.
Three generations of the Kaplan family have shaped the growth strategy of
the Company. Since 1985, the Company has developed ten assisted living
facilities and acquired all or an interest in three others, formed home health
care service agencies in order to offer such services in the Company's
facilities, and developed its prototype facility for cost-effective management.
Most of these facilities have been located in New York State, which has one of
the most extensive regulatory frameworks with respect to the provision of
assisted living services. Accordingly, the Company believes that it not only has
the requisite experience but also the systems, procedures and infrastructure to
support its growth strategy and to adapt to regulatory change. The Company
intends to continue to finance its development and acquisition of new facilities
through a variety of sources, including the proceeds of the Offering, bank and
other financing, long-term operating leases with REITs, future debt or equity
offerings, joint ventures and other sources.
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
be applied to new acquisitions when reviewing these opportunities. The Company
recently entered into
38
<PAGE>
an agreement to acquire the 50% interest that it does not already own in the
entity which owns Senior Quarters at East Northport. With the exception of such
agreement, the Company currently has no firm commitments or other agreements,
arrangements or understandings with respect to any such acquisition.
CONVERSIONS OF EXISTING FACILITIES USED FOR OTHER PURPOSES. The Company has
extensive experience with the conversion of existing buildings into assisted
living facilities which it believes expands its universe of potential
development opportunities. In certain instances, the conversion of an existing
facility may have compelling economic advantages compared to the development of
a new facility, including: (i) lower total development costs; (ii) less time
required for preparation of the facility; and (iii) an expedited zoning permit
process. While the Company believes that the majority of the facilities it
develops in the future will be newly constructed, the Company also believes that
its extensive experience with conversions enlarges its universe of potential
development projects and will enable it to take advantage of economically
lucrative conversion opportunities that do arise.
CONVERSION OF EXISTING BUILDINGS SINCE 1985
<TABLE>
<CAPTION>
FACILITY CONVERSION
- ------------------------------------- --------------------------------------------------------------------------
<S> <C>
Senior Quarters at Huntington Station In 1986, the Company purchased a vacant school building and developed an
assisted living facility by adding a new wing and implementing extensive
renovation and rehabilitation.
Senior Quarters at Stamford This assisted living facility was formerly a luxury hotel that was
purchased by the Company in 1988 and thereafter converted into a managed
residential facility with its own Assisted Living Services Agency.
The Regency at Glen Cove This assisted living facility was formerly an unfinished condominium
project that was converted, designed and built in 1993 by its owner with
the Company's assistance.
Senior Quarters at Cranford The Company assisted the owner of this former hotel in converting it to an
assisted living facility in 1993.
Senior Quarters at Chestnut Ridge This assisted living facility was formerly a hotel that, in 1995, was
converted by doing extensive renovation and adding a new building which
incorporated many of the common areas.
Senior Quarters at East Northport The Company converted this former school building into an ALP facility in
1995-96 by performing extensive renovation and adding two residential
wings.
</TABLE>
ADDITION OF MANAGEMENT CONTRACTS WITH UNAFFILIATED THIRD PARTIES. The
Company currently has four facilities which it manages for not-for-profit
institutions and other unaffiliated third-parties. The Company believes that
management contracts are not only generally profitable but also allow management
a close look at a facility which may lead to its acquisition. Management
believes that it is chosen due to its experience in operating assisted living
facilities.
EXPANSION OF COMPANY-PROVIDED ANCILLARY SERVICES. The Kaplans own and
operate a New York licensed home care services agency, which offers home care
services in most of the Company's New York facilities, 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
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<PAGE>
ancillary services will enable the Company to attract additional residents and
enable residents to stay at the Company's assisted living facilities longer,
rather than having to transfer to more expensive skilled nursing facilities, but
also that its provision of such services will increase as its growth strategy is
implemented.
The Company also seeks to enhance and increase the amount and diversity of
assisted living services it provides through: (i) the continued education of the
senior community, and particularly the residents and their families, concerning
the cost effectiveness of receiving additional services in an assisted living
facility; (ii) the continued development and refinement of assisted living
programs designed to meet the needs of its residents as they "age in place"; and
(iii) the consistent delivery of quality services for residents.
COST-EFFICIENT FACILITIES MANAGEMENT. The Company's growth strategy also
emphasizes continued cost-efficient management at its assisted living
facilities. This includes the use of the Company's new facility prototype, the
balancing of increases in costs with increases in assisted living fees, and the
maximization of occupancy rates. In addition, because its facilities are
relatively close to one another, the Company is able to take advantage of volume
purchases of supplies from vendors with whom it has an established relationship,
thereby reducing operating expenses. Lastly, the Company maintains an aggressive
facility maintenance program which helps not only to attract and retain
residents but also to avoid costly replacements and repairs.
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THE COMPANY'S ASSISTED LIVING FACILITIES
The Company currently owns, manages and/or operates 15 assisted living
facilities containing 1,623 units with a capacity for 2,392 residents. The
following chart sets forth information regarding the Company's existing
facilities.
<TABLE>
<CAPTION>
NUMBER OF YEAR OF
UNITS/ YEAR COMMENCEMENT
RESIDENT OWNED OR CONSTRUCTED OF KAPSON
FACILITY CITY CAPACITY MANAGED OR CONVERTED OPERATIONS
- ------------------------------------------------ -------------- ----------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
CONNECTICUT
Senior Quarters at Stamford (1)............... Stamford 94/188 100% 1988 1988
NEW JERSEY
Senior Quarters at Cranford (1)............... Cranford 173/254 Managed 1993 1993
Change Bridge Inn (1)......................... Montville 103/112 23.75% 1988 1995
Senior Quarters at Jamesburg (1).............. Jamesburg 125/156 10% 1996 1996
NEW YORK
Senior Quarters at Centereach I (2)........... Centereach 101/200 100% 1979 1978
Senior Quarters at Huntington Station (2)..... Huntington 99/198 100% 1987 1987
Senior Quarters at Centereach II (3).......... Centereach 99/198 100% 1989 1989
The Regency at Glen Cove (4).................. Glen Cove 95/105 Managed 1993 1993
Senior Quarters at Chestnut Ridge (2)......... Chestnut Ridge 98/148 50.1% 1995 1995
Castle Gardens (5)............................ Vestal 84/84 Managed 1990/1993 1996
Senior Quarters at East Northport (2)(6)...... East Northport 139/200 50% 1996 1996
Senior Quarters at Lynbrook (2)............... Lynbrook 126/200 Managed 1996 1996
Town Gate East (2)............................ Penfield 100/120 100% 1972 1996
Town Gate Manor (2)........................... Rochester 67/79 100% 1970 1996
PENNSYLVANIA
Senior Quarters at Glen Riddle (1)............ Glen Riddle 120/150 11% 1996 1996
-----------
TOTAL........................................... 1,623/2,392
</TABLE>
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(1) This facility is directly managed by a wholly owned subsidiary of the
Company. See "-- Government Regulation" and "Certain Transactions."
(2) In order to comply with applicable New York law and regulations, this
facility is operated by the Kaplans individually pursuant to an operating
agreement. The Kaplans have engaged a wholly owned subsidiary of the
Company to provide certain management services pursuant to a management
agreement. See "-- Government Regulation" and "Certain Transactions."
(3) This facility is operated by the Kaplans individually pursuant to an
operating agreement with the Company. The Kaplans have engaged a wholly
owned subsidiary of the Company to provide certain management services
pursuant to a management agreement. See "Certain Transactions."
(4) This facility is operated by its owner, a New York not-for-profit
corporation that is unaffiliated with the Company. The owner has engaged a
wholly owned subsidiary of the Company to provide management services
pursuant to a management agreement. See "-- Government Regulation" and
"Certain Transactions."
(5) The portion of this facility that is operated as an independent living
facility (84 beds) is managed by a wholly owned subsidiary of the Company
pursuant to a management agreement. The portion that is operated as an
Enriched Housing Program facility (27 beds) is operated by a New York
not-for-profit corporation.
(6) The Company has entered into an agreement to acquire the 50% interest that
it does not already own in the entity that owns this facility.
The Company's facilities are generally located near or in a major population
center and close to shopping malls and social and cultural activity centers.
Management believes that, among other factors, residents generally choose a
facility that is located close to their homes or the homes of their families.
Room configurations consist of studios and variously sized one-bedroom or
two-bedroom apartments.
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Communal areas usually include a variety of activity rooms, a medical
examination room, beauty salon/ barbershop, library, chapel, media rooms,
billiard room, a crafts room and a 24-hour per day country kitchen.
The Company believes that its facilities are generally larger than typical
assisted living facilities in terms of units and resident capacity. Management
believes that economies of scale enhance operating margins at large facilities
and that "rent-up" risk is minimized through management's extensive 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
44
<PAGE>
management, personal care assistance, housekeeping, maintenance, security,
medication management, food preparation, nutrition planning, supervision of
recreational activities and other operational elements. For a description of
management arrangements regarding the operation of certain facilities, see
"Certain Transactions."
FACILITY. The operational staff at each of the Company's assisted living
facilities generally consists of an administrator, who has overall
responsibility for the operation of the facility (subject, however, to the
control of the licensed operator, where applicable), a medical director, a
recreation director, a case manager or social worker and an assistant
administrator. At least one personal care aide is on duty 24 hours per day to
respond to emergencies, and scheduled 24-hour assisted living services are
available to residents. Each facility has a kitchen staff, a housekeeping staff
and a small maintenance staff. The Company's assisted living facilities have on
average 70 to 80 full-time or part-time employees depending on the size of the
facility and the extent of assisted living services provided in that facility.
The Company's facilities place emphasis on diet and nutrition, as well as
preparing attractively presented healthy meals which can be enjoyed by the
residents. The Company's food service program is led by a nutritionist, who
prepares all menus and recipes for each facility. The menus and recipes are
reviewed and changed based on consultation with nutritional experts, input from
the residents, and applicable law and regulations. Under certain circumstances,
the Company also provides special meals for residents who require special diets.
EMPLOYEES. The Company emphasizes maximizing each employee's potential
through support and training. The Company experiences low turnover in the staff
at both its central office and its facilities and, consequently, it is able to
promote from within. Management personnel is trained in the areas of supervision
and management skills. At the facility level, key personnel such as an
administrator or an assistant administrator will generally have received
approximately eight months training at the Company's central office and one of
the Company's facilities prior to the opening of the facility. Other key
personnel, such as medical directors, case managers or recreational directors
will generally have received approximately four months training at one the
Company's facilities prior to assuming duties at a new facility. In addition,
the administrators of each facility conduct monthly in-service training sessions
relating to various practical areas of care-giving at the facility. These
monthly training sessions cover policies and procedures of all facets of
facility operations, including special areas such as state and social service
regulations, quality assurance, fire, safety disaster procedures, and resident
care. In addition, hourly employees are trained in the Company's philosophy of
assisted living, motivational sessions and practical how-to areas of dealing
with residents. The Company believes that the long tenure of its operational
staff is due to the advancement opportunities that arise out of the Company's
rapid growth.
TRANSITION TEAM. In order to manage its growth more effectively, the
Company dispatches a transition team to each new facility that offers its
permanent staff back-up assistance and technical and other advice with respect
to all aspects of the operation of the new facility, such as budgets, policies,
procedures and systems, activities for the elderly, administration and provision
of specific assisted living services, food service, wellness monitoring,
maintenance, and other operational areas. Depending on the size and nature of
the new facility, a transition team generally consists of two to eight persons
who are department heads of other facilities. The team is typically on site
prior to and through the new facility's opening date, and remains there for a
week at a time during the new facility's first two months of operation.
QUALITY CONTROL. The Company ensures the quality of its services through
frequent, thorough reviews. The administrator of each facility conducts a
"walk-through" inspection every day and the department heads hold frequent staff
meetings to discuss issues concerning the operation of the facility. A Vice
President of Operations conducts a regular site review on an unannounced basis.
The Company also uses outside inspectors to examine the facility from the
viewpoint of the family member of a prospective resident and to report their
impressions to Company management.
45
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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
46
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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 publicly traded for-profit
corporation from operating a licensed facility. Legislation has been enacted
recently in New York State which allows for-profit corporations, whose stock
(and whose parent entity's stock) is not traded on a national exchange or
over-the-counter market, to operate Adult Homes, ALP facilities, and Enriched
Housing Programs. Natural persons individually or in partnership and privately
held corporations may operate Adult Homes and ALP facilities. The licensed
operator(s) of an Adult Home may enter into management contracts which provide
that the licensed operator(s) shall maintain ultimate responsibility and
liability for the licensed entity and the power to discharge persons working at
the licensed facility. Licensed operators of ALP facilities may enter into
management contracts that provide additionally that the licensed operator shall
retain control and responsibility for the day-to-day operations by the licensed
operators, the authority and power to hire and discharge persons working at the
licensed entity, maintain and control the books and records of the licensed
entity, retain ultimate authority to dispose of assets used in the operation of
the licensed entity, to incur any liability on behalf of the licensed entity,
and to adopt or enforce policies regarding the operation of the licensed entity.
Any change in the operator of any type of licensed facility requires prior
notification and approval of the state. New York's licensed facilities are also
subject to periodic inspection and license renewal every four years.
Applicable regulations also include admission standards with respect to the
needs of each individual, and require that assessments be made by a professional
health care provider prior to the provision of home care services. Home care
services may only be provided to residents of a licensed facility by a licensed,
certified or otherwise approved home care services agency. Licensed and
certified agencies may be owned and operated by the operator of the licensed
facility or by a for-profit corporation but are subject to regulation by the
Department of Health. The Kaplans operate the Kapson Licensed Home Care Services
Agency, a home care services agency licensed by the state to arrange and/or
provide, directly or through sub-contracting, nursing services, home health
aides, physical, occupational and speech therapy, nutritional services, personal
care services, and housekeeper or chore services. The Kapson Licensed Home Care
Services Agency has applied to the New York State Department of Health to extend
its license to additional counties so as to provide such services to all of the
New York facilities serviced by the Company. A significant portion of the home
care services provided in the Company's ALP facilities are already being
provided by the Kapson Licensed Home Care Services Agency. If and when its
license is extended to other counties by the Department of Health, the Kapson
Licensed Home Care Services Agency intends to maintain on-site office space at
the Company's facilities. In addition,
47
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the Company has applied for licensure as a home care services agency so that it
may provide all such services in all its New York facilities (other than its ALP
facilities). See "-- Federal and State Fraud and Abuse Laws and Regulations."
The Company expects to apply within the next year to New York state
authorities for registration as a pharmacy in order to provide in-house pharmacy
services in all of its facilities. A New York pharmacy may be owned by a
for-profit corporation provided that the corporation obtains a registration and
that the actual practice of pharmacy is conducted by licensed pharmacists. New
York pharmacies are subject to inspections, notice requirements relating to,
among other things, changes of ownership, and extensive regulations on all
aspects of pharmacy business practices, including but not limited to the
labeling and dispensing of drugs, the preparation of sterile products, and
recordkeeping. The sale of pharmaceutical products by a pharmacy in other states
is subject to regulation by such states.
Licensed facilities in New York are not required to provide a specific mix
of SSI-eligible and private-pay residents, but preference has, in the past, been
given with respect to applicants for licenses under New York's Assisted Living
Program to those who will commit beds to Medicaid residents. Once approved to
provide a designated number or percentage of Medicaid beds, an ALP facility
operator cannot reduce that amount without further state approval, which may or
may not be granted.
In addition to its Adult Homes, the Company operates two ALP facilities in
New York. Pursuant to state law, ALP facilities combine an Adult Home with a
type of home care services agency, which in the Company's facilities is a
licensed home care services agency. The New York State Department of Social
Services and Department of Health have joint oversight over ALP facilities. To
qualify as an ALP resident, an individual must require more care and services
than can be directly provided by a typical Adult Home and must be medically
eligible for placement in a nursing facility. The Assisted Living Program is
available to residents who pay privately but priority is given to
Medicaid-eligible individuals. Payment for such residents is based on a
combination of residential fees based on SSI-established rates, and a daily
capitated Medicaid payment. See "-- Reimbursement." The Program, which was
enacted in 1991 but has only recently been in operation, is subject to
reevaluation in the near future.
In 1995, the New York State legislature set up a task force to study
long-term care financing, which recently issued its report. Changes in
applicable law or regulations may soon result from this report, which, among
other things, encourages development of assisted living facilities and
consideration of assisted living and other long-term care services and programs
that could be attractive to for-profit entities.
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
49
<PAGE>
currently meet the qualifying test of stockholder equity of at least $75.0
million. Submission of a claim for services for which payment is prohibited
under the Stark Law could result in substantial civil penalties. New York State
imposes similar prohibitions against health care professionals referring any
patients to a company that provides pharmacy services in which the health care
professional has an ownership or financial interest such as stock ownership in
the Company. Laws imposing various restrictions applicable to such referrals
exist in many other states. The Company reviews and will continue to review all
aspects of its operations to assure compliance with federal and state health
care fraud and abuse laws, and will monitor developments under such laws.
COMPANY HISTORY
The Kaplan family has an extensive background in real estate and assisted
living. In 1932, the grandfather of the Kaplans founded a family-owned
commercial real estate enterprise with a number of subsequent investments in
hotel and hospitality properties. This enterprise entered the assisted living
business in 1972 by opening its first facility. A second assisted living
facility was opened two years later. Thereafter the family's existing assisted
living facilities were expanded, another was opened and land for future assisted
living projects was purchased. In 1985, The Kapson Group was formed as a New
York general partnership between Glenn Kaplan, Wayne Kaplan and Evan Kaplan. The
Kapson Group retained one of these assisted living facilities. Since that time,
The Kapson Group has phased out its commercial real estate operations, focused
strictly on its assisted living business, and built an executive management team
and assisted living operation with experience and expertise in the financing,
acquisition, development, management and operation of assisted living
facilities.
The Company was formed as a Delaware corporation on June 7, 1996 in order to
consolidate and expand the assisted living facility business of The Kapson
Group. The Kapson Group operated its business in the form of a series of S
corporations, partnerships and limited liability companies. In anticipation of
the Offering, the Company entered into a number of transactions with The Kapson
Group and its affiliates. For a description of these transactions, see "Certain
Transactions."
EMPLOYEES
As of the date hereof, the Company and its facilities employ approximately
900 persons, including 26 in the Company's corporate headquarters. The Company
believes its employee relations are good.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits and other matters arising in the
normal course of business. In the opinion of management of the Company, although
the outcomes of these claims and suits are uncertain, in the aggregate they
should not have a material adverse effect on the Company's financial position or
results of operations.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information regarding the executive officers
and directors of the Company as of August , 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Glenn Kaplan (2) 43 Chairman of the Board of Directors and Chief
Executive Officer
Wayne L. Kaplan 40 Vice Chairman of the Board of Directors; Senior
Executive Vice President and Secretary
Evan A. Kaplan (1) 37 President and Chief Operating Officer; Director
John M. Sharpe, Jr. 43 Vice President, Chief Financial Officer and
Treasurer
Joseph G. Beck (2) 42 Director
Bernard J. Korman (1)(3) 64 Director
Risa Lavizzo-Mourey, M.D. (1)(3) 41 Director
Gerald Schuster (2)(3) 66 Director
</TABLE>
- ------------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Stock Option Committee.
GLENN KAPLAN is the Chairman of the Board of Directors and Chief Executive
Officer of the Company. Prior to June 1996 he was a partner and co-founder of
The Kapson Group. Glenn received a B.S. degree in Accounting from the University
of Bridgeport.
WAYNE L. KAPLAN is the Vice Chairman of the Board of Directors, Senior
Executive Vice President, and Secretary of the Company. Prior to June 1996 he
was a partner and co-founder of The Kapson Group. Wayne is a member of the New
York State Bar, was appointed by Governor Mario Cuomo to the New York State Life
Care Community Council, sits on the Board of Directors of the Assisted Living
Facilities Association of America (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.
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<PAGE>
JOSEPH G. BECK, director, is a founding principal and executive committee
member of Shattuck Hammond Partners Inc. ("Shattuck Hammond"), a specialty
health care investment banking firm based in New York. He directs Shattuck
Hammond's activities in the area of long-term care and related companies. Prior
to Shattuck Hammond, he was a Vice-President (1987-1990) and Principal
(1990-1993) at Cain Brothers, Shattuck & Company, a predecessor to Shattuck
Hammond. From 1985 to 1987, he was a Vice-President at Chemical Bank where he
eventually directed the investment banking work with hospitals and other health
care companies. Prior thereto, he was a senior credit analyst at Moody's
Investors Services, Inc., a financial service company. From 1978 to 1982, he
held several positions in health care regulation and policy analysis for various
departments of the New York State Government and for the New York State Senate.
Mr. Beck is a member of the Board of Trustees of The Lighthouse, a
not-for-profit vision rehabilitation, research and training agency. He received
a B.A. degree from LeMoyne College and a Masters degree in Health Policy and
Management from the Harvard University School of Public Health.
BERNARD J. KORMAN, director, has been Chairman of the Board of Directors of
The Graduate Health System, a Philadelphia based not-for-profit health system
with hospitals in Pennsylvania and New Jersey, since December 1995. From 1983 to
1996, Mr. Korman was Chairman of PCI Services, Inc., a publicly traded company.
Since 1986, Mr. Korman has been Chairman and a director of NutraMax Products,
Inc., a publicly traded consumer healthcare products company. From 1983 until
1996, Mr. Korman was President, CEO and a director of MEDIQ, Incorporated, a
publicly traded healthcare services company. Mr. Korman is currently a director
of: The New America High Income Fund; The Pep Boys -- Manny, Moe & Jack; Today's
Man, Inc.; Omega Healthcare Investors, Inc.; and InnoServ Technologies, Inc. PCI
Services, Inc. and NutraMax Products are affiliates of MEDIQ, Incorporated. Mr.
Korman received a B.S. degree from the University of Pennsylvania and an L.L.B.
degree from the University of Pennsylvania School of Law.
DR. RISA LAVIZZO-MOUREY, director, has been Director of the Institute of
Aging, Chief of the Division of Geriatric Medicine and Associate Executive Vice
President for Health Policy at the University of Pennsylvania, Ralston-Penn
Center, since 1994. From 1992 to 1994, Dr. Lavizzo-Mourey served with the Agency
for Health Care Policy and Research, U.S. Public Health Service of the
Department of Health and Human Services. Dr. Lavizzo-Mourey has been on the
faculty of the University of Pennsylvania School of Medicine since 1986, and is
currently the Sylvan Eisman Associate Professor of Medicine. Dr. Lavizzo-Mourey
is a director of Beverly Enterprises, Inc., Medicus Systems Corp., Managed Care
Solutions, Inc., and Nellco Puritan Bennett Inc. Dr. Lavizzo-Mourey received an
M.D. degree from the Harvard Medical School and an M.B.A. degree in Health Care
Administration from The Wharton School of Business, University of Pennsylvania.
GERALD SCHUSTER, director, has been President and Chief Executive Officer of
Continental Wingate Company, Inc., a real estate, health care and financial
services company which is engaged in commercial mortgage lending and servicing,
development and syndication of multifamily housing, and has developed and has
operated eight long-term care and rehabilitation facilities with 1,100 beds in
New York and Massachusetts, since 1971. Mr. Schuster serves as Chairman of the
Advisory Committee for the Massachusetts Housing Finance Agency, a state
authority for the issuance of multifamily housing debt. Mr. Schuster received a
B.B.A. degree from Clark University.
See "Certain Transactions" and "Principal and Selling Stockholders" for
certain information concerning the Company's Directors and executive officers.
Glenn Kaplan, Wayne L. Kaplan and Evan A. Kaplan are brothers. There are no
other family relationships among any directors or officers of the Company.
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
the Company hold office until the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three
52
<PAGE>
years, and until their successors are elected and qualified, or until their
earlier resignation or removal. All officers are appointed by and serve at the
discretion of the Board of Directors. See "-- Election of Directors."
KEY EMPLOYEES
MARYELLEN K. POKOWITZ has been Vice President of Operations of the Company
since May 1996. Ms. Pokowitz was Head Administrator for the Company from April
1989 to May 1996. Prior to that, Ms. Pokowitz was employed in various
operational positions by the Company since 1977. Ms. Pokowitz was awarded the
"Administrator of the Year" award by the Empire State Association of Adult Homes
in 1990.
PAUL M. HANNAN has been Vice President of Development of the Company since
July 1994. From May 1991 to June 1994, Mr. Hannan was Director of Finance for
Genesis Health Ventures, Inc., a publicly traded long-term health care company,
where he analyzed prospective acquisitions, managed the financial activities and
supervised the development and expansion of existing facilities. Mr. Hannan
received an M.B.A. degree in Finance from Drexel University and a B.S. degree
Business Administration from Delaware Valley College.
ROBERT C. ROSENBERG has been Vice President of Development of the Company
since March 1996. From January 1995 to March 1996, Mr. Rosenberg was Vice
President - Development for the Economic Development Corp. of the City of New
York, where he was responsible for financial analysis and due diligence for a
broad range of real estate projects. From December 1992 to August 1994, Mr.
Rosenberg was Deputy Director of Real Estate for the Metropolitan Transit
Authority. From August 1987 to November 1992, Mr. Rosenberg worked in various
development management positions for Olympia & York Companies (USA). Mr.
Rosenberg received a B.A. in Urban Planning from Stanford University and an
M.B.A. degree in Finance from New York University.
WILLIAM D. BURSON has been Vice President of Marketing for the Company since
March 1996. From September 1991 to March 1996, Mr. Burson was director of
independent living operations for Church Homes, Inc., a 500-bed congregate care
community where he directed general operations and marketing. From 1986 to
September 1991, Mr. Burson was Executive Vice President -- Marketing and Sales
for Retirement Management Group, Inc., a manager of nursing homes and retirement
communities.
DENNIS R. CREGAN has been Project Manager for the Company since October
1994. From January 1994 to June 1994, Mr. Cregan worked for Hunter Real Estate
Management where he was Project Manager for a $12 million capital improvement
project; from May 1990 to December 1993, Mr. Cregan was Manager -- Plant
Engineering for Hazeltine Corporation, a subsidiary of ESCO Electronics Corp., a
publicly traded manufacturer of defense and electronics equipment and systems,
where he was responsible for facilities management, construction budget
administration, contractor selection and compliance with local, state and
federal regulations. From 1982 to May 1990, Mr. Cregan served in several project
planning and administration positions for Hazeltine. Mr. Cregan received a
degree in Architectural Engineering from the State University of New York at
Farmingdale. Mr. Cregan is certified by the International Facilities Management
Association and is a professional member of the National Fire Protection
Association and Construction Specifications Institute.
JUNE F. HECK has been the Controller for the Company since November 1994.
From December 1993 to November 1994, Ms. Heck served as General Manager --
Corporate Accounting for Synergy Gas Corporation, a utility gas company. From
April 1990 to November 1993, Ms. Heck was Accounting Manager of the Weight
Watchers International, Inc. division of H.J. Heinz & Co., a publicly traded
food products company. From August 1984 to April 1990, Ms. Heck served as
Controller for F. Robbins Corp., a commercial heating and air conditioning
company. From July 1981 to February 1984, Ms. Heck was an accountant for Price
Waterhouse. Ms. Heck received a B.S. degree and is pursuing an M.B.A. degree
from the School of Professional Accountancy of the Long Island University --
C.W. Post Campus.
53
<PAGE>
MARLYNN B. COHEN has been Director of Human Resources for the Company since
August 1995. From September 1987 to August 1995, Ms. Cohen was Director of
Administration and Human Resources at Ernst & Young LLP, a public accounting
firm, in Melville, New York. At Ernst & Young, Ms. Cohen was responsible for
employee recruiting, benefit and salary administration, financial budgeting,
computer evaluation and support, and facilities management for a branch office.
Ms. Cohen received a B.A. degree in Economics from New York University.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee, which consists of a majority of
independent directors who are not affiliated with the Kaplans ("Independent
Directors"), makes recommendations concerning the engagement of independent
public accountants, reviews with the independent public accountants the plans
and results of the audit engagement, approves professional services provided by
the independent public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal accounting controls.
COMPENSATION COMMITTEE. The Compensation Committee, which consists of a
majority of Independent Directors, approves the salaries and other benefits of
the executive officers of the Company and administers any non-stock based bonus
or incentive compensation plans of the Company (excluding any cash awards
intended to qualify for the exception for performance-based compensation under
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code")).
In addition, the Compensation Committee consults with the Company's management
regarding pension and other benefit plans, and compensation policies and
practices of the Company.
STOCK OPTION COMMITTEE. The Stock Option Committee, consisting solely of
directors who, to the extent legally required, qualify as "Outside Directors"
under Section 162(m) of the Code and as "Non-Employee Directors" under Rule
16b-3(c) of the Securities Exchange Act of 1934, as amended, administers any
stock-based incentive plans of the Company, including the 1996 Stock Incentive
Plan. In addition, the Stock Option Committee will be responsible for granting
any cash awards intended to qualify for the exception for performance-based
compensation under Section 162(m) of the Code.
ELECTION OF DIRECTORS
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three years. No determination has been made as to which directors will be
members of each class. See "Description of Capital Stock -- Delaware
Anti-Takeover Law and Certain Charter Provisions."
COMPENSATION OF DIRECTORS
The Company intends to pay its directors who are not employees of the
Company an annual compensation fee of $10,000 and a per meeting fee of $500 for
each directors' meeting and each committee meeting attended. Under the Company's
1996 Stock Incentive Plan (the "Incentive Plan"), each non-employee director has
been granted, effective as of the date on which the offer price is determined, a
non-qualified option to purchase 10,000 shares of Common Stock at the initial
public offering price, and each new non-employee director upon the date of his
or her election or appointment will be granted a non-qualified option to
purchase 10,000 shares of Common Stock at the fair market value on the date of
grant. All options granted to non-employee directors will vest at the rate of
25% on each of the first four anniversaries of the date of grant, assuming the
non-employee director is a director on those dates, and all such options
generally will be exercisable for a period of ten years from the date of grant.
Upon a Change of Control (as defined in the Incentive Plan) all unvested options
(which have not yet expired) will automatically become 100% vested. Directors
who are employees of the Company will not be compensated for services as a
director. See "Management--1996 Stock Incentive Plan."
54
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation earned for services rendered in all capacities to the Company for
the fiscal year ended December 31, 1995 by the Company's Chief Executive Officer
and each other executive officer whose salary and bonus for such fiscal year was
in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION (1)
---------------------------------------- ------------------------------------
OTHER ANNUAL RESTRICTED STOCK SECURITIES
NAME AND PRINCIPAL COMPENSATION AWARD(S) UNDERLYING
POSITION YEAR SALARY ($) BONUS ($) ($) ($) OPTIONS #
- --------------------------------- --------- ----------- ----------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Glenn Kaplan(2) ................. 1995 67,177 0 169,189(3) 0 0
Chairman of the Board and Chief
Executive Officer
Wayne L. Kaplan(2) .............. 1995 67,177 0 160,513(3) 0 0
Vice Chairman of the Board,
Senior Executive Vice President
and Secretary
Evan A. Kaplan(2) ............... 1995 67,177 0 160,382(3) 0 0
President and Chief Operating
Officer
<CAPTION>
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
the Kaplans, taking into account the operating results of the Company as well as
such subjective factors as the Compensation Committee deems appropriate and in
the best interests of the Company and its stockholders, which bonus amount will
be shared equally by the Kaplans. In addition, under the agreement the Executive
will be entitled to long-term disability coverage, use of an automobile and club
membership, and benefits generally provided to executive employees.
55
<PAGE>
The agreement also provides that during the Employment Term and thereafter,
the Company will indemnify Executive to the fullest extent permitted by law, in
connection with any claim, against Executive as a result of Executive serving as
an officer or director of the Company or in any capacity at the request of the
Company in or with regard to any other entity, employee benefit plan or
enterprise. Following Executive's termination of employment, the Company will
continue to cover the Executive under the Company's directors and officers
insurance for the period during which Executive may be subject to potential
liability for any claim, action or proceeding (whether civil or criminal) as a
result of his service as an officer or director of the Company at the highest
level then maintained for any then or former officer or director.
Any dispute or controversy arising under or in connection with this
Agreement (other than injunctive relief) shall be settled exclusively by
arbitration. Each party shall bear its own legal fees except that, in the event
the Executive prevails on any material issue, the arbitrator shall award the
Executive his legal fees except those attributable to frivolous positions.
The agreement may be terminated at any time by the Executive for Good Reason
(including a Change in Control of the Company) or by the Company with or without
Cause (as each capitalized term is defined in the agreement). Good Reason also
includes an event of default or termination, other than in accordance with its
terms, by the Company or its subsidiaries without cause of any operating
agreement between the Company and the Kaplans, as operators of the Company's
facilities, or any management agreement between the Company's wholly owned
subsidiary and the Kaplans. If the employment of the Executive is terminated for
any reason, he may withdraw as a licensed operator of certain of the Company's
facilities. Likewise, if any Kaplan is terminated by the Company as an operator
of one of its facilities, he may resign his employment with the Company. See
"Risk Factors -- Operating Agreements; Management Agreements" and "Certain
Transactions."
If the Executive terminates his employment with the Company for Good Reason
(including the Company giving notice of non-renewal) or is terminated without
Cause, he will receive severance pay (i) in an amount equal to two years' Base
Salary and bonus, plus (ii) continued medical benefits for two years. The
agreement provides that Executive will have no obligation to mitigate the
Company's financial obligations in the event of his termination for Good Reason
or without Cause and there will be no offset against the Company's financial
obligations for other amounts earned by the Executive. If termination is the
result of Executive's death or disability, the Company will pay to the Executive
(or his estate), an amount equal to six months' Base Salary at his then current
rate of pay (reduced in the case of disability by his long-term disability
policy payments). If the Executive's employment is terminated by him for Good
Reason or by the Company without Cause, he may also withdraw as an operator of
the Company's facilities; in such an event, he will be entitled to receive twice
his pro rata share of the operating fees (net of fees payable under the
applicable management agreement) for the preceding twelve months. See "Risk
Factors -- Operating Agreements; Management Agreements" and "Certain
Transactions."
1996 STOCK INCENTIVE PLAN
BACKGROUND; PURPOSE; ELIGIBILITY. On June 7, 1996, the Board of Directors
and the stockholders of the Company approved the Incentive Plan. The Incentive
Plan was subsquently amended and restated, effective as of June 7, 1996, to
reflect certain changes in applicable securities laws and to make certain other
changes. The following description of the Incentive Plan is intended only as a
summary and is qualified in its entirety by reference to the Incentive Plan. The
purpose of the Incentive Plan is to enhance the profitability and value of the
Company and its affiliates for the benefit of their stockholders by enabling the
Company (i) to offer employees of the Company stock based incentives and other
equity interests in the Company, thereby creating a means to raise the level of
stock ownership by employees in order to attract, retain and reward such
employees and strengthen the mutuality of interests between employees and the
Company's stockholders, and (ii) to make equity based awards to non-employee
directors thereby attracting, retaining and rewarding such non-employee
directors and strengthening the mutuality of interests between non-employee
directors and the stockholders. All employees of the
56
<PAGE>
Company and its subsidiaries that satisfy certain ownership requirements are
eligible to be granted awards under the Incentive Plan. In addition,
non-employee directors of the Company will receive awards of non-qualified stock
options under the Incentive Plan, but are not eligible for other awards
thereunder.
ADMINISTRATION. The Incentive Plan will be administered by the Stock Option
Committee of the Board of Directors of the Company (the "Board") which, to the
extent legally required, will be comprised solely of two or more directors
qualifying as "outside directors" under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code") and satisfying any requirements of Rule
16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Stock Option Committee will have full authority and discretion, subject to
the terms of the Incentive Plan, to determine those individuals eligible to
receive awards and the amount and type of awards. Terms and conditions of awards
will be set forth in written grant agreements, the terms of which will be
consistent with the terms of the Incentive Plan. Awards under the Incentive Plan
may not be made on or after the tenth anniversary of the date of its adoption,
but awards granted prior to such date may extend beyond that date.
Available Shares and Other Units. A maximum of 600,000 shares of Common
Stock may be issued or used for reference purposes pursuant to the Incentive
Plan. The maximum number of shares of Common Stock subject to each of stock
options or stock appreciation rights that may be granted to any individual under
the Incentive Plan is 50,000 for each fiscal year of the Company during the term
of the Incentive Plan. If a stock appreciation right is granted in tandem with a
stock option, it shall apply against the individual limits for both stock
options and stock appreciation rights, but only once against the maximum number
of shares available under the Incentive Plan.
In general, upon the cancellation or expiration of an award, the unissued
shares of Common Stock subject to such awards will again be available for awards
under the Incentive Plan, but will still count against the individual specified
limits.
The Stock Option Committee may make appropriate adjustments to the number of
shares available for awards and the terms of outstanding awards under the
Incentive Plan to reflect any change in the Company's capital stock, split-up,
stock dividend, special distribution to stockholders, combination or
reclassification with respect to any outstanding series or class of stock or
consolidation, or merger or sale of all or substantially all of the assets of
the Company.
AMENDMENTS. The Incentive Plan provides that it may be amended by the Board
of Directors, except that no such amendment, without stockholder approval to the
extent such approval is required by Rule 16b-3 of the Exchange Act, the
exception for performance-based compensation under Section 162(m) of the Code
or, to the extent applicable to incentive stock options, under Section 422 of
the Code, may increase the aggregate number of shares of Common Stock reserved
for awards or the maximum individual limits for any fiscal year, change the
classification of employees and non-employee directors eligible to receive
awards, decrease the minimum option price of any option, extend the maximum
option period under the Incentive Plan, change any rights with respect to
non-employee directors or to make any other change that requires stockholder
approval under, to the extent applicable, Rule 16b-3 of the Exchange Act, the
exception for performance-based compensation under Section 162(m) of the Code
or, to the extent applicable to incentive stock options, Section 422 of the
Code. The Incentive Plan may not be amended without the approval of the
stockholders of the Company in accordance with the applicable laws or other
requirements to 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
57
<PAGE>
stock options to non-employee directors of the Company. Each of these types of
awards is discussed in more detail below. Awards may be granted singly, in
combination, or in tandem, as determined by the Stock Option Committee.
STOCK OPTIONS. Under the Incentive Plan, the Stock Option Committee may
grant awards in the form of options to purchase shares of the Company's Common
Stock. Options may be in the form of incentive stock options or non-qualified
stock options. The Stock Option Committee will, with regard to each stock
option, determine the number of shares subject to the option, the term of the
option (which shall not exceed ten years, provided, however, that the term of an
incentive stock option granted to a ten percent stockholder of the Company shall
not exceed five years), the exercise price per share of stock subject to the
option, the vesting schedule (if any), and the other material terms of the
option. No option may have an exercise price less than the Fair Market Value of
the Common Stock at the time of grant (or, in the case of an incentive stock
option granted to a ten percent stockholder of the Company, 110% of Fair Market
Value), except that, in the case of certain modifications of the stock options
that are deemed to be new issuances under the Code, the exercise price may
continue to be the original exercise price.
The option price upon exercise may, to the extent determined by the Stock
Option Committee at or after the time of grant, be paid by a participant in
cash, in shares of Common Stock owned by the participant (free and clear of any
liens and encumbrances), in shares of restricted stock valued at fair market
value on the payment date as determined by the Stock Option Committee (without
regard to any forfeiture restrictions applicable to restricted stock), by a
reduction in the number of shares of Common Stock issuable upon exercise of the
option or by such other method as is approved by the Stock Option Committee. If
an option is exercised by delivery of shares of restricted stock, the shares of
Common Stock acquired pursuant to the exercise of the option will generally be
subject to the same restrictions as were applicable to such restricted stock.
All options may be made exercisable in installments, and the exercisability of
options may be accelerated by the Stock Option Committee. The Stock Option
Committee may at any time offer to buy an option previously granted on such
terms and conditions as the Stock Option Committee shall establish. The Stock
Option Committee may in its discretion reprice options or substitute options
with lower exercise prices in exchange for outstanding options that are not
incentive stock options, provided that the exercise price of substitute options
or repriced options shall not be less than the Fair Market Value at the time of
such repricing or substitution. Options may also, at the discretion of the Stock
Option Committee, provide for "reloads," whereby a new option is granted for the
same number of shares as the number of shares of Common Stock or restricted
stock used by the participant to pay the option price upon exercise.
RESTRICTED STOCK. The Incentive Plan authorizes the Stock Option Committee
to award shares of restricted stock. Upon the award of restricted stock, the
recipient has all rights of a stockholder with respect to the shares, including
the right to receive dividends currently, unless so specified by the Stock
Option Committee at the time of grant, subject to the conditions and
restrictions generally applicable to restricted stock or specifically set forth
in the recipient's restricted stock award agreement. Unless otherwise determined
by the Committee at grant, payment of dividends, if any, shall be deferred until
the date that the relevant share of restricted stock vests.
Recipients of restricted stock are required to enter into a restricted stock
award agreement with the Company which states the restrictions to which the
shares are subject and the date or dates or criteria on which such restrictions
will lapse. Within the limits of the Incentive Plan, the Stock Option Committee
may provide for the lapse of such restrictions in installments in whole or in
part or may accelerate or waive such restrictions at any time.
STOCK APPRECIATION RIGHTS ("SARS"). The Incentive Plan authorizes the Stock
Option Committee to grant SARs either with a stock option ("Tandem SARs") or
independent of a stock option ("Non-Tandem SARs"). A SAR is a right to receive a
payment either in cash or Common Stock as the Stock Option Committee may
determine, equal in value to the excess of the Fair Market Value of a share of
Common Stock on the date of exercise over the reference price per share of
Common Stock established in connection with the grant of the SAR. The reference
price per share covered by an SAR will be the per
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share exercise price of the related option in the case of a Tandem SAR and will
be not less than the per share Fair Market Value of the Common Stock on the date
of grant (or any other date chosen by the Committee) in the case of a Non-Tandem
SAR subject to the same exception that applies to stock options.
A Tandem SAR may be granted at the time of the grant of the related stock
option or, if the related stock option is a non-qualified stock option, at any
time thereafter during the term of the stock option. A Tandem SAR generally may
be exercised at and only at the times and to the extent the related stock option
is exercisable. A Tandem SAR is exercised by surrendering the same portion of
the related option. A Tandem SAR expires upon the termination of the related
stock option.
A Non-Tandem SAR will be exercisable as provided by the Stock Option
Committee and will have such other terms and conditions as the Stock Option
Committee may determine. A Non-Tandem SAR may have a term no longer than ten
years from its date of grant. A Non-Tandem SAR is subject to acceleration of
vesting or immediate termination upon termination of employment in certain
circumstances.
The Stock Option Committee is also authorized to grant "limited SARs,"
either as Tandem SARs or Non-Tandem SARs. Limited SARs would become exercisable
only upon the occurrence of a Change in Control (as defined in the Incentive
Plan) or such other event as the Stock Option Committee may designate at the
time of grant or thereafter.
CHANGE IN CONTROL. Subject to the next sentence, unless determined
otherwise by the Stock Option Committee at the time of grant, upon a Change in
Control (as defined in the Incentive Plan), all vesting and forfeiture
conditions, restrictions and limitations in effect with respect to any
outstanding award will immediately lapse and any unvested awards will
automatically become 100% vested. However, unless otherwise determined by the
Stock Option Committee at the time of grant, no acceleration of exercisability
shall occur with regard to certain options that the Stock Option Committee
reasonably determines in good faith prior to a Change in Control will be honored
or assumed or new rights substituted therefor by a participant's employer
immediately following the Change in Control.
AWARDS TO NON-EMPLOYEE DIRECTORS. The Incentive Plan provides for a
one-time nondiscretionary award of 10,000 options to purchase Common Stock to
each non-employee director. See "Management -- Compensation of Directors."
401(K) PLAN
The Predecessor established and maintained a tax-qualified plan under
Section 401(a) of the Code including a Section 401(k) feature (the "401(k)
Plan"). The Company has become the sponsor and will continue to maintain the
401(k) Plan. The 401(k) Plan provides retirement and other benefits to employees
of the Company and provides employees with a means to save for their retirement.
Employees become eligible to participate in the 401(k) Plan after they have
attained age 21 and have worked for at least twelve consecutive months during
which they complete at least 1,000 hours of service.
Subject to legal limitations, participants may elect, on a salary reduction
basis, to have one percent to 15% of their eligible compensation contributed to
their accounts under the 401(k) Plan. The Company may make a discretionary match
of participants' contributions to the 401(k) Plan up to 6% of eligible
compensation ("Matching Contributions"). In addition, the Company may make a
discretionary contribution to the 401(k) Plan ("Optional Contributions") which
will be allocable based on relative eligible compensation of participants who
have completed 1,000 hours of service during the plan year and are employed on
the last day of the plan year (or have retired, died or incurred a disability
during a plan year).
Participants are always fully vested in the value of their 401(k)
contributions and amounts "rolled over" from other qualified retirement plans.
Participants become vested in the Company's Matching Contributions and Optional
Contributions based on a graded seven year vesting schedule (or upon a
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participant's attainment of age 65 while still employed, retirement after
attaining age 65, death, disability or a termination of the 401(k) Plan, if
earlier). Benefits under the 401(k) Plan may be distributed in a number of
different forms to be elected by a participant, including a lump sum,
installment payments and various annuity forms. In certain circumstances,
participants may receive loans or make hardship withdrawals from their accounts
in the 401(k) Plan. Participants may direct the investment of their accounts
under the 401(k) Plan among the various investment vehicles offered under the
401(k) Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 145 of the General Corporation Law of the State of Delaware grants
each corporation organized thereunder the power to indemnify its officers and
directors against liability for certain of their acts. Article Ninth of the
Company's Certificate of Incorporation provides that no director of the Company
shall be liable to the Company for breach of fiduciary duty as a director to the
fullest extent permitted by the laws of the State of Delaware. Article Tenth of
the Company's Certificate of Incorporation provides that the Company shall, to
the extent permitted by Delaware law, indemnify its officers and directors
against liability for certain of their acts.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, its controlling persons, on the one hand, and the Underwriter and
its controlling persons, on the other hand, against certain liabilities in
connection with this offering, including liabilities under the Securities Act.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation policies and decisions, including those relating to salary,
bonuses and benefits of executive officers, have been set or made by the Board
of Directors since the formation of the Company. The Kaplans have participated
as members of the Board of Directors in deliberations concerning executive
officer compensation. Upon consummation of the Offering, the Board of Directors
will create a Compensation Committee consisting of a majority of Independent
Directors which will recommend to the Board the cash compensation to be paid to
the Company's executive officers.
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CERTAIN TRANSACTIONS
CONSOLIDATING TRANSACTIONS. The Company was formed in order to consolidate
and expand the assisted living business of the Predecessor. The Predecessor
historically operated its business through a number of partnerships, limited
liability companies and S corporations. In connection with the Offering, the
Predecessor and the Company are entering into certain transactions pursuant to
which the Company shall receive substantially all of the Predecessor's assets
associated with its assisted living business. In addition, a number of
transactions are being entered into in connection with the operation of the
Company's facilities, largely in order to comply with applicable law and
regulations.
CONVEYANCE OF ASSISTED LIVING BUSINESS TO THE COMPANY. At or prior to
the consummation of the Offering, the Predecessor shall have transferred to the
Company the following: (i) certain wholly owned subsidiaries of the Predecessor
that own the entire fee in the land and building underlying six facilities (Town
Gate East, Town Gate Manor, Senior Quarters at Huntington Station, Senior
Quarters at Centereach I, Senior Quarters at Centereach II and Senior Quarters
at Stamford); (ii) certain wholly owned subsidiaries of the Predecessor that
own, directly or indirectly, less than the entire fee in the land and building
underlying five facilities (23.75% of Change Bridge Inn, 50.1% of Senior
Quarters at Chestnut Ridge, 50% of Senior Quarters at East Northport, 10% of
Senior Quarters at Jamesburg, and 11% of Senior Quarters at Glen Riddle); (iii)
two wholly owned subsidiaries of the Predecessor that provided management
services for all the foregoing facilities, in addition to four facilities in
which the Predecessor did not have an equity interest (Castle Gardens, The
Regency at Glen Cove, Senior Quarters at Lynbrook, and Senior Quarters at
Cranford); (iv) the Predecessor's interest in pre-construction development
projects in seven facilities (Patterson, NY; Albany, NY; Briarcliff Manor, NY;
Tinton Falls, NJ; Westchester County, NY; Riverdale, NY and Northhampton 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."
Legislation has, however, has been recently enacted in New York State which
allows for-profit corporations whose stock (and whose parent entity's stock) is
not traded on a national exchange or over-the-counter market, to operate certain
types of licensed facilities, including ALP facilities. As a result, the Kaplans
may form one or more corporations to operate these facilities. The Kaplans are
entitled, pursuant to the operating agreements, to assign such agreement to any
for-profit corporation that is wholly owned by them.
CERTAIN TRANSACTIONS REGARDING SALES OF COMMON STOCK.
RESTRICTIONS ON TRANSFER. Each Kaplan has agreed with the Company that
he shall not, for so long as he shall be the licensed operator of any of the
Company's facilities, transfer any shares of Common Stock if it would result in
his personally owning fewer than 500,000 shares of Common Stock initially, or
250,000 shares of Common Stock after the fifth anniversary of the consummation
of the Offering, in each case, subject to certain exceptions. In addition, a
stockholders' agreement between the Kaplans and the Company, provides (i) each
Kaplan with a right of first refusal with respect to a transfer of the shares of
Common Stock of the other Kaplans, except for a limited exception in the case of
his death, and (ii) that the Kaplans shall vote all their shares of Common Stock
as a unit.
REGISTRATION RIGHTS. After the Offering, each of the Kaplans along with
Herbert Kaplan, who beneficially own in the aggregate 4,150,000 shares of Common
Stock (assuming no exercise of the Underwriters' over-allotment option) will be
entitled to certain rights with respect to the registration of such shares under
the Securities Act. Under the terms of the agreement between the Company and the
Kaplans, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other security
holders exercising registration rights, each of the Kaplans are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. The stockholders benefiting from these rights may, acting
jointly, also require the Company on two separate occasions to file a
registration statement under the Securities Act at the Company's expense with
respect to shares of Common Stock beneficially owned by then, and the Company is
required to use its diligent reasonable efforts to effect such registration.
These rights are subject to
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certain restrictions, conditions and limitations, among them (i) the right of
the underwriters of an offering to limit the number of shares included in such
registration, and (ii) the lock-up agreement whereby the Company and the Kaplans
have agreed with the Underwriters, except in connection with the Offering and
the Underwriters' over-allotment option, not to sell or otherwise dispose of any
shares of Common Stock or other equity securities of the Company for at least
180 days after the date of this Prospectus without the prior written consent of
the representatives of the Underwriters. See "Underwriting."
SHATTUCK HAMMOND FEE. The Company will pay its financial advisor,
Shattuck Hammond Partners Inc., approximately $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 30, 1996, after giving
effect to the conveyance of the Company's facilities and the payment of the
consideration to the Kaplans as adjusted to reflect the sale of the Common Stock
offered hereby, by: (i) each person known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock; (ii) each of the Company's
directors; (iii) the Company's Chief Executive Officer and each of the Company's
other executive officers; and (iv) the Company's directors and executive
officers as a group:
<TABLE>
<CAPTION>
OWNERSHIP
AFTER
OFFERING
AND
SHARES OVER-ALLOTMENT
OWNERSHIP PRIOR TO OFFERING OWNERSHIP AFTER OFFERING SUBJECT TO OPTION (2)
------------------------------- ---------------------------- OVER- -----------
NAME AND ADDRESS OF NUMBER OF NUMBER OF ALLOTMENT NUMBER OF
BENEFICIAL OWNER (1) SHARES PERCENTAGE SHARES PERCENTAGE OPTION SHARES
- ------------------------------------ --------------- -------------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Glenn Kaplan (3).................... 300 100.0% 4,150,000 53.9% 266,250 3,883,750
Wayne L. Kaplan (3)................. 300 100.0 4,150,000 53.9 266,250 3,883,750
Evan A. Kaplan (3).................. 300 100.0 4,150,000 53.9 266,250 3,883,750
John M. Sharpe, Jr. ................ 0 0 0 0 0 0
Joseph G. Beck...................... 0 0 0 0 0 0
Bernard J. Korman................... 0 0 0 0 0 0
Gerald Schuster..................... 0 0 0 0 0 0
Risa Lavizzo-Mourey, M.D............ 0 0 0 0 0 0
Directors and officers as a group (8
persons)........................... 300 100.0% 4,150,000 53.9% 266,250 3,883,750
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNER (1) PERCENTAGE
- ------------------------------------ ---------------
<S> <C>
Glenn Kaplan (3).................... 48.8%
Wayne L. Kaplan (3)................. 48.8
Evan A. Kaplan (3).................. 48.8
John M. Sharpe, Jr. ................ 0
Joseph G. Beck...................... 0
Bernard J. Korman................... 0
Gerald Schuster..................... 0
Risa Lavizzo-Mourey, M.D............ 0
Directors and officers as a group (8
persons)........................... 48.8%
</TABLE>
- ------------------------------
(1) Except as otherwise noted, the address of the Company's Directors,
executive officers and Selling Stockholders is c/o Kapson Senior Quarters
Corp., 242 Crossways Park West, Woodbury, New York 11797.
(2) Assumes Underwriters' over-allotment option is exercised in full. The
Selling Stockholders will sell 50% of any shares with respect to which the
option is exercised.
(3) Includes shares owned of record by Glenn Kaplan, Wayne Kaplan, and Evan
Kaplan, each of whom share voting and dispositive power over all of these
shares, and Herbert Kaplan, who has a pecuniary interest in, and has shared
voting dispositive power over, 300,001 shares. Herbert Kaplan is the father
of the Kaplans.
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DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport to
be complete and is qualified in its entirety by reference to (i) applicable
provisions of Delaware law, and (ii) the provisions of the Company's Certificate
of Incorporation and By-laws, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $.01, and 10,000,000 shares of Preferred Stock, par
value $.01, which may be issued in one or more classes and series. As of
, 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 The Bank of
New York. Its address and telephone number is The Bank of New York, Attn:
Investor Relations, 101 Barclay St., 11W, New York, NY; (800) 524-4458.
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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 (and upon consummation of the Company's agreement to
acquire the 50% interest it does not already own in the entity that owns Senior
Quarters at East Northport), the holders of 4,200,000 shares of Common Stock
(assuming no exercise of the Underwriters' over-allotment option), or their
transferees, will be entitled to certain rights with respect to the registration
of such shares under the Securities Act, subject to the contractual restrictions
described below. See "Certain Transactions -- Registration Rights." Registration
of such shares under the Securities Act would result in such shares becoming
freely tradeable without restriction under the Securities Act (except for shares
purchased by affiliates) immediately upon the effectiveness of such
registration.
The Company, the Selling Stockholders, each director, executive officer and
affiliate of the Company has agreed with the Underwriters, except in connection
with the Offering and the Underwriters' over-
66
<PAGE>
allotment option, not to sell or otherwise dispose of any shares of Common Stock
or other equity securities of the Company for at least 180 days after the date
of this Prospectus without the prior written consent of the representatives of
the Underwriters, except in connection with the Offering. See "Underwriting."
Each Kaplan has also agreed with the Company that he shall not, for so long as
he shall be the operator of any of the Company's facilities, transfer any shares
of Common Stock if it would result in his personally owning fewer than 500,000
shares of Common Stock initially, or 250,000 shares of Common Stock after the
fifth anniversary of the consummation of the Offering, in each case, subject to
certain exceptions. In addition, a stockholders' agreement among the Kaplans and
the Company, provides (i) each Kaplan with a right of first refusal with respect
to a transfer of the shares of Common Stock of the other Kaplans, except for
transfers to or for the benefit of family members and a limited exception in the
case of his death, and (ii) that the Kaplans shall vote all their shares of
Common Stock as a unit.
The Company intends to file a registration statement under the Securities
Act covering approximately 600,000 shares of Common Stock issued or reserved for
issuance under the Incentive Plan. See "Management -- 1996 Stock Incentive
Plan." Such registration statement is expected to be filed prior to the end of
the 1996 fiscal year and will automatically become effective upon filing.
Accordingly, shares registered under such registration statement pursuant to the
Plan will, subject to Rule 144 volume limitations applicable to affiliates, be
available for sale in the open market, except to the extent that such shares are
subject to vesting restrictions. At , 1996, options to purchase 88,462
shares were issued and outstanding under the Plan, none of which were vested.
67
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company, the Selling Stockholders and the Underwriters (the
"Underwriting Agreement"), the Company has agreed to sell to the underwriters
named below (the "Underwriters"), for whom Salomon Brothers Inc is acting as
representative (the "Representative"), and each such Underwriter has severally
agreed to purchase from the Company, the aggregate number of shares of Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Salomon Brothers Inc ..........................................................
Raymond James & Associates, Inc. ..............................................
Wheat, First Securities, Inc. .................................................
-------------
Total...................................................................... 3,550,000
-------------
-------------
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
Common Stock offered hereby (other than those subject to the over-allotment
option described below) if any such shares are purchased. In the event of a
default by an Underwriter, the Underwriting Agreement provides that, in certain
circumstances the purchase commitments of the non-defaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representative that the several
Underwriters propose to offer shares of Common Stock directly to the public at
the public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. After the Offering, the initial
public offering price and such concessions may be changed.
The Company and the Selling Stockholders have each granted the Underwriters
an option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 266,250 and 266,250 additional shares of Common
Stock, respectively (532,500 in the aggregate), to cover over-allotments, if
any, at the price to the public less the Underwriting Discount set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise such
option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the same proportion of the option shares as the number
of shares of Common Stock to be purchased by such Underwriter in the above table
bears to the total number of shares of Common Stock offered by the Underwriters
hereby. In the event that the Underwriters exercise less than the full
over-allotment option, the number of shares to be sold pursuant thereto shall be
allocated equally as between the Company and the Selling Stockholders in
proportion to the number of such persons' or entity's shares subject to such
option.
Shattuck Hammond Partners Inc. which is not acting as an underwriter in the
Offering, will receive approximately $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 and 6) the agreement
to purchase for $2,600,000 the remaining 50% interest in Senior Quarters at East
Northport through issuance of 50,000 shares of common stock, at an assumed
initial public offering price of $13.00, ($650,000) and the remainder
($1,950,000) paid with proceeds of the initial public offering. See "Certain
Transactions" elsewhere in this Prospectus.
The unaudited pro forma combined condensed balance sheet as of June 30, 1996
was prepared as if the Certain Transactions had occurred at that date. The
unaudited pro forma statements of operations for the year ended December 31,
1995 and for the six months ended June 30, 1996 were prepared as if the
acquisition of Town Gate Manor and Town Gate East, the sale of the 49.9%
minority interest in Senior Quarters at Chestnut Ridge and the pending
acquisition of the remaining 50% interest in Senior Quarters at East Northport
and the Certain Transactions had occurred as of January 1, 1995.
In the opinion of management, all adjustments necessary to present fairly
such pro forma financial statements have been made based on the proposed terms
and structure of the transactions. The Company anticipates, however, that
changes in the composition of the assets to be acquired and liabilities to be
assumed will occur due to changes in the ordinary course of business. The
Company believes any related change in adjustments will not be material to the
pro forma combined condensed financial statements. In addition, the pro forma
adjustments relating to the fair value adjustments for the acquisition of Town
Gate Manor and Town Gate East and the pending acquisition of the remaining 50%
interest in Senior Quarters at East Northport are subject to revision when final
analyses of such values are completed. In management's opinion, such adjustments
are not expected to materially differ from the final fair value adjustments.
These unaudited pro forma combined condensed financial statements are not
necessarily indicative of what actual results would have been had the
transactions occurred at the beginning of the respective periods nor do they
purport to indicate the results of future operations of the Company. These
unaudited pro forma financial statements should be read in conjunction with the
accompanying notes, "Certain Transactions", "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and the audited and
unaudited historical financial statements and notes thereto of the Predecessor,
Town Gate Manor and Town Gate East included elsewhere in this Prospectus.
F-2
<PAGE>
KAPSON SENIOR QUARTERS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR ADJUSTMENTS PRO FORMA
------------- ------------- ------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents........................................... $ 1,714 32,550(e) $ 34,264
Accounts receivable................................................. 95 95
Prepaid expenses and other current assets........................... 348 348
------------- ------------- ------------
Total current assets.............................................. 2,157 32,550 34,707
Property and equipment, net........................................... 56,996 56,996
Facility development costs............................................ 187 -- 187
Restricted cash....................................................... 2,384 -- 2,384
Deferred financing costs, net......................................... 2,139 2,139
Intangibles........................................................... 3,176 1,137(g) 4,313
Investment in joint ventures.......................................... 503 503
Other assets.......................................................... 311 311
------------- ------------- ------------
Total assets...................................................... $ 67,853 $ 33,687 $ 101,540
------------- ------------- ------------
------------- ------------- ------------
LIABILITIES AND PARTNERS' AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt................................... $ 913 -- $ 913
Accounts payable and accrued expenses............................... 1,998 1,998
Accrued interest.................................................... 301 -- 301
Due to affiliates................................................... 2,971 (2,971)(d) --
Deferred revenue.................................................... 318 -- 318
------------- ------------- ------------
Total current liabilities......................................... 6,501 (2,971) 3,530
Long-term debt........................................................ 67,816 67,816
Residential security deposits......................................... 1,573 -- 1,573
Deferred interest payable............................................. 176 -- 176
Other liabilities..................................................... 602 602
------------- ------------- ------------
Total liabilities................................................. 76,668 (2,971) 73,697
------------- ------------- ------------
Minority interest..................................................... 2,292 (1,463)(f) 829
------------- ------------- ------------
Commitments and contingencies......................................... -- -- --
Partners' and shareholders' (deficit)................................. (11,107) 11,107(c) --
Common stock.......................................................... -- 78(a) 78
Paid in capital....................................................... -- 26,936(b) 26,936
------------- ------------- ------------
Total partners' and shareholders' equity (deficit).................. (11,107) 38,121 27,014
------------- ------------- ------------
Total liabilities and partners' and shareholders' equity
(deficit)........................................................ $ 67,853 $ 33,687 $ 101,540
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
F-3
<PAGE>
KAPSON SENIOR QUARTERS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TOWN GATE TOWN GATE PRO FORMA
PREDECESSOR MANOR EAST SUBTOTAL ADJUSTMENTS PRO FORMA
--------------- ----------- ----------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Assisted living revenues.............. $ 14,275 $ 1,407 $ 2,146 $ 17,828 $ -- $ 17,828
Management fees....................... 443 -- -- 443 -- 443
Other -- affiliate.................... 45 -- -- 45 (45)(a) --
--------------- ----------- ----------- --------- ------------- ----------------
Total revenues...................... 14,763 1,407 2,146 18,316 (45) 18,271
--------------- ----------- ----------- --------- ------------- ----------------
OPERATING EXPENSES:
Assisted living operating expenses.... 8,314 854 1,258 10,426 487(b) 10,913
Management fees....................... -- 8 11 19 (19)(c) --
General and administrative............ 1,658 73 96 1,827 1,269(d) 3,096
Depreciation.......................... 1,234 75 136 1,445 (5)(e) 1,440
--------------- ----------- ----------- --------- ------------- ----------------
Total operating expenses............ 11,206 1,010 1,501 13,717 1,732 15,449
--------------- ----------- ----------- --------- ------------- ----------------
Operating income (loss)............... 3,557 397 645 4,599 (1,777) 2,822
Interest income....................... 44 -- 4 48 -- 48
Interest expense...................... (3,732) (127) (191) (4,050) (778)(f) (4,828)
Interest expense -- affiliates........ (204) -- -- (204) 204(g) --
Other income (expense), net........... (34) 8 (4) (30) -- (30)
--------------- ----------- ----------- --------- ------------- ----------------
Income (loss) before minority
interest........................... (369) 278 454 363 (2,351) (1,988)
Minority interest in net loss of
combined partnership................. 16 -- -- 16 344(i) 360
--------------- ----------- ----------- --------- ------------- ----------------
Net income (loss)..................... $ (353) $ 278 $ 454 $ 379 $ (2,007) $ (1,628)
--------------- ----------- ----------- --------- ------------- ----------------
--------------- ----------- ----------- --------- ------------- ----------------
UNAUDITED PRO FORMA DATA
Pro forma benefit for income taxes.... -- -- -- -- 651(h) 651
--------------- ----------- ----------- --------- ------------- ----------------
Pro forma net income (loss)........... $ (353) $ 278 $ 454 $ 379 $ (1,301) $ (977)
--------------- ----------- ----------- --------- ------------- ----------------
--------------- ----------- ----------- --------- ------------- ----------------
Pro forma net loss per common share... $ (.08) $ (.20)
--------------- ----------------
--------------- ----------------
Pro forma weighted average number of
common shares outstanding............ 4,631(j) 200(k) 4,831(k)
--------------- ------------- ----------------
--------------- ------------- ----------------
</TABLE>
F-4
<PAGE>
KAPSON SENIOR QUARTERS CORP.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996
----------------------------
TOWN GATE TOWN GATE PRO FORMA
PREDECESSOR MANOR EAST SUBTOTAL ADJUSTMENTS PRO FORMA
-------------- ------------- ------------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Assisted living revenues................. $ 9,529 $ 357 $ 554 $ 10,440 $ -- $ 10,440
Management fees.......................... 432 -- -- 432 -- 432
Other -- affiliates...................... 23 -- -- 23 (23)(a) --
------- ----- ----- --------- ------------- ---------------
Total revenues......................... 9,984 357 554 10,895 (23) 10,872
------- ----- ----- --------- ------------- ---------------
Operating expenses:
Assisted living operating expenses....... 6,252 264 310 6,826 244(b) 7,070
Management fees.......................... -- 2 3 5 (5)(c) --
General and administrative............... 1,275 9 20 1,304 528(d) 1,832
Depreciation............................. 912 20 35 967 (3)(e) 964
------- ----- ----- --------- ------------- ---------------
Total operating expenses............... 8,439 295 368 9,102 764 9,866
------- ----- ----- --------- ------------- ---------------
Operating income (loss).................. 1,545 62 186 1,793 (787) 1,006
Equity in income from joint ventures..... 28 -- -- 28 -- 28
Interest income.......................... 104 -- 1 105 -- 105
Interest expense......................... (2,844) (20) (30) (2,894) (224)(f) (3,118)
Interest expense -- affiliates........... (121) -- -- (121) 121(g) --
Other income (expense), net.............. (8) -- -- (8) -- (8)
------- ----- ----- --------- ------------- ---------------
Income (loss) before minority
interest.............................. (1,296) 42 157 (1,097) (890) (1,987)
Minority interest in net loss of combined
partnerships............................ 371 -- -- 371 (100) (i) 271
------- ----- ----- --------- ------------- ---------------
Net income (loss)........................ $ (925) $ 42 $ 157 $ (726) $ (990) $ (1,716)
------- ----- ----- --------- ------------- ---------------
------- ----- ----- --------- ------------- ---------------
UNAUDITED PRO FORMA DATA:
Pro forma benefit for income taxes....... -- -- -- -- 686(h) 686
------- ----- ----- --------- ------------- ---------------
Pro forma net income (loss).............. $ (925) $ 42 $ 157 $ (726) $ (304) $ (1,030)
------- ----- ----- --------- ------------- ---------------
------- ----- ----- --------- ------------- ---------------
Pro forma net loss per common share...... $ (.20) $ (.21)
------- ---------------
------- ---------------
Pro forma weighted average number of
common shares outstanding............... 4,631(j) 200(k) 4,831(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
Issuance of 50,000 shares of common stock $.01 par value pursuant to the
agreement to purchase the remaining 50% interest in Senior Quarters at East
Northport.................................................................... 1
---------
$ 78
---------
---------
(b) PAID IN CAPITAL:
Issuance of 3,550,000, shares of common stock $.01 par value pursuant to the
initial public offering at an assumed offering price of $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)
Issuance of 50,000 shares of common stock $.01 par value pursuant to the
agreement to purchase the remaining 50% interest in Senior Quarters at East
Northport at an assumed offering price of $13 per share...................... 649
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)
---------
$ 26,936
---------
---------
</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)
Payment to be made under the terms of the agreement to purchase the remaining
50% interest in Senior Quarters at East Northport ($2,600) from proceeds of
the Offering, net of purchase price payable in common stock ($650)........... (1,950)
---------
$ 32,550
---------
---------
</TABLE>
(f) MINORITY INTEREST:
<TABLE>
<S> <C>
Elimination of the historical minority interest in Senior Quarters at East
Northport due to the acquisition agreement entered into by the Company to
purchase the remaining 50% interest.......................................... $ (1,463)
---------
---------
</TABLE>
(g) INTANGIBLES:
<TABLE>
<S> <C>
To record the excess of the purchase price pursuant to the acquisition
agreement price of the remaining 50% interest in Senior Quarters at East
Northport ($2,600) over the historical minority interest in the facility
($1,463) (goodwill) to be amortized over fifteen years....................... $ 1,137
---------
---------
</TABLE>
F-7
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a) Other -- affiliates:
<TABLE>
<S> <C>
Elimination of revenue from affiliates for services performed by the
Predecessor which will not be continued by the Company........................ $ (45)
---------
---------
</TABLE>
(b) Assisted living operating expenses:
<TABLE>
<S> <C>
Reduction in historical owners'/administrators' salary and consulting fees of
Town Gate Manor and Town Gate East ($133) offset by compensation to be
incurred under new employment contracts ($120)................................ $ (13)
Operating fees to be incurred by the Company under new operating agreements
(3.5%, of respective revenues, net), (Senior Quarters at Huntington Station,
Senior Quarters at Centereach I, Senior Quarters at Centereach II, Senior
Quarters at Chesnut Ridge, Town Gate Manor and Town Gate East)................ 500
---------
$ 487
---------
---------
</TABLE>
(c) Management fee expense:
<TABLE>
<S> <C>
Elimination of historical management fees paid by Town Gate Manor and Town Gate
East which will not be incurred by the Company................................ $ (19)
---------
---------
</TABLE>
(d) General and administrative:
<TABLE>
<S> <C> <C>
Incremental increase in salaries and related benefits associated with new
employment contracts entered into with the former owners/partners of the
Predecessor who will become the senior officers of the Company.................... $ 413
Estimated additional administrative and financial reporting expenses which would
have been incurred by the Company had it been operating as a public company during
the period:
Salaries and wages.................................................... $ 250
Directors' and officer's insurance and fees........................... 100
Legal and accounting.................................................. 140
Other................................................................. 50 540
---------
Amortization of goodwill ($2,903) associated with the acquisition of Town Gate
Manor and Town Gate East on a straight line basis over fifteen years.............. 194
Amortization of non-compete agreements ($322) associated with the acquisition of
Town Gate Manor and Town Gate East on a straight line basis over seven years, the
life of the agreements............................................................ 46
Amortization of goodwill ($1,137) associated with the agreement to
purchase the remaining 50% interest in Senior Quarters at East
Northport on a straight line basis over fifteen years.................. 76
---------
$ 1,269
---------
---------
</TABLE>
(e) Depreciation and amortization:
<TABLE>
<S> <C>
Adjustment to historical depreciation of buildings and furniture and fixtures
associated with Town Gate Manor and Town Gate East, based upon fair value of
the acquired assets and increase in depreciable lives......................... $ (5)
---------
---------
</TABLE>
F-8
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(f) Interest expense:
<TABLE>
<S> <C>
Interest expense associated with the acquisition of Town Gate Manor and Town
Gate East ($10,375 of debt incurred at 4.25% above the 10 year Treasury rate,
10.56% at date of acquisition) ($1,096), net of elimination of historical
interest expense incurred on debt not assumed by the Predecessor nor the
Company ($318)................................................................. $ (778)
---------
---------
</TABLE>
(g) Interest income -- affiliates:
<TABLE>
<S> <C>
Elimination of interest expense on amounts due ($3,206) to affiliates not being
assumed by the Company......................................................... $ 204
---------
---------
</TABLE>
(h) Benefit for income taxes:
<TABLE>
<S> <C>
The Predecessor and the entities that operated Town Gate Manor and Town Gate
East prior to acquisition were not taxable entities. This adjustment provides
pro forma benefit for income taxes at a 40% effective rate. The pro forma
effect of recognizing the deferred tax liability resulting from the change in
tax status effective January 1, 1995 is $2,750................................. $ 651
---------
---------
</TABLE>
(i) Minority interest:
<TABLE>
<S> <C>
To record the 49.9% minority interest in the loss of Senior Quarters at Chestnut
Ridge.......................................................................... $ 360
Elimination of the historical minority interest in the loss of Senior Quarters
at East Northport due to the acquisition agreement entered into by the Company
to purchase the remaining 50% interest in the facility......................... (16)
---------
$ 344
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
(j) Pro forma net loss per share is based upon the pro forma weighted 4,631Shares
average number of common shares issued in the exchange (4,150) plus the
number of shares issued at the assumed offering price of $13 necesary
to pay the $6,250 distribution to the Kaplans (481)....................
-------
-------
(k) Pro forma net loss per share is based upon the pro forma weighted 4,831Shares
average number of common shares in (j) above plus the $650 of actual
shares of common stock to be issued in connection with the agreement to
purchase the remaining 50% interest in Senior Quarters at East
Northport at an assumed offering price of $13 per share (50) and the
assumed number of shares of common stock to be issued in connection
with the agreement to purchase the remaining 50% interest in Senior
Quarters at East Northport, at an assumed offering price of $13 per
share, to satisfy the remainder of the purchase price of $1,950 in cash
(150)..................................................................
-------
-------
</TABLE>
F-9
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a) Other -- affiliates:
<TABLE>
<S> <C>
Elimination of revenue from affiliates for services performed by the Predecessor
which will not be continued by the Company...................................... $ (23)
---------
---------
</TABLE>
(b) Assisted living operating expenses:
<TABLE>
<S> <C>
Reduction in historical owners'/administrators' salary and consulting fees of
Town Gate East Town Gate Manor ($34) offset by compensation to be incurred the
period prior to its acquisition ($30)........................................... $ (4)
Operating fees to be incurred by the Company under new operating agreements (3.5%
of the respective revenues, net) (Senior Quarters at Huntington Station, Senior
Quarters at Centereach I, Senior Quarters at Centereach II, Senior Quarters at
Chestnut Ridge, Senior Quarters at East Northport Town Gate Manor and Town Gate
East)........................................................................... $ 248
---------
$ 244
---------
---------
</TABLE>
<TABLE>
<S> <C>
(c) Elimination of historical management fees paid by Town Gate East and Town Gate
Manor which will not be included by the Company................................. (5)
---------
---------
</TABLE>
(d) General and administrative:
<TABLE>
<S> <C> <C>
Incremental increase in salaries and related benefits associated with new employment
contracts entered into with the former owners/partners of the Predecessor, who will
become the senior officers of the Company........................................... $ 161
Estimated additional administrative and financial reporting expenses which would have
been incurred by the Company had it been operating as a public company during the
period:
Salaries and wages...................................................... $ 125
Directors' and officer's insurance and fees............................. 50
Legal and accounting.................................................... 70
Other................................................................... 25 270
---------
Amortization of goodwill ($2,903) associated with the acquisition of Town Gate Manor
and Town Gate East on a straight line basis over fifteen years for the period prior
to its acquisition.................................................................. 48
Amortization of non-compete agreements ($322) associated with the acquisition of Town
Gate Manor and Town Gate East on a straight line basis over seven years, the life of
the agreements for the period prior to its acquisition.............................. 11
Amortization of goodwill ($1,137) associated with the acquisition
agreement to purchase the remaining 50% interest in Senior Quarters at
East Northport on a straight line basis over fifteen years............... 38
---------
$ 528
---------
---------
</TABLE>
(e) Depreciation and amortization:
<TABLE>
<S> <C>
Depreciation of buildings and furniture and fixtures associated with Town Gate
Manor and Town Gate East, based upon fair value of the acquired assets for the
period prior to its acquisition................................................. $ (3)
---------
---------
</TABLE>
F-10
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(f) Interest expense:
<TABLE>
<S> <C>
Interest expense associated with the acquisition of Town Gate Manor and Town
Gate East ($10,375 of debt incurred at 4.25% above the 10 year Treasury rate,
10.56% at date of acquisition) for the period prior to its acquisition ($274),
net of elimination of historical interest expense incurred on debt of these
entities not assumed by the Predecessor nor the Company ($50).................. $ (224)
---------
---------
</TABLE>
(g) Interest income -- affiliates:
<TABLE>
<S> <C>
Elimination of interest expense on amounts due to affiliates ($2,971) not being
assumed by the Company......................................................... $ 121
---------
---------
</TABLE>
(h) Benefit for income taxes:
<TABLE>
<S> <C>
The Predecessor was not a taxable entity. This adjustment provides pro forma
benefit for income taxes at a 40% effective rate............................... $ 686
---------
---------
</TABLE>
(i) Minority interest:
<TABLE>
<S> <C>
To record the 49.9% minority interest on the net loss of Senior Quarters at
Chestnut Ridge for the period prior to the sale of such interest in April
1996.......................................................................... $ 169
Elimination of the historical minority interest in the loss of Senior Quarters
at East Northport due to the acquisition agreement entered into by the Company
to purchase the remaining 50% interest in the facility........................ (269)
---------
$ (100)
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
(j) Pro forma net loss per share is based upon the pro forma weighted 4,631Shares
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 net loss per share is based upon the pro forma weighted 4,831Shares
average number of common shares in (j) above plus the $650 of actual
shares of common stock to be issued in connection with the agreement to
purchase the remaining 50% interest in Senior Quarters at East
Northport at an assumed offering price of $13 per share (50) and the
assumed number of shares of common stock to be issued in connection
with the agreement to purchase the remaining 50% interest in Senior
Quarters at East Northport, at an assumed offering price of $13 per
share, to satisfy the remainder of the purchase price of $1,950 in cash
(150)..................................................................
-------
-------
</TABLE>
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Partners of
The Kapson Group:
We have audited the accompanying combined balance sheets of The Kapson Group
(the Predecessor) as of December 31, 1994 and 1995, and the related combined
statements of operations, changes in partners' and shareholders' (deficit) and
cash flows for each of the years in the three year period ended December 31,
1995. These financial statements are the responsibility of the Predecessor's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of The Kapson Group as
of December 31, 1994 and 1995, and the combined results of its operations and
its cash flows for each of the years in the three year period ended December 31,
1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
NEW YORK, NEW YORK
JUNE 7, 1996
F-12
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------- JUNE 30, 1996 PROFORMA JUNE
--------------- 30, 1996
(UNAUDITED) ---------------
(NOTE 2)
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents................... $ 1,886,634 $ 3,392,318 $ 1,714,172 $ 1,714,172
Accounts receivable......................... 28,441 77,837 95,000 95,000
Prepaid expenses and other current assets... 219,895 270,317 348,365 348,365
-------------- -------------- --------------- ---------------
Total current assets...................... 2,134,970 3,740,472 2,157,537 2,157,537
Property and equipment, net................... 23,563,033 29,445,121 56,995,793 56,995,793
Facility development costs.................... 5,627,426 16,374,566 186,558 186,558
Restricted cash............................... 1,503,834 2,592,185 2,383,680 2,383,680
Deferred financing costs, net................. 1,421,073 2,082,285 2,139,091 2,139,091
Intangibles................................... -- -- 3,175,662 3,175,662
Investment in joint ventures.................. 502,938 502,938
Other assets.................................. 44,019 172,163 311,654 311,654
-------------- -------------- --------------- ---------------
Total assets.............................. $ 34,294,355 $ 54,406,792 $ 67,852,913 $ 67,852,913
-------------- -------------- --------------- ---------------
-------------- -------------- --------------- ---------------
LIABILITIES AND PARTNERS' AND SHAREHOLDERS' (DEFICIT)
Current liabilities
Current portion of long-term debt........... $ 15,000,000 $ 245,867 $ 913,047 $ 913,047
Accounts payable and accrued expenses....... 1,257,548 3,219,472 1,997,775 1,997,775
Accrued interest............................ 261,873 363,198 300,842 300,842
Due to affiliates........................... 3,149,802 3,300,450 2,971,114 2,971,114
Deferred revenue............................ 177,713 207,564 318,535 318,535
Pro forma distribution to partners and
shareholders............................... -- -- -- 6,250,000
-------------- -------------- --------------- ---------------
Total current liabilities................. 19,846,936 7,336,551 6,501,313 12,751,313
Long-term debt................................ 20,461,411 53,807,880 67,815,513 67,815,513
Resident security deposits.................... 1,199,032 1,278,147 1,573,192 1,573,192
Deferred interest payable..................... 47,500 105,200 175,500 175,500
Construction retainage payable................ -- 227,200 602,322 602,322
-------------- -------------- --------------- ---------------
Total liabilities......................... 41,554,879 62,754,978 76,667,840 82,917,840
-------------- -------------- --------------- ---------------
Minority interest............................. 1,479,116 1,463,271 2,292,575 2,292,575
-------------- -------------- --------------- ---------------
Commitments and contingencies (Note 8)
Partners' and shareholders' (deficit)......... (8,739,640) (9,811,457) (11,107,502) (17,357,502)
-------------- -------------- --------------- ---------------
Total liabilities and partners' and
shareholders' (deficit).................. $ 34,294,355 $ 54,406,792 $ 67,852,913 $ 67,852,913
-------------- -------------- --------------- ---------------
-------------- -------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-13
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Assisted living revenues.............. $ 12,628,697 $ 13,349,033 $ 14,275,484 $ 7,024,189 $ 9,528,925
Management fees....................... 247,750 347,839 442,825 209,061 432,135
Other -- affiliates................... 111,701 57,530 45,065 22,533 22,500
-------------- -------------- -------------- ------------- --------------
Total revenues...................... 12,988,148 13,754,402 14,763,374 7,255,783 9,983,560
-------------- -------------- -------------- ------------- --------------
Operating expenses:
Assisted living operating expenses.... 7,591,122 7,836,765 8,314,372 3,931,327 6,251,739
General and administrative............ 727,009 1,141,735 1,658,658 730,009 1,275,647
Depreciation.......................... 1,188,134 1,180,418 1,233,843 575,689 911,703
-------------- -------------- -------------- ------------- --------------
Total operating expenses............ 9,506,265 10,158,918 11,206,873 5,237,025 8,439,089
-------------- -------------- -------------- ------------- --------------
Operating income........................ 3,481,883 3,595,484 3,556,501 2,018,758 1,544,471
Equity in income from joint ventures.... -- -- -- -- 27,938
Interest income......................... 12,555 8,693 44,234 21,328 104,061
Interest expense........................ (3,417,046) (3,288,107) (3,732,309) (1,655,283) (2,844,142)
Interest expense -- affiliates.......... (136,726) (207,956) (203,487) (104,620) (120,698)
Other income (expense), net............. (9,610) (1,070) (34,065) 1,071 (7,822)
-------------- -------------- -------------- ------------- --------------
Income (loss) before minority interest
and extraordinary item............... (68,944) 107,044 (369,126) 281,254 (1,296,192)
Minority interest in net loss of
combined partnerships................ -- -- 15,845 -- 370,696
-------------- -------------- -------------- ------------- --------------
Income (loss) before extraordinary
item................................. (68,944) 107,044 (353,281) 281,254 (925,496)
Extraordinary item -- forgiveness of
debt................................. -- 4,398,672 -- -- --
-------------- -------------- -------------- ------------- --------------
Net income (loss)..................... $ (68,944) $ 4,505,716 $ (353,281) $ 281,254 $ (925,496)
-------------- -------------- -------------- ------------- --------------
-------------- -------------- -------------- ------------- --------------
Unaudited pro forma data (2):
Net income (loss)..................... $ (68,944) $ 4,505,716 $ (353,281) $ 281,254 $ (925,496)
Pro forma benefit (provision) for
income taxes......................... 27,578 (1,802,286) 141,312 (112,502) 370,198
-------------- -------------- -------------- ------------- --------------
Pro forma net income (loss)............. $ (41,366) $ 2,703,430 $ (211,969) $ 168,752 $ (555,298)
-------------- -------------- -------------- ------------- --------------
-------------- -------------- -------------- ------------- --------------
Pro forma net income (loss) per share
(2).................................... (.01) .58 $ (.05) .04 $ (.12)
-------------- -------------- -------------- ------------- --------------
-------------- -------------- -------------- ------------- --------------
Pro forma weighted average number of
common shares outstanding (2).......... 4,630,769 4,630,769 4,630,769 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)
+See Note 14
F-17
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying combined financial statements include the assets,
liabilities and operations associated with the wholly and majority owned
entities listed above. Since the facilities have ownership and
management interests in common, the assets and liabilities are reflected
at historical cost. Investments in minority owned joint ventures are
accounted for on the equity method. All significant intercompany
accounts and transactions have been eliminated in combination. Minority
interest represents the net equity attributable to non-affiliated
investors that is not owned by the Predecessor.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
REVENUES
Assisted living revenues are recorded when services are rendered and
consist of resident fees for basic housing, support services and fees
associated with additional services such as personalized health and
support services. Additionally, the Predecessor performs services for
other assisted living facilities and real estate investments. Such fees
are recorded when the respective services are rendered.
CLASSIFICATION OF EXPENSES
All expenses incurred by the Predecessor (except interest, depreciation
and general and administrative costs) are classified as assisted living
operating expenses. All expenses (except interest, depreciation, and
assisted living operating expenses) associated with corporate or support
functions are classified as general and administrative expense.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost with depreciation being
provided over the assets' estimated useful lives using the straight-line
method as follows:
<TABLE>
<CAPTION>
Buildings and improvements...................................... 35 years
<S> <C> <C>
Furniture and equipment......................................... 7-10 years
</TABLE>
Interest incurred during construction periods is capitalized as part of
the building costs. Maintenance and repairs are expensed as incurred;
renewals and improvements are capitalized. Upon disposal of property and
equipment subject to depreciation, the related costs and accumulated
depreciation are removed and resulting gains and losses are reflected in
operations.
If there is an event or a change in circumstances that indicates that
the basis of the Predecessor's long-lived assets may not be recoverable,
the Predecessor's policy is to assess any impairment in value by making
a comparison of the current and projected operating cash flows of the
asset over its remaining useful life, on an undiscounted basis, to the
carrying amount of the asset. Such carrying amounts would be adjusted,
if necessary, to reflect an impairment in the value of the assets.
F-18
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FACILITY DEVELOPMENT COSTS
Facility development costs include direct costs related to development
and construction of facilities. When a project is completed, it is
transferred to property and equipment. If a project is abandoned, any
costs previously capitalized would be expensed.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized to interest expense over the term
of the related debt using the interest method. Accumulated amortization
was $403,400, $74,400 and $263,500 at December 31, 1994 and 1995 and
June 30, 1996, respectively.
INCOME TAXES
The businesses comprising the Predecessor have elected to be taxed as
either S Corporations, Partnerships or Limited Liability Companies
pursuant to the provisions of the Internal Revenue Code and, as such,
are not subject to federal or state income taxes because their taxable
income or loss accrues to individual shareholders, partners or members
respectively.
RESTRICTED CASH
Included in restricted cash are certain resident security deposits and
escrowed funds in connection with mortgage notes that the Predecessor
cannot use in operating activities.
CASH EQUIVALENTS
The Predecessor considers all investments purchased with original
maturities of three months or less at acquisition to be a cash
equivalent.
INTANGIBLE ASSETS
Intangible assets consists of goodwill ($2,883,000 net at June 30, 1996)
which is the excess of the purchase price over the net assets of
acquired facilities which is being amortized on the straight-line method
over 15 years, and a covenant not to compete ($293,000 net at June 30,
1996) which is being amortized on a straight-line basis over 7 years.
If there is an event or change in circumstances that indicates that the
basis of the Predecessor's long-lived intangibles may not be
recoverable, the Predecessor's policy is to assess any impairment in
value by making a comparison of the current and projected operating
costs flows of the facility for which the intangible relates over its
remaining useful life, on an undiscounted basis, to the carrying amount
of the intangible. Such carrying amounts would be adjusted, if
necessary, to reflect an impairment in value of the intangible.
PRE-OPENING COSTS
Costs incurred in connection with preparing facility units for initial
rental are expensed as incurred.
INTERIM FINANCIAL DATA (UNAUDITED)
The interim financial data as of June 30, 1996 and for the six months
ended June 30, 1995 and 1996 are unaudited; however, in the opinion of
management, such interim data includes all
F-19
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the combined financial position and the
combined results of operations and cash flows for the periods.
RECENT ACCOUNTING PRONOUNCEMENTS
The Predecessor is not aware of any current accounting pronouncements
that require future adoption that will materially affect the combined
financial condition or combined results of operations of the
Predecessor.
PRO FORMA PRESENTATION (UNAUDITED)
Certain entities that comprise the Predecessor intend on declaring, upon
successful completion of the Offering by the Company, final
distributions to their respective shareholders and partners in the
aggregate of $6,250,000. These distributions will be funded through
proceeds of the Offering and will be used primarily to satisfy (i) the
tax liabilities of the Kaplans expected to be incurred pertaining to the
transfer of the Predecessor interests in the facilities to the Company
($6,000,000) and (ii) real estate transfer taxes arising out of the
transaction expected to be approximately $(250,000).
The pro forma net income (loss) per share for all periods presented were
determined based upon the number of shares of common stock assumed to be
issued by the Company in the initial public offering to fund the
$6,250,000 distribution based on an assumed offering price of $13 per
share (480,769) plus, the issuance of the 4,150,000 shares of common
stock to the Kaplans in the exchange.
The pro forma benefit (provision) for income taxes for the Predecessor
is based on the historical combined financial data of the Predecessor as
if the entities comprising the Predecessor had operated as taxable
corporations for all periods presented and is recorded at the statutory
rate in effect during the period (40%).
3. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------- JUNE 30
--------------
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................ $ 1,419,119 $ 1,959,514 $ 2,450,644
Buildings and improvements.................. 23,756,891 29,728,334 56,432,449
Furniture and equipment..................... 5,927,952 6,396,074 7,628,983
-------------- -------------- --------------
31,103,962 38,083,922 66,512,076
Less, accumulated depreciation.............. 7,540,929 8,638,801 9,516,283
-------------- -------------- --------------
Property and equipment, net................. $ 23,563,033 $ 29,445,121 $ 56,995,793
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The Predecessor's land and buildings and certain furniture and equipment
serve as collateral for long-term debt.
F-20
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT: (CONTINUED)
Interest costs capitalized during development approximated $634,000,
$--, $--, $263,000, and $1,105,000, for the six months ended June 30,
1995 and 1996 and the years ended December 31, 1993, 1994 and 1995,
respectively.
4. INVESTMENTS IN JOINT VENTURES:
At December 31, 1995, the Predecessor had an 11% general partnership
interest in a limited partnership (Senior Quarters at Glen Riddle) and a
10% interest in a limited liability company (Senior Quarters at
Jamesburg). The Predecessor did not have operational control of either
facility. The joint venture agreements provide the Predecessor's joint
venture partners with preference distributions on their initial capital
contributions and provisions for a return of capital before any
distribution can be made to the Predecessor. Senior Quarters at Glen
Riddle and Senior Quarters at Jamesburg, which will commence operations
during 1996, are currently under development. Summarized financial
information for these joint ventures is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
--------------
<S> <C>
Assets
Land........................................................................ $ 1,511,423
Construction in progress.................................................... 6,340,604
Restricted investments...................................................... 20,884,931
Other assets................................................................ 1,344,308
--------------
$ 30,081,266
--------------
--------------
Liabilities and partners' capital:
Bonds payable............................................................... $ 25,585,142
Other liabilities........................................................... 1,267,067
Partners'/members' capital.................................................. 3,229,057
--------------
$ 30,081,266
--------------
--------------
</TABLE>
Effective April 1, 1996 the Predecessor purchased for $475,000 a 23.75%
interest in a limited partnership (Senior Quarters at Montville) (Note
5)
5. ACQUISITIONS AND DISPOSITIONS (UNAUDITED)
ACQUISITIONS:
On April 1, 1996 the Predecessor purchased two assisted living
facilities (Town Gate Manor and Town Gate East) for approximately
$10,375,020 which it fully funded through mortgage notes under the
Credit Facility (Notes 6 and 7). The Predecessor has accounted for this
acquisition under the purchase method. Under the purchase method the
purchase price is allocated to the assets acquired and liabilities
assumed based upon their relative fair value with the excess of
F-21
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
5. ACQUISITIONS AND DISPOSITIONS (UNAUDITED) (CONTINUED)
the purchase price over the fair value of the net assets acquired
recorded as goodwill. The preliminary allocation of the purchase price,
which in management's opinion is not expected to materially differ from
the final fair value valuation adjustments of the net assets acquired
is:
<TABLE>
<S> <C>
Cash.......................................................... $ 518,000
Property and equipment........................................ 6,422,000
Goodwill...................................................... 2,903,000
Covenant not to compete....................................... 323,000
Other assets.................................................. 290,000
Other liabilities............................................. (81,000)
-----------
Purchase price................................................ $10,375,000
-----------
-----------
</TABLE>
The Predecessor also purchased subsequent to December 31, 1995 for
$475,000 in cash, a 23.75% interest in an assisted living facility joint
venture. The Predecessor is accounting for this investment in joint
venture under the equity method of accounting. (See Note 14)
DISPOSITIONS:
Subsequent to year end, the Predecessor sold a 49.9% interest in its
Senior Quarters at Chestnut Ridge facility to an unrelated party for
$1,200,000. Since the Predecessor has retained operational and 50.1%
voting control of the facility the results of the operations of the
facility are combined in the accompanying financial statements with the
49.9% investment reflected as a component of minority interest.
PRO FORMA FINANCIAL INFORMATION:
The Predecessor acquired and disposed of interests in facilities during
the six months ended June 30, 1996. The pro forma financial information
set forth below is based upon the Predecessor's historical Combined
Statements of Operations for the six months ended June 30, 1996 and the
year ended December 31, 1995, adjusted to give effect to these
transactions as of January 1, 1995.
The pro forma financial information is presented for informational
purposes only and may not be indicative of what actual results of
operations would have been had the acquisitions occurred on January 1,
1995, nor does it purport to represent the results of operations for
future periods.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31, 1995
JUNE 30, 1996 -------------------
-------------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C>
Total revenue...................................................... $ 10,895 $ 18,316
Net loss........................................................... 835 242
</TABLE>
F-22
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- -------------- JUNE 30
--------------
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage note payable to a financial institution
bearing interest at 7.605% per annum due in monthly
principal and interest installments of $119,333
through December 1, 2005 when unpaid balance of
$12,954,978 is due. (B)............................. $ -- $ 16,000,000 $ 15,872,053
Mortgage note payable to a financial institution
bearing interest at 4% above the financial
institution's lending rate (9.40% at June 30, 1996).
Note matures on February 28, 1999. (A)(B)(C)(E)..... 6,907,290 6,931,282 6,850,850
Mortgage note payable to a financial institution
bearing interest at 4% above the financial
institution's lending rate (9.40% at June 30, 1996).
Note matures on February 28, 1999. (A)(B)(C)(E)..... 8,774,147 8,759,298 8,657,653
Mortgage note payable to an institution with interest
only payments through December 1996 at 4.25% above
U.S. Treasury Notes (10.7%) beginning January 1997
monthly payments of principal and interest are due.
The note matures December 2006. (B)(D)(See Note
7).................................................. -- 8,000,000 8,000,000
Construction note payable to a financial institution,
maturing June 1, 2036 and providing up to
$20,599,900 in funding, bearing interest at 9.325%
per annum, interest accrued through June 1, 1996 and
thereafter monthly payments of principal and
interest of $164,072 through maturity. (F).......... $ 4,779,974 $ 14,363,167 $ 18,973,004
Mortgage note payable bearing interest at prime plus
2% (10.5% at December 31, 1994). The note provided
for monthly interest only payments and matured in
1995. The Company refinanced this mortgage with a
$16,000,000 facility in 1995........................ 15,000,000 -- --
</TABLE>
F-23
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995
-------------- --------------
JUNE 30
--------------
1996
--------------
(UNAUDITED)
Mortgage note payable to a financial institution with
interest only payments through March 1997 at 4.25%
above U.S. Treasury Notes (10.56%). Beginning April
1997 monthly payments of principal and interest are
due. The note matures April 2006 (B)(F)(G) (Note
7).................................................. -- -- 6,484,375
<S> <C> <C> <C>
Mortgage note payable to a financial institution with
interest only payments through March 1997 at 4.25%
above U.S. Treasury Notes (10.56%). Beginning April
1997 monthly payments of principal and interest are
due. The note matures April 2006 (B)(F)(G) (Note
7).................................................. -- -- 3,890,625
-------------- -------------- --------------
35,461,411 54,053,747 68,728,560
Less, current portion................................ 15,000,000 245,867 913,047
-------------- -------------- --------------
Long-term portion.................................... $ 20,461,411 $ 53,807,880 $ 67,815,513
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- ------------------------
(A) Effective February 1996, the Predecessor will make monthly payments
equal to the outstanding mortgage principal balance multiplied by 12.0%.
The difference between this payment and the interest expense is applied
as a reduction of principal.
(B) The mortgage notes are collaterized by the facilities property and
equipment.
(C) The mortgage notes include an equity participation provision for the
lender. The Predecessor is obligated to pay the lender at either (i) the
maturity of the loan; (ii) refinancing of the loan; or (iii) sale of the
facility, the greater of $480,000 or 25% of the appraised market value of
the facility in excess of $17,500,000. The Predecessor has treated the
$480,000 as deferred interest and has reflected this amount in the
accompanying financial statements under the effective interest method.
The difference between the effective interest rate and the pay rate is
reflected as deferred interest payable. The effective interest rate on
this note was 10.1%, 9.9% and 10.4% at June 30, 1996, December 31, 1994
and 1995, respectively.
(D) Monthly principal and interest payments are based upon a 25 year
amortization period. At maturity, the Predecessor has an option to renew
the note for ten years at a rate of 6.25% above U.S. Treasury Notes
increased annually by 30 basis points. Monthly principal and interest
payments will be based upon a 16-year amortization period. The note also
includes an equity participation for the lender. The Predecessor is
obligated to pay the lender at the expiration of the initial term,
prepayment or upon default, the greater of $800,000 or 50% of the
difference between the fair market value of the facility and $8,000,000.
The Predecessor has treated the $800,000 as deferred interest and has
reflected this amount in the accompanying financial
F-24
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. LONG-TERM DEBT: (CONTINUED)
statements under the effective interest method. The difference between
the effective interest rate and the pay rate is reflected as deferred
interest payable. The effective interest rate on this note was 11.6% at
June 30, 1996 and December 31, 1995.
(E) These notes are partially or totally guaranteed by the respective
partners and shareholders of the Predecessor.
(F) Various prepayment penalties exist.
(G) Monthly principal and interest payments are based upon a 25 year
amortization period. At maturity, the Predecessor has an option to renew
the note for ten years at a rate of 6.25% above U.S. Treasury Notes
increased annually by 30 basis points. Monthly principal and interest
payments will be based upon a 16 year-amortization period. The note also
includes an equity participation for the lender. The Predecessor is
obligated to pay the lender at the expiration of the initial term,
prepayment, default or termination of the note, 50% of the difference
between the fair market value of the facility and $10,375,000 if the fair
market value of the property exceeds the loan amount by more than 125%,
otherwise the Predecessor will pay 10% of the fair market value of the
facility subject to a cap of 50% of the difference between the fair
market value of the facility and the loan amount.
Principal payments on long-term debt as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
- ----------------------------------------------------------
<S> <C>
1996..................................................... $ 245,867
1997.................................................... 360,889
1998.................................................... 391,506
1999.................................................... 16,116,514
2000.................................................... 463,458
Thereafter.............................................. 36,475,513
--------------
Total............................................... $ 54,053,747
--------------
--------------
</TABLE>
7. CREDIT FACILITY
The Predecessor has available a $40 million recourse line of credit (the
"Credit Facility") from Health Care REIT Inc. The Credit Facility
provides both construction and permanent financing.
Construction financings, which can also be used for acquisitions,
generally expire in twelve months or the date the certificate of
occupancy is received. Interest on construction financing is 3.5% above
the base rate announced by National City Bank of Cleveland. Monthly
payments of interest only are required. At this expiration date the
construction financing is automatically converted to a permanent
financing.
Permanent financings ("Mortgage Notes") are for initial terms of 10
years, with a 10 year renewal at the Predecessor's option. Interest,
which is fixed on the date of the permanent financing, is charged at
4.25% above comparable U.S. Treasury Notes during the initial financing
term and 6.25% above comparable U.S. Treasury Notes during any renewal
term. Monthly payments of interest only are due during the first year,
after which monthly payments of principal and interest are due based on
a 25 year amortization period.
F-25
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
7. CREDIT FACILITY (CONTINUED)
The Credit Facility is collateralized by the Predecessor's real estate,
equipment and accounts receivable. At June 30, 1996, the Predecessor has
available under the $40 million Credit Facility $21,625,000.
SUBSEQUENT EVENT (UNAUDITED)
Subsequent to June 30, 1996 and effective as of the date of the initial
public offering of the Company, the Company will obtain an additional
$100 million recourse line of credit from Health Care REIT, Inc.
In addition, subsequent to June 30, 1996, the Company received a
commitment for an additional draw down of $12,810,000 under the Credit
Facility of which $3,744,458 has been drawn.
8. COMMITMENTS AND CONTINGENCIES:
MANAGEMENT AGREEMENTS
The Predecessor has agreements with unaffiliated parties to manage their
facilities. These agreements, which range from three to ten years with
five year renewal options, expire at various dates from 1997 through
2006. The fees received under these agreements are generally 5% of gross
rental revenue of the facility and incentive fees related to facility
operating results.
LEGAL PROCEEDINGS
The Predecessor is named as a defendant in various lawsuits which arise
in the normal course of business. Although the ultimate outcome of these
proceedings cannot be determined, management believes that in no
instance will the outcome have a material adverse effect on the
Predecessor's financial position, result of operations or cash flows.
OPERATING LEASES
The Predecessor is obligated under certain long term non-cancellable
operating leases for its corporate office and office equipment expiring
at various dates through 2007. Future minimum lease payments required
under these leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- -------------------------------------------------------------
<S> <C>
1996..................................................... $ 119,700
1997...................................................... 153,400
1998...................................................... 159,660
1999...................................................... 139,918
2000...................................................... 138,746
</TABLE>
Rent expense was approximately $64,000, $75,000 and $90,000 in 1993,
1994 and 1995, respectively and $44,000 and $60,000 for the six months
ended June 30, 1995 and 1996, respectively.
INITIAL PUBLIC OFFERING
The Company intends to file a Registration Statement under the
Securities Act of 1933 to effect the Offering. The businesses' of the
Predecessor will be contributed to the Company concurrently with the
Offering (see Note 1). In addition to its owned facilities, the
Predecessor will contribute its management agreements with respect to
unaffiliated facilities.
F-26
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
9. EXTRAORDINARY ITEM:
During 1994, the Predecessor negotiated a settlement with various
lenders to satisfy certain outstanding mortgage notes payable and
accrued interest payable at a $4,398,672 discount. The Predecessor
simultaneously refinanced this debt with other lenders at the then
prevailing market rates. This amount has been reflected in the 1994
combined statement of operations as an extraordinary item.
10. RELATED PARTY TRANSACTIONS
DUE TO AFFILIATES
This represents advances from uncombined affiliated entities that are
not presented as a component of the Predecessor. These advances, which
are due on demand and bear interest at rates ranging from 6.53% to
6.92%, were made to assist in the funding of certain of the Predecessor
entities start-up operations.
OTHER -- AFFILIATES
The Predecessor has arrangements with affiliated entities to provide
real estate advisory services. The fees received by the Predecessor are
based on a percentage of the affiliate's annual rental revenue.
11. EMPLOYEE BENEFIT PLAN
In August 1995, the Predecessor established a 401(k) plan for all
employees that meet minimum employment criteria. The plan provides that
the Predecessor may, at its option, contribute to the plan up to 6% of
an employee's salary. Employees are always 100% vested in their own
contributions and vested in Predecessor contributions over seven years.
The Predecessor made no contributions for the year ended December 31,
1995 and the six months ended June 30, 1996.
12. CONCENTRATION OF RISK:
BUSINESS AND CREDIT CONCENTRATION
Concentration of credit risk with respect to resident receivables is
limited due to the large number of residents comprising the resident
roster and the policy of the Predecessor to obtain security deposits and
personal guarantees from third parties in many instances.
FINANCIAL RISK
The Predecessor maintains its cash primarily at two financial
institutions which management believes are of high credit quality.
GEOGRAPHIC CONCENTRATION
The Predecessor's facilities are located primarily in New York, New
Jersey and Connecticut. This concentration imposes on the Predecessor
certain risks, which include local economic conditions, that are not
within management's control.
F-27
<PAGE>
THE KAPSON GROUP
(THE PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATED TO INTERIM DATA AS OF JUNE 30, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash and cash equivalents, restricted cash and variable rate and fixed
rate mortgage notes payable are reflected in the accompanying balance
sheet at amounts considered by management to reasonably approximate fair
value. Management estimates the fair value of its long-term fixed rate
notes payable generally using discounted cash flow analysis based upon
the Predecessor's current borrowing rate for debt with similar
maturities.
14. SUBSEQUENT EVENT:
In August 1996, the Company entered into an agreement to purchase for
$2,600,000 the remaining 50% interest in Senior Quarters at East
Northport. The $2,600,000 purchase price will be satisfied through (i)
the lesser of 50,000 shares of common stock at the initial public
offering price or $750,000 worth of common stock based upon the initial
public offering price and (ii) the remainder of the purchase price will
be paid in cash.
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Kapson Senior Quarters Corp.
We have audited the accompanying balance sheet of Kapson Senior Quarters
Corp. as of June 10, 1996. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on the balance
sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Kapson Senior Quarters Corp. as of
June 10, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
June 11, 1996
F-29
<PAGE>
KAPSON SENIOR QUARTERS CORP.
BALANCE SHEET
AS OF JUNE 10, 1996
ASSETS
<TABLE>
<S> <C>
Cash................................................................................. $ 300
---------
Total Assets..................................................................... $ 300
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Commitments and Contingencies (Note 5)
Shareholders' Equity:
Preferred Stock; $.01; par value 10,000,000 shares authorized, none issued or
outstanding
Common Stock; $.01; par value; 30,000,000 shares authorized, 300 shares issued and
outstanding....................................................................... $ 3
Additional Paid in Capital......................................................... 297
---------
Total Liabilities and Shareholders' Equity....................................... $ 300
---------
---------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-30
<PAGE>
KAPSON SENIOR QUARTERS CORP.
NOTES TO BALANCE SHEET
JUNE 10, 1996
(1) FORMATION OF THE COMPANY
Kapson Senior Quarters Corp. (the "Company") was incorporated under the
General Corporation Law of Delaware on June 7, 1996 by three individual
equal owners (the "Kaplans"). There have been no operations since formation.
The Company was formed in order to consolidate and expand the assisted
living facility business of the Kapson Group (the "Predecessor") of which
the Kaplans are owners. In connection with a proposed public offering (see
Note 2), the Prececessor will contribute their interests in six wholly owned
facilities (Senior Quarters at Huntington Station, Senior Quarters at
Centereach I, Senior Quarters at Centereach II, Senior Quarters at Stamford,
Town Gate Manor and Town Gate East); two majority controlled/owned
facilities (Senior Quarters at Chestnut Ridge and Senior Quarters at East
Northport), three minority owned facilities (Change Bridge Inn, Senior
Quarters at Jamesburg and Senior Quarters at Glen Riddle) (two of which are
under development) and management agreements for four facilities -- (The
Regency at Glen Cove, Senior Quarters at Cranford, Castle Gardens and Senior
Quarters at Lynbrook( (one of which is under development) owned by unrelated
third parties for an aggregate of approximately 4,150,000 shares of common
stock the Company, See Note 2 -- The Initial Public Offering.
(2) STOCKHOLDER EQUITY
COMMON STOCK
The Company is authorized to issue 30,000,000 shares of common stock with a
$.01 par value. On June 10, 1996, the Company issued 300 shares of common
stock to the Kaplans for $1 per share.
THE INITIAL PUBLIC OFFERING
In connection with the Company's plan to expand the assisted living business
of the Predecessor, the Company intends to file a Registration Statement
under the Securities Act of 1933 to effect an initial public offering (the
"Offering"). The proceeds of the Offering are intended to be used for the
development and acquisition of additional assisted living facilities,
working capital and general corporate purposes as well as a distribution to
the Kaplans of an aggregate of $6.25 million which will be used primarily to
satisfy (i) tax liabilities of the Kaplans expected to be incurred
pertaining to the transfer of the Predecessor interests in the facilities to
the Company ($6,000,000) and (ii) real estate transfer taxes arising out of
the transaction estimated to be approximately $250,000.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock,
$.01 par value, in one or more classes or series and to fix the designation,
preferences, rights, qualifications, limitations and restrictions thereof,
including the voting rights, dividends rights, dividend rates, conversion
rights, terms of redemption, redemption prices, liquidation preferences and
number of shares constituting any series. The Company, may without
shareholder approval, issue preferred stock with voting and conversion
rights that could adversely affect the voting power of the holders of the
common stock and the market price of the common stock.
STOCK OPTIONS
The Company adopted the 1996 Stock Incentive Plan (the "Plan") which may be
awarded to key employees. Under the Plan, a maximum of 600,000 shares of
common stock may be issued pursuant to the Plan. The Plan provides for the
grant of any or all of the following types of awards to eligible employees:
(i) stock options, including incentive stock options and non-qualified stock
options; (ii) stock appreciation rights, in tandem with stock options or
freestanding; (iii) restricted stock; and (iv) performance shares. In
addition, the Plan provides for the non-discretionary award of stock options
to non-employee directors of the Company as a portion of their annual
retainer fee. Awards may be granted singly, in combination, or in tandem, as
determined by the 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.
(7) SUBSEQUENT EVENT:
In August 1996, the Company entered into an agreement to purchase for
$2,600,000, the remaining 50% interest in Senior Quarters at East Northport.
The $2,600,000 purchase price will be satisfied through (i) the lesser of
50,000 shares of common stock at the initial public offering price or
$750,000 worth of common stock based upon the initial public offering price
and (ii) the remainder of the purchase price will be paid in cash.
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Partners
Town Gate East
Penfield, New York
We have audited the accompanying balance sheets of Town Gate East (a
Partnership) as of December 31, 1995 and 1994, and the related statements of
income, changes in partners' capital and cash flows for each of the years in the
three year period ended December 31, 1995. These financial statements are the
responsibility of the facility's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Town Gate East (a
Partnership) as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 1995 in conformity with generally accepted accounting principles.
/s/ Rotenberg & Company LLP
Rochester, NY
February 21, 1996
F-34
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
BALANCE SHEETS
AT DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995
------------- ------------- THREE MONTHS
ENDED
MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents....................................... $ 106,746 $ 100,773 $ 86,225
Accounts Receivable -- Net of Allowance for Doubtful Accounts... 19,166 28,709 30,471
Inventories..................................................... 9,654 8,980 8,980
Prepaid Expenses................................................ 56,820 59,457 118,698
------------- ------------- ---------------
Total Current Assets.......................................... $ 192,386 $ 197,919 $ 244,374
Property and Equipment -- Net of Accumulated Depreciation......... 2,433,530 2,349,390 2,318,354
Mortgage Acquisition Costs -- Net of Accumulated Amortization..... 36,624 30,520 29,020
------------- ------------- ---------------
Total Assets................................................ $ 2,662,540 $ 2,577,829 $ 2,591,748
------------- ------------- ---------------
------------- ------------- ---------------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Notes and Mortgage Payable -- Due Within One Year............... $ 94,708 $ 53,040 $ 39,972
Accounts Payable................................................ 41,991 45,136 28,436
Accrued Expenses................................................ 27,623 30,055 8,928
Unearned Resident Care Revenue.................................. 12,333 -- --
------------- ------------- ---------------
Total Current Liabilities..................................... $ 176,655 $ 128,231 $ 77,336
Other Liabilities
Notes and Mortgage Payable -- Due After One Year................ 1,804,759 1,772,572 1,772,572
------------- ------------- ---------------
Total Liabilities........................................... $ 1,981,414 $ 1,900,803 $ 1,849,908
Partners' Capital................................................. 681,126 677,026 741,840
------------- ------------- ---------------
Total Liabilities and Partners' Capital....................... $ 2,662,540 $ 2,577,829 $ 2,591,748
------------- ------------- ---------------
------------- ------------- ---------------
</TABLE>
The accompanying notes are an integral part of this financial statement
and should be read in conjunction therewith.
F-35
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------- MARCH 31, 1996
1993 1994 1995 ----------------------------
AMOUNT AMOUNT AMOUNT 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 1,978,568 $ 2,036,539 $ 2,137,991 $ 527,325 $ 554,657
Operating Expenses.................... 1,385,669 1,439,418 1,557,656 358,884 361,465
Depreciation and Amortization......... 130,386 135,981 142,203 36,900 36,000
------------- ------------- ------------- ------------- -------------
Income Before Other Income............ $ 462,513 $ 461,140 $ 438,132 $ 131,541 $ 157,192
Other Income.......................... 9,443 13,300 14,468 0 0
------------- ------------- ------------- ------------- -------------
Net Income............................ $ 471,956 $ 474,440 $ 452,600 $ 131,541 $ 157,192
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-36
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
TOTAL TOTAL TOTAL
------------- ------------- ------------- THREE MONTHS
ENDED
MARCH 31,
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance -- Beginning of Year.......................... $ 561,330 $ 687,486 $ 681,126 $ 677,026
Net Income............................................ 471,956 474,440 452,600 157,192
------------- ------------- ------------- ------------
Subtotal.............................................. $ 1,033,286 $ 1,161,926 $ 1,133,726 $ 834,218
Partners' Withdrawals................................. 345,800 480,800 456,700 92,378
------------- ------------- ------------- ------------
Balance -- End of Year................................ $ 687,486 $ 681,126 $ 677,026 $ 741,840
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
F-37
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- --------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Cash Received from Residents........... $ 1,959,587 2,036,328 $ 2,110,115 $ 515,285 $ 551,941
Cash Paid to Suppliers and Employees... (1,267,332) (1,296,989) (1,361,568) (397,586) (429,658)
Interest Received...................... 2,514 2,465 3,622 719 954
Interest Paid.......................... (142,204) (151,621) (185,253) (15,227) (28,875)
Other Income........................... 6,929 10,835 10,846
-------------- -------------- -------------- ------------ ------------
Net Cash Flows from Operating
Activities........................ $ 559,494 $ 601,018 $ 577,762 $ 103,191 94,362
-------------- -------------- -------------- ------------ ------------
Cash Flows from Investing Activities
Cash Purchases of Property and
Equipment............................. $ (42,230) $ (71,169) $ (44,324) $ (27,078) $ (3,464)
Proceeds from Sale of Assets........... -- -- 9,010
-------------- -------------- -------------- ------------ ------------
Net Cash Flows from Investing
Activities.......................... $ (42,230) $ (71,169) $ (35,314) $ (27,078) $ (3,464)
-------------- -------------- -------------- ------------ ------------
Cash Flows from Financing Activities.....
Repayment of Debt...................... $ (89,840) $ (69,422) $ (91,721) $ (14,240) $ (13,068)
Partners' Withdrawals.................. 345,800) (480,800) (456,700) 105,200) (92,378)
-------------- -------------- -------------- ------------ ------------
Net Cash Flows from Financing
Activities.......................... $ (435,640) $ (550,222) $ (548,421) $ (119,440) $ (105,446)
-------------- -------------- -------------- ------------ ------------
Net Decrease in Cash and Cash
Equivalents............................. $ 81,624 $ (20,373) $ (5,973) $ (43,327) $ (14,548)
Cash and Cash Equivalents -- Beginning of
Year.................................... 45,495 127,119 106,746 106,746 100,773
-------------- -------------- -------------- ------------ ------------
Cash and Cash Equivalents -- End of
Year.................................... $ 127,119 $ 106,746 $ 100,773 $ 63,419 $ 86,225
-------------- -------------- -------------- ------------ ------------
-------------- -------------- -------------- ------------ ------------
</TABLE>
F-38
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Income......................................... $ 471,956 $ 474,440 $ 452,600 $ 131,541 $ 157,192
Adjustments:
Depreciation..................................... 124,282 129,877 136,099 35,400 34,500
Amortization..................................... 6,104 6,104 6,104 1,500 1,500
Bad Debts........................................ -- -- 6,000 -- --
Loss on Sale of Assets........................... -- -- 1,221 -- --
Changes:
Accounts Receivable.............................. (2,721) (10,084) (15,543) 1,012 (1,762)
Inventories...................................... (195) (649) 674 -- --
Prepaid Expenses................................. (11,186) (4,656) (2,637) (51,467) (59,241)
Accounts Payable................................. 18,303) (2,744) 3,145 (10,888) 16,700)
Accrued Expenses................................. 5,817 (1,143) 2,432 8,426 (21,127)
Unearned Resident Care Revenue................... (16,260) 9,873 (12,333) (12,333) --
----------- ----------- ----------- ----------- -----------
Net Cash Flows from Operating Activities....... $ 559,494 $ 601,018 $ 577,762 $ 103,191 $ 94,362
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
NON-CASH TRANSACTIONS
During 1995, long term debt in the amount of $17,866 was incurred to
purchase a vehicle.
F-39
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The partnership maintains its books and prepares its financial statements on
the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits, certificates of deposit,
and all highly liquid debt instruments with original maturities of three months
or less. The partnership maintains cash and cash equivalents at financial
institutions which periodically may exceed federally insured amounts.
INVENTORIES
Inventories are stated at the lower of cost or market, on the first-in,
first-out method.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation of property and equipment is provided over the estimated useful
lives of the respective assets on the straight line basis as follows:
<TABLE>
<S> <C>
Auto................................................. 5 Years
Building............................................. 40 Years
32 - 40
Building Addition.................................... Years
Equipment............................................ 3 - 15 Years
Improvements......................................... 3 - 20 Years
</TABLE>
Maintenance and repairs are charged to expense. The cost of property and
equipment retired or otherwise disposed of and the related accumulated
depreciation are removed from the accounts.
MORTGAGE ACQUISITION COSTS
Mortgage acquisition costs have been capitalized and are being amortized
using the straight line method over the term of the debt.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. Actual results can differ from those estimates.
INCOME TAXES
Partnership profit and losses are reported by the individual partners on
their personal tax returns. Accordingly, no provision for taxes is reflected in
these financial statements.
NOTE B -- SCOPE OF BUSINESS
The partnership was organized on November 1, 1978 and is engaged in the
operation of a one hundred twenty (120) certified bed adult care facility in
Penfield, New York.
F-40
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 1994 and 1995
and the three months ended March 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Residents...................................................... $ 16,018 $ 27,961 $ 31,602
Town Gate Manor................................................ 3,148 6,748 4,869
--------- --------- ---------------
$ 19,166 $ 34,709 $ 36,471
Less: Allowance for Doubtful Accounts.......................... -- 6,000 6,000
--------- --------- ---------------
Net Accounts Receivable.................................... $ 19,166 $ 28,709 $ 30,471
--------- --------- ---------------
--------- --------- ---------------
</TABLE>
NOTE D -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Auto.................................................... $ 18,090 $ 24,866 $ 24,866
Building................................................ 1,122,627 1,122,627 1,122,627
Building Additions...................................... 1,668,890 1,668,890 1,669,119
Equipment............................................... 385,976 391,183 391,304
Improvements............................................ 216,841 247,047 250,161
------------- ------------- ---------------
$ 3,412,424 $ 3,454,613 $ 3,458,077
Less: Accumulated Depreciation.......................... 1,054,294 1,180,623 1,215,123
------------- ------------- ---------------
$ 2,358,130 $ 2,273,990 $ 2,242,954
Add: Land............................................... 75,400 75,400 75,400
------------- ------------- ---------------
Net Property and Equipment.......................... $ 2,433,530 $ 2,349,390 $ 2,318,354
------------- ------------- ---------------
------------- ------------- ---------------
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994, and 1995
and the three months ended March 31, 1996 was $124,282, $129,877, $136,099 and
$34,500, respectively.
Substantially all of the building and equipment is pledged as collateral
security on notes and mortgages payable.
NOTE E -- MORTGAGE ACQUISITION COSTS
Mortgage acquisition costs at December 31, 1994 and 1995 and March 31, 1996,
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C> <C> <C>
Total Costs.................................................... $ 61,041 $ 61,041 $ 61,041
Less: Accumulated Amortization................................. 24,417 30,521 32,021
--------- --------- ---------------
Net Mortgage Acquisition Costs............................. $ 36,624 $ 30,520 $ 29,020
--------- --------- ---------------
--------- --------- ---------------
</TABLE>
Amortization expense for each of the years ended December 31, 1993, 1994 and
1995 was $6,104, and for the three months ended March 31, 1996, $1,500.
F-41
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- NOTES AND MORTGAGE PAYABLE
Notes and mortgage payable consisted of the following at December 31, 1994
and 1995 and March 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
NOTE PAYABLE -- M & T BANK
$200,000 line of credit bearing interest at prime plus 1%.
Collateralized by all assets of the partnership and guaranteed by
the partners..................................................... $ 40,000 $ -- $
NOTE PAYABLE -- FORD MOTOR CREDIT COMPANY
Installment note paid in full..................................... 5,328 -- --
NOTE PAYABLE -- CHASE MANHATTAN BANK
Installment note payable in monthly payments of $459, including
interest at 10.49%. Note matures in May, 1999. Collateralized by
vehicle.......................................................... -- 15,764 $ 14,797
MORTGAGE PAYABLE -- M & T BANK
Payments are based on a twenty year schedule with the principal
balance due in the tenth year (2001). Monthly payments including
principal and interest at prime plus 1% are $18,608.
Collateralized by the real and personal property used in the
operation of the facility and guaranteed by the partners......... 1,854,139 1,809,848 $ 1,797,747
------------- ------------- -------------
Total Notes and Mortgage Payable................................ $ 1,899,467 $ 1,825,612 $ 1,812,544
Less: Amount Due Within One Year.................................. 94,708 53,040 39,972
------------- ------------- -------------
Amount Due After One Year........................................... $ 1,804,759 $ 1,772,572 $ 1,772,572
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Annual maturities of debt at March 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- --------------------------------------------------------------------- -------------
<S> <C>
1996............................................................... $ 39,972
1997............................................................... 58,482
1998............................................................... 64,482
1999............................................................... 67,787
2000............................................................... 72,244
Thereafter........................................................... 1,509,577
-------------
Total............................................................ $ 1,812,544
-------------
-------------
</TABLE>
Interest expense for the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1996, was $141,695, $155,160, $184,952, and
$28,875, respectively.
NOTE G -- RELATED PARTY TRANSACTIONS
Josephine Kennedy, partner, receives a salary as administrator of the
facility. Albert R. Christiano, partner, receives a salary for consulting
services and is also the legal counsel for the facility. Den Pac
F-42
<PAGE>
TOWN GATE EAST
(A PARTNERSHIP)
PENFIELD, NEW YORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE G -- RELATED PARTY TRANSACTIONS (CONTINUED)
Management, Inc., a corporation whose stock is solely owned by Dennis
Christiano, partner, receives payments for management services. The amounts of
these transactions for the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Josephine Kennedy....................................... $ 52,832 $ 55,212 $ 58,150 $ 15,126
Albert R. Christiano.................................... 8,400 10,600 10,800 2,700
Den-Pac Management, Inc................................. 8,400 10,600 10,800 2,700
</TABLE>
There is an intercompany receivable from Town Gate Manor, related through
common ownership, for shared administrative expenses of $3,148, $6,748 and
$4,869 at December 31, 1994 and 1995 and March 31, 1996, respectively. These
amounts are included in accounts receivable.
NOTE H -- EMPLOYEE BENEFIT PLAN
During 1995, the partnership implemented a 401(k) plan whereby all employees
who meet age and length of service requirements may voluntarily defer up to 15%
of wages. The partnership has elected not to make matching contributions under
the plan.
NOTE I -- SUBSEQUENT EVENT
During 1995, the partners agreed to sell the operations and real estate of
Town Gate East for an amount in excess of book value. The sale closing is April
1, 1996.
F-43
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
REPORT OF INDEPENDENT AUDITORS
The Partners
Town Gate Manor
Rochester, New York
We have audited the accompanying balance sheet of Town Gate Manor (a
Partnership) as of December 31, 1995 and 1994, and the related statements of
income, changes in partners' capital and cash flows for each of the years in the
three year period ended December 31, 1995. These financial statements are the
responsibility of the facility's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Town Gate Manor (a
Partnership) as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 1995 in conformity with generally accepted accounting principles.
/s/ Rotenberg & Company LLP
Rochester, New York
January 29, 1996
F-44
<PAGE>
TOWN GATE MANOR
(A PARTNERSHIP)
ROCHESTER, NEW YORK
BALANCE SHEETS
AT DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996 (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995
------------- ------------- THREE MONTHS
ENDED MARCH
31, 1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents......................................... $ 76,344 $ 133,878 $ 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.
<PAGE>
Employees performing residential services for residents.
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 19
Dilution....................................... 20
Capitalization................................. 21
Dividend Policy................................ 21
Selected Financial, Operating and Pro Forma
Data.......................................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 25
Business....................................... 33
Management..................................... 51
Certain Transactions........................... 61
Principal and Selling Stockholders............. 63
Description of Capital Stock................... 64
Shares Eligible for Future Sale................ 66
Underwriting................................... 68
Experts........................................ 69
Legal Matters.................................. 69
Additional Information......................... 69
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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........................................ 350,000
Printing and engraving expenses................................ 125,000
Accounting fees and expenses...................................
Blue sky fees and expenses..................................... 50,000
Transfer agent and registrar fees.............................. 10,000
Premium on directors and officers liability insurance..........
Miscellaneous.................................................. 150,000
----------
Total...................................................... $
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
"GCL") permits indemnification of directors, officers, employees, and agents of
corporations under certain conditions and subject to certain limitations.
Article Tenth of the Registrant's Certificate of Incorporation provides for
indemnification of the Registrant's officers and directors to the fullest extent
provided by the GCL and other applicable laws as currently in effect and as they
may be amended in the future.
The Company has entered into indemnification agreements with each of its
officers and directors and intends to enter into similar agreements with each of
its future officers and directors. Pursuant to such indemnification agreements,
the Company has agreed to indemnify its officers and directors against certain
liabilities, including liabilities arising out of the offering made by this
Registration Statement.
The Company maintains a standard form of officers' and directors' liability
insurance policy which provides coverage to the officers and directors of the
Company for certain liabilities, including certain liabilities which may arise
out of this Registration Statement.
The Underwriting Agreement filed as Exhibit 1.1 hereto provides for
reciprocal indemnification between the Company and its controlling persons, on
the one hand, and the Underwriters and their controlling persons, on the other
hand, against certain liabilities in connection with this offering, including
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Upon the formation of the Company on June 7, 1996, , each of the Kaplans
purchased 100 shares of Common Stock directly from the Company at a cost of
$1.00 per share. These shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement. --
3.1 Certificate of Incorporation of the Registrant.-
3.2 By-laws of the Registrant.-
5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP.*
10.1 Form of Operating Agreement. --
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
10.2 Form of Management Services Agreement. --
<C> <S>
10.3 Form of Kapson Senior Quarters Corp. 1996 Stock Incentive Plan. --
10.4 Form of Registration Rights Agreement among the Registrant, Glenn Kaplan, Wayne L. Kaplan, Evan A.
Kaplan and Herbert Kaplan. --
10.5 Form of Management Agreement between the Kapson Group and Senior Quarters Management Corp.-
10.6 Form of Management Agreement between the Kapson Group and Senior Quarters Management Corp.-
10.7 Management Agreement dated July 15, 1992 between Coachmen Restaurant, Inc. and Senior Quarters
Management Corp.-
10.8 Management Agreement dated , 1993 between Larkfield Gardens Associates, L.P. and Senior
Quarters Management Corp.-
10.9 Management Agreement dated January 21, 1993 between United Community and Housing Development
Corporation and Senior Quarters Management Corp. (This agreement has been superseded by the
agreement filed as Exhibit No. 10.20).-
10.10 Management Agreement dated May 5, 1995 between Clover Lake Homes, Inc. and Senior Quarters
Management Corp.-
10.11 Management Agreement dated June 8, 1995 between Senior Quarters at Forsgate, L.L.C. and Senior
Quarters Management Corp.-
10.12 Management Agreement dated August 1995 between Montville Development, L.L.C. and Senior Quarters
Management Corp.-
10.13 Management Agreement dated September 1995 between Senior Quarters at Glen Riddle L.P. and Senior
Quarters Management Corp.-
10.15 Management Agreement dated January 29, 1996 between Hassett Belfer Senior Housing and Senior
Quarters Management Corp.-
10.16 Management Agreement dated April 1996 between The Mayfair at Glen Cove, LLC and Senior Quarters
Management Corp. (This agreement has been terminated).-
10.17 Management Agreement dated June, 1996 between Kapson Chestnut Ridge Development Corp. and Senior
Quarters Management Corp.-
10.18 Management Agreement dated February 8, 1993 between Pensun Associates and Senior Quarters Management
Corp.-
10.20 Management Agreement dated July 1, 1996 between National Healthplex Inc. and Kapson Management
Corp.-
10.21 Management Agreement dated July 11, 1994 between National Healthplex Inc. and Senior Quarters
Management Corp. (This agreement has been superseded by the agreement filed as Exhibit No. 10.20).-
10.22 Form of Stockholder Agreement among the Registrant, Glenn Kaplan, Wayne L. Kaplan and Evan A.
Kaplan. --
10.23 Form of Employment Agreement between each of Glenn Kaplan, Wayne L. Kaplan and Evan A. Kaplan and
the Registrant. --
10.24 Form of Indemnification Agreement.-
10.25 Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing made March, 1996 by
Kapson Rochester Manor, LLC in favor of Health Care REIT, Inc.
10.26 Mortgage Note in the sum of $3,890,625.00, dated March, 1996, made by Kapson Rochester Manor, LLC to
the order of Health Care REIT, Inc.
10.27 Loan Agreement dated March, 1996 between Kapson Rochester Manor, LLC and Health Care REIT, Inc.
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
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of a
registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a registrant
of expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
certifies that it has duly caused this Amendment No. 2 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Woodbury, State of New York, on the 22nd 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
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------ -------------------
* Chairman of the Board of Directors
------------------------------------------- and Chief Executive Officer August 22, 1996
Glenn Kaplan (principal executive officer)
/s/ WAYNE L. KAPLAN Senior Executive Vice President,
------------------------------------------- Vice Chairman and Secretary and August 22, 1996
Wayne L. Kaplan Director
*
------------------------------------------- President, Chief Operating Officer August 22, 1996
Evan A. Kaplan and Director
Vice President, Chief Financial
* Officer and Treasurer (principal
------------------------------------------- financial officer and principal August 22, 1996
John M. Sharpe, Jr. accounting officer)
*
------------------------------------------- Director August 22, 1996
Bernard J. Korman
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------ -------------------
*
------------------------------------------- Director August 22, 1996
Gerald Schuster
<C> <S> <C>
*
------------------------------------------- Director August 22, 1996
Joseph G. Beck
*
------------------------------------------- Director August 22, 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).-
10.22 Form of Stockholder Agreement among the Registrant, Glenn Kaplan, Wayne L. Kaplan and Evan
A. Kaplan. --
10.23 Form of Employment Agreement between each of Glenn Kaplan, Wayne L. Kaplan and Evan A.
Kaplan and the Registrant. --
10.24 Form of Indemnification Agreement.-
10.25 Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing made March,
1996 by Kapson Rochester Manor, LLC in favor of Health Care REIT, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- -------------------------------------------------------------------------------------------- -----
10.26 Mortgage Note in the sum of $3,890,625.00, dated March, 1996, made by Kapson Rochester
Manor, LLC to the order of Health Care REIT, Inc.
<C> <S> <C>
10.27 Loan Agreement dated March, 1996 between Kapson Rochester Manor, LLC and Health Care REIT,
Inc.
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>
EXHIBIT 10.25
MORTGAGE, SECURITY AGREEMENT,
ASSIGNMENT OF LEASES AND RENTS
AND FIXTURE FILING
(ACQUISITION/LAND LIEN)
THIS MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND
FIXTURE FILING ("Mortgage") is made and entered into effective as the _____ day
of March, 1996 (the "Effective Date") by KAPSON ROCHESTER MANOR, LLC, a limited
liability company organized under the laws of the State of New York
("Borrower"), having its chief executive office at 339 Crossways Park Drive,
Woodbury, New York 11797, in favor of HEALTH CARE REIT, INC., a Delaware
corporation ("Lender"), having its principal office at One SeaGate, Suite 1950,
P.O. Box 1475, Toledo, Ohio 43603.
In consideration of the loan advances described in Article 2 made or
to be made by Lender to Borrower and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Borrower has executed
and delivered this Mortgage and by these presents does grant, transfer and
convey to Lender and to its successors and assigns, forever all of Borrower's
right, title, and interest to and under the following property which Borrower
now owns or may hereafter acquire ("Property"):
1. The real property ("Real Property") located in the County of
Monroe (the "County") State of New York (the "State") and described on Exhibit A
attached hereto, including without limiting the completeness of the foregoing
grant:
(a) all tenements, hereditaments, and easements, rights of way,
licenses, rights, privileges, and appurtenances pertaining to the Real Property
presently owned or hereafter acquired by Borrower, including without limitation
easements, rights of way, streets, ways, alleys, gores, or strips of land,
whether or not adjoining the Real Property;
(b) all buildings and any other improvements ("Improvements")
now or hereafter erected or placed upon the Real Property and all fixtures
("Fixtures") of every kind and nature
<PAGE>
whatsoever now or hereafter affixed to the Real Property or Improvements
(without limiting the generality of what may be a Fixture, all heating,
ventilating, air conditioning, air cooling, lighting, incinerating, plumbing,
cleaning, communications and power equipment, screens, storm doors, storm
windows, shades, awnings, floor coverings, and carpeting, shall be deemed to be
Fixtures and to be a part of the Real Property, whether or not physically
attached to the Real Property); and
(c) all rents, income, issues, profits, royalties, and other
benefits derived or to be derived from the Real Property, Improvements, and
Fixtures (all of which are called "Rents") and all of Borrower's interest in any
lease, license or other agreement pursuant to which any Rents are payable (all
of which are called "Leases").
2. All the right, title, interest, claims, or demands, including
without limitation claims to the proceeds of any insurance which Borrower now
has or may hereafter acquire with respect to any Property and all awards made
for the taking of the whole or any part of the Property by eminent domain or by
any proceeding or the proceeds of any purchase or transfer in lieu thereof,
including without limitation, any awards resulting from a change of grade or
streets or for severance damages.
3. All real property hereafter acquired by Borrower which is made a
part of the lot(s) or parcel(s) which presently constitute(s) the Real Property
on the tax maps of the county auditor for so long as such after-acquired real
property shall be a part of such lot(s) or parcel(s) (Borrower shall execute and
deliver to Lender such instruments as Lender may require to confirm the lien of
this Mortgage on the additional property covered by this clause. This clause is
intended to insure that the lien of this Mortgage shall always encumber one or
more complete lots or parcels on the tax maps in the office of the auditor of
the county in which the Real Property is located so that the ability to transfer
the Real Property under Article 6 shall not be defeated or hindered by any
alteration of the lot(s) or parcel(s) which presently constitute(s) the Real
Property on such tax maps.)
- 2 -
<PAGE>
AND Borrower grants to Lender a security interest in and to Borrower's right,
title and interest in the following described property:
4. All machinery, furniture, equipment, trade fixtures, appliances,
inventory and all other goods (as "equipment," "inventory" and "goods" are
defined for purposes of Article 9 ("Article 9") of the Uniform Commercial Code
as adopted in the State) now or hereafter located in or on or used or usable in
connection with the Land, Improvements, or Fixtures and replacements, additions,
and accessions thereto, including without limitation those items which are to
become fixtures or which are building supplies and materials to be incorporated
into an Improvement or Fixture.
5. All accounts, contract rights, general intangibles, instruments,
documents, and chattel paper [as "accounts", "contract rights", "general
intangibles", "instruments", "documents", and "chattel paper", are defined for
purposes of Article 9] now or hereafter arising in connection with the business
located in or on or used or usable in connection with the Real Property,
Improvements, or Fixtures, and replacements, additions, and accessions thereto.
6. All franchises, permits, licenses, operating rights,
certifications, approvals, consents, authorizations and other general
intangibles regarding the use, occupancy or operation of the Improvements, or
any part thereof, including without limitation, certificates of need, state
health care facility licenses, and Medicare and Medicaid provider agreements, to
the extent permitted by law.
7. Unless expressly prohibited by the terms thereof, all contracts,
agreements, contract rights and materials relating to the design, construction,
operation and management of the Improvements, plans, specifications, drawings,
blueprints, models, mock-ups, brochures, flyers, advertising and promotional
materials and mailing lists.
8. All ledger sheets, files, records, computer programs, tapes,
other electronic data processing materials, and other documentation relating to
the preceding listed property or
- 3 -
<PAGE>
otherwise used or usable in connection with the Real Property and Improvements.
9. The products and proceeds of the preceding listed property,
including without limitation cash and non-cash proceeds, proceeds of proceeds,
and insurance proceeds.
TO HAVE AND TO HOLD the same with all of the rights, privileges and
appurtenances thereto belonging unto Lender, its successors and assigns forever
in accordance with the terms and conditions set forth herein.
ARTICLE 1: WARRANTIES
1.1 Borrower covenants with Lender and its successors and assigns that:
Borrower is lawfully seized in fee simple of the Property; the Property is free
from all mortgages, liens, charges, claims, security interests, pledges,
collateral assignments, leases, attachments, levies, encroachments, rights of
way, restrictions, assessments, and all other encumbrances and title matters of
every kind or nature whatsoever, except for the exceptions listed on Exhibit B
attached hereto (the "Permitted Exceptions"); Borrower has good right to
mortgage, sell and convey the same; and Borrower does warrant and will defend
the Property to Lender and its successors and assigns, forever, against all
claims and demands except the Permitted Exceptions.
ARTICLE 2: PURPOSES
2.1 SECURED OBLIGATIONS. This Mortgage secures performance of the following
obligations (the "Secured Obligations") of Borrower:
2.1.1 PAYMENT OF CREDIT EXTENDED. The payment of the indebtedness of
Borrower to Lender in the original principal amount of $3,890,625.00
($2,731,520.20 prior to consolidation) plus interest on the unpaid balance
thereof, which indebtedness is evidenced by a promissory note ("Note") made by
Borrower and delivered to Lender on this date, and any extensions,
modifications, substitutions or renewals of the indebtedness or Note, and which
is due and payable on the Renewal Date set forth in the Note, as extended from
time to time.
- 4 -
<PAGE>
2.1.2 OBLIGATIONS UNDER LOAN DOCUMENTS. The performance of all obligations
of Borrower under the Loan Agreement (defined in Section 2.6), the Note, this
Mortgage and all other documents executed by Borrower in connection therewith,
any extensions, modifications or renewals thereof, and any documents executed in
substitution therefor (collectively, the "Loan Documents").
2.1.3 ADVANCES TO PROTECT PROPERTY. The payment of unpaid balances of all
advances made by Lender for the payment of taxes, assessments, insurance
premiums, or costs incurred for the protection of the Property.
2.1.4 FUTURE ADVANCES. The payment of any unpaid balances of loan advances
which Lender may make or may be obligated to make under this Mortgage or the
Loan Agreement at any time after this Mortgage is delivered to the recorder for
record to the extent that the total unpaid loan indebtedness, exclusive of
interest thereon, does not exceed the maximum amount of $6,000,000.00 which may
be outstanding at any time and from time to time.
2.1.5 OTHER FUTURE ADVANCES. With respect to items of Property in which no
interest arises under real estate law and with respect to all items of Property
which are or are to become Fixtures as defined for purposes of Article 9, the
repayment of ALL advances made and value extended hereafter by Lender to or on
behalf of Borrower, whether or not made or extended pursuant to an existing
commitment.
2.1.6 BORROWER'S OBLIGATIONS. As used herein, "Borrower's Obligations"
means, collectively, all of the Secured Obligations required to be paid or
performed by Borrower.
2.2 COMBINATION OF INSTRUMENTS. This Mortgage combines a real estate
mortgage, an assignment of rents and leases, a security agreement, a fixture
filing, and a financing statement into one document and shall be construed
accordingly.
2.3 OPEN-END MORTGAGE. For all items of the Property in which an interest
arises under real estate law, this is an open-end mortgage which secures payment
of future advances.
- 5 -
<PAGE>
2.4 SECURITY AGREEMENT. For all Fixtures and all items of Property in
which no interest arises under real estate law, this Mortgage is also a security
agreement under Article 9. To the extent that this Mortgage is a security
agreement, it secures all future advances made and value hereafter extended to
or on behalf of Borrower.
2.5 FINANCING STATEMENT AND FIXTURE FILING. This Mortgage, a carbon copy,
a photographic copy, or other reproduction of it or a financing statement is
sufficient as a financing statement and may be filed as such. As a financing
statement, this Mortgage covers items of collateral which are or which may
become fixtures in addition to personal property. If this Mortgage or any
reproduction of it is filed as a financing statement: Borrower is the debtor;
Lender is the secured party; an address of Lender from which information
concerning the security interest may be obtained is Lender's address set forth
at the beginning; and a mailing address of Borrower is Borrower's address at the
beginning.
2.6 LOAN AGREEMENT. This Mortgage is subject to a certain Loan Agreement
("Loan Agreement") executed by Borrower and Lender on even date. The Loan
Agreement sets forth, among other things, the terms and conditions under which
Lender is obligated to advance up to the full amount of the Note and may make
non-obligatory advances, all of which are secured by this Mortgage. The Loan
Agreement is hereby incorporated herein and made a part hereof as though fully
rewritten herein including the defined terms. No defenses, offsets, or
counterclaims available to Borrower arising out of the Loan Agreement or Note
shall be valid or effective against any collateral transferee of this Mortgage
or the Note or its successors or assigns after this Mortgage and the Note are
collaterally assigned by Lender to one or more transferees who are providing
financing to Lender, and Borrower hereby expressly waives all such defenses,
offsets, or counterclaims to that extent. Borrower does not waive any such
defenses, offsets or counterclaims against an absolute transferee of this
Mortgage or the Note who acquired the same pursuant to a purchase of Lender's
interest in the Loan. A copy of the Loan Agreement is maintained at the offices
of Lender and may be inspected by interested persons.
2.7 INTERPRETATION. This Mortgage form is and shall be construed
accordingly to reflect the fact that the credit giving
- 6 -
<PAGE>
rise to the Secured Obligations would not have been extended by Lender but for
the security provided by this Mortgage. Where the sense requires it, the
singular may be read as the plural or the reverse and any gender may be read as
any other gender.
2.8 CONSOLIDATION. This Mortgage is the "Mortgage" referred to in the
Mortgage Consolidation, Spreader and Modification Agreement between Lender and
Borrower dated as of the Effective Date.
ARTICLE 3: COVENANTS
3.1 OBLIGATIONS. Borrower shall pay and perform all of Borrower's Obligations
when due and required.
3.2 IMPOSITIONS.
3.2.1 Borrower shall pay, not later than one day prior to the date such
Impositions become delinquent, all real estate taxes, personal property taxes,
general and special assessments, water and sewer rents and charges, license
fees, all charges which may be imposed for the use of vaults, chutes, areas and
other space beyond the lot line and abutting the public sidewalks in front of or
adjoining the Property, and all other governmental levies and charges
(collectively, the "Impositions") of every kind and nature whatsoever, general
and special, ordinary and extraordinary, foreseen and unforeseen, which shall be
assessed, levied, confirmed, imposed or become a lien upon or against the
Property or any part thereof, or which shall become due and payable with respect
thereto, unless contested in good faith as permitted by the Loan Agreement.
Borrower shall deliver to Lender [i] not more than 5 days after the due date of
each Imposition, a copy of the invoice for such Imposition and the check
delivered for payment thereof; and [ii] not more than 30 days after the due date
of each Imposition, a copy of the official receipt evidencing such payment or
other proof of payment satisfactory to Lender. If any law of any government
having jurisdiction over the Property is enacted after this date [i] deducting
from the value of land for the purpose of taxation any lien thereon; [ii]
imposing upon Lender the payment of the whole or any part of the Imposition
which is required to be paid by Borrower hereunder; or [iii] changing in any way
laws relating to the taxation of deeds of trust or debts
- 7 -
<PAGE>
secured by deeds of trust or mortgage interests in the Property, or the manner
of collection of taxes, in any such case, so as to affect this Mortgage or the
Secured Obligations, then Borrower, upon 30 days' notice from Lender, shall pay
such Imposition or reimburse Lender therefor. Borrower shall have no liability
for Lender's corporate franchise tax.
3.2.2 Borrower shall pay, or reimburse Lender for, all sales taxes,
intangible taxes, mortgage taxes, gross receipts taxes, documentary stamp taxes,
mortgage assignment taxes, transfer taxes and similar taxes imposed on Lender
relating to the Secured Obligations, Note, this Mortgage, or the indebtedness
secured by this Mortgage, the collection of the indebtedness or the foreclosure
of the lien of this Mortgage. At the direction of Lender, Borrower shall pay or
reimburse Lender for such taxes 30 days after Lender gives notice to Borrower.
3.3 INSURANCE.
3.3.1 Borrower shall maintain in full force and effect an extended coverage
policy ("Policy") of insurance in a nonreporting form insuring against "All
Risk" of physical loss or damage to the Improvements, including but not limited
to risk of loss from fire and other hazards, collapse, transit coverage,
vandalism, malicious mischief, theft, earthquake, sinkholes, testing, and damage
resulting from defective workmanship or material. The policy shall be in the
amount of the full replacement value of the Improvements and shall contain a
deductible amount acceptable to Lender. Lender shall be named as mortgagee and
loss payee under a standard non-contributing lender's loss payable clause. At
all times during which Improvements are being constructed on the Real Property,
the Policy shall include a builder's completed value risk policy and shall
otherwise satisfy the foregoing requirements.
3.3.2 Borrower shall maintain in full force and effect consequential loss of
rents and income coverage insuring against "All Risk" of physical loss or damage
with limits and deductible amounts acceptable to Lender covering risk of loss
during the first 9 months of reconstruction.
3.3.3 If the Property is located, in whole or in part, in a federally
designated 100-year flood plain area, Borrower shall
- 8 -
<PAGE>
maintain in full force and effect flood insurance for the Improvements in an
amount equal to the lesser of [i] the full replacement value of the
Improvements; or [ii] the maximum amount of insurance available for the
Improvements under all federal and private flood insurance programs.
3.3.4 Borrower shall maintain in full force and effect liability insurance
against the following:
[i] Claims for personal injury or property damage commonly
covered by commercial general liability insurance with endorsements for
incidental malpractice, blanket contractual, personal injury, owner's protective
liability, voluntary medical payments, products and completed operations, broad
form property damage, and extended bodily injury, with a combined single limit
of not less than $5,000,000.00 per occurrence for bodily injury, death and
property damage.
[ii] Claims for personal injury and property damage commonly
covered by commercial automobile liability insurance, covering all owned and
non-owned automobiles, with a combined single limit of not less than
$5,000,000.00 per occurrence for bodily injury, death and property damage.
[iii] Claims commonly covered by worker's compensation insurance
for all persons employed by Borrower on the Property. Such worker's
compensation insurance shall be in accordance with the requirements of all
applicable local, state, and federal law.
3.3.5 Borrower shall comply with the following insurance requirements
throughout the term of the loan:
[i] The form and substance of all policies shall be subject to
the approval of Lender, which approval will not be unreasonably withheld.
[ii] The carriers of all policies shall have a Best's Rating of
"A" or better and a Best's Financial Category of XII or larger and shall be
authorized to do insurance business in the State.
- 9 -
<PAGE>
[iii] Borrower shall be the "named insured" and Lender shall be
the "additional insured" on each liability policy.
[iv] Borrower shall deliver to Lender policies or other
satisfactory evidence showing the required coverages and endorsements. The
policies of insurance shall provide that no cancellation, reduction in amount or
material change in coverage shall be effective until at least thirty (30) days
after written notice to Lender.
[v] Borrower shall notify Lender of any loss or damage to the
Property in excess of $50,000.00 which is or may be covered by any insurance
immediately after the occurrence thereof. Borrower shall promptly adjust and
compromise any insurance claims and, if Borrower fails (in Lender's good faith
judgment) to promptly adjust and compromise such claims, Lender shall have the
right, but not the obligation, on behalf of Borrower, to adjust and compromise
any claims under such insurance, collect and receive the proceeds thereof and
execute and deliver all proofs of loss, receipts, vouchers and releases in
connection with such claims. Except as provided herein, Borrower shall not
adjust or compromise any claims under such insurance, or collect and receive the
proceeds thereof, without the written consent of Lender. Lender is hereby
irrevocably appointed attorney-in-fact for Borrower for such purposes, and
Borrower shall, upon request of Lender, execute any proofs of loss, vouchers and
releases in connection with such claims.
[vi] Borrower may carry the insurance required hereunder under a
blanket policy of insurance, provided that the coverage afforded Lender will not
be reduced or diminished or otherwise be different from that which would exist
under a separate policy meeting all of the requirements of this Mortgage.
[vii] Borrower shall not take out separate insurance concurrent in
form or contributing in the event of loss with that required in this section or
increase the amounts of any then existing policy by securing an additional
policy or policies unless all parties having an insurable interest in the
subject matter or the insurance, including Lender, are included therein as an
additional insured and the losses payable under said insurance in the same
manner as losses are payable under this Agreement.
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Borrower shall immediately notify Lender of the taking out of any such separate
insurance or the increasing of any of the amounts of the then existing insurance
by securing an additional policy or additional policies.
[viii] Borrower acknowledges that Lender may collaterally assign
the loan as security for any loan or loans to Lender. Borrower shall, within
seven (7) days after a request from Lender, deliver to Lender certificates of
insurance naming any such lender as an additional insured.
[ix] Borrower hereby assigns to Lender all unearned premiums as
further security for the Secured Obligations and the transfer of title to the
Property by any means, including without limitation, sale pursuant to any remedy
permitted by this Mortgage, shall constitute an assignment to Lender or other
purchaser of all right, title, and interest of Borrower in and to proceeds from
such policy attributable to loss or damage occurring prior to the transfer of
title to the Property.
[x] At least thirty (30) days prior to the expiration of each
policy, Borrower shall deliver to Lender a certificate showing renewal of such
policy and payment of the annual premium therefor.
3.4 FUNDS FOR IMPOSITIONS AND INSURANCE.
3.4.1 After an Event of Default, Borrower shall pay to Lender a sum (called
"Funds") equal to one-twelfth of the yearly payments for Impositions and
insurance on the Property, as may be reasonably estimated by Lender, together
with the monthly payments to be made under the Note. The Funds paid to Lender
shall be used to make the specified payments and as additional security for the
Secured Obligations.
3.4.2 The Funds shall be deposited by Lender with an institution the
deposits or accounts of which are insured or guaranteed by federal or state
agency, and shall not be deemed to be funds held in trust, and may be held with
the general funds of such depository. The funds shall be placed in an interest-
bearing account. All interest thereon shall be considered "Funds".
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3.4.3 If the amount of the Funds held by Lender together with future monthly
installments of Funds payable prior to the due dates of the Impositions and the
insurance on the Property shall not be sufficient to make payments as they fall
due, Borrower shall pay to Lender the amount necessary to pay the deficiency
within ten (10) days after the date from which Lender gives notice requesting
payment thereof.
3.4.4 Upon performance in full of the Secured Obligations, Lender shall
promptly refund to Borrower any Funds held by Lender.
3.4.5 If the Property is sold or acquired by Lender, Lender shall apply any
Funds then held by Lender as a credit against the Secured Obligations.
3.4.6 Lender has the right to make payments for which it is holding Funds,
and at its election, to make other payments required to be made by Borrower.
3.5 APPLICATION OF PAYMENTS. All payments and proceeds of sale received by
Lender under this Mortgage shall be credited as set forth in the Note.
3.6 CHARGES AND LIENS.
3.6.1 PAYMENTS. Except to the extent Borrower makes payments therefor under
Section 3.4 and except for items being contested in good faith in compliance
with the requirements of the Loan Agreement, Borrower shall promptly pay before
delinquent taxes, assessments, levies, and any other charges which have or may
become a lien on any of the Property.
3.6.2 NOTICE AND RECEIPTS. Borrower shall promptly furnish to Lender all
notices of amounts due under this Section 3.6 and receipts evidencing payment of
such amounts.
3.7 PRESERVATION OF PROPERTY. Borrower shall keep the Property in good repair,
and shall neither commit waste nor permit impairment or deterioration of the
Property.
3.8 PROTECTION OF SECURITY. If Borrower fails to perform Borrower's agreements
under this Mortgage or if any action or
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proceeding is commenced which materially affects Lender's interest in the
Property, including without limit any proceeding concerning eminent domain,
insolvency, any decedent, or enforcement of any ordinance, legislation, or
regulation, then Lender is authorized to make such appearances, disburse such
sums, and take such action that Lender reasonably determines is necessary or
desirable to protect the Property and Lender's interest therein, including,
without limit the disbursement of sums for payment of reasonable attorneys'
fees, taxes, assessments, insurance premiums, costs incurred for the protection
of the Property, and the entry upon the Property to make repairs.
3.9 INSPECTION. After reasonable notice to Borrower, Lender or any person
authorized by Lender may enter upon and inspect any of the Property at all
reasonable times.
3.10 EMINENT DOMAIN. If the Property or any part thereof becomes the
subject of any proceeding ("Condemnation") for the taking of property or any
conveyance in lieu thereof, the following provisions shall apply.
3.10.1 NOTICE OF CONDEMNATION. Borrower shall give written notice of the
Condemnation to Lender within three business days after Borrower is notified of
the Condemnation. Within 30 days after Borrower is notified of the
Condemnation, Borrower shall provide the following information to Lender: [i]
the date of the Condemnation; [ii] the nature of the Condemnation; [iii] a
description of the portion of the Property affected by the Condemnation; [iv] a
preliminary estimate of the cost to repair, rebuild, restore or replace the
Property; [v] a preliminary estimate of the schedule to complete the repair,
rebuilding, restoration or replacement of the Property; and [vi] a description
of the anticipated settlement amount and the expected settlement date. Within
five (5) days after request from Lender, Borrower will provide Lender with
copies of all correspondence relating to the Condemnation and any other
information reasonably requested by Lender.
3.10.2 PROCEEDS. Borrower shall pay or cause to be paid to Lender so much of
the award or compensation resulting therefrom ("Proceeds") as is attributable to
the Property, up to the outstanding amount of Borrower's Obligations, and
Borrower hereby
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directs such payments to be made directly to Lender and hereby assigns to Lender
Borrower's rights thereto. Lender may apply all or any part of the Proceeds,
after deducting all costs and expenses (regardless of the nature thereof and
whether incurred with or without suit, including without limit reasonable
attorneys' fees) incurred by Lender in connection with the Proceeds, either to
the payment of Borrower's Obligations (without payment of any prepayment fee) or
to the restoration of the Property upon such conditions as Lender may require.
Notwithstanding the foregoing, if the amount of Proceeds does not exceed
$250,000.00 and there is no existing uncured Event of Default hereunder,
Borrower shall have the right to require that the Proceeds be applied to the
restoration of the Property which shall be upon such conditions as Lender may
require.
3.10.3 INTERVENTION BY LENDER. Lender is hereby authorized, but not
required, to intervene at any time in any such proceedings, settlement thereof,
or conveyance in lieu thereof, to prosecute or to settle any such proceedings or
conveyance; and to collect the Proceeds resulting therefrom; all on behalf of
and in the name of Borrower and Lender and according to Lender's sole
discretion.
3.10.4 DEFENSE BY BORROWER. If Lender does not do so under Section 3.10.3,
Borrower shall defend, protect, and uphold the value of the Property and
Lender's rights to receive any portion of the Proceeds attributable to the value
of the Property; however, Borrower shall consult with Lender throughout such
proceedings and prior settlement thereof or any conveyance in lieu thereof and
abide by Lender's directions concerning such proceedings, settlement, or
conveyance.
3.10.5 BORROWER'S OBLIGATIONS. Borrower's obligation to make payment on
Borrower's Obligations shall not abate pending any repair or restoration of the
Property due to the Condemnation. In addition, Borrower shall reimburse Lender,
within ten (10) days after demand, for all costs, expenses, and fees (including
architect and engineer fees) incurred by Lender in connection with any repair or
restoration of the Property due to the Condemnation.
3.10.6 CONDEMNATION PROCEEDS NOT TRUST FUNDS. Notwithstanding anything in
this Mortgage or at law or equity to the contrary, none of the Proceeds paid to
Lender shall be deemed trust funds, and
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Lender shall be entitled to dispose of such proceeds as provided in this Section
3.10. Borrower expressly assumes all risk of loss, including a decrease in the
use, enjoyment, or value, of the Property from any Condemnation.
3.11 OTHER MORTGAGES AND LIENS.
3.11.1 PRIOR MORTGAGES. If any of the Property is subject or becomes subject
to a lien prior to the lien of this Mortgage, the following provisions shall
apply.
[i] Borrower shall pay when due all amounts required to be paid
under any obligation secured by a prior lien and shall otherwise perform all of
the obligations of Borrower hereunder.
[ii] Borrower shall not request, accept, or permit payment to
Borrower of any loan amount or disbursement the repayment of which is secured by
any prior mortgage without prior express written consent from Lender.
[iii] Borrower shall be in compliance with Sections 3.3 and 3.4 if
Borrower pays the Impositions and maintains the insurance coverage required
under any prior mortgage to which Lender has expressly consented.
[iv] A default in any prior mortgage shall be a default under
this Mortgage.
[v] Lender may cure any defaults of Borrower under any prior
Mortgage or pay, in whole or in part, any prior lien, and, to the extent of such
payments, Lender shall be subrogated to the rights and lien of the prior lien;
however, any prior lien rights to which Lender may become subrogated shall not
merge with the lien of this Mortgage.
3.11.2 NO MERGER OF LIENS. Lender may at any time during the term of this
Mortgage hold more than one lien against the Property or any part thereof. All
such liens held by Lender shall remain separate and distinct from each other and
each shall retain its individual priority and shall not merge with any other
lien held by Lender, unless and until Lender executes and records an instrument
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expressly merging any such liens. If a default in this Mortgage occurs, Lender
may foreclose upon any lien against the Property held by it in such order and at
such times as Lender may elect. If Lender acquires title to the Property other
than through foreclosure of this Mortgage, the lien of this Mortgage shall
continue and shall not merge with Lender's title to the Property.
3.11.3 NO CONSENT. Nothing in this Section 3.11 shall be construed to mean
that Lender consents to any lien prior to the lien of this Mortgage. Lender
consents only to the Permitted Exceptions.
3.12 ADVANCES AND DEFAULT RATE. Any payment made by Lender that Lender has
the right to make under any term of this Mortgage (except for payments from
Funds for which Funds have been deposited by Borrower) and expenses incurred and
payments made by Lender in taking action authorized by this Mortgage shall be
indebtedness of Borrower secured by this Mortgage, shall be payable upon demand,
shall bear interest at the Default Rate (as defined in the Note) from the date
of disbursement, and shall be deemed advances under subsections 2.1.3, 2.1.4 and
2.1.5.
3.13 DAMAGE, DESTRUCTION AND REBUILDING.
3.13.1 NOTICE OF CASUALTY. If the Property shall be destroyed, in whole or
in part, or damaged by fire, flood, windstorm or other casualty (a "Casualty"),
Borrower shall give written notice thereof to Lender within three business days
after the occurrence of the Casualty. Within 30 days after the occurrence of
the Casualty, Borrower shall provide the following information to Lender: [i]
the date of the Casualty; [ii] the nature of the Casualty; [iii] a description
of the damage or destruction caused by the Casualty including the type of
Property damaged and the area of the Improvements damaged; [iv] a preliminary
estimate of the cost to repair, rebuild, restore or replace the Property; [v] a
preliminary estimate of the schedule to complete the repair, rebuilding,
restoration or replacement of the Property; [vi] a description of the
anticipated property insurance claim including the name of the insurer, the
insurance coverage limits, the deductible amount, the expected settlement
amount, and the expected settlement date; and [vii] a description of the
business interruption claim including the name of the insurer, the insurance
coverage limits, the deductible amount, the expected settlement amount, and the
expected
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settlement date. Within five (5) days after request from Lender, Borrower
will provide Lender with copies of all correspondence to the insurer and any
other information reasonably requested by Lender.
3.13.2 APPLICATION OF INSURANCE PROCEEDS. Lender may elect either to [i]
require the Borrower to rebuild or repair the Property according to plans and
specifications approved in writing by Lender and upon such conditions as Lender
may reasonably require; or [ii] apply the net proceeds of insurance against the
Borrower's Obligations (without payment of any prepayment fee) to be credited as
set forth in the Note. Notwithstanding the foregoing, if the amount of
insurance proceeds does not exceed $250,000.00 and there is no existing uncured
Event of Default hereunder, Borrower shall have the right to require that the
proceeds be applied to the restoration of the Property which shall be upon such
conditions as Lender may require. All net proceeds of insurance policies
resulting from claims for casualty to the Property or any element thereof shall
be paid to and held by Lender subject to the provisions of this Mortgage.
3.13.3 REPAIR. In the event Lender elects to have the Property rebuilt or
repaired [i] the Borrower shall promptly repair or rebuild the Property in a
good and workmanlike manner, in compliance with all laws and regulations, and in
accordance with plans and specifications, construction budget and construction
schedule approved by Lender; and [ii] Lender shall apply so much of the net
proceeds of such insurance as may be necessary to pay or reimburse the costs of
such repair or rebuilding, either on completion thereof or as the work
progresses.
3.13.4 INSUFFICIENT PROCEEDS. If the proceeds of any insurance settlement
are not sufficient to pay the costs of such repair, rebuilding or restoration in
full, Borrower shall deposit with Lender at Lender's option, and within ten (10)
days of Lender's request, an amount sufficient in Lender's judgment to complete
such repair, rebuilding or restoration. Borrower shall not, by reason of the
deposit or payment, be entitled to any reimbursement from Lender or diminution
in or postponement of the payments to Lender on the Note.
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3.13.5 NO ABATEMENT; EXPENSES. Borrower's obligation to make payments on
Borrower's Obligations shall not abate pending the repairs or rebuilding of the
Property. Borrower shall pay the costs, expenses and fees of any architect or
engineer employed by Lender to review any plans and specifications and to
supervise and approve the repairs or rebuilding of the Property.
3.13.6 NOT TRUST FUNDS. Notwithstanding anything herein or at law or equity
to the contrary, none of the insurance proceeds paid to Lender as herein
provided shall be deemed trust funds, and Lender shall be entitled to and shall
be obligated to dispose of such proceeds as provided in this Section 3.13.
Borrower expressly assumes all risk of loss, including a decrease in the use,
enjoyment or value, of the Project from any casualty whatsoever, whether or not
insurable or insured against.
3.14 APPLICATION OF ADVANCES. Borrower will, in compliance with Section 13
of the Lien Law, receive the advances secured hereby and will hold the right to
receive such advances as a trust fund to be applied first for the purpose of
paying the cost of the improvement and will apply the same first to the payment
of the cost of the improvement before using any part of the total of the same
for any other purpose.
ARTICLE 4: TRANSFER OF THE PROPERTY; ASSUMPTION
4.1 BORROWER'S SUCCESSORS. This Mortgage shall be binding upon Borrower's
successors and assigns shall be binding upon and inure to the benefit of Lender
and its successors and assigns; however, Borrower may neither assign Borrower's
rights under this Mortgage nor delegate Borrower's duties under this Mortgage
without the express written consent of Lender.
4.2 NO TRANSFER. Except for [i] transfers made in connection with Permitted
Liens (as defined in the Loan Agreement); and [ii] residency agreements with the
residents of the Property, Borrower shall not sell, lease, grant a lien on or
security interest in, or otherwise transfer or encumber all or any part of the
Property or any legal or equitable interests therein.
4.3 NO RELEASE OF BORROWER. No sale, transfer, or encumbrance of the Property
or of Borrower's rights under this Mortgage and the
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Note and no delegation of Borrower's obligations under this Mortgage or any
other Borrower's Obligations shall release Borrower from liability for any
Borrower's Obligations unless: [i] Lender and such transferee or delegee agree
in writing that such transferee or delegee is satisfactory to Lender and that
such transferee or delegee shall perform Borrower's Obligations and pay such
interest thereon as Lender may request, and [ii] Lender delivers to Borrower a
written release.
ARTICLE 5: LEASES AND RENTS
5.1 ASSIGNMENT OF RENTS. Borrower hereby authorizes Lender or Lender's agents
to collect the Rents and hereby directs each tenant of the Property to pay the
Rents to Lender or Lender's agents; provided, however, that prior to the
occurrence of an Event of Default under this Mortgage, Borrower shall collect
and receive all Rents as trustee for the benefit of Lender and Borrower, shall
apply the Rents so collected to the amount then due and payable under this
Mortgage with a balance, so long as no Event of Default has occurred, to the
account of Borrower, it being intended by Borrower and Lender that this
assignment of Rents constitutes an absolute assignment and not an assignment for
additional security only. Upon the occurrence of an Event of Default and
without the necessity of Lender entering upon and taking and maintaining full
control of the Property in person, by agent or by a receiver, Lender shall
immediately be entitled to possession of all Rents as the same become due and
payable, including but not limited to, Rents then due and unpaid, and all such
Rents shall immediately upon delivery be held by Borrower as trustee for the
benefit of Lender only. Borrower agrees that after an Event of Default has
occurred, each tenant of the Property shall pay such Rents to Lender or Lender's
agent on Lender's written demand to each tenant therefor, delivered to each
tenant personally or by mail, without any liability on the part of said tenant
to inquire further as to the existence of a default by Borrower. Borrower
hereby covenants that Borrower has not executed any prior assignment of Rents,
that Borrower has not performed, and will not perform any acts which would
prevent Lender from exercising its rights under this section. Borrower
covenants that Borrower will not hereafter collect or accept payment of any
Rents more than one month prior to the due dates of such Rents nor (excepting
payment of arrears) in an amount referable to a period exceeding one month,
except that Borrower may
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require prepayment of such Rents and other monies by way of security for
performance of any lessee's or other obligor's covenants under any Lease if the
amount of such a prepayment is promptly paid over to Lender and applied to
Borrower's Obligations. Borrower further covenants that Borrower will execute
and deliver to Lender such further assignments of Rents as Lender may from time
to time request.
5.2 COMPLIANCE WITH LEASES. Borrower shall comply with all Leases and shall
notify Lender if Borrower is unable to do so or determines that it will be
unable to do so for any significant terms. Lender may do whatever it determines
is necessary to insure that all Leases continue in effect whenever Lender
determines that Borrower is or may be unable to perform any significant term of
the Leases.
5.3 MODIFICATION OF LEASES. Borrower shall not significantly change the terms
of any Lease and shall not reduce any rent without the prior written consent of
Lender.
5.4 NO DELEGATION OF BORROWER'S DUTIES AND INDEMNITY. Borrower does not hereby
delegate to Lender Borrower's duties under the Leases and Lender shall not be
obligated to discharge such duties. Borrower shall indemnify Lender and hold it
harmless from all claims, regardless of merit, in any way arising out of the
Leases and the assignment to Lender of the Leases and Rents and any expenses
related to such claims, including without limitation attorneys' fees. Borrower
shall reimburse Lender for any claims paid or expenses incurred by Lender which
fall within the preceding indemnity immediately upon demand.
5.5 SUBORDINATION OF LEASES. All Leases and the rights of tenants thereunder
shall be subordinate to the lien of this Mortgage and to all terms, conditions
and provisions hereof, and to any renewal, consolidation, extension,
modification or replacement hereof, and every Lease shall provide for such
subordination therein.
5.6 ATTORNMENT. The tenant of any Lease shall attorn to anyone, including
Lender, who acquires the lessor's interest in the Lease and the Property
("Purchaser"), whether by foreclosure sale or otherwise. The tenant's
attornment shall be effective immediately upon the Purchaser's succession to the
lessor's interest and the
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Lease shall continue in effect between Purchaser as lessor and the tenant
without any further act of Purchaser, Lender or the tenant. Purchaser shall
have no liability for any act, omission or obligation of the previous lessor.
Every Lease shall provide for such attornment therein.
ARTICLE 6: DEFAULT, ACCELERATION, AND REMEDIES
6.1 EVENT OF DEFAULT. The occurrence of any Event of Default under the Loan
Agreement shall constitute an Event of Default under this Mortgage.
6.2 RIGHTS AND REMEDIES UPON DEFAULT. Whenever any Event of Default occurs,
Lender may take any one or more of the following remedial steps concurrently or
successively in addition to any other remedies under the Loan Documents, at law
or in equity, to the extent permitted by applicable law.
6.2.1 The Secured Obligations shall be immediately due and payable, without
presentment of any kind, demand, notice of dishonor, protest, or other notice of
any kind, all of which Borrower hereby waives.
6.2.2 Lender may enter and take possession of the Property without
terminating this Mortgage, and complete construction of the Improvements (or any
part thereof) and perform the obligations of Borrower under the Loan Documents.
6.2.3 To the extent permitted by law and in accordance with all applicable
law, Lender may exercise its power of sale.
6.2.4 Lender may foreclose this Mortgage or accept delivery of a deed in
lieu of foreclosure. In any foreclosure or sale, the Property may be sold in
one or more parcels, lots, or groups (including mixtures of personal and real
property, or separately, any provision of law to the contrary notwithstanding)
and, to the extent permitted by law, Lender shall be under no obligation either
to marshal any assets of the Borrower or to marshal any portions of the
Property.
6.2.5 Lender may sue Borrower directly to collect any monies then due and
may take any action at law or equity (including
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bringing an action for a mandatory injunction, restraining order or specific
performance) to enforce performance of Borrower's Obligations.
6.2.6 For any security in which no interest arises under real estate law,
Lender may exercise its rights as a secured party under Article 9. Borrower
agrees that a commercially reasonable manner of disposition of the Property
subject to security interests under Article 9 shall include, without limitation
and at the option of Lender, the sale of the Property in whole or in part,
concurrently with the foreclosure sale of the Property in accordance with the
provisions of this Mortgage.
6.2.7 Lender may terminate its obligation to disburse loan proceeds.
6.2.8 Lender may, and is hereby authorized by Borrower, at any time or from
time to time, to the fullest extent permitted by law, without advance notice to
Borrower (any such notice being expressly waived by Borrower) to set-off and
apply any and all sums held by Lender, any indebtedness of Lender to Borrower,
any and all claims by Borrower against Lender, against any obligations of
Borrower hereunder, and against claims by Lender against Borrower, whether or
not such obligations or claims of Borrower are matured and whether or not Lender
has exercised any other remedies hereunder.
6.2.9 In any action or proceeding to foreclose this Mortgage, or upon actual
or threatened waste to any part of the Property, Lender may apply, without
notice to Borrower, for the appointment of a receiver ("Receiver") of the
Property. Unless prohibited by law, such appointment may be made either before
or after sale, without notice, without regard to the solvency or insolvency of
Borrower at the time of application for such Receiver and without regard to the
then value of the Property, and Lender may be appointed as Receiver. The
Receiver shall have the power to collect the rents, issues and profits of the
Property during the pendency of the foreclosure and, in case of a sale and
deficiency during the full statutory period of redemption, whether there be
redemption or not, as well as during any future times, if any, when Borrower,
except for the intervention of such Receiver, would be entitled to collect such
rents, issues and profits, and all other powers which may be necessary or are
usual in such cases for the
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protection, possession, control, management and operation of the Property during
the whole of said proceeding. All sums of money received by the Receiver from
such rents and income, after deducting therefrom the reasonable charges and
expenses paid or incurred in connection with the collection and disbursement
thereof, shall be applied to the payment of the Secured Obligations or applied
to remedy any default hereunder as Lender may direct. Borrower, if requested to
do so, will consent to the appointment of any such Receiver as aforesaid.
6.2.10 Lender may obtain control over and collect all accounts, contract
rights, instruments, documents, or chattel paper of Borrower now owned or
existing or hereafter arising or acquired (the "Receivables") and apply the
proceeds of the collections to satisfaction of the Secured Obligations unless
prohibited by law. Borrower appoints Lender or its designee as attorney for
Borrower with powers [i] to receive, to indorse, to sign and/or to deliver, in
Borrower's name or Lender's name, any and all checks, drafts, and other
instruments for the payment of money relating to the Receivables, and to waive
demand, presentment, notice of dishonor, protest, and any other notice with
respect to any such instrument; [ii] to sign Borrower's name on any invoice or
bill of lading relating to any Receivable, drafts against account debtors,
assignments and verifications of Receivables, and notices to account debtors;
[iii] to send verifications of Receivables to any account debtor; and [iv] to do
all other acts and things necessary to carry out this Mortgage Instrument.
Lender shall not be liable for any omissions, commissions, errors of judgment,
or mistakes in fact or law made in the exercise of any such powers. At Lender's
option, Borrower shall [i] provide Lender a full accounting of all amounts
received on account of Receivables with such frequency and in such form as
Lender may require, either with or without applying all collections on
Receivables in payment of Borrower's Obligations secured hereby or [ii] deliver
to Lender on the day of receipt all such collections in the form received and
duly indorsed by Borrower. At Lender's request, Borrower shall institute any
action or enter into any settlement determined by Lender to be necessary to
obtain recovery or redress from any account debtor in default of Receivables.
Lender may give notice of its security interest in the Receivables to any or all
account debtors with instructions to make all payments on Receivables directly
to Lender, thereby terminating Borrower's authority to collect Receivables.
After
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terminating Borrower's authority to enforce or collect Receivables, Lender shall
have the right to take possession of any or all Receivables and records thereof
and is hereby authorized to do so, and only Lender shall have the right to
collect and enforce the Receivables. Prior to the occurrence of an Event of
Default, at Borrower's cost and expense, but on behalf of Lender and for
Lender's account, Borrower shall collect or otherwise enforce all amounts unpaid
on Receivables and hold all such collections in trust for Lender, but Borrower
may commingle such collections with Borrower's own funds, until Borrower's
authority to do so has been terminated, which may be done only after an Event of
Default. Notwithstanding any other provision hereof, Lender does not assume any
of Borrower's obligations under any Receivable, and Lender shall not be
responsible in any way for the performance of any of the terms and conditions
thereof by Borrower.
6.2.11 Lender may take any other action which Lender is entitled to take
under any law, equity, or the Loan Documents.
6.2.12 Lender may, at its option, but without any obligation so to do, and
without waiving or releasing Borrower from any of the agreements and covenants
in the Loan Documents, pay any sum or perform any act or take such action as
Lender may deem necessary or desirable in order to protect the lien of this
Mortgage, the Property or otherwise in the sole discretion of Lender. Borrower
hereby grants to Lender, and agrees that Lender shall have, after the occurrence
of one or more Events of Default, the absolute and immediate right to enter in
and upon the Property or any part thereof to such extent and as often as Lender,
in its reasonable discretion, deems necessary or desirable for such purpose.
Lender may pay and expend such sums of money as it may, in its reasonable
discretion, deem necessary for the purposes stated herein. Borrower hereby
agrees to pay to Lender, on demand, all such sums so paid or expended by Lender,
together with interest thereon from the date of each such payment or expenditure
at the default rate specified in the Note.
6.3 SALE OF PROPERTY. The following provisions apply to any sale of the
Property pursuant to this Article 6 or pursuant to any judicial proceeding.
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6.3.1 RECEIPT SUFFICIENT DISCHARGE FOR PURCHASER. The receipt of the court
officer or other person conducting any such sale for the purchase money paid at
any such sale shall be sufficient discharge thereof to any purchaser of the
Property, or any part thereof, sold as aforesaid. No such purchaser or his
representatives, grantees or assigns, after paying such purchase money and
receiving such receipt, shall be bound to see to the application of such
purchase money upon or for purpose of this Mortgage, or shall be answerable in
any matter whatsoever for any loss, misapplication or non-application of any
such purchase money or any part thereof, nor shall any such purchaser be bound
to inquire as to the necessity or expediency of any such sale.
6.3.2 LENDER'S PURCHASE OF PROPERTY. Lender or any holder of the Note may
bid for and purchase the Property being sold, and upon compliance with the terms
of sale, Lender or any holder of the Note may hold, retain, possess and dispose
of such Property in its own absolute right without further accountability.
6.3.3 APPLICATION OF PROCEEDS OF SALE. Unless Lender elects otherwise, the
purchase money or proceeds of any such sale shall be applied: first, to all
charges, expenses and fees payable by Borrower under the Loan Documents,
including all reasonable attorney's fees, Receiver's fees and other costs and
expenses incurred by Lender, with interest thereon at the default rate specified
in the Note; second, to all unpaid interest accrued on any of the Secured
Obligations; third, to the principal amount outstanding of the Secured
Obligations; and the balance, if any, to Borrower.
6.3.4 NO DEFENSE; WAIVER. Failure to join or to provide notice to tenants
under any Leases as defendants in any foreclosure action or suit shall not [i]
constitute a defense to such foreclosure; [ii] preclude Lender from obtaining a
deficiency judgment or otherwise reduce or diminish the amount of any such
judgment in any manner whatsoever; or [iii] give rise to any claims by Borrower,
or any person claiming through or under Borrower, against Lender. Upon the
request of Lender and to the extent not prohibited by applicable law, Borrower
shall execute and file with the clerk of the court a legally sufficient waiver
of any statutory waiting period with respect to the execution of a judgment
obtained by Lender in connection with any foreclosure proceedings. The
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<PAGE>
obligations of Borrower to so execute and file such waiver shall survive the
termination of this Mortgage.
ARTICLE 7: MISCELLANEOUS
7.1 ADVANCES BY LENDER. At any time and from time to time during the term of
this Mortgage, Lender may incur and/or pay and/or advance costs or expenses:
[i] incurred or advanced by Lender which Lender is authorized or has the right
(but not necessarily the obligation) to incur or may incur under any term of any
Loan Document or any law; [ii] of whatever nature incurred or advanced by Lender
in exercising any right or remedy provided by any term of any Loan Document or
in taking any action which Lender is authorized to take by any term of any Loan
Document; [iii] required to be paid by Borrower by any term of any Loan
Document, but which Borrower fails to pay within 10 days after demand; or [iv]
any and all costs and expenses from which Borrower is required to hold Lender
harmless by any term of any Loan Document, but from which Borrower fails to hold
Lender harmless. Any reasonable costs, expenses, or advances incurred or paid
by Lender shall become part of the loan and, upon demand, shall be paid to
Lender together with interest thereon at the default rate specified in the Note
from the date of disbursement by Lender. Payment of such costs, expenses, or
advances shall be secured by this Mortgage.
7.2 POWER OF ATTORNEY. Borrower hereby irrevocably and unconditionally
appoints Lender, or Lender's authorized officer, agent, employee or designee, as
Borrower's true and lawful attorney-in-fact, to act for Borrower in Borrower's
name, place, and stead, to execute, deliver and file [i] all applications and
any and all other necessary documents and instruments in order to convey the
Property in fee simple to any purchaser upon foreclosure sale of the Property,
to effect the issuance, transfer, reinstatement, renewal and/or extension of any
and all certificates of need, licenses, and other governmental authorizations
issued to Borrower in connection with Borrower's operation of the Property to
permit any transferee to operate the Property under such governmental
authorizations; [ii] financing statements and continuation statements with such
filing offices as Lender deems necessary or desirable to further evidence and
perfect Lender's security interest in the personal property collateral granted
pursuant to this Mortgage Instrument; and [iii] to do any and all
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<PAGE>
other acts incidental to any of the foregoing. Borrower irrevocably and
unconditionally grants to Lender as its attorney-in-fact full power and
authority to do and perform every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Borrower might or could do
if personally present or acting, with full power of substitution, hereby
ratifying and confirming all that said attorney shall lawfully do or cause to be
done by virtue hereof. This power of attorney is coupled with an interest and
is irrevocable prior to the full performance of Borrower's Obligations. Except
in the case of an emergency, Lender shall give Borrower three business days
prior written notice before acting on behalf of Borrower pursuant to this power
of attorney.
7.3 ATTORNEY'S FEES AND EXPENSES. Borrower shall pay all reasonable costs and
expenses incurred by Lender in enforcing or preserving Lender's rights under the
Note, Loan Agreement, this Mortgage, any guaranty of Borrower's Obligations, and
all other Loan Documents, whether or not an Event of Default has actually
occurred or has been declared and thereafter cured, including but not limited
to, [i] the fees, expenses, and costs of any litigation, receivership,
administrative, bankruptcy, insolvency or other similar proceeding; [ii]
attorney and paralegal fees and disbursements; [iii] the expenses of Lender and
its employees, agents, attorneys, and witnesses in preparing for litigation,
administrative, bankruptcy, insolvency or other proceedings and for lodging,
travel and attendance at meetings, hearings, depositions, and trials in
connection therewith; [iv] court costs; and [v] consulting and witness fees and
expenses incurred by Lender in connection with any such proceedings. All such
costs, charges and fees as incurred shall be deemed to be secured by this
Mortgage and collectible out of the proceeds of this Mortgage in any manner
permitted by law or by this Mortgage.
7.4 CONSTRUCTION OF RIGHTS AND REMEDIES AND WAIVER OF NOTICE AND CONSENT.
7.4.1 The provisions of this part Section 7.4 shall apply to all rights and
remedies provided by this Mortgage or any Loan Document or by law or equity.
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<PAGE>
7.4.2 WAIVER OF NOTICES AND CONSENT TO REMEDIES. Unless otherwise expressly
provided herein, any right or remedy may be pursued without notice to or further
consent of Borrower, both of which Borrower waives.
7.4.3 Each right or remedy under the Loan Documents is distinct from but
cumulative to each other right or remedy and may be exercised independently of,
concurrently with, or successively to any other rights and remedies.
7.4.4 No extension of time for or modification of amortization of the loan
shall release the liability or bar the availability of any right or remedy
against Borrower or any successor in interest, and Lender shall not be required
to commence proceedings against Borrower or any successor or to extend time for
payment or otherwise to modify amortization of the loan secured by this Mortgage
by reason of any demand by Borrower or any successor.
7.4.5 Lender has the right to proceed at its election against all security
or against any item or items of such security from time to time, and no action
against any item or items of security shall bar subsequent actions against any
item or items of security.
7.4.6 No forbearance in exercising any right or remedy shall operate as a
waiver thereof; no forbearance in exercising any right or remedy on any one or
more occasion shall operate as a waiver thereof on any further occasion; and no
single or partial exercise of any right or remedy shall preclude any other
exercise thereof or the exercise of any other right or remedy.
7.4.7 Failure by Lender to insist upon the strict performance of any of the
covenants and agreements herein set forth or to exercise any rights or remedies
upon default by Borrower hereunder shall not be considered or taken as a waiver
or relinquishment for the future of the right to insist upon and to enforce by
mandamus or other appropriate legal or equitable remedy strict compliance by
Borrower with all of the covenants and conditions hereof, or of the rights to
exercise any such rights or remedies, if such default by Borrower is continued
or repeated, or of the right to recover possession of the Property by reason
thereof. To the extent permitted by law, any two or more of such rights or
remedies may be exercised at the same time.
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<PAGE>
7.4.8 If any covenant or agreement contained in any Loan Document is
breached by Borrower and thereafter waived by Lender, such waiver shall be
limited to the particular breach so waived and shall not be deemed to waive any
other breach hereunder. No waiver shall be binding unless it is in writing and
signed by Lender. No course of dealing between Lender and Borrower, nor any
delay or omission on the part of Lender in exercising any rights under any of
the Loan Documents, shall operate as a waiver.
7.4.9 Pursuant to this Mortgage, Borrower has granted to Lender a security
interest in the personal property and Fixtures comprising a part of the Property
to further secure the Secured Obligations. Borrower hereby authorizes Lender to
file financing and continuation statements with respect to such collateral
(including Fixtures) in which Borrower has an interest, without the signature of
Borrower whenever lawful, and upon request, Borrower shall promptly execute
financing and continuation statements in form satisfactory to Lender to perfect
and maintain perfected Lender's security interest in such collateral, and shall
pay all filing fees in connection therewith. If Borrower fails to execute any
such statement pursuant to Lender's request, Lender may execute such statement
as Borrower's attorney-in-fact pursuant to the power of attorney made by
Borrower under Section 7.2 hereof. In the event of the occurrence of one or
more Events of Default, Lender, pursuant to the applicable provision of Article
9, shall have the option of proceeding as to both real and personal property in
accordance with its rights and remedies in respect of the Property, in which
event the default provisions of Article 9 shall not apply. The parties agree
that in the event Lender elects to proceed with respect to collateral
constituting personal property or Fixtures separately from the other Property,
the giving of five (5) days' notice by Lender, sent by an overnight mail
service, postage prepaid, to Borrower at its address referred to in the
introductory paragraph herein, designating the place and time of any public sale
or the time after which any private sale or other intended disposition of such
collateral is to be made, shall be deemed to be reasonable notice thereof and
Borrower waives any other notice with respect thereto.
7.4.10 Borrower and any other person now or hereafter obligated for the
payment or performance of all or any part of the Note shall not be released from
paying and performing under the Note, and the
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<PAGE>
lien of this Mortgage shall not be affected by reason of [i] the failure of
Lender to comply with any request of Borrower (or of any other person so
obligated), to take action to foreclose this Mortgage or otherwise enforce any
of the provisions of this Mortgage or of any of the Secured Obligations, or [ii]
the release, regardless of consideration, of the obligations of any person
liable for payment or performance of the Note, or any part thereof, or [iii] any
agreement or stipulation extending the time of payment or modifying the terms of
the Note, and in the event of such agreement or stipulation, Borrower and all
such other persons shall continue to be liable under such documents, as amended
by such agreement or stipulation, unless expressly released and discharged in
writing by Lender.
7.4.11 Borrower, for itself and its successors and assigns, hereby
irrevocably waives and releases, to the extent permitted by law, and whether now
or hereafter in force, [i] the benefit of any and all valuation and appraisement
laws, [ii] any right of redemption after the date of any sale of the Property
upon foreclosure, whether statutory or otherwise, in respect of the Property,
[iii] any applicable homestead or dower laws, and [iv] all exemption laws
whatsoever and all moratoriums, extensions or stay laws or rules, or orders of
court in the nature of any one or more of them.
7.4.12 Nothing contained in any of the Loan Documents shall constitute any
consent or request by Lender, express or implied, for the performance of any
labor or services or the furnishing of any materials or other property in
respect of the Property or any part thereof, or be construed to permit the
making of any claim against Lender in respect of labor or services or the
furnishing of any materials or other property or any claim that any lien based
on the performance of such labor or services or the furnishing of any such
materials or other property is prior to the lien of this Mortgage.
7.5 NOTICES. All notices, demands, requests, and consents (hereinafter
"notices") given pursuant to the terms of this Mortgage shall be in writing,
shall be addressed to the addresses set forth in the introductory paragraph of
this Mortgage and shall be served by [i] personal delivery; [ii] United States
certified mail, return receipt requested, postage prepaid; or [iii]
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<PAGE>
nationally recognized overnight courier. All notices shall be deemed to be
given upon the earlier of actual receipt or three (3) days after mailing or one
(1) business day after deposit with the overnight courier. Any notices meeting
the requirements of this section shall be effective, regardless of whether or
not actually received. Lender and Borrower may change their notice address at
any time by giving the other party written notice of such change.
7.6 AMENDMENT. This Mortgage may only be amended by a writing signed by Lender
and Borrower. All references to this Mortgage, whether in this Mortgage or in
any other document or instrument, shall be deemed to incorporate all amendments,
modifications and renewals of this Mortgage made after the Effective Date.
7.7 AFFILIATE OBLIGATIONS. As used in this Mortgage, the term "Secured
Obligations" shall include, and this Mortgage shall secure the payment and
performance of all indebtedness and obligations of Borrower or any Affiliate
(except Kapson Chestnut Ridge Development Corp. and Chestnut Ridge Development,
LLC) to Lender now existing or hereafter arising, including, without limitation,
indebtedness evidenced by promissory notes, lease agreements, guaranties or
otherwise and obligations under such indebtedness documents and other documents
executed by Borrower or any Affiliate in connection therewith, and any
extensions, modifications, substitutions or renewals thereof (collectively, the
"Affiliate Obligations"). As used herein, "Affiliate" means any person,
corporation, partnership, trust or other legal entity that, directly or
indirectly, controls, is controlled by, or is under common control with
Borrower. "Control" (and the correlative meaning of the term "controlled by")
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such entity. "Affiliate"
includes, without limitation, Kapson Management Corp., a New York corporation,
Kapson Rochester East, LLC, a New York limited liability company, and Senior
Quarters Management Corp., a New York corporation. Upon request of Lender,
Borrower shall execute one or more amendments to this Mortgage or any other Loan
Document to further identify and describe any of the Affiliate Obligations.
7.8 WAIVERS RELATING TO AFFILIATE FINANCING.
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7.8.1 Borrower [i] acknowledges that Lender would not have extended to
Borrower or any Affiliate the credit giving rise to Secured Obligations (the
"Credit") and will not continue to extend Credit to Borrower or any Affiliate
but for this Mortgage; [ii] warrants that Borrower has given this mortgage to
induce Lender to extend and to continue to extend Credit to Borrower or any
Affiliate; [iii] agrees that Lender may rely on this Mortgage in extending
future Credit to Borrower or any Affiliate; [iv] warrants that Borrower has
received good and valuable consideration for this Mortgage; [v] waives
acceptance of this Mortgage; [vi] warrants that Borrower has not given this
Mortgage in reliance upon the existence of any other security for or guaranty of
the Secured Obligations or anyone liable for performing the Secured Obligations
(including any Affiliate) (collectively the "Security"); [vii] acknowledges
receipt of notice of all Credit extended before this date; [viii] waives notice
of any Credit extended after this date; and [ix] waives protest and any other
notice of failure to pay any Credit or to perform any agreement relating to any
Credit or security for or guaranty of the Secured Obligations.
7.8.2 Borrower [i] warrants that Borrower has not relied on any information
about any Affiliate, the Security, any mortgagor, or the Credit provided
directly or indirectly by Lender; [ii] warrants that Borrower is familiar with
the Affiliates, the affairs of the Affiliates, and the Security; [iii] warrants
that Borrower has had ample opportunity to investigate the Affiliates, the
affairs of the Affiliates, the Security, and the effect that the Credit will
have; [iv] warrants that Borrower has been provided all information concerning
the Affiliates, the affairs of the Affiliates, and the Security that Borrower
has requested; [v] warrants that Borrower has had adequate opportunity to seek
and evaluate professional advice concerning the Affiliates, the Security, and
this Mortgage from advisors of Borrower's choosing, including financial and
legal advice; [vi] agrees that Borrower shall not rely on any information
provided by Lender about any Affiliates or the Security, including any other
mortgagor; [vii] shall continue to investigate and evaluate the Affiliates and
the Security independently throughout the term of this Mortgage; and
[viii] acknowledges that Lender has no obligation to provide Borrower any
information about any Affiliate or the Security.
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7.8.3 Without notice to or consent of Borrower, Lender may do or refrain
from doing anything affecting any Credit or any Security including the
following: [i] granting or not granting any indulgences to anyone (including any
Affiliate) liable for payment of any Credit or any Security; [ii] failing to get
or to perfect any Security; [iii] failing to get an enforceable agreement to
repay any Credit; [iv] releasing any Security or anyone or any property from
liability for payment of any Credit; [v] changing any agreement relating to any
Credit or any Security; [vi] extending the time for payment of any Credit
including extending the time beyond the term of the notes or other documents
evidencing the Secured Obligations; or [vii] delaying in enforcing or failing to
enforce any rights to payment of any Credit or rights against any Security.
7.8.4 Borrower's obligations under this Mortgage shall not be affected by
[i] any default in any document concerning any Secured Obligations or Security
when accepted by Lender or arising anytime thereafter; [ii] the unenforceability
of or defect in any Security or document relating to any Secured Obligations;
[iii] any decline in the value of any Security; or, [iv] the death,
incompetence, insolvency, dissolution, liquidation, or winding up of affairs of
Borrower, any Affiliate, or anyone liable for any Security or any Secured
Obligations or the start of insolvency proceedings by or against any such person
or entity.
7.8.5 Waiver of surety's defenses. Borrower waives all suretyship and other
similar defenses.
ARTICLE 8: INTERPRETATION
8.1 CAPTIONS. The captions and headings contained in this Mortgage are for
convenient reference only and are not to be used to interpret or define the
provisions hereof.
8.2 SEVERABILITY. If any provision of this Mortgage or the application thereof
to any party or circumstance shall, to any extent, be adjudged to be invalid or
unenforceable, the remainder of this Mortgage and the application of any such
provision to other parties or circumstances shall not be affected thereby, and
each provision of this Mortgage shall be valid and enforceable to the fullest
extent permitted by law.
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<PAGE>
8.3 GOVERNING LAW. This Mortgage and the rights and obligations of the parties
hereunder shall be governed by and construed and interpreted in accordance with
the laws of the State.
8.4 SURVIVAL. All agreements, representations, and warranties contained in
this Mortgage shall survive the execution and delivery of this Mortgage, and
shall be deemed to be effective continuously throughout the term of this
Mortgage Instrument.
ARTICLE 9: CONSTRUCTION
9.1 NO LIABILITY FOR LENDER. Borrower hereby acknowledges and agrees that the
undertaking of Lender under this Mortgage is limited as follows:
(A) LENDER IS NOT AND WILL NOT BE IN ANY WAY THE AGENT FOR OR TRUSTEE OF
BORROWER. LENDER DOES NOT INTEND TO ACT IN ANY WAY FOR OR ON BEHALF OF BORROWER
IN DISBURSING THE PROCEEDS UNDER THE LOAN AGREEMENT. LENDER'S PURPOSE IN MAKING
THE REQUIREMENTS SET FORTH HEREIN AND IN THE LOAN AGREEMENT IS TO PROTECT THE
VALIDITY AND PRIORITY OF THIS MORTGAGE AND THE VALUE OF ITS SECURITY.
(B) THIS MORTGAGE IS NOT TO BE CONSTRUED BY BORROWER OR ANYONE FURNISHING
LABOR, MATERIALS, OR ANY OTHER WORK OR PRODUCT FOR IMPROVING THE PROPERTY AS AN
AGREEMENT BY LENDER TO ASSURE THAT ANYONE WILL BE PAID FOR FURNISHING SUCH
LABOR, MATERIALS, OR ANY OTHER WORK OR PRODUCT. BORROWER IS AND SHALL BE SOLELY
RESPONSIBLE FOR SUCH PAYMENTS.
(C) LENDER IS NOT RESPONSIBLE FOR CONSTRUCTION OF ANY IMPROVEMENTS TO THE
PROPERTY. NOTWITHSTANDING LENDER'S INSPECTION OF THE PROPERTY AND THE
IMPROVEMENTS, LENDER ASSUMES NO RESPONSIBILITY FOR THE QUALITY OF CONSTRUCTION
OR WORKMANSHIP, OR FOR THE ARCHITECTURAL OR STRUCTURAL SOUNDNESS OF ANY
IMPROVEMENTS TO THE PROPERTY, OR FOR THE ADHERENCE TO OR APPROVAL OF ANY PLANS
AND SPECIFICATIONS FOR ANY IMPROVEMENTS TO THE PROPERTY.
NOW, THEREFORE, if Borrower shall pay Borrower's Obligations in full
and shall fully comply with this Mortgage, then this Mortgage and the estate
hereby granted shall cease, and Lender shall thereupon release this Mortgage at
the cost and expense of Borrower (all claims for statutory penalties, in case of
Lender's
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failure to release, being hereby waived); otherwise, this Mortgage shall remain
in full force and effect.
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<PAGE>
IN WITNESS WHEREOF, this Mortgage has been duly executed as of (but
not necessarily on) the Effective Date.
KAPSON ROCHESTER MANOR, LLC
By:____________________________
Glenn Kaplan, Member
STATE OF NEW YORK )
) SS:
COUNTY OF NASSAU )
On the ____ day of March, 1996 before me personally came Glenn Kaplan,
to me known, who, being by me duly sworn, did depose and say that he resides in
Woodbury, New York; that he is a member of Kapson Rochester Manor, LLC, the
company described in and which executed the above instrument; and that he signed
his name thereto by order of the members of said company.
_______________________________
Notary Public
My Commission Expires:___________________ [SEAL]
THIS INSTRUMENT PREPARED BY:
DIANE V. DAVIS, ESQ.
SHUMAKER, LOOP & KENDRICK
1000 JACKSON STREET
TOLEDO, OHIO 43624
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<PAGE>
EXHIBIT A: LEGAL DESCRIPTION
<PAGE>
EXHIBIT B: PERMITTED EXCEPTIONS
1. Taxes and assessments not yet due and payable.
<PAGE>
Additional Mortgage Documents
The following is a schedule of additional primary mortgage documents
relating to facilities of which the Company owns the entire or a majority
interest. Stockholders may obtain a copy of such documents by so requesting in
writing.
Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture
Filing made March, 1996 by Kapson Rochester East, LLC in favor of Health Care
REIT, Inc.
Restated Mortgage, Consolidation, Modification and Extension Agreement,
dated as of December 14, 1994, between Larkfield Gardens Associates, L.P., as
mortgagor, and Sims Mortgage Funding, Inc., as mortgagee.
Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture
Filing (Building/Construction Lien), effective as of January 11, 1995 by Kapson
Chestnut Ridge Development Corp. as borrower and Health Care REIT, Inc. as
lender.
Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture
Filing (Acquisition/Land Lien), effective as of January 11, 1995, by Kapson
Chestnut Ridge Development Corp., as borrower, and Health Care REIT, Inc., as
lender.
Consolidated and Restated First Mortgage and Security Agreement, dated as
of February 22, 1994, in the amount of $16,059,750 from Commco Management
Associates Inc. to General Electric Capital Corporation.
Multifamily Mortgage Assignment of Rents and Security Agreement, dated as
of November 30, 1995, between H. K. Associates and KAP Shore Development Corp.,
as mortgagor/grantor, and Green Park Financial Limited Partnership, as
mortgagee.
Consolidation, Amendment and Restatement of Mortgages, dated November 30,
1995, by and among H. K. Associates, KAP Shore Development Corp. and Green Park
Financial Limited Partnership.
Open-End Construction First Mortgage Deed and Security Agreement, dated as
of February 22, 1994, in the amount of $16,059,750.00 from Kapson Stamford Corp.
to General Electric Capital Corporation.
<PAGE>
EXHIBIT 10.26
NOTE
$3,890,625.00 March 28, 1996
Woodbury, New York
FOR VALUE RECEIVED, KAPSON ROCHESTER MANOR, LLC, a limited liability
company organized under the laws of the State of New York ("Borrower"), shall
pay to the order of HEALTH CARE REIT, INC., a corporation organized under the
laws of the State of Delaware ("Lender"), the principal sum of Three Million
Eight Hundred Ninety Thousand Six Hundred Twenty-Five Dollars ($3,890,625.00),
or so much thereof as shall have been advanced to Borrower, with interest on so
much thereof as shall from time to time be outstanding at the rate of interest
set forth below, until fully paid. This note is given pursuant to the Loan
Agreement of even date among Borrower and Lender (the "Loan Agreement") and is
subject to the provisions thereof. The definitions in the Loan Agreement shall
be applicable to any capitalized terms herein that are not otherwise defined.
1. DEFINITIONS.
"Amortization Date" means the first anniversary of the
Commencement Date.
"Business Day" means any day which is not a Saturday or Sunday or
a public holiday under the laws of the United States of America or the State of
Ohio.
"Closing Date" means the date of this note.
"Collateral Document" means any document providing security for
or guarantee of repayment of this note.
"Commencement Date" means [i] the Closing Date if the Closing
Date occurs on the first day of a month or [ii] the
<PAGE>
first day of the month after the Closing Date if the Closing Date occurs on any
day other than the first day of the month.
"Consolidation Agreement" means the Mortgage Consolidation,
Spreader and Modification Agreement between Borrower and Lender dated as of the
Closing Date.
"Default Rate" means the greater of [i] 2.50% plus the then
applicable interest rate; or [ii] 18.50%.
"Equity Participation Fee" has the meaning set forth in Section
4.
"Event of Default" has the meaning set forth in Section 9.
"Initial Rate" means a rate equal to the sum of [i] the Initial
Rate Index plus [ii] the Initial Rate Spread, and includes the annual increase
by the Initial Rate Increaser Amount as set forth in Section 2(b).
"Initial Rate Increaser Amount" means 30 basis points per year.
"Initial Rate Index" means the Rate Index on the Closing Date.
"Initial Rate Spread" means 4.25%.
"Initial Term" means the period commencing on the Closing Date
and expiring on the day before the Renewal Date.
"Loan Amount" means $3,890,625.00.
"Lockout Period" means [i] the period commencing on the Closing
Date and ending on the day before the sixth anniversary of the Commencement
Date; and [ii] the period commencing on the Renewal Date and ending on the day
before the sixth anniversary of the Renewal Date.
"Maturity Date" means the tenth anniversary of the Renewal Date.
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<PAGE>
"Mortgage" means the Mortgage, Security Agreement, Assignment of
Leases and Rents and Fixture Filing (Acquisition/Land Lien), dated this date,
made by Borrower in favor of Lender to secure repayment of this Note, as
consolidated pursuant to the Consolidation Agreement.
"Rate Change Date" means [i] during the Initial Term, each
anniversary of the Commencement Date; and [ii] during the Renewal Term, each
anniversary of the Renewal Date.
"Rate Index" means the yield to maturity quoted in The Wall
Street Journal on the Closing Date or Renewal Date, as applicable, for the most
actively traded United States Treasury Note having the nearest equivalent term
to the Initial Term or the Renewal Term, whichever is applicable. The
determination of the most actively traded United States Treasury Note will be
based upon the quotations given to the Lender by National City Bank (Cleveland)
or such other money center bank as Lender may then be using for interest rate
swap transactions.
"Renewal Date" means the tenth anniversary of the Commencement
Date.
"Renewal Notice" means the written notice by Borrower to Lender
that Borrower exercises its option to extend the term of this note to include
the Renewal Term.
"Renewal Rate" means the rate equal to the sum of [i] the Renewal
Rate Index plus [ii] the Renewal Rate Spread, and includes the annual increase
by the Renewal Rate Increaser Amount as set forth in Section 2(c).
"Renewal Rate Increaser Amount" means 30 basis points per year.
"Renewal Rate Index" means the Rate Index on the Renewal Date;
provided, however, if the Renewal Date is not a Business Day, then the Renewal
Rate Index will be the Rate Index on the next Business Day.
"Renewal Rate Spread" means 6.25%.
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"Renewal Term" means the period commencing on the Renewal Date
and expiring on the Maturity Date.
2. INTEREST RATE.
(a) INITIAL RATE. The interest rate per annum for the Initial
Term will be the Initial Rate. On each Rate Change Date during the Initial
Term, the Initial Rate then in effect will be increased by the Initial Rate
Increaser Amount.
(b) RENEWAL RATE. The interest rate per annum for the Renewal
Term will be the Renewal Rate. On each Rate Change Date during the Renewal
Term, the Renewal Rate then in effect will be increased by the Renewal Rate
Increaser Amount.
(c) DEFAULT RATE. After the occurrence and during the
continuance of an Event of Default, Borrower shall pay interest on this note,
and on any judgment on this note, at the Default Rate.
(d) COMPUTATION METHOD. All interest rates shall be calculated
based on the actual number of days elapsed over a 360-day year (365/360 method).
3. TERM, AMORTIZATION AND PAYMENTS. The term of this note shall be
the Initial Term; provided, however, that if [i] the Renewal Notice is received
by Lender at least 60 days prior to the Renewal Date, [ii] there is no uncured
Event of Default on the date of the Renewal Notice and on the Renewal Date, and
[iii] Lender has received a notice of renewal for each loan and lease financing
made by Lender to any Affiliate of Borrower, the term of this note shall be
extended to include the Renewal Term. Borrower shall make payments in arrears
in accordance with the following:
(a) On the first day of the first month after the Commencement
Date and on the first day of each month thereafter to and including the
Amortization Date, Borrower shall pay accrued interest only on the outstanding
principal balance at the Initial Rate for the period commencing on the
Commencement Date and ending on the day before the Amortization Date.
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(b) Commencing on the first day of the first month after the
Amortization Date and on the first day of each month thereafter until the
Renewal Date, Borrower shall make monthly payments of principal and interest in
an amount sufficient to fully amortize the outstanding principal balance of this
note on the Amortization Date at the applicable interest rate then in effect
based upon a 25-year amortization period. On each Rate Change Date, the amount
of the monthly payment of principal and interest shall be adjusted to reflect
the Initial Rate or Renewal Rate then in effect and shall be in an amount
sufficient to fully amortize the outstanding principal balance of this note on
such date based upon the remaining balance of the 25-year amortization period.
(c) If the term of this note has not been extended pursuant to
the first paragraph of Section 3, Borrower shall make a balloon payment on the
Renewal Date equal to the outstanding balance of this note including the
outstanding principal balance, all accrued and unpaid interest, the Equity
Participation Fee and all charges, expenses and other amounts payable by
Borrower to Lender. If the term of this note has been extended to include the
Renewal Term pursuant to the first paragraph of Section 3, the following
subparagraphs (d), (e) and (f) shall apply.
(d) On the Renewal Date, Borrower shall make one payment of
principal and interest in an amount equal to the amount of the most recent
monthly payment of principal and interest paid pursuant to subparagraph (b)
above and shall pay the Equity Participation Fee.
(e) Commencing on the first day of the first month after the
Renewal Date and on the first day of each month thereafter until the Maturity
Date, Borrower shall make monthly payments of principal and interest in an
amount sufficient to fully amortize the outstanding principal balance of this
note on the Renewal Date at the applicable interest rate then in effect based
upon a 16-year amortization period. On each anniversary of the Renewal Date,
the amount of the monthly payment of principal and interest shall be adjusted to
reflect the Renewal Rate then in effect and shall be in an amount sufficient to
fully amortize the outstanding principal balance of this note on such date based
upon the remaining balance of the 16-year amortization period.
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(f) On the Maturity Date, Borrower shall make a balloon payment
equal to the outstanding balance of this note including the outstanding
principal balance, all accrued and unpaid interest and all charges, expenses and
other amounts payable by Borrower to Lender.
4. EQUITY PARTICIPATION. Upon the earliest to occur of the
following:
[i] the Renewal Date,
[ii] prepayment of the Loan,
[iii] acceleration of the Loan pursuant to an Event of
Default, or
[iv] termination of the Loan,
Borrower will pay Lender a fee ("Equity Participation Fee") computed as follows:
[a] if the fair market value of the Facility at such time exceeds the Loan
Amount by more than 125%, the fee will equal 50% of the difference between the
fair market value of the Facility and the Loan Amount; and [b] if the fair
market value of the Facility is less than or equal to 125% of the Loan Amount,
the fee will equal 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 fair market value of the Facility will be determined by an MAI
appraiser selected by Borrower and reasonably acceptable to Lender using the
same appraisal methodology as was used for the appraisal submitted to Lender for
the closing of the Loan. Borrower shall pay the appraisal fee. The Equity
Participation Fee constitutes bargained-for consideration for Lender's extension
of the Loan to Borrower.
5. METHOD AND PLACE OF PAYMENT. Borrower shall make all payments on
this note at One SeaGate, Suite 1950, Toledo, Ohio 43604, or at such other place
as the holder hereof may designate. Borrower shall make all payments in lawful
money of the United States of America.
6. PREPAYMENT. Borrower shall have no privilege of prepaying this
note in whole or in part except as expressly
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provided herein. Borrower may not make partial prepayments at any time.
Borrower may not make full prepayment of this note during any Lockout Period.
Borrower may prepay the entire outstanding principal balance of this note plus
accrued interest thereon at any time that is not within a Lockout Period by
giving Lender 45 days irrevocable prior written notice and, in consideration for
the privilege of prepayment, Borrower shall pay Lender a prepayment fee as
follows:
(a) 7.00% of the outstanding principal balance of the note if
Borrower prepays the note on or after the sixth anniversary but before the
seventh anniversary of the Commencement Date;
(b) 5.00% of the outstanding principal balance of the note if
Borrower prepays the note on or after the seventh anniversary but before the
eighth anniversary of the Commencement Date;
(c) 3.00% of the outstanding principal balance of the note if
Borrower prepays the note on or after the eighth anniversary but before the
ninth anniversary of the Commencement Date;
(d) 1.00% of the outstanding principal balance of the note if
Borrower prepays the note on or after the ninth anniversary of the Commencement
Date but before the 60th day prior to the Renewal Date;
(e) 7.00% of the outstanding principal balance of the note if
Borrower prepays the note on or after the sixth anniversary but before the
seventh anniversary of the Renewal Date;
(f) 5.00% of the outstanding principal balance of the note if
Borrower prepays the note on or after the seventh anniversary but before the
eighth anniversary of the Renewal Date;
(g) 3.00% of the outstanding principal balance of the note if
Borrower prepays the note on or after the eighth anniversary but before the
ninth anniversary of the Renewal Date;
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(h) 1.00% of the outstanding principal balance of the note if
Borrower prepays the note on or after the ninth anniversary of the Renewal Date
but before the 60th day prior to the Maturity Date.
There shall be no prepayment fee if this note is paid during the last 60 days of
the Initial Term or Renewal Term, as applicable. If Borrower gives Lender
notice of prepayment, such notice may not be withdrawn and the entire balance of
this note, including the applicable prepayment fee and the Equity Participation
Fee, shall be due and payable upon the date specified for prepayment in such
notice.
Borrower acknowledges that [i] Lender has extended the Loan to
Borrower in reliance upon the Renewal Date and Maturity Date set forth in this
note; [ii] Lender does not desire prepayment of this note; [iii] prepayment of
this note during any Lockout Period will cause irreparable injury to Lender for
which there is no adequate remedy at law; and [iv] if Borrower attempts to repay
this note during any Lockout Period or if an Event of Default occurs during any
Lockout Period, Lender is entitled, at its option, to obtain the remedy of
specific performance with respect to Borrower's obligations under this note and
the other Loan Documents. Borrower irrevocably waives all defenses based on the
adequacy of a remedy at law that might be asserted as a bar to the remedy of
specific performance.
In the event that a court of competent jurisdiction holds that [i] the
prohibition of prepayment set forth in this note is unenforceable, or [ii] the
remedy of specific performance will not be granted to Lender with respect to any
attempt by Borrower to prepay this note during a Lockout Period, whether such
prepayment is made pursuant to the occurrence of an Event of Default or for any
other reason, a prepayment fee of 7.00% of the outstanding principal balance of
this note shall be payable by Borrower to Lender in connection with any
prepayment made during a Lockout Period.
The prepayment fee payable under this note constitutes the bargained-
for consideration for Borrower's privilege of prepayment, and does not
constitute a penalty.
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7. LATE CHARGE. Borrower acknowledges that any default in any
payment due under this note will result in loss and additional expense to Lender
in handling such delinquent payments and meeting Lender's other financial
obligations. Because such loss and additional expense is extremely difficult
and impractical to ascertain, Borrower agrees that if any payment hereunder is
not paid within 10 days after the due date, Borrower shall pay, as a reasonable
estimate of such loss and expense, a late charge equal to the lesser of [i] 5%
of the amount of the overdue payment, or [ii] the maximum amount permitted by
applicable law.
8. APPLICATION OF PAYMENTS. Unless Lender elects otherwise, all
payments and other amounts received by Lender shall be credited as follows:
[i] first to any charges, costs, expenses and fees payable by Borrower under
this note, the Loan Agreement or the Mortgage, or incurred by Lender for the
protection of any collateral securing the payment of this note, if not paid by
Borrower by the due date; [ii] second to interest on the foregoing amounts at
the Default Rate from the due date or date of payment by Lender, as the case may
be; [iii] third to accrued but unpaid interest on this note; [iv] fourth, to the
principal amount outstanding; and [v] the balance, if any, to Borrower.
9. DEFAULT. The occurrence of an Event of Default under the Loan
Agreement or Mortgage shall be an Event of Default hereunder.
10. ACCELERATION. Upon the occurrence of any Event of Default, in
addition to all other remedies under the Loan Agreement, Mortgage, any other
security for or guarantee of this note, and at law or in equity, at the option
of Lender [i] the outstanding principal balance of this note, all accrued and
unpaid interest thereon and all other amounts payable by Borrower to Lender,
including, without limitation, the Equity Participation Fee and the applicable
prepayment fee, shall be immediately due and payable, and [ii] all such amounts
shall bear interest at the Default Rate from the date of the Event of Default
until paid. Lender may exercise either or both options without notice or demand
of any kind. If an Event of Default occurs and payment of this note is
accelerated, any payment of the indebtedness evidenced by this note by Borrower
or any other person or entity shall be deemed to be a voluntary prepayment and
the indebtedness shall include the
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prepayment fee required under Section 6, to the extent permitted by law. If the
acceleration of this note occurs during a Lockout Period and Lender is not
granted the remedy of specific performance as set forth in Section 6, the
prepayment fee shall be 7.00% of the outstanding principal balance of this note.
11. GOVERNING LAW. This note shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to the conflict of laws rules thereof.
12. TIME IS OF THE ESSENCE. Time is of the essence in the payment of
this note. All grace periods in the Loan Agreement and any Collateral Document
that apply to a default shall run concurrently.
13. HOLIDAYS. If any installment of this note becomes due on a day
which is not a Business Day, Borrower may pay the installment on the next
succeeding day on which banking institutions are open.
14. WAIVERS. None of the following shall be a course of dealing,
estoppel, waiver or the like on which any party to this note or any Collateral
Document may rely: [i] Lender's acceptance of one or more late or partial
payments; [ii] Lender's forbearance from exercising any right or remedy under
this note or any Collateral Document; or [iii] Lender's forbearance from
exercising any right or remedy under this note or any Collateral Document on any
one or more occasions. Lender's exercise of any rights or remedies or a part of
a right or remedy on one or more occasions shall not preclude Lender from
exercising the right or remedy at any other time. Lender's rights and remedies
under this note, the Collateral Documents, and the law and equity are cumulative
to, but independent of, each other.
15. REPRESENTATIONS. Each party to this note and each Collateral
Document: [i] acknowledges that Lender would not have extended the credit
evidenced by this note and will not continue to extend the credit but for the
obligations of each; [ii] warrants that each has executed this note or
Collateral Documents to induce Lender to extend and to continue to extend the
credit; [iii] warrants that each has received good and valuable consideration
for executing this note or any Collateral Document;
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and [iv] warrants that none have executed this note or any Collateral Document
in reliance upon the existence of the security for or guaranty or promise of the
payment of this note.
16. INDULGENCES. Without notice, Lender may do or refrain from doing
anything affecting this note or any Collateral Document, as many times as Lender
desires, including the following: [i] granting or not granting any indulgences
to anyone liable for payment of this note or to anyone liable under any
Collateral Document; [ii] releasing any security or anyone or any property from
liability on this note or any Collateral Document; [iii] amending this note or
any Collateral Document, including extending the time for payment of this note,
in accordance the terms of such Collateral Documents.
17. NO RELEASE OF LIABILITY. No obligations of any party to this
note shall be affected by [i] any default in this note or any Collateral
Document when accepted by Lender or arising any time thereafter; [ii] the
unenforceability of or defect in this note or in any Collateral Document or any
interest conveyed by any Collateral Document; [iii] any decline in the value of
any interest in any property conveyed by any Collateral Document; or, [iv] the
death, incompetence, insolvency, dissolution, liquidation or winding up of
affairs of any party to this note or any Collateral Document or the start of
insolvency proceedings by or against any such party. EACH PARTY TO THIS NOTE
WAIVES ALL SURETYSHIP AND OTHER SIMILAR DEFENSES. No party to this note or any
Collateral Document may enforce any right of subrogation or contribution unless
and until this note is paid in full and waives all rights of subrogation against
any party that is subject to insolvency proceedings unless and until this note
is paid in full.
18. NOTICES. All notices, demands, requests and consents
(hereinafter "notices") given pursuant to this note shall be in writing, and
shall be served by [i] personal delivery, [ii] United States certified mail,
return receipt requested, postage prepaid; or [iii] nationally recognized
overnight courier to the following addresses:
To Borrower: Kapson Rochester Manor, LLC
339 Crossways Park Drive
Woodbury, New York 11797
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To Lender: Health Care REIT, Inc.
One SeaGate, Suite 1950
P.O. Box 1475
Toledo, Ohio 43603
All notices shall be deemed to be given upon the earlier of actual receipt or
three days after deposit in the United States mail, or one business day after
deposit with the overnight courier. Lender and Borrower may change their notice
address at any time by giving the other party written notice of such change.
19. REPRESENTATION AND WARRANTY REGARDING BUSINESS PURPOSE. Borrower
represents and warrants that the loan evidenced by this note is for business
purposes only and not for personal, family, household, or agricultural purposes.
20. SECURITY. This note is secured by the Mortgage, a Letter of
Credit and all other collateral for the Loan and is guaranteed by the
Unconditional and Continuing Guaranty of Glenn Kaplan, Evan Kaplan and Wayne
Kaplan.
21. PROTEST. Except as otherwise expressly provided in the Loan
Agreement or Mortgage, each party to this note jointly and severally waives
protest, notice of protest, demand, dishonor or default, presentment for
payment, notice of intent to declare this note immediately due and payable,
notice of declaration that this note is immediately due and payable in full, all
other notices, and all demands.
22. SAVINGS CLAUSE. The intention of Lender and Borrower is to
comply with the laws of the State of New York concerning the rate of interest on
this note. Notwithstanding any other provision in this note or in any other
document given in connection with this note, Borrower shall not be required to
pay interest in excess of the maximum lawful rate. To the extent the amount of
interest provided in this note ever exceeds the maximum lawful rate (the "Excess
Interest"), [i] the provisions of this paragraph shall govern and control;
[ii] Borrower shall not be obligated to pay any Excess Interest; [iii] any
Excess Interest that Lender may have received shall be credited against the then
outstanding balance due under this note and, if the Excess Interest exceeds the
outstanding balance, the excess amount shall be
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refunded to Borrower; [iv] the rate of interest under this note shall be
automatically reduced to the maximum lawful rate and this note and any other
documents given in connection therewith shall be deemed reformed and modified to
reflect such reduction; and [v] subject to the foregoing provisions of this
paragraph, Borrower shall have no action or remedy against Lender for any
damages whatsoever or any defense to enforcement of the note or any other
documents given in connection therewith arising out of the payment or collection
of any Excess Interest. In determining whether interest paid or payable on this
note exceeds the maximum lawful rate, Borrower agrees to exclude voluntary
prepayment fees from the calculation of interest and to spread the total amount
of interest throughout the entire contemplated term of this note.
23. ATTORNEY'S FEES AND EXPENSES. Borrower shall pay to Lender all
reasonable costs and expenses incurred by Lender in enforcing or preserving
Lender's rights under this note, the Loan Agreement or any Collateral Document,
and in all matters of collection, whether or not an Event of Default has
actually occurred or has been declared and thereafter cured, including but not
limited to, [i] attorney's and paralegal's fees and disbursements; [ii] the fees
and expenses of any litigation, administrative, bankruptcy, insolvency,
receivership and any other similar proceeding; [iii] court costs; [iv] the
expenses of Lender, its employees, agents, attorneys and witnesses in preparing
for litigation, administrative, bankruptcy, insolvency and other proceedings and
for lodging, travel, and attendance at meetings, hearings, depositions, and
trials; and [v] consulting and witness fees incurred by Lender in connection
with any litigation or other proceeding.
24. SEVERABILITY. If any clause, provision, section or article of
this note is ruled invalid by any court of competent jurisdiction, the
invalidity of such clause, provision, section, or article shall not affect any
of the remaining provisions hereof.
25. ASSIGNMENT. Borrower shall not assign its rights nor delegate
its obligations under this note.
26. AMENDMENT. This note may not be amended except in writing signed
by Borrower and Lender. All references to this note, whether in this note or in
any other document or instrument,
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shall be deemed to incorporate all amendments, modifications, and renewals of
this note and all substitutions made therefor after the date hereof.
27. COTERMINOUS FINANCINGS. The term of this note, the Renewal Date,
the Maturity Date, the Lockout Period and the prepayment periods described in
Section 6 of this note are subject to adjustment from time to time in connection
with the $40,000,000 credit facility ("Credit Facility") extended by Lender to
Kapson Management Corp. as set forth in the Credit Facility Agreement dated
January 11, 1995. Upon the closing of each financing made pursuant to the
Credit Facility, the Renewal Date, Maturity Date, Lockout Period and prepayment
periods set forth in this note shall be deemed extended to be coterminous with
the most recent financing.
28. CONSENT TO JURISDICTION. BORROWER HEREBY IRREVOCABLY SUBMITS AND
CONSENTS TO THE NON-EXCLUSIVE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL
COURT HAVING JURISDICTION OVER MONROE COUNTY, NEW YORK FOR ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO [I] THE
COMMITMENT LETTER FOR THE LOAN EVIDENCED BY THIS NOTE; [II] THIS NOTE; OR [III]
ANY LOAN DOCUMENT EXECUTED IN CONNECTION WITH THIS NOTE. BORROWER HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT BORROWER MAY EFFECTIVELY DO SO, THE
DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR
PROCEEDING. BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY
SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.
BORROWER AND ANY GUARANTOR AGREE NOT TO INSTITUTE ANY LEGAL ACTION OR
PROCEEDING AGAINST LENDER OR ANY DIRECTOR, OFFICER, EMPLOYEE, AGENT OR PROPERTY
OF LENDER, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THE COMMITMENT
LETTER OR ANY LOAN DOCUMENT IN ANY COURT OTHER THAN A STATE OR FEDERAL COURT
HAVING JURISDICTION OVER LUCAS COUNTY, OHIO OR MONROE COUNTY, NEW YORK.
BORROWER HEREBY CONSENTS TO SERVICE OF PROCESS BY LENDER IN ANY MANNER
AND IN ANY JURISDICTION PERMITTED BY LAW. NOTHING HEREIN SHALL AFFECT OR IMPAIR
LENDER'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW, OR
LENDER'S RIGHT TO BRING ANY
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ACTION OR PROCEEDING AGAINST BORROWER OR THE PROPERTY OF BORROWER OR ANY
GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION.
29. WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY LAW,
BORROWER AND ANY GUARANTOR HEREBY KNOWINGLY AND VOLUNTARILY WAIVE THE RIGHT TO A
JURY TRIAL IN ANY ACTION, PROCEEDING OR COUNTERCLAIMS ARISING OUT OF OR RELATING
TO THIS NOTE.
30. CONSOLIDATION. This note is the "Note" referred to in the
Consolidation Agreement. All of the terms and provisions of this note shall
supersede and replace all of the terms and provisions of the Prior Note (as
defined in the Consolidation Agreement).
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the undersigned has executed this note effective
as of the date first set forth above.
KAPSON ROCHESTER MANOR, LLC
By:____________________________
Glenn Kaplan, Member
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Additional Mortgage Notes
The following is a schedule of additional mortgage notes relating to
facilities of which the Company owns the entire or a majority interest.
Stockholders may obtain a copy of such documents by so requesting in writing.
Mortgage Note in the sum of $6,484,375.00, dated March 28, 1996, made by
Kapson Rochester East, LLC to the order of Health Care REIT, Inc.
Restated Mortgage Note, dated December 14, 1994, in the principal sum of
$20,599,900.00, issued by Kapson Northport Development Corp. to Sims Mortgage
Funding, Inc.
Promissory Note, dated January 11, 1995, in the principal sum of
$8,000,000.00 issued by Kapson Chestnut Ridge Development Corp. to Health Care
REIT, Inc.
Mortgage Note, dated February 22, 1994, between Commco Management
Associates, Inc. and General Electric Capital Corporation in the principal sum
of $2,860,769.72.
Consolidation, Amendment and Restatement of Notes, dated November 30, 1995,
by and among H. K. Associates and KAP Shore Development Corp., and Green Park
Financial Limited Partnership.
Consolidated and Restated Promissory Note in the amount of $8,965,882,
dated February 22, 1994, issued by Commco Management Associates, Inc. to General
Electric Capital Corporation.
<PAGE>
EXHIBIT 10.27
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is made and entered into effective
as of March __, 1996 (the "Closing Date") between KAPSON ROCHESTER MANOR,
LLC, a limited liability company organized under the laws of the State of New
York (the "Borrower"), having its chief executive office at 339 Crossways
Park Drive, Woodbury, New York 11797, and HEALTH CARE REIT, INC., a
corporation organized under the laws of the State of Delaware (the "Lender"),
having an address of One SeaGate, Suite 1950, P.O. Box 1475, Toledo, Ohio
43603.
R E C I T A L S:
A. Borrower desires to acquire a 79-bed assisted living facility
known as Town Gate Manor and located in Greece, New York.
B. Lender has agreed to provide a loan of up to the Loan Amount
(hereinafter defined) to finance the facility, upon the terms and subject to
the conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and the
premises contained herein, the parties agree as follows:
ARTICLE 1: PURPOSE AND DEFINITIONS
1.1 PURPOSE. The purpose of this Agreement is to establish the Loan with
Lender for the financing of the Facility (as hereinafter defined).
1.2 DEFINITIONS. Except as otherwise expressly provided, [i] the terms
defined in this section have the meanings assigned to them in this section
and include the plural as well as the singular; [ii] all accounting terms not
otherwise defined herein have the meanings assigned to them in accordance
with generally accepted accounting principles as of the time applicable; and
[iii] the words "herein", "hereof", and "hereunder" and similar words refer
to this Agreement as a whole and not to any particular section.
<PAGE>
"Affiliate" means any person, corporation, partnership, limited liability
company, trust, or other legal entity that, directly or indirectly, controls,
or is controlled by, or is under common control with Borrower or any
Guarantor. "Control" (and the correlative meanings of the terms "controlled
by" and "under common control with") means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of such entity. "Affiliate" includes, without limitation, Kapson
Management Corp., a New York corporation, Kapson Chestnut Ridge Development
Corp., a New York corporation, Kapson Rochester East, LLC, a New York limited
liability company, Chestnut Ridge Development, LLC, a New York limited
liability company, and Senior Quarters Management Corp., a New York
corporation.
"Annual Financial Statements" means [i] for the Borrower, the audited
balance sheet and statement of income for the most recent fiscal year on an
individual facility and consolidated basis and an audited operating statement
for each Facility for the most recent fiscal year; and [ii] for the
Guarantor, the unaudited financial statement for the most recent fiscal year.
"Appraisal" means an appraisal setting forth the fair market value of the
Facility.
"Approved Costs" means the following: [i] Facility Costs; [ii] Closing
Costs; and [iii] Letter of Credit Deposit. "Approved Costs" do not include
working capital or fees paid to Borrower, Guarantors, or any Affiliate of
Borrower or Guarantors.
"Article 9" means Article 9 of the Uniform Commercial Code as enacted in
the State.
"Borrower" means Kapson Rochester Manor, LLC, a limited liability company
organized under the laws of the State of New York, its successors and
permitted assigns.
"Borrower's Organizational Documents" means the Articles of Organization
of Borrower certified by the Secretary of State of the state of organization,
as amended to date, and the Operating Agreement of Borrower certified by
Borrower, as amended to date.
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<PAGE>
"Business Day" means any day which is not a Saturday or Sunday or a
public holiday under the laws of the United States of America or the State of
Ohio.
"Cash Flow" has the meaning set forth in Section 5.11.1.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended from time to time. The terms "disposal"
and "release" as used in this Agreement shall have the meaning set forth in
CERCLA.
"Closing" means the closing of the Loan.
"Closing Costs" means the following reasonable costs to meet Lender's
closing requirements: [i] Commitment Fee; [ii] title insurance premiums and
search fees; [iii] cost of surveys; [iv] costs of environmental studies; [v]
legal fees of Lender's counsel and Borrower's counsel; [vi] property
inspection fees; [vii] Letter of Credit Fee charged by Issuer for the first
year the Letter of Credit is issued; [viii] Loan Expenses; and [ix] other
costs customarily incurred in closing financings.
"Collateral Assignment of Management Agreement" means the Collateral
Assignment of Management Agreement between Lender and The Kapson Group and
the Consent of Manager attached thereto.
"Commitment" means the commitment for the Loan dated November 28, 1994,
as amended on September 28, 1995 and November 9, 1995.
"Commitment Fee" means the commitment fee for the Loan payable to Lender
by Borrower in an amount equal to 1.00% of the Loan Amount.
"Consolidation Agreement" means the Mortgage Consolidation, Spreader and
Modification Agreement between Lender and Borrower of even date.
"Coverage Ratio" has the meaning set forth in Section 5.11.1.
"Environmental Assessment" means an environmental assessment of the Land
meeting the Lender's Requirements for Environmental Assessments.
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"Environmental Consultant" means a registered engineer in the State or
other consultant approved by Lender.
"Environmental Laws" means all federal, state, and local ecological,
wetlands, and other environmental laws and regulations, as amended from time
to time, including but not limited to [i] CERCLA; [ii] the Resource
Conservation and Recovery Act; [iii] the Hazardous Materials Transportation
Act; [iv] the Clean Air Act; [v] Clean Water Act; [vi] the Toxic Substances
Control Act; and [vii] the Safe Water Drinking Act.
"Facility" means the Real Property and Personal Property comprising the
assisted living facility being financed by the Loan.
"Facility Costs" means the following reasonable costs: [i] for
acquisition transactions, the purchase price for the land and building and
personal property costs not to exceed 10% of the Loan Amount; [ii] for
development and conversion transactions, the following costs: [a] land
acquisition cost and, for conversion projects, acquisition costs of the
existing land and building, in each case being funded pursuant to the Land
Mortgage; [b] cost of construction of the building and fixtures; [c] costs of
architectural and engineering services; [d] costs of soil borings and other
customary testing services; [e]cost of personal property not to exceed 10% of
the Loan Amount; [f] Development Fees; [g] Construction Loan Period interest;
[h] Capitalized Interest; and [i]other reasonable and customary costs
approved by Lender.
"Financial Statements" means [i] the unaudited balance sheet and
statement of income of Borrower; and [ii] the unaudited financial statement
of each Guarantor submitted to Lender.
"Fixtures" means all fixtures now or hereafter installed or located in,
on or about the Land or the Improvements and any replacements, substitutions
and additions thereto.
"Government Authorizations" means all permits, licenses, approvals,
consents, and authorizations required to comply with all Legal Requirements,
including but not limited to, [i] zoning permits, variances, exceptions,
special use permits, conditional use permits, and consents; [ii] all permits,
licenses and approvals required for licensure and operation of an assisted
living
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facility, [iii] environmental, ecological, coastal, wetlands, air, and
water permits, licenses, and consents; [iv] curb cut, subdivision, land use,
and planning permits, licenses, approvals and consents; [v] building, sign,
fire, health, and safety permits, licenses, approvals, and consents; and [vi]
architectural reviews, approvals, and consents required under restrictive
covenants.
"Guaranty" means the Unconditional and Continuing Guaranty entered into
by the Guarantor to guarantee payment of the Loan and any amendments thereto
or substitutions or replacements therefor.
"Guarantor" means Glenn Kaplan, Evan Kaplan and Wayne Kaplan,
individually and collectively.
"Hazardous Materials" means any substance [i] the presence of which poses
a hazard to the health or safety of persons on or about the Land including
but not limited to asbestos containing materials; [ii] which requires removal
or remediation under any Environmental Law, including without limitation any
substance which is toxic, explosive, flammable, radioactive, or otherwise
hazardous; or [iii] which is regulated under or classified under any
Environmental Law as hazardous or toxic including but not limited to any
substance within the meaning of "hazardous substance", "hazardous material",
"hazardous waste", "toxic substance", "regulated substance", "solid waste",
or "pollutant" as defined in any Environmental Law.
"Improvements" means all buildings, structures, additions, and
improvements now or hereafter erected or placed upon the Land and the offsite
improvements, if any, necessary for the operation of each Facility.
"Insurance Requirements" means [i] all terms of any insurance policy
required by the Loan Documents; [ii] all requirements of the issuer of any
such policy; and [iii] the requirements of any Board of Insurance
Underwriters or similar organization.
"Intangible Personal Property" means the following: [i] all accounts,
contract rights, general intangibles, instruments, documents, Receivables,
and chattel paper (as "accounts", "contract rights", "general intangibles",
"instruments", "documents", and "chattel paper" are defined for purposes of
Article 9) now or
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hereafter arising in connection with the business located in or on or
used or usable in connection with the Real Property and replacements,
additions, and accessions thereto; [ii] unless prohibited by law, all
franchises, permits, licenses and rights therein regarding the use, occupancy
or operation of the Improvements, or any part thereof; [iii] unless expressly
prohibited by the terms thereof, all contracts, agreements, contract rights
and materials relating to the design, construction or operation of the
Improvements, including but not limited to, plans, specifications, drawings,
blueprints, models and mock-ups, and all brochures, flyers, advertising and
promotional materials and mailing lists; and [iv] all ledger sheets, files,
records, computer programs, tapes, other electronic data processing
materials, and other documentation relating to the preceding listed property.
"Issuer" means a financial institution satisfactory to Lender issuing the
Letter of Credit and such Issuer's successors and assigns. Any "Issuer"
shall have a Lace Financial Service Rating of "C+" or higher at all times
throughout the term of the Loan.
"Land" means the land described on Exhibit A.
"Legal Requirements" means all laws, regulations, rules, orders, writs,
injunctions, decrees, certificates, requirements, agreements, conditions of
participation and standards of any federal, state, county, municipal or other
governmental entity, administrative agency, insurance underwriting board,
architectural control board, private third-party payor, accreditation
organization, or any restrictive covenants applicable to the development and
operation of each Facility by Borrower, including but not limited to, [i]
zoning, building, fire, health, safety, sign, and subdivision regulations and
codes; [ii] licensure to operate as an assisted living facility; [iii] the
Environmental Laws; and [iv] requirements, conditions and standards for
participation in third-party payer insurance programs.
"Lender" means Health Care REIT, Inc., its successors and assigns.
"Letter of Credit" means an irrevocable and transferable Letter of Credit
in an amount equal to 5.00% of the Loan Amount,
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issued by Issuer in favor of Lender as security for the Loan and in
form acceptable to Lender, and any amendments thereto or replacements or
substitutions therefor.
"Letter of Credit Deposit" means the amount of cash collateral required
by Issuer to be pledged as security for the Letter of Credit.
"List of Leases and Contracts" means the List of Leases and Contracts
described in Section 4.16 and set forth on Exhibit D attached hereto.
"Loan" means the loan by Lender to Borrower in the amount of the Loan
Amount.
"Loan Amount" means $3,890,625.00.
"Loan Documents" means [i] this Agreement; [ii] the Note; [iii] the
Mortgage; [iv] the Collateral Assignment of Management Agreement; [v] the
Consolidation Agreement; and [vi] all other documents and instruments
executed by Borrower in connection with the Loan.
"Loan Expenses" means all reasonable costs and expenses incurred by
Lender in investigating, making and administering the Loan, including but not
limited to, [i] attorneys' and paralegals' fees and costs; and [ii] travel,
transportation, food, and lodging costs and expenses incurred by Lender and
Lender's attorneys and paralegals.
"Management Agreement" means the Management Agreement between The Kapson
Group and Manager dated as of March 27, 1996, as amended from time to time.
"Manager" means Senior Quarters Management Corp., a corporation organized
under the laws of the State of New York.
"Material Obligation" means [i] any indebtedness secured by a lien, deed
of trust or mortgage on any Facility and any agreement relating thereto; [ii]
any obligation or agreement that is material to the operation of any Facility
or that is material to Borrower's business or financial condition; [iii] any
indebtedness or capital
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lease that has an outstanding principal balance of at least $50,000.00
and any agreement relating thereto; and [iv] any obligation to or agreement
with the Issuer relating to the Letter of Credit.
"Maturity Date" has the meaning set forth in the Note.
"Mortgage" means the Mortgage, Security Agreement, Assignment of Leases
and Rents and Fixture Filing (Acquisition/Land Lien) of even date granted by
Borrower to Lender, as consolidated pursuant to the Consolidation Agreement.
"Net Worth" has the meaning set forth in Section 5.11.1.
"Note" means the Note of even date made by Borrower in favor of Lender
for a principal amount equal to the Loan Amount.
"Periodic Financial Statements" means [i] unaudited internal balance
sheet and statement of income of Borrower for the most recent quarter; and
[ii] after the Facility is completed, an unaudited internal Facility
operating statement for the most recent quarter.
"Permitted Exceptions" means the exceptions to title set forth on
Exhibit B.
"Permitted Liens" means [i] liens granted to Lender; [ii] liens
customarily incurred by Borrower in the ordinary course of business for items
not due and payable including mechanic's liens and deposits and charges under
worker's compensation laws; [iii] liens for taxes and assessments not yet due
and payable; [iv] any lien, charge, or encumbrance which is being contested
in good faith pursuant to this Agreement; [v] the Permitted Exceptions; and
[vi] purchase money financing and capitalized equipment leases for the
acquisition of personal property provided, however, that Lender obtains a
nondisturbance agreement from the purchase money lender or equipment lessor
in form and substance as may be satisfactory to Lender if the original cost
of the equipment exceeds $50,000.00.
"Personal Property" means the Tangible Personal Property and Intangible
Personal Property.
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"Pro Forma Statement" means a financial forecast for the Facility
for the five year period commencing on the Closing Date prepared in
accordance with the standards for forecasts established by the American
Institute of Certified Public Accountants.
"Real Property" means, collectively, the Land, Improvements and Fixtures.
"Receivables" means [i] all of Borrower's rights to receive payment for
providing resident care and services as set forth in any accounts, contract
rights, and instruments, whether now existing or hereafter arising (but not
including any rights arising after Lender shall have foreclosed on the
Facility or after a receiver is appointed for the Facility), and all proceeds
thereof, and [ii] those documents, chattel paper, inventory proceeds,
provider agreements, participation agreements, ledger sheets, files, records,
computer programs, tapes, and agreements relating to Borrower's rights to
receive payment for providing resident care services.
"Renewal Date" has the meaning set forth in the Note.
"Reserves" has the meaning set forth in Section 2.7.3.
"Secured Obligations" has the meaning set forth in the Mortgage.
"State" means the State of New York.
"Survey" means a survey of the Land prepared in accordance with the
Minimum Detail Requirements for Land Title Surveys jointly adopted by
ALTA/ACSM in 1992 and such other requirements as may be required by Lender
and Title Company.
"Surveyor's Report" means a Surveyor's Report in the form customarily
used by Title Company and prepared in connection with each Survey.
"Tangible Personal Property" means all machinery, furniture, equipment,
trade fixtures, appliances, inventory, and other goods (as "equipment",
"inventory", and "goods" are defined for purposes of Article 9) now or
hereafter located in or on or used or usable
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in connection with the Real Property and replacements, additions, and
accessions thereto, including without limitation those items which are to
become Fixtures or which are building supplies and materials to be
incorporated into an Improvement or Fixture.
"Title Commitment" means an ALTA Form B Commitment, 1970 form as revised
10-17-84, for mortgage title insurance issued by the Title Company for each
Facility.
"Title Company" means Lawyers Title Insurance Corporation.
"Title Policy" means the final title policy issued by the Title Company
to Lender pursuant to the Title Commitment for each Facility.
1.3 INCORPORATION OF AMENDMENTS. The definition of any agreement, document,
or instrument set forth in this Agreement or in any other Loan Document shall
be deemed to incorporate all amendments, modifications, and renewals thereof
and all substitutions and replacements therefor.
1.4 EXHIBITS. The following exhibits are attached hereto and incorporated
herein:
Exhibit A: Legal Description
Exhibit B: Permitted Exceptions
Exhibit C: Government Authorizations
Exhibit D: List of Leases and Contracts
Exhibit E: Pending Litigation
Exhibit F: Documents to be Delivered
Exhibit G: Certificate and Facility Financial Reports
ARTICLE 2: LOAN AND LOAN DOCUMENTS
2.1 OBLIGATION TO LEND. Subject to the terms and upon the conditions set
forth in the Loan Documents, Lender shall lend to Borrower up to the Loan
Amount. The indebtedness of Borrower to Lender for the Loan is evidenced by
the Note.
2.2 OBLIGATION TO REPAY. Borrower shall repay the Loan in accordance with
the terms of the Note and the other Loan Documents.
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2.2.1 TERM OF THE LOAN. The term of the Loan will expire on the
Renewal Date set forth in the Note, unless extended by Borrower to the
Maturity Date.
2.2.2 INTEREST AND PAYMENTS. Borrower shall make payments in accordance
with the Note at the rates set forth in the Note.
2.3 USE OF PROCEEDS. Borrower shall use the proceeds of the Loan solely for
the purpose of paying the Approved Costs.
2.4 SECURITY. The Loan is secured by the Mortgage and any other security for
the Loan provided to Lender.
2.5 COMMITMENT FEE. Borrower shall pay the Commitment Fee at the Closing.
2.6 LOAN EXPENSES. At the Closing, Borrower shall pay or reimburse Lender
for any Loan Expenses incurred up to the Closing Date. Within 30 days after
receipt of an invoice therefor, Borrower shall reimburse Lender for any Loan
Expenses incurred by Lender. Lender may, at Lender's option, apply proceeds
of the Loan to pay the Commitment Fee and Loan Expenses.
2.7 DISBURSEMENTS. Upon Borrower's compliance with all conditions precedent,
Lender shall disburse the Loan.
2.8 CLOSING. The Closing shall occur at a time and place mutually agreed
upon by Lender and Borrower, but no later than the date specified in the
Commitment unless extended by Lender in its sole and absolute discretion.
Lender may elect to close by exchanging executed counterparts of one or more
of the Loan Documents and other closing documents by mail or a national
courier service, or by telecopier followed by exchanging documents by mail or
national courier service.
ARTICLE 3: CONDITIONS PRECEDENT TO DISBURSEMENT
3.1 CONDITIONS PRECEDENT TO INITIAL DISBURSEMENT. Borrower shall comply
with, and Lender's obligation to make the initial disbursement of the Loan
shall be conditioned upon Borrower's performance of the following conditions
precedent:
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3.1.1 TITLE COMMITMENT. Borrower shall have delivered to Lender the
Title Commitment issued by the Title Company committing to insure the
Mortgage to be a valid first lien upon the Land and all appurtenant easements
subject only to Permitted Exceptions. The Title Commitment shall be in form
and substance satisfactory to Lender.
3.1.2 SURVEY. Borrower shall have delivered to Lender the Survey and
Surveyor's Report in the form customarily used by the Title Company. The
Survey shall contain such items as may be required by Lender or Title
Company.
3.1.3 ENVIRONMENTAL ASSESSMENT. Borrower shall have delivered to Lender
the Environmental Assessment prepared by the Environmental Consultant, in
form, scope and substance satisfactory to Lender.
3.1.4 LEGAL OPINION. Borrower shall have delivered to Lender one or more
opinions of counsel, in form and substance satisfactory to Lender, covering
the law of the State and such other federal and state laws as Lender may
require.
3.1.5 APPRAISAL. Borrower shall have delivered to Lender the Appraisal
for each Facility prepared by an MAI appraiser, addressed to Lender, and in
form and substance satisfactory to Lender.
3.1.6 INSURANCE. Borrower shall have delivered to Lender satisfactory
evidence of the property and liability insurance coverage required by Lender.
3.1.7 LOAN DOCUMENTS. Borrower shall have delivered to Lender fully
executed originals of the Loan Documents and Guaranty, and, where applicable,
such documents shall have been recorded.
3.1.8 ORGANIZATIONAL DOCUMENTS. Borrower shall have delivered to Lender
copies of the Borrower's Organizational Documents and resolutions authorizing
the Loan, certified by Borrower to be true and complete and not revoked or
amended since the respective dates thereof, and any management agreement for
the Facility.
3.1.9 FLOOD PLAIN. Borrower shall have delivered evidence satisfactory to
Lender that the Land is not located in a 100-year
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flood plain as defined by the United States Department of Housing and
Urban Development in the Flood Disaster Protection Act of 1973, as amended,
or if the Land is located in a 100-year flood plain, that flood insurance
which satisfies the requirements of the Mortgage is in effect for the
Facility.
3.1.10 ZONING. Borrower shall have delivered to Lender copies of the
applicable zoning ordinance, an up-to-date zoning map designating each
Facility, certificate of the zoning official having jurisdiction over the
Facility in form and substance satisfactory to Lender, and such other
evidence as may be required by Lender to show that each Facility complies
with applicable zoning, land use and subdivision laws, rules and regulations.
3.1.11 LIST OF LEASES AND CONTRACTS. Borrower shall have delivered to
Lender, to the extent available prior to Closing, the List of Leases and
Contracts.
3.1.12 LICENSES AND PERMITS. Borrower shall have delivered to Lender, to
the extent available prior to Closing, copies of all required licenses,
permits, consents, and approvals, the certificate of occupancy and other
Government Authorizations as may be needed to comply with all Legal
Requirements and such items shall be in full force and effect.
3.1.13 EMINENT DOMAIN. No eminent domain proceedings shall have been
threatened or be pending with respect to a substantial or material part of
the Land.
3.1.14 FINANCIAL STATEMENTS. Borrower shall have delivered to Lender the
Financial Statements and the Pro Forma Statements.
3.1.15 LETTER OF CREDIT. Borrower shall have delivered to Lender the
original Letter of Credit and copies of all notes, collateral documents and
agreements made between Borrower (or any Affiliate) and Issuer relating to
the Letter of Credit.
3.1.16 NO EVENT OF DEFAULT. There shall be no uncured Event of Default
under this Agreement.
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3.1.17 OTHER CLOSING REQUIREMENTS. Borrower shall have satisfied all
other closing requirements of the Loan Documents and the Commitment.
ARTICLE 4: BORROWER'S REPRESENTATIONS AND WARRANTIES
Borrower hereby makes the following representations and warranties,
as of the Closing Date, to Lender and acknowledges that Lender is making the
Loan in reliance upon such representations and warranties. Borrower's
representations and warranties shall survive the Closing and, except as
specifically provided below, shall continue in full force and effect until
Borrower has repaid the Loan in full and performed all other obligations
under the Loan Documents.
4.1 ORGANIZATION AND GOOD STANDING. Borrower is a limited liability company
duly organized, validly existing, and in good standing under the laws of the
State of New York and is qualified to do business in and is in good standing
under the laws of the State.
4.2 POWER AND AUTHORITY. Borrower has the power and authority to execute,
deliver, and perform its obligations under the Loan Documents and all
transactions contemplated thereby. Borrower has taken all requisite action
to authorize the execution, delivery and performance of Borrower's
obligations under such documents.
4.3 ENFORCEABILITY. The Loan Documents constitute valid and binding
obligations of Borrower, enforceable in accordance with their terms. The
Guaranty constitutes the valid and binding obligation of Guarantor,
enforceable in accordance with their terms.
4.4 NO VIOLATION. The execution, delivery and performance of the Loan
Documents and Guaranty and the consummation of the transactions contemplated
by the Loan Documents and Guaranty [i] do not conflict with and will not
conflict with, and do not result and will not result in a breach of the
Borrower's Organizational Documents; [ii] do not conflict with and will not
conflict with, and do not result and will not result in a breach of, or
constitute or will constitute a default (or an event which, with or without
notice or lapse of time, or both, would constitute a default)
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under, or result or will result in a creation of any lien or
encumbrance (other than the lien of the Mortgage) upon any Facility under any
of the terms, conditions or provisions of any agreement or other instrument
or obligation to which Borrower or Guarantor is a party or by which its
assets are bound; and [iii] do not violate and will not violate any order,
writ, injunction, decree, statute, rule or regulation applicable to Borrower,
Guarantor, or any Facility.
4.5 NO LITIGATION. As of the Closing Date and except as disclosed on Exhibit
E, [i] there are no actions, suits, proceedings or investigations by any
governmental agency or regulatory body pending against Borrower, Guarantor or
any Facility; [ii] Borrower has not received notice of any threatened
actions, suits or proceeding or investigations against Borrower, Guarantor or
any Facility at law or in equity, or before any governmental board, agency or
authority which, if determined adversely to Borrower or Guarantor, would
materially and adversely affect any Facility, or the financial condition of
Borrower or Guarantor; [iii] there are no unsatisfied or outstanding
judgments against Borrower, Guarantor or any Facility; [iv] there is no labor
dispute materially and adversely affecting the operation or business
conducted by Borrower, Guarantor, or any Facility; and [v] Borrower does not
have knowledge of any facts or circumstances which might reasonably form the
basis for any such action, suit, or proceeding.
4.6 FINANCIAL STATEMENTS. Borrower has furnished Lender with true, correct
and complete copies of the Financial Statements. The Financial Statements
fairly present the financial position of Borrower, as of the respective dates
and the results of operations for the periods then ended in conformance with
generally accepted accounting principles applied on a basis consistent with
prior periods. The Financial Statements are true, complete and correct and,
as of the Closing Date, no material adverse change has occurred since the
furnishing of such statements and information. As of the Closing Date, the
Financial Statements and other information do not contain any untrue
statement or omission of a material fact and are not misleading in any
material respect. Borrower and Guarantor are solvent, and no bankruptcy,
insolvency, or similar proceeding is pending or contemplated by or against
Borrower or Guarantor.
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4.7 REPORTS, STATEMENTS AND COPIES. All reports, statements,
certificates and other data furnished by or on behalf of Borrower or
Guarantor to Lender in connection with the Loan Documents or Guaranty
Documents, or the transactions contemplated thereunder, and all
representations and warranties made therein, or any certificate or other
instrument delivered in connection therewith, are true and correct in all
material respects and do not omit to state any material fact or circumstance
necessary to make the statements contained therein, in light of the
circumstances under which they are made, not misleading as of the date of
such information, reports, statements or certificates. The copies of all
agreements and instruments submitted to Lender, including, without
limitation, all agreements relating to management of the Facility, the Letter
of Credit, and Borrower's working capital are true, correct and complete
copies and include all amendments and modifications of such agreements.
4.8 TITLE TO LAND. Borrower has good, indefeasible record fee simple title
to the Land, free and clear of any and all mortgages, liens, charges, claims,
collateral assignments, leases, attachments, levies, encroachments,
rights-of-way, equities, restrictions, assessments, and all other title
matters whatsoever except for the Permitted Exceptions.
4.9 PARTIES IN POSSESSION. Except as disclosed on Exhibit B, there are no
parties in possession of any Facility or any portion thereof as managers,
lessees, tenants at sufferance, or trespassers.
4.10 ACCESS. Access to the Land is directly from a dedicated public
right-of-way without any easement. There is no fact or condition which would
result in the termination or reduction of the current access to and from the
Land to such right-of-way.
4.11 UTILITIES. There are available at the Land gas, water, and sanitary
sewer lines, storm sewers, electrical and telephone services in operating
condition which are adequate for the operation of each Facility at a
reasonable cost. The Land has direct access to utility lines located in a
dedicated public right-of-way without any easement. As of the Closing Date,
there is no pending or threatened governmental or third party proceeding
which
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would impair or result in the termination of such utility availability.
4.12 CONDEMNATION AND ASSESSMENTS. As of the Closing Date, Borrower has
not received notice of, and there are no pending or, to the best of
Borrower's knowledge, threatened, condemnation, assessment or similar
proceedings affecting or relating to any Facility, or any portion thereof,
any utilities, sewers, roadways or other public improvements.
4.13 ZONING. As of the Closing Date, [i] the use and operation of the
Facility as an assisted living facility is a permitted use under the
applicable zoning code; [ii] except as disclosed on Exhibit C hereto, no
special use permits, conditional use permits, variances, or exceptions have
been granted or are needed to develop or use each Facility as an assisted
living facility; and [iii] the Land is not located in any special districts
such as historical districts or overlay districts.
4.14 GOVERNMENT AUTHORIZATIONS. The Facility conforms to all Legal
Requirements. Exhibit C attached hereto contains a complete list of all
Government Authorizations required for the operation of the Facility. Except
as otherwise noted in Exhibit C, Borrower has obtained all Government
Authorizations required to commence operation of the Facility.
4.15 ENVIRONMENTAL MATTERS. Subject to the matters disclosed in the
Environmental Assessment, during the period of Borrower's ownership of the
Facility and, to the best of Borrower's knowledge after diligent inquiry, for
the period prior to Borrower's ownership of the Facility, [i] the Facility is
in compliance with all Environmental Laws; [ii] there were no releases of
Hazardous Materials on, from, or under the Facility, except in compliance
with all Environmental Laws; [iii] no Hazardous Materials have been, are or
will be used, generated, stored, or disposed of at the Facility, except in
compliance with all Environmental Laws; [iv] asbestos has not been and will
not be used in the construction of any Improvements; [v] no permit is or has
been required from the Environmental Protection Agency or any similar agency
or department of any state or local government for the use or maintenance of
any Improvements; and [vi] no summons, citation or inquiry has been made by
any such environmental unit, body or agency or a third
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party demanding any right of recovery for payment or reimbursement for
costs incurred under CERCLA or any other Environmental Laws and the Land is
not subject to the lien of any such agency. "Disposal" and "release" shall
have the meanings set forth in CERCLA.
4.16 LEASES AND CONTRACTS. To the best of Borrower's knowledge after due
inquiry, as of the Closing Date and except as disclosed on Exhibit D, there
are no leases or contracts (including but not limited to, insurance
contracts, maintenance contracts, construction contracts, employee benefit
plans, employment contracts, equipment leases, security agreements, architect
agreements, and management contracts) relating to any part of the ownership,
operation, possession, renovation, management or administration of the Land
or the Facility.
4.17 NO DEFAULT. As of the Closing Date, [i] there is no existing Event
of Default under the Loan Documents; and [ii] no event has occurred which,
with the giving of notice or the passage of time, or both, would constitute
or result in such an Event of Default.
4.18 ERISA. To the best of Borrower's knowledge after due inquiry, all
plans [as defined in Section 4021(a) of the Employee Retirement Income Security
Act of 1974 as amended or supplemented from time to time ("ERISA")] for which
Borrower is an "employer" or a "substantial employer" [as defined in
Sections 3(5) and 4001(a)(2) of ERISA, respectively] are in compliance with
ERISA and the regulations and published interpretations thereunder. To the
extent Borrower maintains a qualified defined benefit pension plan: [i] there
exists no accumulated funding deficiency; [ii] no reportable event and no
prohibited transaction has occurred; [iii] no lien has been filed or threatened
to be filed by the Pension Benefit Guaranty Corporation established pursuant to
Subtitle A of Title IV of ERISA; and [iv] Borrower has not been deemed to be a
substantial employer as of the Closing Date.
4.19 CHIEF EXECUTIVE OFFICE. Borrower maintains its chief executive
office and its books and records at the address set forth in the introductory
paragraph of this agreement. Borrower does not conduct any of its business
or operations other than at its chief executive office and at the Facility.
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4.20 OTHER NAME OR ENTITIES. Except as disclosed herein, none of
Borrower's business is conducted through any corporate subsidiary,
unincorporated association or other entity and Borrower has not, within the
six years preceding the date of this agreement [i] changed its name, [ii]
used any name other than the name stated at the beginning of this agreement,
or [iii] merged or consolidated with, or acquired any of the assets of, any
corporation or other business.
4.21 PRO FORMA STATEMENT. Borrower has delivered to Lender a true,
correct, and complete copy of the Pro Forma Statement. The Pro Forma
Statement shows Borrower's reasonable expectation of the most likely results
of Facility operations for the five year period commencing on the Closing
Date.
4.22 TAX STATUS. Borrower is taxable as a partnership under the Internal
Revenue Code and all applicable state tax laws.
4.23 EQUITY. Borrower is prepared and able to fund as needed the
Facility Costs and working capital for the Facility in an amount not less
than Borrower's Equity.
ARTICLE 5: AFFIRMATIVE COVENANTS
5.1 PERFORM OBLIGATIONS. Borrower shall perform all of its obligations
under the Loan Documents, the Government Authorizations, the Permitted
Exceptions, all Insurance Requirements and all Legal Requirements. Borrower
shall take all necessary action to obtain all Government Authorizations
required for the operation of the Facility as soon as possible after the
Effective Date.
5.2 INDEMNITY.
5.2.1 INDEMNIFICATION. Borrower shall indemnify, save harmless and defend
Lender, any successors or assigns of Lender, and Lender's and such
successor's and assign's directors, officers, employees and agents from and
against any and all liabilities, obligations, claims, damages (including
consequential damages), penalties, causes of action, costs and expenses
(including without limitation, reasonable attorneys' fees and court costs)
imposed upon or incurred by or asserted against Lender by reason of [i] its
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holding of a lien against any Facility; [ii] any accident or injury to
or death of persons or loss of or damage to or loss of the use of property
occurring on or about any Facility or any part thereof or the adjoining
sidewalks, curbs, vaults and vault spaces, if any, streets, alleys or ways;
[iii] any use, nonuse or condition of any Facility or any part thereof or the
adjoining sidewalks, curbs, vaults and vault spaces, if any, streets, alleys
or ways; [iv] performance of any labor or services or the furnishing of any
materials or other property in respect of any Facility or any part thereof
made or suffered to be made by or on behalf of Borrower; [v] any negligence
or tortious act on the part of Borrower or any of its respective agents,
contractors, lessees, licensees, or invitees; [vi] any work in connection
with any alterations, changes, new construction or demolition of any
Facility; or [vii] the consummation of the Loan and the execution and
delivery of the Loan Documents. Borrower will pay and save Lender harmless
against any and all liability with respect to any intangible personal
property tax or similar imposition of the State or any subdivision or
authority thereof now or hereafter in effect, to the extent that the same may
be payable by Lender in respect of the Mortgage or the Secured Obligations.
All amounts payable to Lender under this section shall be payable on written
demand and shall be deemed indebtedness secured by the Mortgage and any such
amounts which are not paid within 10 days after demand therefor by Lender
shall bear interest at the Default Rate. In case any action, suit or
proceeding is brought against Borrower by reason of any such occurrence,
Borrower shall use its best efforts to defend such action, suit or proceeding.
5.2.2 NOTICE OF CLAIM. Lender shall notify Borrower in writing of any
claim or action brought against Lender in which indemnity may be sought
against Borrower pursuant to this section. Such notice shall be given in
sufficient time to allow Borrower to defend or participate in such claim or
action, but the failure to give such notice in sufficient time shall not
constitute a defense hereunder nor in any way impair the obligations of
Borrower under this section unless the failure to give such notice precludes
Borrower's defense of any such action.
5.2.3 SURVIVAL OF COVENANTS. The covenants of Borrower contained in this
section shall remain in full force and effect after the termination of this
Agreement until the expiration of the
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period stated in the applicable statute of limitations during which a
claim or cause of action may be brought and payment in full or the
satisfaction of such claim or cause of action and of all expenses and charges
incurred by Lender relating to the enforcement of the provisions herein
specified.
5.2.4 REIMBURSEMENT OF EXPENSES. Unless prohibited by law, Borrower
hereby agrees to pay to Lender all of the reasonable fees, charges and
reasonable out-of-pocket expenses related to the Facility and requested by
Lender or required hereby, or incurred by Lender in enforcing the provisions
of this Agreement, which are not otherwise required to be paid by Borrower.
5.3 ENVIRONMENTAL INDEMNITY; AUDITS.
5.3.1 INDEMNIFICATION. Borrower shall defend, indemnify and hold harmless
Lender, any successors to Lender's interest in this Agreement or the other
Loan Documents, and Lender's and such successors' directors, officers,
employees, agents, and contractors from and against any losses, claims,
damages (including consequential damages), penalties, fines, liabilities,
costs (including cleanup and recovery costs), and expenses (including
expenses of litigation and reasonable attorneys' fees) incurred by Lender or
other indemnitee or assessed against any Facility by virtue of any claim or
lien by any governmental or quasi-governmental unit, body, or agency, or any
third party for clean-up costs or other costs pursuant to CERCLA or any other
Environmental Law. Borrower's indemnity shall survive the termination of
this Agreement. Provided, however, Borrower shall have no indemnity
obligation with respect to (i) Hazardous Materials that are first introduced
to any Facility subsequent to the date that Borrower's legal and equitable
ownership and occupancy of any Facility shall have fully terminated; or (ii)
Hazardous Materials introduced to any Facility by Lender, its successors or
assigns.
5.3.2 AUDITS. If at any time during the term of the Loan any governmental
authority notifies Borrower of a violation of Environmental Laws or Lender
reasonably believes that a Facility may violate Environmental Laws, Lender
may require one or more additional environmental audits of the Facility by a
qualified environmental consultant in such form, scope and substance as
specified by Lender, at Borrower's expense.
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5.4 MECHANIC'S LIENS. Borrower shall not suffer or permit any
mechanic's, materialmen or construction lien claims to be filed or otherwise
asserted against any Facility and will promptly discharge the same in case of
the filing of any lien claims or proceedings for the enforcement thereof;
provided, however, that Borrower shall have the right to contest in good
faith and with due diligence the validity of any such lien or claim upon
furnishing to the Title Company such security or indemnity as may be required
by Lender. If Borrower shall fail promptly either to discharge or to contest
claims asserted and give security or indemnity as required by Lender, then
Lender may, at its election (but shall not be required to), after 10 days'
notice to Borrower, procure the release and discharge of any such claim and
any judgment or decree thereon and may in its sole discretion effect any
settlement or compromise of the same, or may furnish such security or
indemnity to the Title Company, and any amounts so expended by Lender,
including premiums paid or security furnished in connection with the issuance
of any surety company bonds, shall be deemed to be an advance. In settling,
compromising, or discharging any claims or liens, Lender shall not be
required to inquire into the validity or amount of any such claim and shall
have no liability for its actions in connection therewith.
5.5 PERSONAL PROPERTY. All of the Personal Property will be kept free and
clear of all mortgages, conditional vendor's liens, equipment leases and all
liens, encumbrances, and security interests whatsoever, except for the
Permitted Liens. Borrower shall, from time to time upon Lender's reasonable
request, furnish Lender with satisfactory evidence of the foregoing,
including searches of applicable public records. Upon Lender's request,
Borrower shall execute and deliver a security agreement, financing statements
and other related instruments to evidence and perfect Lender's security
interest in the Personal Property. If Borrower fails to execute any such
instrument pursuant to Lender's request, Lender may execute such instrument
as Borrower's attorney-in-fact pursuant to the power of attorney made by
Borrower in the Mortgage.
5.6 PROCEEDINGS TO ENJOIN OR PREVENT CONSTRUCTION. If any proceedings are
filed seeking to enjoin or otherwise prevent or declare invalid or unlawful
the construction, occupancy, maintenance, or operation of the Improvements or
any portion thereof, Borrower will cause such proceedings to be vigorously
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contested in good faith, and in the event of an adverse ruling or
decision, prosecute all allowable appeals therefrom, and will, without
limiting the generality of the foregoing, resist the entry or seek the stay
of any temporary or permanent injunction that may be entered, and use its
best efforts to bring about a favorable and speedy disposition of all such
proceedings and any other proceedings.
5.7 DOCUMENTS AND INFORMATION.
5.7.1 FURNISH DOCUMENTS. Borrower shall periodically during the term of
the Loan deliver to Lender the Annual Financial Statements, Periodic
Financial Statements and other documents described on Exhibit F within the
specified time periods. With each delivery of Annual Financial Statements
and Periodic Financial Statements to Lender, Borrower shall also deliver to
Lender a certificate signed by a member of Borrower, an Annual Facility
Financial Report or Quarterly Facility Financial Report, as applicable, and a
Quarterly Facility Accounts Receivable Aging Report, all in the form of
Exhibit G. In addition, Borrower shall deliver to Lender the Annual Facility
Financial Report and a Quarterly Facility Accounts Receivable Aging Report
(based upon internal financial statements) within 60 days after the end of
each fiscal year.
5.7.2 FURNISH INFORMATION. Borrower shall [i] promptly supply Lender with
such information concerning its financial condition, affairs and property, as
Lender may reasonably request from time to time hereafter; [ii] promptly
notify Lender in writing of any condition or event that constitutes a breach
or event of default of any term, condition, warranty, representation, or
provisions of this Agreement or any other agreement, and of any material
adverse change in its financial condition; [iii] maintain a standard and
modern system of accounting; [iv] permit Lender or any of its agent or
representatives to have access to and to examine all of its books and records
regarding the financial condition of each Facility at any time or times
hereafter during business hours; and [v] permit Lender to copy and make
abstracts from any and all of said books and records.
5.7.3 FURTHER ASSURANCES AND INFORMATION. Borrower shall, on request of
Lender from time to time, execute, deliver, and furnish
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documents as may be necessary to fully consummate the transactions
contemplated under this Agreement. Within 15 days after a request from
Lender, Borrower shall provide to Lender such additional information
regarding Borrower, Borrower's financial condition or any Facility as Lender,
or any existing or proposed creditor of Lender, or any auditor or underwriter
of Lender, may require from time to time, including, without limitation, a
current Borrower's Certificate and Facility Financial Report in the form of
Exhibit G.
5.7.4 MATERIAL COMMUNICATIONS. Borrower shall transmit to Lender, within
five business days after receipt thereof, any material communication
affecting a Facility, the Loan Documents, the Legal Requirements or the
Government Authorizations, and Borrower will promptly respond to Lender's
inquiry with respect to such information. Borrower shall promptly notify
Lender in writing of any potential, threatened or existing litigation or
proceeding against, or investigation of, Borrower, Guarantor or any Facility
that may affect the right to operate the Facility or title to the Facility or
Lender's interest therein.
5.7.5 REQUIREMENTS FOR FINANCIAL STATEMENTS. Borrower shall meet the
following requirements in connection with the preparation of the financial
statements: [i] all audited financial statements shall be prepared in
accordance with generally accepted accounting principles consistently
applied; [ii] all unaudited financial statements shall be prepared in a
manner substantially consistent with prior audited and unaudited financial
statements submitted to Lender; [iii] all financial statements shall fairly
present the financial condition and performance for the relevant period in
all material respects; [iv] the financial statements shall include all notes
to the financial statements and a complete schedule of contingent liabilities
and transactions with Affiliates; and [v] the audited financial statements
shall contain an unqualified opinion.
5.8 COMPLIANCE WITH LAWS. Borrower shall comply with all Legal
Requirements and keep all Government Authorizations in full force and effect.
Borrower shall pay when due all taxes and governmental charges of every kind
and nature that are assessed or imposed upon Borrower at any time during the
term of the Loan, including, without limitation, all income, franchise,
capital stock, property,
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sales and use, business, intangible, employee withholding, and all taxes and
charges relating to Borrower's business and operations.
5.9 BROKER'S COMMISSION. Borrower shall indemnify Lender from claims of
brokers arising by the execution hereof or the consummation of the
transactions contemplated hereby and from expenses incurred by Lender in
connection with any such claims (including attorneys' fees).
5.10 EXISTENCE AND CHANGE IN OWNERSHIP. Borrower and Manager shall each
maintain its existence throughout the term of this Agreement. Any change in
the ownership of Borrower or Manager, directly or indirectly, shall require
Lender's prior written consent.
5.11 FINANCIAL COVENANTS. The defined terms used in this section are
defined in Section 5.11.1. The following financial covenants shall be met
throughout the term of the Loan:
5.11.1 DEFINITIONS.
(a) "Cash Flow" means the net income of Borrower as reflected on
the income statement of Borrower plus [i] the amount of the provision for
depreciation and amortization; plus [ii] the amount of the provision for
management fees; plus [iii] the amount of the provision for income taxes;
plus [iv] the amount of the provision for interest payments; minus [v] an
imputed management fee equal to 5% of revenues (net of contractual
allowances); and minus [vi] an imputed replacement reserve equal to $400.00
per unit at the Facility, per year.
(b) "Coverage Ratio" is the ratio of [i] Cash Flow for each
applicable period; [ii] to the principal and interest payments due pursuant
to the Note and all other debt service and lease payments relating to the
Facility for the applicable period.
(c) "Net Worth" means an amount equal to the total consolidated
fair market value of the tangible assets of the entity or person (excluding
goodwill and other intangible assets) minus the total consolidated
liabilities of the entity or person. The method of calculating Net Worth and
valuing business assets shall be consistent with the financial statements
provided to Lender prior to the Closing.
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5.11.2 COVERAGE RATIO. As of the date 12 months after the Closing
Date and thereafter throughout the term of the Loan, Borrower shall maintain
for each fiscal quarter a Coverage Ratio of not less than 1.25 to 1.0.
5.11.3 NET WORTH. Each Guarantor shall maintain a Net Worth of at least
$6,000,000.00.
5.11.4 CURRENT RATIO. Borrower shall maintain for each fiscal quarter a
ratio of current assets to current liabilities (but excluding the current
portion of long term debt) of not less than 1.1 to 1.0.
ARTICLE 6: NEGATIVE COVENANTS
Until the Secured Obligations shall have been performed in full,
Borrower covenants and agrees that Borrower shall not do any of the following
without the prior written consent of Lender:
6.1 NO DEBT. Borrower shall not create, incur, assume, or permit to
exist any indebtedness other than [i] trade debt incurred in the ordinary
course of Borrower's business; [ii] indebtedness relating to the Letter of
Credit; and [iii] indebtedness that is secured by any Permitted Lien.
6.2 O LIENS. Borrower shall not create, incur, or permit to exist any
lien, charge, encumbrance, easement or restriction upon the Facility or any
lien upon or pledge of any interest in Borrower, except for Permitted Liens.
6.3 NO GUARANTIES. Borrower shall not create, incur, assume, or permit
to exist any guarantee of any loan or other indebtedness except for the
endorsement of negotiable instruments for collection in the ordinary course
of business.
6.4 NO TRANSFER OF FACILITY. Borrower shall not sell, lease, mortgage,
convey or otherwise transfer any legal or equitable interest in any Facility
except for [i] transfers made in connection with any Permitted Lien; and [ii]
residency agreements with the residents of the Facility.
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6.5 NO DISSOLUTION. Borrower and Manager shall not dissolve,
liquidate, merge, consolidate or terminate its existence or sell, assign,
lease, or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired).
6.6 NO CHANGE IN MANAGEMENT. No material change shall occur in the
executive management of Borrower or of Manager or in the management of the
Facility. The Manager shall remain the manager of the Facility.
6.7 NO INVESTMENTS. Borrower shall not purchase or otherwise acquire,
hold, or invest in securities (whether capital stock or instruments
evidencing indebtedness) of or make loans or advances to any person,
including, without limitation, any Guarantor, any Affiliate or any
shareholder, member or partner of Borrower or any Affiliate, except for cash
balances temporarily invested in short-term or money market securities.
6.8 CONTRACTS. Borrower shall not execute or modify any material
contracts or agreements with respect to any Facility. Contracts made in the
ordinary course of business and in an amount less than $50,000.00 shall not
be considered "material" for purposes of this paragraph.
6.9 SUBORDINATION OF PAYMENTS. After the occurrence of an Event of
Default and until such Event of Default is cured, Borrower shall not make any
payments or distributions (including salary, bonuses, fees, principal,
interest, dividends, liquidating distributions, management fees, cash flow
distributions, or lease payments) to Guarantor, Manager, any Affiliate or any
shareholder, member or partner of Borrower, Guarantor or any Affiliate.
6.10 CHANGE OF LOCATION OR NAME. Borrower shall not change any of the
following: [i] the location of the principal place of business or chief
executive office of Borrower, or any office where any of Borrower's books and
records are maintained; or [ii] the name under which Borrower conducts any of
its business or operations. Borrower can make such change after 15 days
notice to Lender and the execution and filing of UCC statements and other
documents reasonably requested by Lender.
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ARTICLE 7: DEFAULT AND REMEDIES
7.1 EVENT OF DEFAULT. Any one or more of the following events shall
constitute an "Event of Default" hereunder:
7.1.1 Borrower fails to pay any installment on the Note or any other
monetary obligation payable by Borrower under the Loan Documents within 10
days after such payment is due.
7.1.2 Failure of Borrower or Manager (where applicable) to comply with any
covenant set forth in Section 5.10, Section 5.11, Article 6 or Section 9.1 of
this agreement.
7.1.3 Borrower fails to observe and perform any covenant, condition or
agreement under the Loan Documents to be performed by Borrower and [i]
continuance of such failure for a period of 30 days after written notice
thereof is given to the Borrower by the Lender; or [ii] if, by reason of the
nature of such default the same cannot be remedied within the said 30 days,
Borrower fails to proceed with reasonable diligence (reasonably satisfactory
to Lender) after receipt of the notice to cure the same or, in any event,
fails to cure such default within 60 days after receipt of the notice. The
foregoing notice and cure provisions do not apply to any Event of Default
otherwise specifically described in any other subsection of Section 7.1.
7.1.4 [i] The filing by Borrower of a petition under 11 U.S.C. or the
commencement of a bankruptcy or similar proceeding by Borrower; [ii] the
failure by Borrower within 60 days to dismiss any involuntary bankruptcy
petition or other commencement of a bankruptcy, reorganization or similar
proceeding against Borrower or to lift or stay any execution, garnishment or
attachment of the Facility; [iii] the entry of an order for relief under 11
U.S.C. in respect of Borrower; [iv] assignment by Borrower for the benefit of
its creditors; [v] the entry by Borrower into an agreement of composition
with its creditors; [vi] the approval by a court of competent jurisdiction of
a petition applicable to Borrower in any proceeding for its reorganization
instituted under the provisions of any state or federal bankruptcy,
insolvency, or similar laws; or [vii] appointment by final order, judgment or
decree of a court of competent jurisdiction of a receiver of the whole or any
substantial part of the properties of Borrower (provided such
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receiver shall not have been removed or discharged within 60 days of
the date of his qualification).
7.1.5 [i] Any receiver, administrator, custodian or other person takes
possession or control of all or part of any Facility and continues in
possession for 60 days; [ii] any writ against all or part of any Facility is
not released within 60 days; [iii] any judgment in excess of $100,000 is
rendered or proceedings are instituted against all or part of any Facility or
Borrower which affect all or part of any Facility and which is undismissed
for 60 days (except as otherwise provided in this section); [iv] all or a
substantial part of the assets of Borrower are attached, seized, subjected to
a writ or distress warrant, or are levied upon, or come into the possession
of any receiver, trustee, custodian, or assignee for the benefit of creditors
and are not released within 60 days; [v] Borrower is enjoined, restrained, or
in any way prevented by court order, or any proceeding is filed or commenced
seeking to enjoin, restrain, or in any way prevent Borrower from conducting
all or a substantial part of its business or affairs and such proceeding is
not released within 60 days; or [vi] if a notice of lien, levy, or assessment
is filed of record with respect to all or any part of the property of
Borrower and is not dismissed within 30 days.
7.1.6 Any representation or warranty made by Borrower or Guarantor in the
Loan Documents, Guaranty, any guaranty of or other security for the Secured
Obligations, or any report, certificate, application, financial statement or
other instrument furnished by Borrower or Guarantor pursuant hereto or
thereto shall prove to be false, misleading or incorrect in any material
respect as of the date made.
7.1.7 Borrower vacates or abandons the Facility or any material part
thereof or ceases to do business or ceases to exist for any reason whatever.
7.1.8 Borrower, any Guarantor or any Affiliate defaults on any
indebtedness or obligation to Lender or any agreement with Lender, or
Borrower defaults on any Material Obligation, and any applicable grace or
cure period with respect to default under such indebtedness, obligation or
agreement expires without such default having been cured. This provision
applies to all such
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indebtedness, obligations and agreements as they may be amended,
modified, extended, or renewed from time to time.
7.1.9 Any guarantor of the Secured Obligations dissolves, terminates, is
adjudicated incompetent, files a petition in bankruptcy, or is adjudicated
insolvent under 11 U.S.C. or any other insolvency law, or fails to comply
with any covenant or requirement set forth in the guaranty of such guarantor,
and Borrower fails within 30 days to deliver to Lender a substitute guaranty
or other collateral reasonably satisfactory to Lender. Upon the death or
incompetency of any guarantor of the Secured Obligations, the current amount
of the "Guaranteed Credit" as defined in the Guaranty of the deceased or
incompetent guarantor shall be immediately due and payable and Lender shall
have the right to file a claim for such amount against the estate of the
deceased or incompetent guarantor, unless Borrower delivers to Lender a
substitute guaranty or other collateral reasonably satisfactory to Lender
within 30 days after the death or adjudication of incompetency. If Borrower
provides evidence satisfactory to Lender that the remaining guarantors have a
combined net worth of at least Eighteen Million Dollars ($18,000,000.00),
this shall be deemed to be satisfactory substitute collateral and Lender
shall not have a claim against the deceased guarantor's estate or against the
incompetent guarantor.
7.1.10 The occurrence of any change in the legal or equitable ownership of
all or part of any Facility, or any interest therein, or of Borrower or
Manager, directly or indirectly, without the prior written consent of Lender.
7.1.11 The license for the Facility, or any other Government Authorization,
is cancelled, suspended or otherwise invalidated or there is a reduction in
the number of licensed units at the Facility in excess of three units.
7.2 REMEDIES ON DEFAULT. Whenever any Event of Default occurs, Lender may,
in addition to any other remedies under the Loan Documents, at law or in
equity, take any one or more of the following remedial steps concurrently or
successively:
7.2.1 ACCELERATION. Lender may declare the Secured Obligations to be
immediately due and payable, without presentment of any kind,
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demand, notice of dishonor, protest, or other notice of any kind, all
of which Borrower hereby waives.
7.2.2 OTHER REMEDIES. Lender may take whatever action at law or in equity
as may appear necessary or desirable to collect any monies then due and/or
thereafter to become due, or to enforce performance of the Secured
Obligations.
7.2.3 WAIVER. Without waiving any prior or subsequent Event of Default,
Lender may waive any Event of Default or, with or without waiving any Event
of Default, remedy any default.
7.2.4 TERMINATE DISBURSEMENT. Lender may terminate its obligation to
disburse Loan proceeds.
7.2.5 COMPLETE CONSTRUCTION. Lender may enter and take possession of the
Land and Facility without terminating the Mortgage, and complete construction
of the Improvements (or any part thereof) and perform the obligations of
Borrower under the Loan Documents. Without limiting the generality of the
foregoing and for the purposes aforesaid, Borrower hereby appoints Lender its
lawful attorney-in-fact with full power to do any of the following: [i]
complete construction and equipping of the Improvements in the name of
Borrower; [ii] use unadvanced funds remaining under the Note, or funds that
may be reserved, escrowed, or set aside for any purposes hereunder at any
time, or to advance funds in excess of the Loan Amount, to complete the
Improvements; [iii] make changes in the Plans and Specifications that shall
be necessary or desirable to complete the Improvements in substantially the
manner contemplated by the Plans and Specifications; [iv] retain or employ
new general contractors, subcontractors, architects, engineers, and
inspectors as shall be required for said purposes; [v] pay, settle, or
compromise all existing bills and claims, which may be liens or security
interests, or to avoid such bills and claims becoming liens against the
Facility or security interest against fixtures or equipment, or as may be
necessary or desirable for the completion of the construction and equipping
of the Improvements or for the clearance of title; [vi] execute all
applications and certificates, in the name of Borrower, that may be required
by any of the Construction Documents; [vii] do any and every act that
Borrower might do in its own behalf, to prosecute and defend all actions or
proceedings in connection with the Improvements; and [viii] to execute,
deliver and file all applications and other documents and take any and all
actions necessary to transfer the operations of
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the Facility to Lender or Lender's designee. This power of attorney is
a power coupled with an interest and cannot be revoked.
ARTICLE 8: MISCELLANEOUS
8.1 ADVANCES BY LENDER. At any time and from time to time, Lender may incur
and/or pay and/or advance costs or expenses: (i) incurred or advanced by
Lender which Lender is authorized or has the right (but not necessarily the
obligation) to incur or may incur under any Loan Document or any law; (ii) of
whatever nature incurred or advanced by Lender in exercising any right or
remedy provided under any Loan Document or in taking any action which Lender
is authorized to take under any Loan Document; (iii) required to be paid by
Borrower under any Loan Document, but which Borrower fails to pay within 10
days after demand; or (iv) any and all costs and expenses from which Borrower
is required to hold Lender harmless under any Loan Document, but from which
Borrower fails to hold Lender harmless. Any costs, expenses, or advances
incurred or paid by Lender shall become part of the Loan and, upon demand,
shall be paid to Lender together with interest thereon at the Default Rate
from the date of disbursement by Lender. Payment of such costs, expenses, or
advances shall be secured by the Mortgage.
8.2 POWER OF ATTORNEY. To the extent permitted by law, Borrower hereby
irrevocably and unconditionally appoints Lender, or Lender's authorized
officer, agent, employee or designee, as Borrower's true and lawful
attorney-in-fact, to act for Borrower in Borrower's name, place, and stead,
to execute, deliver and file all applications and any and all other necessary
documents or things to effect the issuance, transfer, reinstatement, renewal
and/or extension of any and all licenses and other Governmental
Authorizations issued to Borrower or applied for by Borrower in connection
with Borrower's operation of each Facility, to permit any transferee to
operate each Facility under the Governmental Authorizations, and to do any
and all other acts incidental to any of the foregoing. Borrower irrevocably
and unconditionally grants to Lender as its attorney-in-fact full power and
authority to do and perform every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Borrower might or could
do if personally present or acting, with full power of substitution, hereby
ratifying and confirming all that said attorney shall lawfully do or cause to
be done by virtue hereof. This power of attorney is coupled with an interest
and is
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<PAGE>
irrevocable prior to the full performance of the Secured Obligations.
Except in the case of an emergency, Lender shall give Borrower three business
days prior written notice before acting on behalf of Borrower pursuant to
this power of attorney.
8.3 CONSTRUCTION OF RIGHTS AND REMEDIES AND WAIVER OF NOTICE AND CONSENT.
8.3.1 APPLICABILITY. The provisions of this Section 8.3 shall apply to
all rights and remedies provided by any Loan Document or by law or equity.
8.3.2 WAIVER OF NOTICES AND CONSENT TO REMEDIES. Unless otherwise
expressly provided herein, any right or remedy may be pursued without notice
to or further consent of Borrower, both of which Borrower waives.
8.3.3 CUMULATIVE RIGHTS. Each right or remedy under the Loan Documents is
distinct from but cumulative to each other right or remedy and may be
exercised independently of, concurrently with, or successively to any other
rights and remedies.
8.3.4 EXTENSION OR MODIFICATION OF LOAN. No extension of time for or
modification of amortization of the Loan shall release the liability or bar
the availability of any right or remedy against Borrower or any successor in
interest, and Lender shall not be required to commence proceedings against
Borrower or any successor or to extend time for payment or otherwise to
modify amortization of the Loan secured by this Agreement by reason of any
demand by Borrower or any successor.
8.3.5 RIGHT TO SELECT SECURITY. Lender has the right to proceed at its
election against all security or against any item or items of such security
from time to time, and no action against any item or items of security shall
bar subsequent actions against any item or items of security.
8.3.6 FORBEARANCE NOT A WAIVER. No forbearance in exercising any right or
remedy shall operate as a waiver thereof; no forbearance in exercising any
right or remedy on any one or more occasion shall operate as a waiver thereof
on any further occasion; and no single or partial exercise of any right or
remedy shall preclude any other exercise thereof or the exercise of any other
right or remedy.
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<PAGE>
8.3.7 NO WAIVER. Failure by Lender to insist upon the strict
performance of any of the covenants and agreements herein set forth or to
exercise any rights or remedies upon default by Borrower hereunder shall not
be considered or taken as a waiver or relinquishment for the future of the
right to insist upon and to enforce by mandamus or other appropriate legal or
equitable remedy strict compliance by Borrower with all of the covenants and
conditions hereof, or of the rights to exercise any such rights or remedies,
if such default by Borrower is continued or repeated, or of the right to
recover possession of any Facility by reason thereof. To the extent
permitted by law, any two or more of such rights or remedies may be exercised
at the same time.
8.3.8 NO CONTINUING WAIVERS. If any covenant or agreement contained in
the Loan Documents is breached by Borrower and thereafter waived by Lender,
such waiver shall be limited to the particular breach so waived and shall not
be deemed to waive any other breach hereunder. No waiver shall be binding
unless it is in writing and signed by Lender. No course of dealing between
Lender and Borrower, nor any delay nor omission on the part of Lender, in
exercising any rights under the Loan Documents shall operate as a waiver.
8.3.9 APPROVAL NOT A WAIVER. Lender's review and approval of any
contracts relating to a Facility shall not constitute a waiver by Lender of
any of the terms or requirements of the Loan Documents which may conflict
with any provision of any such contracts.
8.3.10 NO RELEASE. Borrower and any other person now or hereafter
obligated for the payment or performance of all or any part of the Note shall
not be released from paying and performing under the Note, and the lien of
the Mortgage shall not be affected by reason of [i] the failure of Lender to
comply with any request of Borrower (or of any other person so obligated), to
take action to foreclose the Mortgage or otherwise enforce any of the
provisions of the Mortgage or of any of the Secured Obligations, or [ii] the
release, regardless of consideration, of the obligations of any person liable
for payment or performance of the Note, or any part thereof, or [iii] any
agreement or stipulation extending the time of payment or modifying the terms
of the Note, and in the event of such agreement or stipulation, Borrower and
all such other persons shall continue to be liable under such documents, as
amended by such agreement or stipulation, unless expressly released and
discharged in writing by Lender.
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<PAGE>
8.3.11 WAIVER OF HOMESTEAD, APPRAISAL AND EXEMPTION. Borrower, for
itself and its successors and assigns, hereby irrevocably waives and
releases, to the extent permitted by law, and whether now or hereafter in
force, [i] the benefit of any and all valuation and appraisement laws, [ii]
any right of redemption after the date of any sale of any Facility upon
foreclosure, whether statutory or otherwise, in respect of any Facility, [iii]
any applicable homestead or dower laws, and [iv] all exemption laws
whatsoever and all moratoriums, extensions or stay laws or rules, or orders
of court in the nature of any one or more of them.
8.4 ASSIGNMENT.
8.4.1 ASSIGNMENT BY LENDER. Lender may assign, negotiate, pledge, or
transfer this Agreement, the Note, the Mortgage, and all other Loan Documents
to any creditors to secure a loan from such creditors to Lender and, in case
of such assignment, the rights and remedies of Lender in connection with the
interest and assigns shall be enforceable against Borrower by such creditors
with the same force and effect and to the same extent as the same would have
been enforceable by Lender but for such assignment. Lender shall have the
right to sell participation interests in the Loan provided that Lender shall
be designated the agent for all participants in the Loan.
8.4.2 ASSIGNMENT BY BORROWER. Borrower shall not assign or attempt to
assign its rights nor delegate its obligations under this Agreement.
8.5 NOTICES. All notices, demands, requests, and consents (hereinafter
"notices") given pursuant to the terms of this Agreement shall be in writing,
shall be addressed to the addresses set forth in the introductory paragraph
of this Agreement and shall be served by [i] personal delivery; [ii] United
States certified mail, return receipt requested, postage prepaid; or [iii]
nationally recognized overnight courier. All notices shall be deemed to be
given upon the earlier of actual receipt or three days after deposit in the
United States mail or one business day after deposit with the overnight
courier. Any notices meeting the requirements of this section shall be
effective, regardless of whether or not actually received. Lender and
Borrower may change their notice address at any time by giving the other
party notice of such change.
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<PAGE>
8.6 ENTIRE AGREEMENT. This Agreement and the other Loan Documents
constitute the entire agreement between Borrower and Lender. No
representations, warranties, and agreements have been made by Lender except
as set forth in this Agreement. If there is any conflict between the terms
and provisions of the Commitment and the terms of this Agreement, this
Agreement shall govern.
8.7 SEVERABILITY. If any term or provision of this Agreement is held or
deemed by Lender to be invalid or unenforceable, such holding shall not
affect the remainder of this Agreement and the same shall remain in full
force and effect.
8.8 CAPTIONS AND HEADINGS. The captions and headings are inserted only as a
matter of convenience and for reference and in no way define, limit or
describe the scope of this Agreement or the intent of any provision thereof.
8.9 GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State.
8.10 BINDING EFFECT. This Agreement will be binding upon and inure to the
benefit of the heirs, successors, personal representatives, and permitted
assigns of Lender and Borrower.
8.11 MODIFICATION. This Agreement may only be modified by a writing signed
by both Lender and Borrower. All references to this Agreement, whether in
this Agreement or in any other document or instrument, shall be deemed to
incorporate all amendments, modifications, and renewals of this Agreement
made after the date hereof. If Borrower requests Lender's consent to any
change in ownership, merger or consolidation of Borrower or Guarantor, any
assumption of the Loan, or any modification of the Loan Documents, Borrower
shall provide Lender all relevant information and documents sufficient to
enable Lender to evaluate the request. In connection with any such request,
Borrower shall pay to Lender a fee in the amount of $2,500.00 and shall pay
all of Lender's reasonable attorney's fees and expenses and other reasonable
out-of-pocket expenses incurred in connection with Lender's evaluation of
Borrower's request, the preparation of any documents and amendments, the
subsequent amendment of any documents between Lender and its collateral pool
lenders (if applicable), and all related matters.
- 36 -
<PAGE>
8.12 CONSTRUCTION OF AGREEMENT. This Agreement has been prepared
by Lender and its professional advisors and reviewed by Borrower and its
professional advisors. Lender, Borrower and their advisors believe that this
Agreement is the product of all their efforts, it expresses their agreement,
and that it shall not be interpreted in favor of either Lender or Borrower or
against either Lender or Borrower merely because of their efforts in
preparing it.
8.13 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original hereof.
8.14 NO THIRD-PARTY BENEFICIARY RIGHTS. No person not a party to this
Agreement shall have or enjoy any rights hereunder and all third-party
beneficiary rights are expressly negated. Without limiting the generality of
the foregoing, no one other than Borrower shall have any rights to obtain or
compel a disbursement of proceeds of the Loan hereunder.
8.15 LENDER'S AUTHORITY TO FURNISH COPIES OF LOAN DOCUMENTS. Lender may
exhibit or furnish the Loan Documents or copies thereof to any potential
transferee of the Secured Obligations (whether such transfer is absolute or
collateral), to any governmental or regulatory authority in connection with
any legal, administrative or regulatory proceedings requiring the disclosure
of the terms of the Loan Documents, to Lender's attorneys, auditors and
underwriters, and to any other person or entity for which there is a
legitimate business purpose for such disclosure.
8.16 PERMITTED CONTESTS. Borrower, on its own or on Lender's behalf (or
in Lender's name), but at Borrower's expense, may contest, by appropriate
legal proceedings conducted in good faith and with due diligence, the amount
or validity or application, in whole or in part, of any Imposition (as
defined in the Mortgage) or any legal requirement or insurance requirement or
any lien, attachment, levy, encumbrance, charge or claim provided that [i] in
the case of an unpaid Imposition, lien, attachment, levy, encumbrance, charge
or claim, the commencement and continuation of such proceedings shall suspend
the collection thereof from Lender and from the Facility, [ii] the Facility
or any part thereof or interest therein would not be in any immediate danger
of being sold, forfeited, attached or lost, [iii] in the case of a legal
requirement, Lender would not be in any immediate danger of civil or criminal
liability for failure to comply therewith pending the outcome of such
proceedings, [iv] in the event that any such
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<PAGE>
contest shall involve a sum of money or potential loss in excess of
$50,000.00, the Borrower shall deliver to Lender and its counsel an opinion
of Borrower's counsel to the effect set forth in clauses [i], [ii] and [iii],
to the extent applicable; [v] in the case of a legal requirement and/or an
Imposition, lien, encumbrance or charge, Borrower shall give such reasonable
security as may be demanded by Lender to insure ultimate payment of the same
and to prevent any sale or forfeiture of the Facility or any part thereof by
reason of such non-payment or non-compliance, [vi] in the case of an
insurance requirement, the coverage required by the Mortgage shall be
maintained, [vii] in the case of a mechanic's or materialmen lien, the
requirements of Section 5.4 shall be satisfied, and [viii] if such contest be
finally resolved against Lender or Borrower, Borrower shall promptly pay the
amount required to be paid, together with all interest and penalties accrued
thereon, or comply with the applicable legal requirement or insurance
requirement. Lender, at Borrower's expense, shall execute and deliver to
Borrower such authorizations and other documents as may reasonably be
required in any such contest, and, if reasonably requested by Borrower or if
Lender so desires, Lender shall join as a party therein. Borrower shall
indemnify and save Lender harmless against any liability, cost or expense of
any kind that may be imposed upon Lender in connection with any such contest
and any loss resulting therefrom.
8.17 LENDER MERELY A LENDER.
8.17.1 NO AGENCY. LENDER IS NOT AND WILL NOT BE IN ANY WAY THE AGENT FOR
OR TRUSTEE OF BORROWER. LENDER DOES NOT INTEND TO ACT IN ANY WAY FOR OR ON
BEHALF OF BORROWER IN DISBURSING THE PROCEEDS OF THE LOAN. LENDER'S PURPOSE
IN MAKING THE REQUIREMENTS SET FORTH IN THIS AGREEMENT IS TO PROTECT THE
VALIDITY AND PRIORITY OF ITS MORTGAGE AND THE VALUE OF ITS SECURITY. LENDER
DOES NOT INTEND TO BE AND IS NOT AND WILL NOT BE RESPONSIBLE FOR THE
COMPLETION OF ANY IMPROVEMENTS ERECTED OR TO BE ERECTED UPON THE LAND; THE
PAYMENT OF BILLS OR ANY OTHER DETAILS IN CONNECTION WITH THE LAND AND
IMPROVEMENTS; ANY PLANS AND SPECIFICATIONS PREPARED IN CONNECTION WITH THE
LAND AND IMPROVEMENTS; OR BORROWER'S RELATIONS AND CONTRACTS WITH ANY
CONTRACTORS, SUBCONTRACTORS, MATERIALMEN, OR LABORERS PERFORMING WORK OR
SUPPLYING MATERIALS FOR THE LAND AND IMPROVEMENTS.
8.17.2 NO OBLIGATION TO PAY. THE MORTGAGE AND THIS AGREEMENT ARE NOT TO BE
CONSTRUED BY BORROWER OR ANYONE FURNISHING LABOR,
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<PAGE>
MATERIALS, OR ANY OTHER WORK OR PRODUCT FOR IMPROVING THE LAND AS AN
AGREEMENT UPON THE PART OF LENDER TO ASSURE THAT ANYONE WILL BE PAID FOR
FURNISHING SUCH LABOR, MATERIALS, OR ANY OTHER WORK OR PRODUCT. BORROWER
SHALL BE SOLELY RESPONSIBLE FOR SUCH PAYMENTS.
8.17.3 NO RESPONSIBILITY FOR CONSTRUCTION. LENDER IS NOT RESPONSIBLE FOR
CONSTRUCTION OF THE IMPROVEMENTS. NOTWITHSTANDING INSPECTION OF THE LAND AND
THE IMPROVEMENTS, LENDER AND LENDER'S INSPECTOR ASSUME NO RESPONSIBILITY FOR
THE QUALITY OF CONSTRUCTION OR WORKMANSHIP OR FOR THE ARCHITECTURAL OR
STRUCTURAL SOUNDNESS OF ANY IMPROVEMENTS OR FOR THE ADHERENCE TO OR APPROVAL
OF ANY PLANS AND SPECIFICATIONS IN CONNECTION THEREWITH OR FOR ANY
IMPROVEMENTS.
ARTICLE 9: SECURITY
9.1 LETTER OF CREDIT.
9.1.1 TERMS OF LETTER OF CREDIT. As partial security for the performance
of its obligations under the Loan Documents, Borrower shall maintain the
Letter of Credit in favor of Lender until the Secured Obligations are
performed in full. The Letter of Credit shall permit partial draws and shall
permit drawing upon presentation of a draft drawn on the Issuer and a
certificate signed by Lender stating that an Event of Default has occurred.
The Letter of Credit shall be for an initial term of one year and shall be
automatically renewed annually for successive terms of at least one year
unless the Lender receives notice from the Issuer, by certified mail, at
least 60 days prior to the expiry date then in effect that the Letter of
Credit will not be extended for an additional one-year period.
9.1.2 REPLACEMENT LETTER OF CREDIT. Borrower shall provide a replacement
Letter of Credit that satisfies the requirements of Section 9.1.1 from an
Issuer acceptable to Lender within 30 days after the occurrence of [i]
Lender's receipt of notice from the Issuer that the Letter of Credit will not
be extended for an additional one-year period; or [ii] Lender gives notice to
Borrower that the Lace Financial Service rating for the Issuer is less than a
"C+"; or [iii]Lender gives notice to Borrower that Issuer admits in writing
its inability to pay its debts generally as they become due, files a petition
in bankruptcy or petitions to take advantage of any insolvency act, makes an
assignment for the benefit of its creditors, consents to the appointment of a
receiver of itself or of the whole or any substantial part of its property,
or files a
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<PAGE>
petition or answer seeking reorganization or arrangement under the
federal bankruptcy laws or any other applicable law or statute of the United
States of America or any state thereof. Borrower's failure to comply with
the requirements of this section shall be an immediate Event of Default under
the Loan Documents without any notice, cure or grace period.
9.1.3 DRAWS. Lender may draw under the Letter of Credit upon the
occurrence of an Event of Default under any of the Loan Documents. Any such
draw may be in whole or in part and, if a partial draw, may be made from time
to time after the occurrence of an Event of Default and while it is
continuing. Any such draw shall not cure an Event of Default. Lender shall
have the right, but not the obligation, to apply all or any portion of the
proceeds from the Letter of Credit to pay all or any portion of [a] the
outstanding principal balance of the Loan, whether matured or unmatured; plus
[b] all accrued unpaid interest; plus [c] any prepayment fee payable under
the Note; plus [d] all other obligations, charges, costs, and expenses
payable by Borrower under the Loan Documents; plus [e] all reasonable
expenses and costs incurred by Lender in administering, enforcing or
preserving Lender's rights under the Note, Loan Agreement, Letter of Credit,
Mortgage, or any other security, including but not limited to, [i] the fees,
expenses, and costs of any litigation, receivership, administrative,
bankruptcy, insolvency, or other similar proceeding; [ii] attorney,
paralegal, consulting and witness fees and disbursements; and [iii] the
expenses, including but not limited to, lodging, meals and transportation, of
Lender and its employees, agents, attorneys, and witnesses in preparing for
litigation, receivership, administrative, bankruptcy, insolvency, or similar
proceedings and attendance at hearings, depositions, and trials in connection
therewith.
With respect to any portion of the Letter of Credit proceeds that is
not applied to payment of the Secured Obligations, Lender shall have the
option to either [i] deposit the proceeds into an interest-bearing account
with a financial institution chosen by Lender ("LC Account"); or [ii] require
Borrower to obtain a replacement Letter of Credit satisfactory to Lender and
Borrower may use the proceeds to secure Borrower's reimbursement obligation
for the Letter of Credit. All interest accruing on the LC Account shall be
paid to Lender and may, from time to time, be withdrawn from the LC Account
by Lender and applied to payment of Secured Obligations. At any time and
from time to time until the Secured
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<PAGE>
Obligations are performed in full, Lender may apply all or any portion
of the funds held in the LC Account to payment of all or any portion of the
Secured Obligations. Within 10 days after any such payment from the LC
Account, Lender shall give written notice to Borrower describing the amount
of such payment and how it was applied to the Secured Obligations.
Upon the occurrence of either [i] Lender's receipt of a replacement
Letter of Credit that satisfies the requirements of Section 9.1.1 and is
issued by an Issuer acceptable to Lender; or [ii] the date on which the
Secured Obligations are performed in full, Lender shall pay the principal
balance of the LC Account (including any accrued interest) to Borrower.
9.1.4 PARTIAL DRAWS. Upon the occurrence of a monetary Event of Default
under any of the Loan Documents, Lender may, at its option, make a partial
draw on the Letter of Credit in an amount not to exceed the amount of
Borrower's monetary obligations under the Loan Documents then past due. If
Lender then applies the proceeds from such partial draw on the Letter of
Credit to payment of all or any portion of Borrower's monetary obligations
then past due, Borrower shall, within 10 days after notice from Lender of
such partial draw and payment, cause the amount of the Letter of Credit to be
reinstated to the amount in effect prior to such partial draw. Borrower's
failure to comply with the requirements of this section shall be an immediate
Event of Default under the Loan Documents without any notice, cure or grace
period. Lender's rights under this Section 9.1.4 are in addition to, and not
in limitation of, Lender's rights under Section 9.1.3.
9.1.5 SUBSTITUTE LETTER OF CREDIT. Borrower may, from time to time,
deliver to Lender a substitute Letter of Credit meeting the requirements of
this Agreement and issued by an Issuer acceptable to Lender. Upon Lender's
approval of the substitute Letter of Credit, Lender shall release the
previous Letter of Credit to the Borrower.
9.2 GUARANTY. The Loan is guaranteed by the Guarantor pursuant to the
Guaranty.
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<PAGE>
IN WITNESS WHEREOF, Lender and Borrower have executed and
delivered this Agreement effective as of the Effective Date.
HEALTH CARE REIT, INC.
By:____________________________
Title:____________________
KAPSON ROCHESTER MANOR, LLC
By:____________________________
Glenn Kaplan, Member
Tax I.D. No. __________________
STATE OF OHIO )
) SS:
COUNTY OF LUCAS )
On the ____ day of _____________, 1996 before me personally came
________________________________________, to me known, who, being by me duly
sworn, did depose and say that he resides in ________________________________;
that he is the ___________________ of Health Care REIT, Inc., the corporation
described in and which executed the above instrument; and that he signed his
name thereto by order of the Board of Directors of said corporation.
_______________________________
Notary Public
My Commission Expires:___________________ [SEAL]
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<PAGE>
STATE OF NEW YORK )
) SS:
COUNTY OF NASSAU )
On the ____ day of March, 1996 before me personally came Glenn
Kaplan, to me known, who, being by me duly sworn, did depose and say that he
resides in Woodbury, New York; that he is a member of Kapson Rochester Manor,
LLC, the limited liability company described in and which executed the above
instrument; and that he signed his name thereto by order of the members of
said company.
_______________________________
Notary Public
My Commission Expires:___________________ [SEAL]
ACKNOWLEDGMENT OF MANAGER
The undersigned Manager hereby consents to the foregoing Loan
Agreement between Kapson Rochester East, LLC and Health Care REIT, Inc. and
agrees to be bound by all of the terms and provisions of the Loan Agreement
applicable to Manager, including, without limitation, Sections 5.10, 6.5, 6.6
and 6.9 and Article 10 of the Loan Agreement.
SENIOR QUARTERS MANAGEMENT CORP.
By:____________________________
Title:__________________
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<PAGE>
STATE OF NEW YORK )
) SS:
COUNTY OF NASSAU )
On the ____ day of March, 1996 before me personally came
____________, to me known, who, being by me duly sworn, did depose and say
that he resides in Woodbury, New York; that he is the ______________________
of Senior Quarters Management Corp., the corporation described in and which
executed the above instrument; and that he signed his name thereto by order
of the Board of Directors of said corporation.
_______________________________
Notary Public
My Commission Expires:___________________ [SEAL]
THIS INSTRUMENT PREPARED BY:
DIANE V. DAVIS, ESQ.
SHUMAKER, LOOP & KENDRICK
1000 JACKSON STREET
TOLEDO, OHIO 43624
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<PAGE>
EXHIBIT A: LEGAL DESCRIPTION
<PAGE>
EXHIBIT B: PERMITTED EXCEPTIONS
1. Taxes and assessments not yet due and payable.
[TO BE COMPLETED]
<PAGE>
EXHIBIT C: GOVERNMENT AUTHORIZATIONS
[BORROWER TO PROVIDE]
<PAGE>
EXHIBIT D: LIST OF LEASES AND CONTRACTS
[BORROWER TO PROVIDE]
<PAGE>
EXHIBIT E: PENDING LITIGATION
NONE
<PAGE>
EXHIBIT F: DOCUMENTS TO BE DELIVERED
Borrower shall deliver each of the following documents to Lender no
later than the date specified for each document:
1. Annual Financial Statements of Borrower (audited financial
statement of Borrower and audited operating statement for each Facility)
- -within 90 days after the end of each fiscal year.
2. Periodic Financial Statements of Borrower and Facility - within
45 days after the end of each quarter.
3. Borrower's Certificate and Facility Financial Report
(Exhibit G) - with each delivery of Borrower's financial statements.
4. Annual Financial Statements of Guarantor - within 30 days after
the end of each fiscal year.
5. Periodic Financial Statements of Guarantor - within 10 days
after Lender's request (not to exceed once per year).
6. Guarantor's certificate - with each delivery of Guarantor's
financial statements.
7. Federal tax returns of Borrower and Guarantor - within 15 days
after the filing of the return. If the filing date is extended, also provide
a copy of the extension application within 15 days after filing.
8. Survey and inspection reports for each Facility - within 7 days
after receipt by Borrower.
9. Real estate taxes
(a) Copy of invoice and check - within 5 days after the due
date; and
(b) Copy of official receipt or other satisfactory evidence of
payment - within 30 days after the due date.
<PAGE>
10. Certificate of insurance renewal and evidence of payment
of premium - at least 30 days prior to the expiration of each policy.
<PAGE>
EXHIBIT G: BORROWER'S CERTIFICATE
AND FACILITY OF FINANCIAL REPORT
Report Period: Commencing ____________ and ending ___________
Loan: $6,484,375.00 loan made by Health Care REIT, Inc. ("Lender") to Kapson
Rochester East, LLC ("Borrower")
I hereby certify to Lender as follows:
1. The attached [specify AUDITED or UNAUDITED and ANNUAL or
QUARTERLY, and if CONSOLIDATED, so state] financial statements of Borrower [i]
have been prepared in accordance with generally accepted accounting principles
consistently applied; [ii] have been prepared in a manner substantially
consistent with prior financial statements submitted to Lender; and [iii]
fairly present the financial condition and performance of Borrower in all
material respects.
2. The attached [Annual or Quarterly] Facility Financial Report
for the Report Period is complete, true and accurate and has been prepared in
a manner substantially consistent with prior schedules submitted to Lender.
As set forth in the [Annual or Quarterly] Financial Report, Borrower has
maintained the Coverage Ratio and the Current Ratio for the Report Period as
required under the Loan Agreement between Borrower and Lender.
3. To the best of my knowledge, Borrower was in compliance with
all of the provisions of the Loan Agreement and all other loan documents
executed by Borrower in connection with the Loan at all times during the
Report Period, and no default, or any event which with the passage of time or
the giving of notice or both would constitute a default, has occurred under
the Loan.
Executed this _____ day of _______________, _________.
KAPSON ROCHESTER EAST, LLC
Name:__________________________
Title:____________________
<PAGE>
ANNUAL FACILITY FINANCIAL REPORT
FACILITY NAME: ____________________________________________________________
FACILITY ADDRESS: ____________________________________________________________
____________________________________________________________
REPORT PERIOD: Twelve (12) months beginning _______________________________
and ending ________________________________________________.
All information reported should be for this period only.
CENSUS % RESIDENT
OCCUPANCY DATA DATA DAYS % REVENUES
- --------------------------------------------------------------------------------
Total Beds/Units: _______ Medicaid: _______% _______%
Total Available Days: _______ Medicare: _______% _______%
Total Occupied Days: _______ Private & Other: _______% _______%
Occupancy Percentage: _______% Total: _______% _______%
OPERATING DATA
1. Gross Revenues . . . . . . . . . . . . . . . . . . . . . $______________
2. Contractual Allowances . . . . . . . . . . . . . . . . . $______________
3. Net Revenues . . . . . . . . . . . . . . . . . . . . . . $______________
4. Operating Expenses (before interest,
lease/rent, depreciation, amortization and
management fees) . . . . . . . . . . . . . . . . . . . . $______________
5. Net Operating Income . . . . . . . . . . . . . . . . . . $______________
6. Interest Expense . . . . . . . . . . . . . . . . . . . . $______________
7. Lease/Rent Expense . . . . . . . . . . . . . . . . . . . $______________
8. Depreciation Expense . . . . . . . . . . . . . . . . . . $______________
9. Amortization Expense . . . . . . . . . . . . . . . . . . $______________
10. Management Fees. . . . . . . . . . . . . . . . . . . . . $______________
11. Management Fees (as a percent of Gross
Revenues). . . . . . . . . . . . . . . . . . . . . . . . ______________%
12. Overhead Allocation (if applicable). . . . . . . . . . . $______________
13. Other (identify) . . . . . . . . . . . . . . . . . . . . $______________
14. Income Taxes . . . . . . . . . . . . . . . . . . . . . . $______________
<PAGE>
15. Net Income (amount should agree with the
facility's financial statements) . . . . . . . . . . . . $______________
<PAGE>
FINANCING DATA
(Note: This data breaks out Items 6 and 7 above.)
Related to Health All Other Leases
Care REIT, Inc. and/or Debt Total
-----------------------------------------------
Interest or Lease Expense _________ _________ ________
Principal Payments
(if any) _________ _________ ________
$ $ $
---------- ---------- ----------
---------- ---------- ----------
COVERAGE RATIO
1. Net Operating Income $______________
2. Less Imputed Management Fee
(5% of gross revenues) (______________)
3. Less Imputed Replacement Reserve for
period ($400.00 per unit per year) (______________)
4. Adjusted Net Operating Income $______________
5. Loan/Lease Payments to HCRI $______________
6. Actual Coverage Ratio (Line 4 DIVIDED BY Line 5) ______________
7. Minimum Coverage Ratio (per Loan
Agreement) (after first 12 months
of operation) 1.25/1.0 1.25/1.0
CURRENT RATIO
1. Current Assets $______________
2. Current Liabilities $______________
3. Actual Current Ratio (Line 1 DIVIDED BY Line 2) $______________
4. Minimum Current Ratio (per Loan Agreement) 1.1/1.0
I certify that the foregoing is true and accurate.
_________________________________ Date:________________________
Name:_________________
Title:_________________
Phone Number:_______________
<PAGE>
QUARTERLY FACILITY FINANCIAL REPORT
FACILITY NAME: __________________________________________________________
FACILITY ADDRESS: __________________________________________________________
__________________________________________________________
REPORT PERIOD: Three (3) months beginning _______________________________
and ending _______________________________________________.
All information reported should be for this period only.
CENSUS % RESIDENT
OCCUPANCY DATA DATA DAYS % REVENUES
- --------------------------------------------------------------------------------
Total Beds/Units: _______ Medicaid: _______% _______%
Total Available Days: _______ Medicare: _______% _______%
Total Occupied Days: _______ Private & Other: _______% _______%
Occupancy Percentage: _______% Total: _______% _______%
OPERATING DATA
1. Gross Revenues . . . . . . . . . . . . . . . . . . . . . . $______________
2. Contractual Allowances . . . . . . . . . . . . . . . . . . $______________
3. Net Revenues . . . . . . . . . . . . . . . . . . . . . . . $______________
4. Operating Expenses (before interest,
lease/rent, depreciation, amortization and
management fees) . . . . . . . . . . . . . . . . . . . . . $______________
5. Net Operating Income . . . . . . . . . . . . . . . . . . . $______________
6. Interest Expense . . . . . . . . . . . . . . . . . . . . . $______________
7. Lease/Rent Expense . . . . . . . . . . . . . . . . . . . . $______________
8. Depreciation Expense . . . . . . . . . . . . . . . . . . . $______________
9. Amortization Expense . . . . . . . . . . . . . . . . . . . $______________
10. Management Fees. . . . . . . . . . . . . . . . . . . . . . $______________
11. Management Fees (as a percent of Gross
Revenues). . . . . . . . . . . . . . . . . . . . . . . . . ______________%
12. Overhead Allocation (if applicable). . . . . . . . . . . . $______________
13. Other (identify) . . . . . . . . . . . . . . . . . . . . . $______________
14. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . $______________
15. Net Income (amount should agree with the
facility's financial statements) . . . . . . . . . . . . . $______________
<PAGE>
FINANCING DATA
(Note: This data breaks out Items 6 and 7 above.)
Related to Health All Other Leases
Care REIT, Inc. and/or Debt Total
- -------------------------------------------------------------------------------
Interest or Lease Expense _________ _________ ________
Principal Payments
(if any) _________ _________ ________
$ $ $
------------ ------------ ------------
------------ ------------ ------------
COVERAGE RATIO
1. Net Operating Income $______________
2. Less Imputed Management Fee
(5% of gross revenues) (______________)
3. Less Imputed Replacement Reserve for
period ($400.00 per unit per year) (______________)
4. Adjusted Net Operating Income $______________
5. Loan/Lease Payments to HCRI $______________
6. Actual Coverage Ratio (Line 4 DIVIDED BY Line 5) ______________
7. Minimum Coverage Ratio (per Loan
Agreement) (after first 12 months
of operation) 1.25/1.0
CURRENT RATIO
1. Current Assets $______________
2. Current Liabilities $______________
3. Actual Current Ratio (Line 1 DIVIDED BY Line 2) ______________
4. Minimum Current Ratio (per Loan Agreement) 1.1/1.0
I certify that the foregoing is true and accurate.
Date:
- ------------------------- -----------------------------------
Name:
--------------------
Title:
--------------
Phone Number:
------------
<PAGE>
QUARTERLY FACILITY ACCOUNTS RECEIVABLE AGING REPORT
FACILITY NAME: ________________________
FACILITY ADDRESS: ________________________
________________________
________________________
ACCOUNTS RECEIVABLE AGING AS OF ____________ (MOST RECENT QUARTER ENDED)
<TABLE>
<CAPTION>
PAYOR 0-30 DAYS % 31-60 DAYS % 61-90 DAYS % OVER 90 DAYS %
<S> <C> <C> <C> <C>
Medicaid $_____________ $_____________ $_____________ $_____________
___% ___% ___% ___%
Medicare $_____________ $_____________ $_____________ $_____________
___% ___% ___% ___%
Commercial Insurance $_____________ $_____________ $_____________ $_____________
___% ___% ___% ___%
Other -_____________ $_____________ $_____________ $_____________ $_____________
___% ___% ___% ___%
TOTALS $_____________ $_____________ $_____________ $_____________
100% 100% 100% 100%
% OF TOTALS $ ___________% ___________% ___________% ___________%
ACCOUNTS RECEIVABLE AGING AS OF ____________ (2ND RECENT QUARTER ENDED)
PAYOR 0-30 DAYS % 31-60 DAYS % 61-90 DAYS % OVER 90 DAYS %
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Medicaid $_____________ $_____________ $_____________ $_____________
___% ___% ___% ___%
Medicare $_____________ $_____________ $_____________ $_____________
___% ___% ___% ___%
Commercial Insurance $_____________ $_____________ $_____________ $_____________
___% ___% ___% ___%
Other - $_____________ $_____________ $_____________ $_____________
______________ ___% ___% ___% ___%
TOTALS $_____________ $_____________ $_____________ $_____________
100% 100% 100% 100%
% OF TOTALS ___________% ___________% ___________% ___________%
</TABLE>
<PAGE>
Additional Loan Agreements
The following is a schedule of additional loan agreements relating to
facilities of which the Company owns the entire or a majority interest.
Stockholders may obtain a copy of such documents by so requesting in writing.
Loan Agreement dated March, 1996 between Kapson Rochester East, LLC and
Health Care REIT, Inc.
Building Loan Agreement, dated as of December 14, 1994, by and between
Larkfield Gardens Associates, L.P. and Sims Mortgage Funding, Inc.
Loan Agreement, effective as of January 11, 1995, between Kapson Chestnut
Ridge Development Corp., as borrower, and Health Care REIT, Inc., as lender.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-5945) of our reports (i) dated June 7, 1996, on our audits of the
combined financial statements of The Kapson Group (the "Predecessor") as of
December 31, 1994 and 1995, and for each of the years in the three year period
ended December 31, 1995, and (ii) dated June 11, 1996, on our audit of the
balance sheet of Kapson Senior Quarters Corp., as of June 10, 1996. We also
consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
New York, New York
August 23, 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 21, 1996