As filed with the Securities and Exchange Commission on September 13, 1996
Registration No. 333-05955
=========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
GRAND COURT LIFESTYLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 8059 22-3423087
-------- ---- ----------
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation classification identification
or organization) code number) number)
---------------
2650 N. Military Trail
Suite 350
Boca Raton, Florida 33431
(561) 997-0323
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices
---------------
John W. Luciani, III, Executive Vice President
Grand Court Lifestyles, Inc.
2650 N. Military Trail
Suite 350
Boca Raton, Florida 33431
(561) 997-0323
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
---------------
Copies to:
John T. Hood, Esq.
Reid & Priest LLP
40 West 57th Street
New York, New York 10019
(212) 603-2000
Approximate date of commencement of proposed distribution to the
public: As promptly as practicable after the effective date 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: [x]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act of 1933, 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 of 1933, check the following box and
list the Securities Act registration statement 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
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.
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<PAGE>
GRAND COURT LIFESTYLES, INC.
Registration Statement
on Form S-1
Cross Reference Sheet
Furnished Pursuant to Item 501(b) of Regulation S-K
Form S-1 Item Number and Caption Location in Prospectus
-------------------------------- ----------------------
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus . . . . . Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus . . . . . Inside Front Cover Page;
Outside Back Cover Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges Prospectus Summary;
Summary
Consolidated Financial
Data; Risk Factors
4. Use of Proceeds . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . Plan of Distribution
6. Dilution . . . . . . . . . . . . . . . Dilution
7. Selling Security Holders . . . . . . . Principal and Selling
Stockholders
8. Plan of Distribution . . . . . . . . . Outside Front Cover Page;
Plan of Distribution
9. Description of Securities to be
Registered . . . . . . . . . . . . . Outside Front Cover Page;
Prospectus Summary;
Description of Capital
Stock
10. Interests of Named Experts and
Counsel . . . . . . . . . . . . . . . Legal Matters; Experts
11. Information with Respect to
Registrant . . . . . . . . . . . . . . Outside Front Cover Page;
Prospectus Summary; Risk
Factors; Use of Proceeds;
Dividend Policy;
Capitalization; Selected
Consolidated Financial
Data; Management's
Discussion and Analysis
of Financial Condition
and Results of
Operations; Business;
Management; Principal and
Selling Stockholders;
Description of Capital
Stock; Consolidated
Financial Statements
12. Disclosures of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . Not Applicable
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 13, 1996
PROSPECTUS
2,777,778 SHARES
GRAND COURT LIFESTYLES, INC.
COMMON STOCK
Grand Court Lifestyles, Inc. (the "Company") is offering, on a "best-
efforts" basis, a maximum of 2,777,778 shares (the "Maximum Offering") and
a minimum of 1,388,889 shares (the "Minimum Offering") of its Common Stock,
$.01 par value ("Common Stock") at $18.00 per share. There is no minimum
required purchase by an investor. Of the maximum number of shares of
Common Stock being offered hereby, 2,500,000 shares are being offered by
the Company and 277,778 shares are being offered by certain stockholders
(the "Selling Stockholders"). The number of shares to be sold by the
Selling Stockholders will equal 10% of the aggregate number of shares to be
sold in this offering. The offering will terminate no later than ________,
199_ (120 days after the date of this Prospectus). See "Principal and
Selling Stockholders."
Prior to this offering, there has been no public market for the
Company's Common Stock. The offering price for the Common Stock has been
unilaterally determined by the Company. See "Plan of Distribution." The
Common Stock has been approved for quotation on the NASDAQ National Market
under the trading symbol "GCLI," subject to certain conditions.
AN INVESTMENT IN THE COMMON STOCK INVOLVES SUBSTANTIAL RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------
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 THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
==========================================================================
PROCEEDS TO
PRICE TO COMMISSIONS PROCEEDS TO SELLING
PUBLIC (1)(2) COMPANY(2) STOCKHOLDERS(2)
--------------------------------------------------------------------------
Per Share . . $18.00 $1.08 $16.92 $16.92
--------------------------------------------------------------------------
Total $25,000,002 $1,500,000.12 $21,150,000 $2,350,001.88
Minimum(3)
--------------------------------------------------------------------------
Total Maximum $50,000,004 $3,000,000.24 $42,300,000 $4,700,003.76
=========================================================================
(1) The shares of Common Stock offered hereby will be offered through
brokers and dealers who are members of the National Association of
Securities Dealers, Inc., as sales agents, at a commission of up to 6%
of the price at which shares are sold to the public. Brokers and
dealers also will be paid due diligence fees and non-accountable
expense allowances, in the aggregate, of up to 1% of the offering
price at which shares are sold to the public. The Company also
intends to offer shares of the Common Stock directly through the
efforts of its officers, directors and employees. No commissions will
be paid by the Company with respect to shares of Common Stock which it
sells to investors through such efforts. However, certain employees
of the Company are also registered representatives of brokers and
dealers participating in the offering, and may, in such capacities,
sell shares of Common Stock and receive commissions in respect of
shares so sold. See "Plan of Distribution."
(2) Assuming that a commission is paid with respect to all shares of
Common Stock offered hereby at a rate of 6%, but before deducting
expenses (which include (i) up to 1% of the gross proceeds of the
offering which is payable to participating brokers and dealers as due
diligence fees and non-accountable expense allowances and (ii) up to
1% of the gross proceeds of the offering payable as wholesalers or
finders fees), estimated at $1,860,000 if the Total Minimum is sold
and $2,360,000 if the Total Maximum is sold. All expenses of the
Offering will be paid by the Company, except that the Selling
Stockholders will pay commissions, due diligence fees and non-
accountable expense allowances and wholesalers or finders fees with
respect to shares sold by them.
(3) Until at least 1,388,889 shares of Common Stock are sold, the proceeds
of the offering will be held in escrow by First Union National Bank.
If at least 1,388,889 shares of Common Stock are not sold within 60
days from the date of this Prospectus (subject to an extension of up
to 60 days at the sole discretion of the Company), the offering will
terminate and such proceeds will be promptly returned to subscribers,
without interest or deductions. Shares of Common Stock sold to
officers, directors or employees of the Company will not be counted
for purposes of determining whether such number of shares has been
sold.
---------------
The shares of Common Stock are offered subject to prior sale, when, as
and if delivered and accepted by the Company and subject to certain other
conditions. The Company reserves the right to withdraw, cancel or modify
said offer and to reject orders in whole or in part.
---------------
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and the consolidated financial statements, including
the notes thereto, appearing elsewhere in this Prospectus. Unless the
context otherwise requires, (i) all references herein to the "Company"
include the Company, its subsidiaries and its predecessors taken as a
whole, and (ii) all references herein to a "fiscal" year refer to the
fiscal year beginning on February 1 of that year (for example, "fiscal
1995" refers to the fiscal year beginning on February 1, 1995). Other than
in the consolidated financial statements, all share and per share data has
been restated to give effect to a 1,084.1-for-1 stock split and reduction
in par value per share from $.10 to $.01 which will occur upon the closing
of the Offering. This Prospectus contains certain forward-looking
statements which involve certain risks and uncertainties. The Company's
actual results could differ materially from the results anticipated in
these forward-looking statements as a result of the factors set forth under
"Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Grand Court Lifestyles, Inc. (the "Company"), a fully integrated
provider of adult living accommodations and services, acquires, finances,
develops and manages adult living communities. The Company's revenues have
been, and are expected to continue to be, primarily derived from sales of
partnership interests in partnerships it organizes to finance the
acquisition of existing adult living communities. The Company manages such
adult living communities and, as a result, is one of the largest operators
of adult living communities in the United States, operating communities
offering both independent- and assisted-living services. The Company
currently operates 30 adult living communities containing 4,350 apartment
units in 11 states in the Sun Belt and the Midwest. To the extent that the
development plan described below is successfully implemented, the Company
anticipates that the percentage of its revenues derived from sales of
partnership interests would decrease and the percentage of its revenues
derived from newly constructed communities would increase.
The Company has derived, and it expects to continue to derive, a
substantial portion of its revenues from sales of partnership interests in
partnerships it organizes to finance the acquisition of existing adult
living centers. The Company has financed the acquisition and development
of the 30 adult living communities that it operates by utilizing mortgage
financing and by arranging for the sale of limited partnership interests in
34 limited partnerships ("Investing Partnerships) formed to acquire
interests in the 29 other partnerships that own adult living communities
("Owning Partnerships"). The Company is the general partner of all but one
of the Owning Partnerships and manages all of the adult living communities
in its portfolio. The Company is also the general partner of 22 of the 34
Investing Partnerships. As a result of its financing acquisitions by
arranging for the sale of partnership interests, the Company retains a
participation in the cash flow, sale proceeds and refinancing proceeds of
the properties after certain priority payments to the limited partners.
The limited partners typically agree to pay their capital contributions
over a five-year period. Past offerings have provided, and it is
anticipated that future offerings will provide, that the limited partners
will receive guaranteed distributions during each of the first five years
of their investment equal to between 11% to 12% of their then paid-in
scheduled capital contributions. Pursuant to the management contracts with
the Owning Partnerships, the Company is required to pay to the Owning
Partnerships, and the Owning Partnerships distribute to the Investing
Partnerships for distribution to limited partners, amounts sufficient to
fund any part of such guaranteed return not paid from cash flow from the
related property. During the fiscal year ended January 31, 1996 and the
six months ended July 31, 1996, the Company paid approximately $1,025,000
and $2,202,000, respectively, with respect to guaranteed return
obligations. The Company anticipates that for at least the next two years,
the aggregate guaranteed return obligations with respect to existing and
future Investing Partnerships will exceed the aggregate cash flow generated
by the related properties, which will result in the need to utilize cash
generated by the Company to meet its guaranteed return obligations. The
Company's obligations with respect to guaranteed returns are contractual
obligations of the Company to make payments under the management contracts
to the Owning Partnerships. In general, the accrual of expenses arising
from obligations of the Company, including such obligations under the
management contracts, reduces the amount of earnings that might otherwise
be available for distribution to stockholders. The aggregate amount of
guaranteed return obligations for each of the fiscal years 1996 through
2001 based on existing management contracts is $5,901,000, $13,396,000,
$11,306,000, $11,809,000, $9,173,000 and $3,897,000, respectively. Such
amounts of guaranteed return obligation are calculated based upon paid-in
capital contributions of limited partners as of July 31, 1996 and remaining
scheduled capital contributions. Actual amounts of guaranteed return
obligations in respect of such contracts will vary based upon the timing
and amount of such capital contributions. Furthermore, such amounts of
guaranteed return obligations are calculated without regard to the cash
flow the related properties will generate that can be used to offset such
obligations.
1
<PAGE>
The existing adult living communities managed by the Company are not
owned by the Company. Future revenues, if any, of the Company relating to
such communities would primarily arise in the form of (i) deferred income
earned on sales of interests in the Owning Partnership for such
communities, (ii) management fees and (iii) amounts payable by the
Investing Partnerships to the Company in the event of the subsequent sale
or refinancing of such communities.
At July 31, 1996, the Company had approximately $21.5 million
principal amount of debt ("Investor Note Debt") secured by promissory notes
from investors in offerings of limited partnership interests, which debt
has an average interest rate of 10.43% per annum. In each of the last five
years, the collection rate with respect to such investor notes has exceed
99% of the principal amount thereof that became due and such collections
have been sufficient to pay interest and principal with respect to the
Company's related Investor Note Debt. There can be no assurance that
future collections will continue at such rate. In the event that future
collections are not sufficient to pay interest and principal with respect
to the Company's related Investor Note Debt, the Company would need to pay
the shortfall from cash generated by its operations and, as a result, the
Company's business, operating results and financial condition could be
adversely affected.
The Company plans to continue to acquire existing adult living
communities, and currently plans to acquire between four to eight existing
communities over the next two years. The Company has entered into
contracts to acquire an adult living community in Morristown, Tennessee
containing 180 apartment units, an adult living community in Tampa, Florida
containing 164 apartment units and two adult living communities in Sparks,
Nevada containing 92 apartment units and 64 apartment units, respectively.
In addition, the Company has acquired one adult living community from an
existing Owning Partnership and has agreed to acquire one adult living
community from another existing Owning Partnership, and may engage in other
similar transactions. The Company intends to continue to finance its
future acquisitions by utilizing mortgage financing and by arranging for
the sale of limited partnership interests in new Investing Partnerships
which will own interests in new Owning Partnerships. It is anticipated
that the Company will be the managing general partner of the new Owning
Partnerships that own communities acquired in the future.
Senior management formed the first predecessor of the Company over 25
years ago and, in the aggregate, have over 80 years of experience in the
acquisition, financing, development and management of residential real
property. Prior to 1986, the Company acquired, developed, arranged for the
sale of interests in partnerships owning, and in most cases managed, multi-
family properties containing approximately 20,000 apartment units,
primarily in the Sun Belt and the Midwest. Beginning in 1986, the Company
has focused exclusively on adult living communities. According to a study
conducted by the American Senior Housing Association, the Company currently
operates one of the largest portfolios of adult living communities in the
United States. The Company has become an experienced provider of both
independent- and assisted-living services. The Company operates 30 adult
living communities containing 4,350 apartment units. The Company also
operates one nursing home. The Company believes that its experience in the
acquisition, development and management of adult living communities
positions it to take advantage of social and economic trends that are
projected to increase demand for adult living services. The Company's
operating objective is to provide high-quality, personalized living
services to senior residents, primarily persons over the age of 75.
The Company has instituted a development plan pursuant to which it
currently intends to construct between 18 and 24 adult living communities
during the next two years containing between 2,268 and 3,458 apartment
units. The Company plans to own or operate pursuant to long-term leases or
similar arrangements the adult living communities that will be developed
under the plan. The Company has obtained a letter of intent from Capstone
Capital Corporation ("Capstone") to provide up to $39 million for
development of up to four new adult living communities that will be
operated by the Company pursuant to long-term leases with Capstone. The
Company's development plan contemplates its first new communities being
built in Texas, where, as of September 6, 1996, it owned one site and held
options to acquire eight additional sites. The Company generally plans to
concentrate on developing projects in only a limited number of states at
any given time. The Company believes that this focus will allow it to
realize certain efficiencies in the development and management of
communities.
The Company's development plan is based upon a "prototype" adult
living community that it has designed. The prototype incorporates
attributes of the various facilities managed by the Company, which it
believes appeal to the elderly. The prototype has been designed to be
built in two sizes: one containing 126 apartment units and the other 142
apartment units. In all other respects, the two sizes of the prototype are
virtually identical and both will be located on sites of up to seven acres.
The Company believes that its development prototype is larger than most
assisted-living facilities, which typically range from 40 to 80 units. The
Company believes that the greater number of units will allow the Company to
achieve economies of scale in operations, resulting in lower operating
2
<PAGE>
costs per unit, without sacrificing quality of service. Each community
will offer residents a choice between independent-living and assisted-
living services. As a result, the market for each facility will be broader
than for facilities that offer only either independent-living or assisted-
living services. Due to licensing requirements and the expense and
difficulty of converting existing independent-living units to assisted-
living units, independent-living and assisted-living units generally are
not interchangeable. However, the Company's prototype is designed to
allow, at any time, for conversion of units, at minimum expense, for use as
either independent-living or assisted-living units. Each community
therefore may adjust its mix of independent-living and assisted-living
units as the market or existing residents demand. The Company believes
that part of the appeal of this type of community is that residents will be
able to "age in place" with the knowledge that they need not move to
another facility if they require assistance with "activities of daily
living." The Company believes that the ability to retain residents by
offering them higher levels of services will result in stable occupancy
with enhanced revenue streams. The Company believes that the common areas
and amenities offered by its prototype represent the state of the art for
independent-living facilities and are superior to those offered by smaller
independent-living facilities or by most assisted-living facilities. The
Company believes that this will make its prototype adult living communities
attractive to both independent-living residents who foresee their future
need for assisted-living services and residents who initially seek
assisted-living services.
The effectuation of the development plan will expose the Company to
additional risk. The Company anticipates that the construction of each
community will require at least 12 months and expects each newly
constructed community to incur start-up losses for at least nine months
after commencing operations. There can be no assurance that newly
constructed communities will generate positive cash flow. In addition,
there can be no assurance that the Company will not suffer delays in its
development plan or cost overruns. The Company's development plan has
placed, and increasingly will place, a significant burden on the Company's
management and operating personnel. The Company's ability to manage its
growth effectively will require it to attract, train, motivate, manage and
retain key employees. Moreover, in implementing its growth strategy, the
Company expects to face competition in its efforts to develop and acquire
adult living communities. As a result of any of the foregoing factors, the
Company's business, operating results and financial condition could be
adversely affected.
The Company believes that management and marketing are critical to the
success of an adult living community. In order to attain high occupancy
rates at newly developed properties, the Company plans to continue its
marketing program which has resulted in an average occupancy rate at July
31, 1996 at its existing adult living communities of approximately 93%. In
addition, the Company plans to use the common facility design of its
prototype and its "The Grand Court" trademarked name to promote recognition
of its properties nationally. The Company focuses exclusively on "Private-
pay" residents who pay for housing or related services out of their own
funds, rather than relying on the few states that have enacted legislation
which enables assisted-living facilities to receive Medicaid funding
similar to funding generally provided to skilled nursing facilities. The
Company believes this "Private-pay" focus will allow the Company to
increase rental revenues as demographic pressure increases demand for adult
living facilities and to avoid potential financial difficulties it might
encounter if it were dependent on Medicaid or other reimbursement programs
that may be scaled back as a result of health care reform, budget deficit
reduction or other pending or future state or Federal government
initiatives.
Grand Court Lifestyles, Inc. is a Delaware corporation formed in 1996
to consolidate substantially all of the assets of its predecessors, J&B
Management Company, Leisure Centers, Inc., and their affiliates. Unless
the context otherwise indicates, all references to the Company include
Grand Court Lifestyles Inc., its subsidiaries and predecessors. The
Company's principal executive offices are located at 2650 N. Military
Trail, Suite 350, Boca Raton, Florida 33431 and its telephone number is
(561) 997-0323.
3
<PAGE>
The following diagram illustrates the relationship among the Company,
the Owning Partnerships and the Investing Partnerships.
{Diagram illustrating the relationship among the Company, the
Owning Partnerships and the Investing Partnerships appears here. At the
top of the diagram is a box containing the name "Grand Court Lifestyles,
Inc." (the "Company box"). An arrow with the words "Manager of Adult
Living Community" is drawn to the left of the diagram from the Company box
to a box appearing at the bottom of the page entitled "Adult Living
Community" (the "Adult Living Community box". An arrow with the words
"Sale of a General Partnership Interest in Owning Partnership" is drawn
from the Company box to a box below it entitled "Investing Partnership"
(the "Investing Partnership box"). In return, an arrow with the words
"Cash, Purchase Note and Investor Notes as Consideration for Sale" is drawn
from the Investing Partnership box to the Company box. An arrow with the
words "Sale of Limited Partnership Interest" is drawn from the Investing
Partnership box to a box appearing to its left entitled "Limited Partners"
(the "Limited Partners box"). In return, an arrow with the words "Cash and
Investor Notes as Consideration for Sale" is drawn from the Limited
Partners box to the Investing Partnership box. An arrow with the words
"General Partner" is drawn from the Investing Partnership box to a box
below entitled "Owning Partnership" (the "Owing Partnership box"). An
arrow with the words "Owner of Adult Living Community" is drawn from the
Owning Partnership box to the Adult Living Community box appearing directly
below the Owning Partnership box. Arrows with the words "Directly or
Through A Wholly-Owned Subsidiary - General Partner" is drawn to the right
of the diagram from the Company box to the Investing Partnership box and
the Owning Partnership box.}
4
<PAGE>
THE OFFERING
Common Stock to be sold by
the Company . . . . . . . .
Minimum offering . . . . . 1,250,000 shares
Maximum offering . . . . . 2,500,000 shares
Common Stock to be sold by
Selling Stockholders
Minimum offering . . . . . 138,889 shares(1)
Maximum offering . . . . . 277,778 shares(1)
Common Stock outstanding before
this offering . . . . . . . 10,000,000 shares
Total Common Stock to be outstanding
after this offering assuming the
minimum number of shares of
Common Stock are sold(2) . . 11,250,000 shares
Total Common Stock to be outstanding
after this offering assuming the
maximum number of shares of
Common Stock are sold(2) . . 12,500,000 shares
Use of proceeds . . . . . . . The Company intends to use all
of the net proceeds of the
Offering to be received by it
to fund a portion of the costs
of developing adult living
communities except that the
Company intends to use
approximately $3 million of
such net proceeds for working
capital and general corporate
purposes. See "Use of
Proceeds."
(1) The number of shares to be sold by the Selling Stockholders will
equal 10% of the aggregate number of shares to be sold in this
offering.
(2) Excludes 1,250,000 shares reserved for issuance pursuant to the
Company's stock option plans. As of the date hereof, there were
not any options granted under the Company's stock option plans.
See "Management - Stock Plans".
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data and other data)
The summary consolidated financial data have been taken or derived
from, and should be read in conjunction with, the Company's consolidated
financial statements and the related notes thereto, and the capitalization
data included elsewhere in this Prospectus. The results of operations for
an interim period have been prepared on the same basis as the year end
financial statements and, in the opinion of management, contain all
adjustments, consisting of only normally recurring adjustments, necessary
for a fair presentation of the results of operations for such period. The
results of operations for an interim period may not give a true indication
of results for the full year. See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED JANUARY 31,
------------------------------------
1992 1993 1994 1995
---- ---- ---- ----
STATEMENT OF
OPERATIONS DATA:
Revenues:
Sales . . . . . . . . . . $23,088 $24,654 $29,461 29,000
Deferred income
earned . . . . . . . . . 253 792 6,668 3,518
Interest income . . . . . 25,584 13,209 13,315 9,503
Property management
fees from related
parties . . . . . . . . 449 584 4,124 4,516
Other income . . . . . . -- -- -- --
------ ------ ------ ------
49,374 39,239 53,568 46,537
------ ------ ------ ------
Costs and expenses:
Cost of sales . . . . . . 15,983 14,685 26,548 21,249
Selling . . . . . . . . . 6,256 7,027 6,706 6,002
Interest . . . . . . . . 14,021 11,874 10,991 13,610
General and
administrative . . . . . 5,836 5,617 5,271 6,688
Officers'
Compensation(1) . . . . . 1,200 1,200 1,200 1,200
Depreciation and
amortization . . . . . . 412 975 1,433 2,290
------ ------ ------ ------
43,708 41,378 52,149 51,039
------ ------ ------ ------
Income (loss) before
provision for income taxes 5,666 (2,139) 1,419 (4,502)
Provision for income taxes -- -- -- --
------ ------- ------ --------
Net income (loss) 5,666 (2,139) 1,419 (4,502)
Pro-forma income tax
provisions (benefit)(2) . . 2,266 (856) 568 (1,801)
------ ------- ------ -------
Pro-forma net income
(loss)(2) . . . . . . . . . $3,400 $(1,283) $851 (2,701)
====== ======== ====== =======
Pro-forma earnings (loss)
per common share(2) . . . . $ .34 $ (.13) $ .09 $ (.27)
====== ======== ====== =======
Weighted average common
shares used . . . . . . . 10,000 10,000 10,000 10,000
====== ====== ====== ======
OTHER DATA:
Adult living
communities operated
(end of period) . . . . . 9 14 18 24
====== ====== ====== ======
Number of units
(end of period) . . . . . 1,639 2,336 2,834 3,683
====== ====== ====== ======
Average occupancy
percentage (3) . . . . . 83.3% 90.6% 90.4% 89.3%
====== ====== ====== ======
YEARS
ENDED
JANUARY SIX MONTHS ENDED
31, JULY 31,
------- ----------------
1996 1995 1996
---- ---- ----
STATEMENT OF
OPERATIONS DATA:
Revenues:
Sales . . . . . . . . . . . $41,407 $19,991 $18,836
Deferred income
earned . . . . . . . . . . 9,140 4,570 --
Interest income . . . . . . 12,689 7,030 7,886
Property management
fees from related
parties . . . . . . . . . 4,666 2,890 1,559
Other income . . . . . . . 1,013 925 --
------- ------- -------
68,915 35,406 28,281
------- ------- -------
Costs and expenses:
Cost of sales . . . . . . . 27,112 14,855 9,323
Selling . . . . . . . . . . 7,664 3,854 3,489
Interest . . . . . . . . . 15,808 7,891 7,802
General and
administrative . . . . . . 8,475 3,586 4,099
Officers'
Compensation(1) . . . . . . 1,200 600 600
Depreciation and
amortization . . . . . . . 2,620 1,491 1,730
------- ------- -------
62,879 32,277 27,043
-------- ------- -------
Income (loss) before
provision for income
taxes . . . . . . . . . . . 6,036 3,129 1,238
Provision for income
taxes . . . . . . . . . . . -- -- 330
------- ------- -------
Net income (loss) 6,036 3,129 908
Pro-forma income tax
provisions (benefit)(2) . . 2,414 1,252 165
------- ------- -------
Pro-forma net income
(loss)(2) . . . . . . . . . $3,622 $1,877 $743
======= ======= =======
Pro-forma earnings (loss)
per common share(2) . . . . . $ .36 $ .19 $ .07
======= ======= =======
Weighted average common
shares used . . . . . . . . 10,000 10,000 10,000
======= ======= ========
OTHER DATA:
Adult living
communities operated
(end of period) . . . . . . 28 26 30
======= ======= =======
Number of units (end of
period) . . . . . . . . . . 4,164 3,777 4,350
======= ======= =======
Average occupancy
percentage (3) . . . . . . 94.7% 93.0% 92.7%
======== ======= ========
6
<PAGE>
AS OF JANUARY 31,
--------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
BALANCE SHEET
DATA:
Cash and cash
equivalents . . $ 3,477 $ 6,455 $ 9,335 $ 10,950 $ 17,961
Notes and
receivables-net 230,760 234,115 227,411 220,014 223,736
Total assets . 241,691 251,118 249,203 249,047 260,742
Total
liabilities . . 191,234 203,990 211,647 217,879 225,238
Stockholders'
equity . . . . 50,457 47,128 37,556 31,168 35,504
AS OF JULY 31,
------------------------------
ADJUSTED(4)
ACTUAL MINIMUM
------ -----------
BALANCE SHEET DATA:
Cash and cash equivalents $7,190 $26,530
Notes and receivables-net 226,044 226,044
Total assets . . . . . . 254,364 273,704
Total liabilities . . . . 218,852 218,852
Stockholders' equity . . 35,512 54,852
--------------
(1) John Luciani and Bernard M. Rodin, the Chairman of the Board and
President, respectively, of the Company received dividends and
distributions from the Company's predecessors but did not receive
compensation. Officers' Compensation is based upon the aggregate
compensation currently received by such officers, $600,000 a year for
each such officer. Amounts received by such officers in excess of
such amount are treated as dividends for purposes of the Company's
financial statements. In the first six months of fiscal 1996, such
officers also received $450,000 each as a dividend. See "Management."
(2) The Company's predecessors were Sub-chapter S corporations and a
partnership. The pro forma statement of operations data reflects
provisions for federal and state income taxes as if the Company had
been subject to federal and state income taxation as a C corporation
during each of the periods presented.
(3) Average occupancy percentages were determined by adding all of the
occupancy percentages of the individual communities and dividing that
number by the total number of communities. The average occupancy
percentage for each particular community was determined by dividing
the number of occupied apartment units in the particular community on
the given date by the total number of apartment units in the
particular community.
(4) "Adjusted" amounts give effect to the application by the Company of
its net proceeds of this offering (based upon an assumed initial
public offering price of $18.00 per share, after deducting commissions
and other offering expenses payable by the Company) if the minimum
number of shares of Common Stock are sold. See "Capitalization."
7
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should
consider carefully the factors set forth below, as well as other
information contained in this Prospectus, before making a decision to
purchase the Common Stock offered hereby.
POTENTIAL FOR OPERATING LOSSES
The Company has begun developing new adult living communities. The
Company anticipates that the construction of each community will require at
least 12 months and expects each newly constructed community to incur
start-up losses for at least nine months after commencing operations. In
addition, during the past ten years the Company's revenues have been
derived principally from arranging for the sale of partnership interests to
finance the acquisition of existing adult living communities. Competition
to acquire such communities has intensified, and there can be no assurance
that the Company will be able to acquire such communities on terms
favorable enough to offset the start-up losses associated with newly
developed communities and the costs and cash requirements arising from the
Company's overhead and existing debt and guaranty obligations. Such
factors could cause the Company to incur operating losses until, at least,
its newly constructed communities are completed, leased up and begin
generating positive cash flow. Nor can there be any assurance that such
newly constructed communities will generate positive cash flow. If the
Company incurs operating losses, this could have a material adverse effect
on the Company's business, operating results and financial condition and
the market price of the shares of Common Stock. For the fiscal year ending
January 31, 1993 and the fiscal year ending January 31, 1995, respectively,
the Company incurred net losses of approximately $2.1 million and $4.5
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations" and "--Liquidity and
Capital Resources" and "Business--Partnership Offerings" and "--Strategy."
DEVELOPMENT DELAYS AND COST OVERRUNS
The Company currently expects to begin construction of between 18 and
24 new adult living communities during the next two years. There can be no
assurance that the Company will not suffer delays in its development
program, which could adversely affect the Company's growth. To date, the
Company has not opened any newly developed adult living communities or
entered into any substantial commitments of capital resources to develop
such communities. Development of adult living communities can be delayed
or precluded by various zoning, healthcare licensing and other applicable
governmental regulations and restrictions. Real estate development
projects generally are subject to various risks, including permitting,
licensing and construction delays, that may result in construction cost
overruns and longer periods of operating losses. The Company intends to
rely on third-party general contractors to construct new communities.
There can be no assurance that the Company will not experience difficulties
in working with general contractors and subcontractors, any of which
difficulties also could result in increased construction costs and delays.
Furthermore, project development is subject to a number of contingencies
over which the Company will have little control and that may adversely
affect project cost and completion time, including inability to obtain
construction financing, shortages of or the inability to obtain labor or
materials, the inability of the general contractors or subcontractors to
perform under their contracts, strikes, adverse weather conditions, delays
in property lease-ups and changes in applicable laws or regulations or in
the method of applying such laws and regulations. If the Company's
development schedule is delayed, the Company's business, operating results
and financial condition could be adversely affected. See "Business--
Strategy" and "--Operations."
SUBSTANTIAL DEBT OBLIGATIONS OF THE COMPANY
At July 31, 1996 the Company had approximately $131.7 million
principal amount of debt ("Total Debt") at an average interest rate of
11.75% per annum. Of the principal amount of Total Debt, $15.9 million
becomes due in the fiscal year ending January 31, 1997; $18.9 million
becomes due in the fiscal year ending January 31, 1998; $32.2 million
becomes due in the fiscal year ending January 31, 1999; $17.6 million
becomes due in the fiscal year ending January 31, 2000; $18.5 million
becomes due in the fiscal year ending January 31, 2001, and the balance of
$28.6 million becomes due thereafter.
8
<PAGE>
Of the Total Debt, $78.7 million principal amount were debentures
("Debenture Debt") issued in eleven separate series, secured by notes owed
to the Company by partnerships formed to invest in multifamily housing (the
"Multi-family Notes"), investor notes and limited partnership interests
arising from offerings arranged by the Company in connection with
acquisitions of multi-family housing (the "Purchase Note Collateral"). The
Debenture Debt has an average interest rate of 11.95% per annum and has
maturities ranging from 1996 through 2004. During the fiscal year ended
January 31, 1996 and the six months ending July 31, 1996, total interest
expense with respect to Debenture Debt was approximately $8.7 million and
$4.9 million, respectively, the Purchase Note Collateral produced
approximately $3.0 million and $708,105 of interest and related payments to
the Company, respectively, which was approximately $5.7 million and
$4.2 million less than the amount required to pay interest on the Debenture
Debt, respectively. The Company paid the shortfall from cash generated by
its operations. Debenture Debt in the aggregate principal amount of
approximately $8.7 million, $2.1 million, $19.5 million, $10.3 million and
$15.1 million will mature in the respective fiscal years 1996 through 2000.
There can be no assurance that amounts received with respect to the
Purchase Note Collateral will be sufficient to pay the Company's future
debt service obligations with respect to the Debenture Debt. Several of
the Multi-family Notes have reached their final maturity dates and, due to
the inability, in view of the current cash flows of the properties, to
maximize the value of the underlying property at such maturity dates,
either through a sale or refinancing, these final maturity dates have been
extended by the Company. The Company expects that it may need to extend
maturities of other Multi-family Notes.
Of the Company's Total Debt, an additional $26.5 million principal
amount was unsecured, having an average interest rate of 12.97% per annum
("Unsecured Debt") and an additional $5.0 million of such debt is mortgage
debt ("Mortgage Debt") with an average interest rate of 12% per annum. The
Company incurred the Mortgage Debt, which is secured by adult living
communities, in order to facilitate the acquisition financing for such
communities. At July 31, 1996, the Company had approximately $21.5 million
principal amount of debt ("Investor Note Debt") secured by promissory notes
from investors in offerings of limited partnership interests, which debt
has an average interest rate of 10.43% per annum. In each of the last five
years, the collection rate with respect to such investor notes has exceeded
99% of the principal amount thereof that became due and such collections
have been sufficient to pay interest and principal with respect to the
Company's related Investor Note Debt. There can be no assurance that
future collections will continue at such rate. In the event that future
collections are not sufficient to pay interest and principal with respect
to the Company's related Investor Note Debt, the Company would need to pay
the shortfall from cash generated by its operations and, as a result, the
Company's business, operating results and financial condition could be
adversely affected. The Company intends to continue to incur Investor Note
Debt, utilizing as collateral investor notes generated by future sales of
limited partnership interests in Investing Partnerships formed in
connection with acquisitions of existing adult living communities. The
Company is in the process of issuing additional Unsecured Debt in the
amount of $7.5 million to refinance other indebtedness. Although the
Company currently does not anticipate incurring additional Debenture Debt
or Unsecured Debt, there can be no assurance that this will be the case.
For example, the Company may incur additional Debenture Debt or Unsecured
Debt as a means of refinancing its existing debt or for working capital
purposes. Neither the Company nor the Owning Partnerships have policies
limiting the amount or proportion of indebtedness incurred. Certain
Investor Note Debt obligations contain provisions requiring the Company to
maintain a net worth of $35,000,000. In addition, certain obligations of
the Company contain covenants requiring the Company to maintain a
consolidated debt to consolidated net worth ratio of, in the most
restrictive case, no more than 6.5 to 1. At January 31, 1996 and at July
31, 1996, the Company's consolidated debt to net worth ratio was 6.3 to 1
and 6.2 to 1, respectively. In addition, one obligation of the Company
contains a covenant requiring the Company to maintain a debt for borrowed
money to consolidated net worth ratio of 5 to 1. At January 31, 1996 and
at July 31, 1996, the Company's debt for borrowed money to consolidated net
worth ratio was 3.95 to 1 and 3.73 to 1, respectively.
The formation of the Company pursuant to the merger into the Company
of various affiliated corporations and asset transfers resulted in defaults
which exist under approximately $6.3 million aggregate principal amount of
Investor Note Debt. None of the lenders have commenced any action to
pursue remedies in respect of such debt. The Company is currently working
with the lenders of such debt on amendments to the underlying debt
instruments which would give effect to the formation of the Company and
waive any such defaults. Although the Company
9
<PAGE>
believes that all such defaults will be waived, there can be no assurance
that this will be the case. If any required waiver could not be obtained,
the Company would seek to refinance such debt. In the event that the
lenders of such debt accelerated such debt or commenced any other actions
to pursue remedies, the Company's business, operating results and financial
condition could be adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 6 of
Notes to the Company's Consolidated Financial Statements.
POTENTIAL INCREASES IN DEBT SERVICE OBLIGATIONS RELATING TO VARIABLE RATE
DEBT
The Investor Note Debt, which totaled $21.5 million in aggregate
principal amount at July 31, 1996, bears interest at variable rates
determined by reference to the prime rate of the lending banks. Each 1%
increase or decrease of the interest rate on such debt would result in an
increase or decrease in the annual debt service obligation of the Company
of approximately $215,000. Therefore, increases in interest rates could
adversely affect the operating results and financial condition of the
Company.
DIFFICULTIES OF MANAGING RAPID EXPANSION
The Company will pursue an aggressive expansion program, and it
expects that its rate of growth will increase as it implements its
development program for new adult living communities. The Company's
success will depend in large part on identifying suitable development
opportunities, and its ability to pursue such opportunities, complete
development, and lease up and effectively operate its adult-living
communities. The Company's growth has placed a significant burden on the
Company's management and operating personnel. The Company's ability to
manage its growth effectively will require it to continue to attract,
train, motivate, manage and retain key employees. If the Company is unable
to manage its growth effectively, its business, operating results and
financial condition could be adversely affected. See "Business--Strategy"
and "Management--Directors and Executive Officers."
GUARANTEED RETURN OBLIGATIONS AND PREPAYMENT RIGHTS OF LIMITED PARTNERS
The Company has financed the acquisition of existing adult living
communities it operates by arranging for the private placement of limited
partnership interests in Investing Partnerships and intends to continue
this practice for all of its future acquisitions of existing adult living
communities. The limited partners typically agree to pay their capital
contributions over a five-year period. Past offerings have provided, and
it is anticipated that future offerings will provide, that the limited
partners will receive guaranteed distributions during each of the first
five years of their investment equal to between 11% to 12% of their then
paid-in scheduled capital contributions. Pursuant to the management
contracts with the Owning Partnerships, the Company is required to pay to
the Owning Partnerships, and the Owning Partnerships distribute to the
Investing Partnerships for distribution to limited partners, amounts
sufficient to fund any part of such guaranteed return not paid from cash
flow from the related property. During the fiscal year ended January 31,
1996 and the six months ended July 31, 1996, the Company paid approximately
$1,025,000 and $2,202,000, respectively, with respect to guaranteed return
obligations. The increase in the amount the Company paid with respect to
guaranteed return obligations in the six month period ended July 31, 1996
is due to an increase in debt service payments due to the refinancing of a
number of its adult living communities, an acceleration of the maintenance
and repairs of various adult living communities, and the establishment of
capital improvement reserves pursuant to the terms of the newly refinanced
loans, which reduced the cashflow and incentive management fees these
properties generate and is offset and exceeded by an increase in interest
income received by the Company during the six months ended July 31, 1996,
which was also the result of such refinancings. The refinancings resulted
in the return of over $43 million of capital to limited partners, which
reduced the amount of capital upon which the Company is obligated to make
payments in respect of guaranteed returns. The refinancings also resulted
in increased debt service payments by the Owning Partnerships which own the
refinanced adult living communities. These debt service payments reduced
the cash flow available to pay the guaranteed return to limited partners
during the six months ended July 31, 1996. The decrease in available cash
flow exceeded the reduction in the guaranteed return obligations and,
therefore, increased the amount required to be paid by the Company with
respect to such guaranteed return obligations. The aggregate amount which
the
10
<PAGE>
Company will be required to pay with respect to guaranteed return
obligations will depend upon a number of factors, including, among others,
the expiration of such obligations for certain partnerships, the cash flow
generated by the properties the Company currently operates, the terms of
future offerings by Investing Partnerships and the cash flow to be
generated by the related properties. Based upon its estimates of these
factors, which estimates may vary materially from actual results, the
Company anticipates that for at least the next two years, the aggregate
guaranteed return obligations with respect to existing and future Investing
Partnerships will exceed the aggregate cash flow generated by the related
properties, which will result in the need to utilize cash generated by the
Company to meet guaranteed return obligations. The aggregate amount of
guaranteed return obligations for each of the fiscal years 1996 through
2001 based on existing management contracts is $5,901,000, $13,396,000,
$11,306,000, $11,809,000, $9,173,000 and $3,897,000, respectively. Such
amounts of guaranteed return obligation are calculated based upon paid-in
capital contributions of limited partners as of July 31, 1996 and remaining
scheduled capital contributions. Actual amounts of guaranteed return
obligations in respect of such contracts will vary based upon the timing
and amount of such capital contributions. Furthermore, such amounts of
guaranteed return obligations are calculated without regard to the cash
flow the related properties will generate that can be used to offset such
obligation.
To the extent that the Company must expend funds to meet its
guaranteed return obligations, the Company will have fewer funds available
to utilize for other business purposes, including funds for application to
its new development plan, to meet other liquidity and capital resource
commitments and for dividends, if any. The Company will attempt to
structure future offerings by Investing Partnerships to minimize the
likelihood that it will be required to utilize the cash it generates to pay
guaranteed returns, but there can be no assurance that this will be the
case. In the past, limited partners have been allowed to prepay capital
contributions. These prepayments reduce the recorded value of the
Company's note receivables and reduce interest income received by the
Company. Pursuant to the terms of offerings, the Company, as the general
partner of each Investing Partnership, has the option not to accept future
prepayments by limited partners of capital contributions. The Company has
not determined whether it will continue to accept prepayments by limited
partners of capital contributions. In addition, by financing the
acquisition of existing adult living communities through, and acting as the
general partner of, partnerships, the potential exists for claims by
limited partners for violations of the terms of the partnership or guaranty
agreements and of applicable federal and state securities and blue sky laws
and regulations.
The Company's obligations with respect to guaranteed returns are
contractual obligations of the Company to make payments under the
management contracts to the Owning Partnerships. In general, the accrual
of expenses arising from obligations of the Company, including such
obligations under the management contracts, reduces the amount of earnings
that might otherwise be available for distribution to stockholders. As
described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Deferred Income Earned",
the Company has deferred income on sales of interests in Owning
Partnerships in respect of such obligations. As a result of such
deferrals, the revenues relating to sales are reduced and actual payments
of such obligations will generally not result in the recognition of expense
unless the underlying property's cash flows are less than anticipated and,
as a result thereof, the amount paid by the Company in respect of the
guaranteed return obligations is greater than the amount assumed in
establishing the amount of such deferred income. If the underlying
property's cash flow is greater than the amount utilized in determining
deferred income, the Company's earnings will be enhanced by the recognition
of deferred income earned and, to the extent cash flow exceeds guaranteed
returns, management fees. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Revenues," "--Liquidity and
Capital Resources" and "Business--Partnership Offerings."
PROPERTY ENCUMBERED WITH MORTGAGE FINANCING
The adult living communities currently operated by the Company are
generally encumbered with mortgage financing. While these mortgage loans
are obligations of the Owning Partnerships rather than direct obligations
of the Company, the Company typically provides a guaranty of certain
obligations under the mortgages including, for example, any costs incurred
for the correction of hazardous environmental conditions. As of July 31,
1996, the aggregate principal amount of the mortgage debt of the Owning
Partnerships was approximately $148.3 million and the aggregate annual debt
service obligations, excluding any balloon amounts payable at maturity, was
approximately
11
<PAGE>
$13.1 million. Most of this debt contains provisions which limit the
ability of the respective Owning Partnerships to further encumber the
property. Through January 31, 2001, approximately $89.0 million of balloon
payments under the mortgages will become due and payable. The Company
anticipates that the Owning Partnerships will make these balloon payments
by refinancing the mortgages on their respective properties. The debt
service payments on such mortgage debt reduces the cash flow available for
distribution by partnerships to limited partners who are typically
guaranteed an annual distribution of between 11% and 12% of their paid-in
capital during the first five years of any partnership, to the extent not
paid from cash flow from the related property. The Company anticipates
that it will continue to finance its future acquisitions of existing adult
living communities through mortgage financing and partnership offerings.
The Company intends to finance its development of adult living communities
through mortgage financing and other types of financing, including long-
term operating leases arising through sale/leaseback transactions. The
financing of Company-developed communities will be direct obligations of
the Company and, accordingly, the amount of mortgage indebtedness is
expected to increase and the Company expects to have substantial debt
service and annual lease payment requirements in the future as the Company
pursues its growth strategy. As a result, a substantial portion of the
Company's cash flow will be devoted to debt service and fixed lease
payments. There can be no assurance that the Company will generate
sufficient cash flow from operations to pay its interest and principal
obligations on its mortgage debt or to make its lease payments. In
addition, the Company arranged for the sale of limited partnership
interests in two partnerships organized to make second mortgage loans to
the Company to fund approximately 20% of the costs of developing three new
adult living communities.
The formation of the Company pursuant to the merger into the Company
of various affiliated corporations and asset transfers resulted in defaults
under approximately $11.8 million aggregate principal amount of mortgage
debt of Owning Partnerships. None of the lenders have commenced any action
to pursue remedies in respect of such debt. The Company is currently
working with the lenders of such debt on amendments to the underlying debt
instruments which would give effect to the formation of the Company and
waive any such defaults. Although the Company believes that all such
defaults will be waived, there can be no assurance that this will be the
case. If any required waiver could not be obtained, the Company would seek
to cause such debt to be refinanced. In the event that the lender of such
debt accelerated such debt, sought to foreclose on the properties secured
by such debt or commenced other remedies, such Owning Partnerships and the
Company's business, operating results and financial condition could be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Liquidity and Capital Resources,"
"Business--Partnership Offerings" and Note 2 of Notes to the Company's
Consolidated Financial Statements.
EXISTING DEFAULTS AND BANKRUPTCIES OF OWNING PARTNERSHIPS
The Company holds promissory notes ("Purchase Notes") from Investing
Partnerships which were formed to acquire controlling interests in Owning
Partnerships which own adult living properties ("Adult Living Notes") and
Purchase Notes from Investing Partnerships which were formed to acquire
controlling interests in Owning Partnerships which own multi-family
properties ("Multi-Family Notes"). Because the Adult Living Notes are
recorded on the Company's financial statements net of loans from the
Investing Partnerships (which loans represent the proceeds of investor note
prepayments), all but $2.2 million of the $176.5 million of "Notes and
Accrued Interest Receivable," and all but approximately $500,000 of the
$54.0 million of "Other Receivables" recorded on the Company's Consolidated
Balance Sheet as of July 31, 1996 relate to Multi-Family Notes. (See
Note 4 to Consolidated Financial Statements.) The Company holds 169
Multi-Family Notes which are secured by controlling interests in 126 multi-
family properties (the "Multi-Family Properties"). The Company is not a
partner in any of the Owning Partnerships which own Multi-Family Properties
or in any of the corresponding Investing Partnerships.
Twenty-seven of the 126 Multi-Family Properties are in default on
their respective mortgages. Thirty-six Multi-Family Notes are secured by
controlling interests in these 27 properties, which have a recorded value,
when combined with the "Other Receivables" relating to said properties, of
$72.9 million. The Owning Partnerships that own these 27 properties have
been negotiating with the respective mortgage lenders and, in some cases,
have obtained workout agreements pursuant to which the lenders generally
agree during the term of the agreement not to take any action regarding the
mortgage default and to accept reduced debt service payments for a period
of time,
12
<PAGE>
with the goal of increasing property cash flow to enable the property to
fully service its mortgage. Seven of these Owning Partnerships have filed
petitions seeking protection from foreclosure actions under Chapter 11 of
the U.S. Bankruptcy Code ("Chapter 11 Petitions") and the Company
anticipates that in the near future two additional Owning Partnerships will
similarly seek such protection by filing Chapter 11 Petitions (said nine
Owning Partnerships are, collectively, the "Protected Partnerships"). The
aggregate "Notes and Accrued Interest Receivable" and "Other Receivables"
relating to the nine Multi-Family Notes whose nine related Investing
Partnerships own interests in the Protected Partnerships was $24.1 million.
In order to support the recorded value of these nine Multi-Family
Notes, the Selling Stockholders and one of their affiliates have assigned
certain interests they own personally in various partnerships that own
multi-family properties (the "Assigned Interests") to these nine Investing
Partnerships, which Assigned Interests provide additional security for the
related nine Multi-Family Notes. In that the appraised value of the
Assigned Interests is approximately equal to the previous recorded value of
the Investing Partnerships' interests in the Protected Partnerships (which
are deemed to have no value due to the filing of the Chapter 11 Petitions),
the filing of these petitions by the Protected Partnerships has not
resulted in a reduction of the recorded value on the Company's financial
statements of these Multi-Family Notes. Each of these nine Investing
Partnerships will reassign to the Selling Stockholders and their affiliate
any portions of the Assigned Interests not required to maintain the
recorded value of its Multi-Family Note after the applicable Protected
Partnership emerges from its Chapter 11 proceeding.
It is possible that the other 18 Owning Partnerships that own Multi-
Family Properties that are in default on their mortgages will file
Chapter 11 Petitions or take similar actions seeking protection from their
creditors. In addition, many of the Multi-Family Properties are dependent
to varying degrees on Section 8 housing assistance payment contracts with
the United States Department of Housing and Urban Development ("HUD"), many
of which will expire over the next few years. HUD has introduced various
initiatives to restructure its housing subsidy programs by increasing
reliance on prevailing market rents, by reducing spending on future
Section 8 contracts by, among other things, not renewing expiring contracts
and by restructuring mortgage debt on those properties where a decline in
rental revenues is anticipated. Due to uncertainty regarding the final
policies that will result from these initiatives and numerous other factors
that affect each property which can change over time (including the local
real estate market, the provisions of the mortgage debt encumbering the
property, prevailing interest rates and the general state of the economy)
it is impossible for the Company to determine whether these initiatives
will have an impact on the Multi-Family Properties and, if there is an
impact, whether the impact will be positive or negative.
In view of the foregoing, there can be no assurance that other Owning
Partnerships that own Multi-Family Properties will not default on their
mortgages, file Chapter 11 Petitions, and/or lose their properties through
foreclosure. Unless the Selling Stockholders contribute additional
property, and there can be no assurance that they will be willing or able
to do so, any future filings of Chapter 11 petitions by Owning Partnerships
that own Multi-Family Properties or the loss of any such property through
foreclosure would cause the Company to realize a loss equal to the recorded
value of the applicable Multi-Family Note plus any related advances, net of
any deferred income recorded for such Multi-Family Note which would reduce
such loss. In addition, the Company could be required to realize such a
loss even in the absence of Chapter 11 Petitions or loss of any such
property through foreclosure if, at any time in which the Company's
financial statements are issued, such property is considered impaired under
applicable accounting rules. Such losses could result in a default by the
Company in its covenants under various debt obligations to maintain a
specified net worth or debt-to-net worth ratio and could adversely affect
the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation Liquidity and Capital Resources".
LIABILITIES ARISING FROM GENERAL PARTNER STATUS
The Company is a general partner of all but one of the Owning
Partnerships and the general partner of 22 of 34 Investing Partnerships.
The mortgage financing of the adult living communities is without recourse
to the general credit or assets of the Company except with respect to
certain specified obligations, including, for example, costs incurred for
the correction of hazardous environmental conditions. However, except for
such non-recourse obligations, as a general partner, the Company is fully
liable for all partnership obligations, including those presently
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<PAGE>
unknown or unobserved, and unknown or future environmental liabilities.
The cost of any such obligations or claims, if partially or wholly borne by
the Company, could adversely affect the Company's business, operating
results and financial condition.
RIGHT OF PARTNERSHIPS TO TERMINATE MANAGEMENT CONTRACTS
All of the adult living communities operated by the Company and the
nursing home operated by the Company are managed by the Company pursuant to
written management contracts, which generally have a five year term
coterminous with the Company's guaranty of annual distributions to limited
partners. This five-year guaranty obligation has terminated for four of
the 34 Investing Partnerships. After the initial five year term, the
management contracts are automatically renewed each year, but are
cancelable on 30 to 60 days notice at the election of either the Company or
the Owning Partnership. Action can be taken in each partnership by a
majority in interest of partners on such major matters as the removal of
the general partners, the request for or approval or disapproval of a sale
of a property owned by a partnership or other significant actions affecting
the properties or the partnership. The Company is the general partner of
28 of the 29 Owning Partnerships that own the adult living communities and
the nursing home operated by the Company. The Company is also the general
partner of 22 of the 34 Investing Partnerships formed to acquire 98% to 99%
of the equity interests in said Owning Partnerships. In these cases,
termination of the management contracts after their initial five-year terms
generally would require removal of the Company as general partner of the
Owning and/or Investing Partnership. Removing the Company as the general
partner of an Investing Partnership requires the vote of a majority of the
holders of limited partner interest and would result in loss of the fee
income under those contracts. See "--Conflicts of Interest" and
"Business--Partnership Offerings."
LACK OF UNDERWRITER
This offering will be made, in part, on a "self-underwritten" basis
and, in part, on a best efforts basis through brokers and dealers. The
Company has never engaged in the public sale of its securities, and it has
no experience in the underwriting of any public securities offerings.
Accordingly, there is no prior experience from which investors may judge
the Company's ability to consummate this offering. There can be no
assurance that the Company will be successful in selling the shares of
Common Stock offered hereby. See "Plan of Distribution."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will
develop or be sustained after the Offering. The Common Stock has been
approved for quotation on the NASDAQ National Market, subject to certain
conditions. After completion of the Offering, the market price of the
Common Stock could be subject to significant fluctuations in response to
various factors and events, including the liquidity of the market for the
shares of Common Stock, variations in the Company's operating results, new
statutes or regulations or changes in the interpretation of existing
statutes or regulations affecting the healthcare industry in general or the
independent or assisted-living industry in particular. In addition, the
stock market in recent years has experienced broad price and volume
fluctuations that often have been unrelated to the operating performance of
particular companies. These market fluctuations also may adversely affect
the market price of the shares of Common Stock. See "Plan of
Distribution."
CONFLICTS OF INTEREST
Messrs. Luciani and Rodin, the Chairman of the Board and President of
the Company, respectively, and entities controlled by them serve as general
partners of partnerships directly and indirectly owning multi-family
properties and on account of such general partner status have personal
liability for recourse partnership obligations and own small equity
ownership interests in the partnerships. The Company held notes,
aggregating $163.6 million, at July 31, 1996 that are secured by the
limited partnership interests in such partnerships. These individuals have
provided personal guarantees in certain circumstances to obtain mortgage
financing for certain adult living communities operated by the Company and
for certain of the Company's Investor Note Debt, and the obligations
14
<PAGE>
thereunder may continue. In addition, Messrs. Luciani and Rodin and
certain employees will devote a portion of their time to overseeing the
third-party managers of multi-family properties and one adult living
community in which Messrs. Luciani and Rodin have financial interests but
the Company does not. Mr. Luciani devotes approximately 20% of his time to
such activities and Mr. Rodin devotes approximately 5% of his time to such
activities, although these amounts can vary from year to year. These
activities, ownership interests and general partner interests create actual
or potential conflicts of interest on the part of these officers. See
"Certain Transactions" and Note 10 of Notes to the Company's Consolidated
Financial Statements.
The Company is the managing general partner for 28 of the 29 Owning
Partnerships which own the 30 adult living communities and one nursing home
which the Company operates. The general partner of the remaining
partnership is Terrace Lion Corp., a Missouri corporation whose sole
officer, director and shareholder is Maurice Barksdale, a consultant to the
Company. The Company also is the general partner for 22 of the 34
Investing Partnerships that own 99% partnership interests in these owning
partnerships. In addition, the Company is the managing agent for all of
the Company's 30 adult living communities and one nursing home. The
Company has financed the acquisition of adult living communities through
the sales of limited partnership interests in the investing partnerships.
By serving in all of these capacities, the Company may have conflicts of
interest in that it has both a duty to act in the best interests of
partners of various partnerships, including the limited partners of the
Investing Partnerships, and the desire to maximize earnings for the
Company's stockholders in the operation of such adult living communities
and nursing home. See "Business--Partnership Offerings" and Note 10 of
Notes to the Company's Consolidated Financial Statements.
The Company has acquired one adult living community from an existing
Owning Partnership and has agreed to acquire one adult living community
from another existing Owning Partnership. The Company will finance these
acquisitions using mortgage financing and by arranging for the sale of
limited partnership interests in new Investing Partnerships. The Company
has obtained the consent to these transactions of the limited partners in
the existing Investing Partnerships that own interests in the Owning
Partnerships from which the communities will be acquired. The Company may
engage in similar transactions in the future. Potential conflicts of
interest may exist because of the Company's roles as general partner of
each of the selling and acquiring Owning Partnerships and of each of the
acquiring Investing Partnerships and, in some cases, the selling Investing
Partnerships.
The Company also may have a conflict of interest in that certain of
the adult living communities operated by the Company may face direct
competition from other communities operated by the Company. Decisions made
by the Company to benefit one such community may not be beneficial to the
other, thus exposing the Company to a claim of a breach of fiduciary duty
by limited partners. See "Business--Communities."
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends, and will continue to depend, on the service of
its principal executive officers. The loss of the services of one or more
of them could have a material adverse effect on the Company's operating
results and financial condition. Certain of the Company's officers or
entities controlled by them are general partners of partnerships that own
or invest in real property and they may be required to devote time to such
partnerships. The Company also depends on its ability to attract and
retain management personnel who will be responsible for the day-to-day
operations of each of its adult living communities. If the Company is
unable to hire qualified management to operate such communities, the
Company's business, operating results and financial condition could be
adversely affected. See "--Conflicts of Interest" and "Management."
COMPETITION
The long-term care industry is highly competitive, and the Company
believes that the assisted-living segment, in particular, will become even
more competitive in the future. The Company will be competing with
numerous other companies providing similar long-term care alternatives such
as home healthcare agencies, community-based service programs, adult living
communities and convalescent centers. The Company expects that, as the
provision of assisted-living services receives increased attention and the
number of states providing
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<PAGE>
reimbursement for assisted-living rises, competition will intensify as a
result of new market entrants. The Company also faces potential
competition from skilled-nursing facilities that provide long-term care
services. Moreover, in implementing its growth strategy, the Company
expects to face competition in its efforts to develop and acquire adult
living communities. 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. Consequently, there can be
no assurance that the Company will not encounter increased competition in
the future that could limit its ability to attract residents or expand its
business and therefore have a material adverse effect on its business,
operating results and financial condition. Moreover, if the development of
new adult living communities outpaces demand for those facilities in
certain markets, such markets may become saturated. Such an oversupply of
such communities could cause the Company to experience decreased occupancy
and depressed cash flows and operating results. See "Business--
Competition."
STAFFING AND LABOR COSTS
The Company competes with other providers of independent- and
assisted-living services with respect to attracting and retaining qualified
personnel. The Company also is dependent upon the available labor pool of
employees. A shortage of trained or other personnel may require the
Company to enhance its wage and benefits package in order to compete. No
assurance can be given that the Company's labor costs will not increase, or
that if they do increase, they can be matched by corresponding increases in
rental or management revenue. Any significant failure by the Company to
attract and retain qualified employees, to control its labor costs or to
match increases in its labor expenses with corresponding increases in
revenues could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Employees."
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
The Company currently, and for the foreseeable future, expects to rely
primarily on its residents' ability to pay the Company's fees from their
own or familial financial resources. Inflation or other circumstances that
adversely affect the ability of seniors to pay for the Company's services
could have an adverse effect on the Company. If the Company encounters
difficulty in attracting seniors with adequate resources to pay for its
services, its business, operating results and financial condition could be
adversely affected. See "Business--Operations."
GOVERNMENT REGULATION
Healthcare is heavily regulated at the Federal, state and local levels
and represents an area of extensive and frequent regulatory change.
Currently no federal rules explicitly define or regulate independent- or
assisted-living communities. A number of legislative and regulatory
initiatives relating to long-term care are proposed or under study at both
the federal and state levels that, if enacted or adopted, could have an
adverse effect on the Company's business and operating results. The
Company cannot predict whether and to what extent any such legislative or
regulatory initiative will be enacted or adopted, and therefore cannot
assess what effect any current or future initiative would have on the
Company's business and operating results. Changes in applicable laws and
new interpretations of existing laws can significantly affect the Company's
operations, as well as its revenues and expenses. The Company's adult
living communities are subject to varying degrees of regulation and
licensing by local and state health and social service agencies and other
regulatory authorities specific to their location. While regulations and
licensing requirements often vary significantly from state to state, they
typically relate to fire safety, sanitation, staff training, staffing
levels and living accommodations such as room size, number of bathrooms and
ventilation, as well as regulatory requirements relating specifically to
certain of the Company's health-related services. The Company's success
will depend in part on its ability to satisfy such regulations and
requirements and to acquire and maintain any required licenses. Federal,
state and local governments occasionally conduct unannounced
investigations, audits and reviews to determine whether violations of
applicable rules and regulations exist. Devoting management and staff time
and legal resources to such investigations, as well as any material
violation by the Company that is discovered in any such investigation,
audit or review, could have a material adverse effect on the Company's
business and operating results. See "Business--Strategy" and
"--Governmental Regulation."
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<PAGE>
CONTROL BY CERTAIN STOCKHOLDERS
Each share of Common Stock is entitled to one vote on all matters
submitted to a vote of the holders of the Common Stock. After giving
effect to this Offering, John Luciani and Bernard M. Rodin will
collectively beneficially own shares of Common Stock representing
approximately 88% of the Company's Common Stock if the Minimum Offering is
sold and approximately 78% of the Company's Common Stock if the Maximum
Offering is sold. As a result, they will maintain control over the
election of a majority of the Company's directors and, thus, over the
operations and business of the Company as a whole. In addition, such
stockholders will have the ability to prevent certain types of material
transactions, including a change of control of the Company. The control by
John Luciani and Bernard M. Rodin over a substantial majority of the
Company's Common Stock may make the Company a less attractive target for a
takeover than it otherwise might be, or render more difficult or discourage
a merger proposal or a tender offer. See "Principal and Selling
Stockholders."
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property
may be held liable for the costs of removal or remediation of certain
hazardous or toxic substances, including, without limitation, asbestos-
containing materials, that could be located on, in or under such property.
Such laws and regulations often impose liability whether or not the owner
or operator knows of, or was responsible for, the presence of the hazardous
or toxic substances. The costs of any required remediation or removal of
these substances could be substantial and the liability of an owner or
operator as to any property is generally not limited under such laws and
regulations, and could exceed the property's value and the aggregate assets
of the owner or operator. The presence of these substances or failure to
remediate such substances properly may also adversely affect the owner's
ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator or any
entity who arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may also be liable for
these costs, as well as certain other costs, including governmental fines
and injuries to persons or properties. As a result, the presence, with or
without the Company's knowledge, of hazardous or toxic substances at any
property held or operated by the Company could have an adverse effect on
the Company's business, operating results and financial condition. See
"Business--Government Regulation."
GENERAL REAL ESTATE RISKS
The performance of the Company's adult living communities is
influenced by factors affecting real estate investments, including the
general economic climate and local conditions, such as an oversupply of, or
a reduction in demand for, adult living communities. Other factors include
the attractiveness of properties to tenants, 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. The
performance of the Company's adult living communities also may be adversely
affected by energy shortages and the costs attributable thereto, strikes
and other work stoppages by employees of the adult living communities,
damage to or destruction of the adult living communities, various
catastrophic or other uninsurable losses and defaults by a substantial
number of tenants under their leases. The potential for operating losses
and the risk of development delays and cost overruns have been previously
described. 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.
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<PAGE>
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
properties are substantially in compliance with present requirements or are
exempt therefrom, if required changes involve a greater expenditure than
anticipated or must be made on a more accelerated basis than anticipated,
additional costs would be incurred by the Company. Further legislation may
impose additional burdens or restrictions with respect to access by
disabled persons, the costs of compliance with which could be substantial.
See "Business--Government Regulation."
LIABILITY AND INSURANCE
The Company's business 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 claims, many of which seek large amounts and result in significant
legal costs. The Company expects that from time to time it will be subject
to such suits as a result of the nature of its business. The Company
currently maintains insurance policies in amounts and with such coverage
and deductibles as it deems appropriate, based on the nature and risks of
its business, historical experience and industry standards. 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 will not
arise. A successful claim against the Company not covered by, or in excess
of, the Company's insurance could have a material adverse effect on the
Company's operating results and financial condition. Claims against the
Company, regardless of their merit or eventual outcome, may also have a
material adverse effect on 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, and there can be no
assurance that the Company will be able to obtain liability insurance
coverage in the future or, if available, that such coverage will be on
acceptable terms. See "Business--Legal Proceedings."
UNILATERAL DETERMINATION OF OFFERING PRICE
The public offering price of the shares was determined unilaterally by
the Company and has not been negotiated by underwriters or other third
parties. Among the factors considered by the Company in determining the
price were the history of, and the prospects for, the Company and the
industry in which it competes, its past and present operations, its past
and present earnings and the trend of such earnings, the present state of
the Company's development, the general condition of the securities markets
at the time of this offering and the recent market prices of publicly
traded common stocks of comparable companies. There can be no assurance
that the Shares can be resold at the offering price, if at all. Purchasers
of the Shares will be exposed to a substantial risk of a decline in the
market price of the Common Stock after the offering, if a market develops.
See "Plan of Distribution."
POLICY NOT TO PAY DIVIDENDS AND POTENTIAL LIMITATIONS ON ABILITY TO PAY
DIVIDENDS
The Company does not anticipate paying dividends subsequent to July
31, 1996. 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. In addition, certain provisions of future
indebtedness of the Company may prohibit or limit the Company's ability to
pay dividends. See "Dividend Policy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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<PAGE>
DISCRETIONARY USE OF PROCEEDS
The Company intends to use all of its net proceeds from the Offering
to finance the development of new adult living communities except for
approximately $3 million which the Company intends to use for working
capital and general corporate purposes. However, since the Company has
not, to date, entered into any substantial commitments of capital resources
to develop such communities, delays or difficulties in project development
could cause the Company to use such net proceeds to acquire existing adult
living communities and for general corporate purposes. The Company's
management will, therefore, retain broad discretion in allocating all of
the net proceeds of the Offering. See "Use of Proceeds."
ANTI-TAKEOVER CONSIDERATIONS
The Company's Board of Directors (the "Board of Directors") has the
authority, without action by the stockholders, to issue up to 1,000,000
shares of Preferred Stock par value $.0001 per share (the "Preferred
Stock"), and to fix the rights and preferences of such shares. This
authority, together with certain provisions in the Company's Restated
Certificate of Incorporation (the "Certificate") and By-Laws (including
provisions that limit stockholder ability to call a stockholders meeting or
to remove directors and require a two-thirds vote of stockholders for
amendment of certain provisions of the Certificate or approval of certain
business combinations), may delay, deter or prevent a change in control of
the Company, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may adversely affect the market price
of, and the voting and other rights of the holders of, the Common Stock.
See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
The existing stockholders of the Company acquired their shares of
Common Stock at an average cost substantially below the assumed initial
public offering price set forth on the cover page of this Prospectus.
Therefore, purchasers of Common Stock in the Offering will experience
immediate and substantial dilution, which, assuming an initial public
offering price of $18.00 per share, will be $13.86 per share assuming the
Minimum Offering and $12.62 per share assuming the Maximum Offering. See
"Dilution."
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 such sales could occur
could adversely affect the market price of the Common Stock and the
Company's ability to raise equity. Upon completion of the Offering, the
Company will have 11,250,000 shares of Common Stock outstanding assuming
the Minimum Offering and 12,500,000 shares of Common Stock outstanding
assuming the Maximum Offering. Of the shares outstanding after this
Offering, all shares sold in the Offering will be freely tradable 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, as such term is defined in Rule 144 promulgated under the
Securities Act. The remaining shares are "restricted securities" within
the meaning of Rule 144. Such restricted securities may be sold subject to
the limitations of Rule 144. Furthermore, the Company intends to register
approximately 1,250,000 shares of Common Stock reserved for issuance
pursuant to the Company's stock option plans. See "Shares Eligible for
Future Sale."
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting
estimated commissions and offering expenses payable by the Company, are
estimated to be approximately $40.0 million if the Maximum Offering is
completed and $19.3 million if the Minimum Offering is completed. The
Company intends to use all of its net proceeds to finance the development
of new adult living communities except for approximately $3 million which
the Company intends to use for working capital and general corporate
purposes. However, since the Company has not, to date, entered into any
substantial commitments of capital resources to develop such communities,
delays or difficulties in project development could cause the Company to
use such net proceeds to acquire existing adult living communities and for
general corporate purposes. The Company anticipates that most of the
construction loans it obtains to finance the development and lease-up costs
of the new adult living communities will fund between 75%
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<PAGE>
to 80% of such costs, requiring the Company to contribute 20% to 25% of
such costs. The Company arranged for the sale of limited partnership
interests in two partnerships organized to make second mortgage loans to
the Company to fund approximately 20% of the costs of developing three new
adult living communities. The Company will use its net proceeds of the
Offering (above the approximately $3 million to be used for working capital
and general corporate purposes) plus funds generated by its operations to
fund the 20% to 25% of development costs not provided by construction
loans. To the extent the Company does not sell sufficient shares of Common
Stock to complete the maximum offering, the Company may seek to obtain
construction financing from other sources which do not require such levels
of equity contributions from the developer, engage in refinancings of newly
developed adult living communities that have reached stabilized occupancy
or issue additional debt to generate additional funds to continue its
development program. See "Business--Strategy".
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. The Company will not
receive any proceeds from the sale of any shares by the Selling
Stockholders.
DIVIDEND POLICY
The Company does not anticipate paying dividends subsequent to
July 31, 1996. 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. In addition, certain provisions of
proposed and future indebtedness of the Company may prohibit or limit the
Company's ability to pay dividends. During fiscal 1994, fiscal 1995 and
the six months ended July 31, 1996, the Company's predecessors paid
dividends and other distributions of $1,886,000, $1,700,000, and $900,000,
respectively, exclusive of amounts reflected as officers' compensation.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Certain
Transactions."
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CAPITALIZATION
The following table sets forth the actual consolidated capitalization
of the Company at July 31, 1996, and as adjusted to reflect (i) the sale of
the minimum number of shares of Common Stock by the Company in this
offering and (ii) the application of the estimated net proceeds thereof.
The table should be read in conjunction with the Company's Consolidated
Financial Statements and the related notes thereto included elsewhere in
this Prospectus. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
AS OF JULY 31, 1996
-----------------------
AS ADJUSTED
MINIMUM
ACTUAL OFFERING
------ --------
(IN THOUSANDS)
--------------
Bank Debt . . . . . . . . . . . . . . . $30,740 $30,740
Other debt, principally debentures . . 101,891 101,891
Stockholders' equity:
Preferred Stock, $.0001 par value;
1,000,000 shares authorized; none
issued and outstanding . . . . . . . -- --
Common Stock, $.01 par value;
20,000,000 shares authorized;
10,000,000 shares issued and
outstanding; 11,250,000 shares
issued and outstanding as adjusted
for Minimum Offering (1) . . . . . . 100 113
Accumulated deficit . . . . . . . . . (405) (405)
35,817 55,144
Additional paid-in capital (1) . . . ------ ------
35,512 54,852
Total stockholders' equity . . . ------ ------
$168,143 $187,483
Total capitalization . . . . . ======== ========
(1) Gives effect to a 1,084.1-for-1 stock split and reduction in par value
from $.10 to $.01 which will occur upon the closing of the Offering.
Does not include 1,250,000 shares reserved for issuance under the
Company's stock option plans.
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DILUTION
The net tangible book value of the Company's Common Stock at July 31,
1996 was approximately $27,238,000, or $2.72 per share. Net tangible book
value per share is determined by dividing the number of outstanding shares
of Common Stock into the net tangible book value of the Company (total net
assets of $35,512,000 less intangible assets of $8,274,000). After giving
effect to the Minimum Offering (based upon an assumed initial public
offering price of $18.00 per share, and after deduction of commissions and
estimated offering expenses payable by the Company), the pro forma net
tangible book value of the Common Stock at July 31, 1996 would have been
$46,578,000, or $4.14 per share, representing an immediate increase in pro
forma net tangible book value of $1.42 per share to existing stockholders
and an immediate dilution of $13.86 per share to new investors. After
giving effect to the Maximum Offering (based upon an assumed initial public
offering price of $18.00 per share and after deduction of commissions and
estimated offering expenses payable by the Company), pro forma net tangible
book value of the Common Stock of July 31, 1996 would have been
$67,278,000, or $5.38 per share, representing an immediate increase in pro
forma net tangible book value of $2.66 per share to existing shareholders
and an immediate dilution of $12.62 per share to new investors. The
following table illustrates the immediate per share dilution:
Minimum Maximum
Offering Offering
-------- --------
Assumed initial public offering price per share $18.00 $18.00
Net tangible book value per share as of
July 31, 1996 . . . . . . . . . . . . . . . 2.72 2.72
Increase per share attributable to new
investors . . . . . . . . . . . . . . . . . 1.42 2.66
----- -----
Pro forma net tangible book value per
share after offering . . . . . . . . . . . . . 4.14 5.38
----- -----
Net tangible book value dilution per share to
new investors . . . . . . . . . . . . . . . . . $13.86 $12.62
====== ======
The following tables summarize, on a pro forma basis at July 31, 1996,
the difference between the number of shares purchased from the Company,
total consideration paid and the average price paid per share by existing
stockholders (based upon Total Stockholders' Equity at July 31, 1996) and
new investors after giving effect to the Minimum Offering and the Maximum
Offering, respectively:
MINIMUM OFFERING
SHARES PURCHASED
----------------
NUMBER PERCENT
------ -------
Selling
Stockholders(1) . . . 9,861,111 88
New investors(1) . . 1,388,889 12
---------- ---
Total . . . . . 11,250,000 100
========== ===
MINIMUM OFFERING
----------------
TOTAL CONSIDERATION PAID
------------------------
AVERAGE PRICE
AMOUNT PERCENT PER SHARE
------ ------- -------------
Selling Stockholders(1) . $35,512,000 59 $3.60
New investors(1) . . . . 25,000,000 41 $18.00
----------- ---
Total . . . . . . . . . $60,512,000 100
=========== ===
(1) Upon completion of the Minimum Offering, the Selling Stockholders
will own 9,861,111 shares of Common Stock, and the new investors
will own 1,388,889 shares of Common Stock, representing 100% of
the outstanding shares of Common Stock.
MAXIMUM OFFERING
----------------
SHARES PURCHASED
----------------
NUMBER PERCENT
------ -------
Selling
Stockholders(1) . . . 9,722,222 78
New investors(1) . . 2,777,778 22
--------- ---
Total . . . . . . . 12,500,000 100
========== ===
MAXIMUM OFFERING
----------------
TOTAL CONSIDERATION PAID
------------------------
AVERAGE PRICE
AMOUNT PERCENT PER SHARE
------ ------- -------------
Selling Stockholders(1) . $35,512,000 42 $3.65
New investors(1) . . . . 50,000,000 58 $18.00
----------- ---
Total . . . . . . . . . $85,512,000 100
=========== ===
(1) Upon completion of the Maximum Offering, the Selling Stockholders
will own 9,722,222 shares of Common Stock, and the new investors
will own 2,777,778 shares of Common Stock, representing 100% of
the outstanding shares of Common Stock.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data and other data)
The following selected consolidated financial data, except as
noted herein, have been taken or derived from the Company's consolidated
financial statements and should be read in conjunction with the
consolidated financial statements and the related notes thereto included
herein. The results of operations for an interim period have been prepared
on the same basis as the year end financial statements and, in the opinion
of management, contain all adjustments, consisting of only normally
recurring adjustments, necessary for a fair presentation of the results of
operations for such period. The results of operations for an interim
period may not give a true indication of results for the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEARS ENDED JANUARY 31,
-------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
STATEMENT OF
OPERATIONS DATA:
Revenues:
Sales . . . . . . . . . $ 23,088 $ 24,654 $ 29,461 $ 29,000 $ 41,407
Deferred income earned 253 792 6,668 3,518 9,140
Interest income . . . . 25,584 13,209 13,315 9,503 12,689
Property management
fees from related
parties . . . . . . . 449 584 4,124 4,516 4,666
Other income . . . . . -- -- -- -- 1,013
------- ------- ------- ------- -------
49,374 39,239 53,568 46,537 68,915
------- ------- ------- ------ -------
Costs and expenses:
Cost of sales . . . . . 15,983 14,685 26,548 21,249 27,112
Selling . . . . . . . . 6,256 7,027 6,706 6,002 7,664
Interest . . . . . . . 14,021 11,874 10,991 13,610 15,808
General and
administrative . . . . 5,836 5,617 5,271 6,688 8,475
Officers'
Compensation(1) . . . 1,200 1,200 1,200 1,200 1,200
Depreciation and 412 975 1,433 2,290 2,620
amortization . . . . . ------- ------- ------- ------- -------
43,708 41,378 52,149 51,039 62,879
------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes . . . . . . . . . 5,666 (2,139) 1,419 (4,502) 6,036
Provision for income
taxes . . . . . . . . . -- -- -- -- --
------- ------- ------- ------- -------
Net income (loss) 5,666 (2,139) 1,419 (4,502) 6,036
Pro-forma income tax 2,266 (856) 568 (1,801) 2,414
provisions (benefit)(2) ------- ------- ------- ------- ------
Pro-forma net income $ 3,400 $ 1,283 $ 851 $(2,701) $3,622
(loss)(2) . . . . . . . ======= ======= ======= ======= ======
Pro-forma earnings (loss) $ .34 $ (.13) $ .09 $ (.27) $ .36
per common share(2) . . . ======= ======= ======= ======= ======
Weighted average common 10,000 10,000 10,000 10,000 10,000
shares used . . . . . . ======= ======= ======= ======= =======
Other Data:
Adult living
communities
operated (end of 9 14 18 24 28
period) . . . . . . . ======= ======= ======= ======= =======
Number of units (end of 1,639 2,336 2,834 3,683 4,164
period) . . . . . . . ======= ======= ======= ======= =======
Average occupancy 83.3% 90.6% 90.4% 89.3% 94.7%
percentage (3) . . . ======= ======= ======= ======= =======
SIX MONTHS ENDED
JULY 31,
-------------------
1995 1996
---- ----
STATEMENT OF
OPERATIONS DATA:
Revenues:
Sales . . . . . . . . . . . . . . $19,991 $18,836
Deferred income earned . . . . . 4,570 --
Interest income . . . . . . . . . 7,030 7,886
Property management
fees from related
parties . . . . . . . . . . . . . 2,890 1,559
Other income . . . . . . . . . . 925 --
------- -------
35,406 28,281
------- -------
Costs and expenses:
Cost of sales . . . . . . . . . . 14,855 9,323
Selling . . . . . . . . . . . . . 3,854 3,489
Interest . . . . . . . . . . . . 7,891 7,802
General and administrative . . . 3,586 4,099
Officers' Compensation(1) . . . . 600 600
Depreciation and amortization . . 1,491 1,730
-------- -------
32,277 27,043
-------- -------
Income (loss) before provision
for income taxes . . . . . . . . 3,129 1,238
-- 330
Provision for income taxes . . . . -------- -------
Net income (loss) 3,129 908
Pro-forma income tax 1,252 165
provisions (benefit)(2) . . . . . ------- -------
$1,877 $743
Pro-forma net income (loss)(2) . . ======= =======
Pro-forma earnings (loss) per $.19 $.07
common share(2) . . . . . . . . . ======= =======
Weighted average common 10,000 10,000
shares used . . . . . . . . . . . ======= =======
Other Data:
Adult living communities 26 30
operated (end of period) . . . ======= =======
Number of units (end of 3,777 4,350
period) . . . . . . . . . . . . ======= =======
Average occupancy 93.0% 92.7%
percentage (3) . . . . . . . . ======= =======
23
<PAGE>
AS OF JANUARY 31,
-------------------------------
1992 1993 1994
---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents . . $ 3,477 $ 6,455 $ 9,335
Notes and receivables-net . . 230,760 234,115 227,411
Total assets . . . . . . . . 241,691 251,118 249,203
Total liabilities . . . . . . 191,234 203,990 211,647
Stockholders' equity . . . . 50,457 47,128 37,556
AS OF JANUARY 31, AS OF JULY 31,
------------------ --------------
1995 1996 1996
---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents . . . $ 10,950 $ 17,961 $ 7,190
Notes and receivables-net . . . 220,014 223,736 226,044
Total assets . . . . . . . . . 249,047 260,742 254,364
Total liabilities . . . . . . . 217,879 225,238 218,852
Stockholders' equity . . . . . 31,168 35,504 35,512
--------------
(1) John Luciani and Bernard M. Rodin, the Chairman of the Board and
President, respectively, of the Company received dividends and
distributions from the Company's predecessors but did not receive
compensation. Officers' Compensation is based upon the aggregate
compensation currently received by such officers, $600,000 a year
for each such officer. Amounts received by such officers in
excess of such amounts are treated as dividends for purposes of
the Company's financial statements. In the first six months of
fiscal 1996, such officers also received $450,000 each as a
dividend. See "Management."
(2) The Company's predecessors were Sub-chapter S corporations and a
partnership. The pro forma statement of operations data reflects
provisions for federal and state income taxes as if the Company
had been subject to federal and state income taxation as a C
corporation during each of the periods presented.
(3) Average occupancy percentages were determined by adding all of
the occupancy percentages of the individual communities and
dividing that number by the total number of communities. The
average occupancy percentage for each particular community was
determined by dividing the number of occupied apartment units in
the particular community on the given date by the total number of
apartment units in the particular community.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a fully integrated provider of adult living
accommodations and services which acquires, finances, develops and manages
adult living communities. The Company's revenues have been, and are
expected to continue to be, primarily derived from sales of partnership
interests in partnerships it organizes to finance the acquisition of
existing adult living communities. The Company manages such adult living
communities and, as a result, is one of the largest operators of adult
living communities in the United States, operating communities offering
both independent and assisted living services. The Company currently
operates 30 adult living communities containing 4,350 apartment units in 11
states in the Sun Belt and the Mid-West. The Company also operates one 60-
bed skilled nursing facility. To the extent that the development plan
described below is successfully implemented, the Company anticipates that
the percentage of its revenues derived from sales of partnership interests
would decrease and that the percentage of revenues derived from newly
constructed communities would increase.
The Company was formed pursuant to the merger of various Sub-
Chapter S corporations which were wholly owned by the Selling Stockholders
and the transfer of certain assets by and assumption of certain liabilities
of (i) a partnership that was wholly owned by the Selling Stockholders and
(ii) the Selling Stockholders individually. In exchange for the transfer
of such stock and assets, the Selling Stockholders received shares of the
Company's Common Stock. These transactions are collectively called the
"reorganization". All of the assets and liabilities of the reorganization
were transferred at historical cost. The reorganization was effective as
of April 1, 1996. Prior to the reorganization, the various Sub-chapter S
corporations and the partnership, which were wholly-owned by the Selling
Stockholders were historically reported on a combined basis.
Historically, the Company has financed the acquisition and
development of multi-family and adult living communities by utilizing
mortgage financing and by arranging for the sale of limited partnership
interests. The Company is the general partner of all but one of the
partnerships that owns the adult living communities in the Company s
portfolio and the Company manages all of the adult living communities in
its portfolio. The Company has a participation in the cash flow, sale
proceeds and refinancing proceeds of the properties after certain priority
payments to the limited partners. The existing adult living communities
managed by the Company are not owned by the Company. Future revenues, if
any, of the Company relating to such communities would primarily arise in
the form of (i) deferred income earned on sales of interests in the Owning
Partnerships for such communities, (ii) management fees and (iii) amounts
payable by the Investing Partnerships to the Company in the event of the
subsequent sale or refinancing of such communities. The Company intends to
continue to finance its future acquisitions of existing adult living
communities by utilizing mortgage financing and by arranging for the sale
of partnership interests, and anticipates acquiring four to eight such
communities during the next two years. The Company has entered into
contracts to acquire an adult living community in Morristown, Tennessee
containing 180 apartment units, an adult living community in Tampa, Florida
containing 164 apartment units and two adult living communities in Sparks,
Nevada containing 92 apartment units and 64 apartment units, respectively.
In addition, the Company has acquired one adult living community from an
existing Owning Partnership and has agreed to acquire one adult living
community from another existing owning partnership, and may engage in other
similar transactions.
The Company has adopted a development plan pursuant to which it
intends to construct between 18 and 24 adult living communities during the
next two years containing between 2,268 and 3,408 apartment units. The
Company plans to own or operate pursuant to long-term leases or similar
arrangements the adult living communities that will be developed under the
plan. The Company will use proceeds of this Offering, mortgage financing
and long-term leases or similar arrangements to finance the development,
construction and initial operating costs.
25
<PAGE>
The Company derives its revenues from sales of interests in adult
living real estate limited partnerships, recognition of deferred income
with respect to such partnerships, interest on notes received by the
Company from such partnerships as part of the purchase price for the sale
of interests, and property management fees received by the Company:
. Sales. Sales of interests in adult living real estate partnerships
are recognized when the profit on the transaction is determinable, that is,
the collectibility of the sales price is reasonably assured and the
earnings process is virtually complete. The Company determines the
collectibility of the sales price by evidence supporting the buyers'
substantial initial and continuing investment in the adult living
communities as well as other factors such as age, location and cash flow of
the underlying property.
. Deferred Income Earned. The Company has deferred income on sales to
Investing Partnerships of interests in Owning Partnerships. The Company
has arranged for the private placement of limited partnership interests in
Investing Partnerships. Offerings of interests in Investing Partnerships
which were formed to acquire controlling interests in Owning Partnerships
which own adult living properties ("Adult Living Owning Partnerships")
provide that the limited partners will receive guaranteed distributions
during each of the first five years of their investment equal to between
11% to 12% of their then paid-in capital contributions. Pursuant to
management contracts with the Adult Living Owning Partnerships, the Company
is required to pay to the Adult Living Owning Partnerships, and the Adult
Living Owning Partnerships distribute to the Investing Partnership for
distribution to limited partners, amounts sufficient to fund any part of
such guaranteed return not paid from cash flow from the related property.
The amount of deferred income for each property is calculated at the
beginning of each fiscal year in a multi-step process. First, based on the
property's cash flow in the previous fiscal year, the probable cash flow
for the property for the current fiscal year is determined and that amount
is initially assumed to be constant for each remaining year of the guaranty
period (the "Initial Cash Flow"). The Initial Cash Flow is then compared
to the guaranteed return obligation for the property for each remaining
year of the guaranty period. If the Initial Cash Flow exceeds the
guaranteed return obligation for any fiscal year, the excess Initial Cash
Flow is added to the assumed Initial Cash Flow for the following fiscal
year and this adjusted Initial Cash Flow is then compared to the guaranteed
return obligation for said following fiscal year. If the Initial Cash Flow
is less than the guaranteed return obligation for any fiscal year, a
deferred income liability is created in an amount equal to such shortfall
and no adjustment is made to the Initial Cash Flow for the following year.
As this process is performed for each property every year, changes in a
property's actual cash flow will result in changes to the assumed Initial
Cash Flow utilized in this process and will result in increases or
decreases to the deferred income liability for the property. Any deferred
income liability created in the year the interest in the Owning Partnership
is sold reduces revenues relating to the sale. The payment of the
guaranteed obligations, however, will generally not result in the
recognition of expense unless the property's actual cash flow for the year
is less than the Initial Cash Flow for the year, as adjusted, and as a
result thereof, the amount paid by the Company in respect of the guaranteed
return obligations is greater than the amount assumed in establishing the
deferred income liability. If, however, the property's actual cash flow is
greater than the Initial Cash Flow for the year, as adjusted, the Company's
earnings will be enhanced by the recognition of deferred income earned and,
to the extent cash flow exceeds guaranteed returns, management fees. The
Company accounts for the sales of controlling interests in Owning
Partnerships which own multi-family properties ("Multi-Family Owning
Partnerships") under the installment method. Under the installment method
the gross profit is determined at the time of sale. The revenue recorded
in any given year would equal the cash collections multiplied by the gross
profit percentage. The Company has deferred all future income to be
recognized on these transactions. Losses on these properties are
recognized immediately upon sale. Sales of controlling interests in Multi-
Family Owning Partnerships account for 87% of Company's deferred income.
. Interest Income. The Company has note receivables from Investing
Partnerships which were formed to acquire interests in Owning Partnerships
which own adult living communities. Such notes generally have interest
rates ranging from 11% to 13.875% per annum and are due in installments
over five years from the date the Investing Partnership acquired its
interest in the Owning Partnership. The notes represent senior
indebtedness of the related limited partnership and are collateralized by
Investing Partnership's interest in the Owning Partnership that owns
26
<PAGE>
the related adult living community. These properties are generally
encumbered by mortgages. The mortgages generally bear interest at rates
ranging from 8% to 9.5% per annum. The mortgages are generally
collateralized by a mortgage lien on the related adult living communities.
Principal and interest payments on each note are also collateralized by the
investor notes payable to the Investing Partnership to which the limited
partners are admitted.
The Company also has note receivables from limited partnerships which
were formed to acquire controlling interests in multi-family properties.
The notes have maturity dates ranging from ten to fifteen years from the
date the partnership interests were sold. Several notes have reached their
final maturity dates and, due to the inability, in view of the current cash
flows of the properties, to maximize the value of the underlying property
at such maturity dates, either through a sale or refinancing, these final
maturity dates have been extended by the Company. The Company expects that
it may need to extend maturities of other Multi-family Notes. The notes
represent senior indebtedness of the related limited partnership and are
collateralized by a 99% partnership interest in the partnership that owns
the related multi-family property. These properties are encumbered by
mortgages, which generally bear interest rates ranging from 7% to 12% per
annum. The mortgages are collateralized by a mortgage lien on the related
multi-family property. Interest payments on each note also are
collateralized by the investor notes.
. Management fees. Property management fees earned for services
provided to related parties are recognized as revenue when related services
have been performed.
Results of Operation
. Revenues
Revenues for the three months ended July 31, 1996 were $10.7 million
compared to $21.7 million for the three months ended July 31, 1995, a
decrease of $11.0 million or 50.7%. Revenues for the six months ended July
31, 1996 were $28.3 million compared to $35.4 million for the six months
ended July 31, 1995, a decrease of $7.1 million or 20.1%. Revenues for the
fiscal year ended January 31, 1996 ("Fiscal 1995") were $68.9 million
compared to $46.5 million for the year ending January 31, 1995 ("Fiscal
1994"), representing an increase of $22.4 million or 47.3%. Revenues for
Fiscal 1994 were $46.5 million compared to $53.6 million for the year ended
January 31, 1994 ("Fiscal 1993"), representing a decrease of $7.1 million
or 13.2%.
Sales for the three months ended July 31, 1996 were $8.1 million
compared to $14.2 million for the three months ended July 31, 1995, a
decrease of $6.1 million or 43.0%. The decrease is attributable to the
sale of partnership interests relating to 83% of one adult living community
in the three months ended July 31, 1996 as compared to two adult living
communities in the three months ended July 31, 1995. Sales for the six
months ended July 31, 1996 were $18.8 million compared to $20.0 million for
the six months ended July 31, 1995, a decrease of $1.2 million or 6.0%.
This decrease is attributable to slightly lower revenue generated from the
sale of partnership interests relating to three adult living communities in
the six months ended July 31, 1996 as compared to the sale of partnership
interests relating to three adult living communities in the six months
ended July 31, 1995. Sales for Fiscal 1995 were $41.4 million compared to
$29.0 million for Fiscal 1994, representing an increase of $12.4 million or
42.8%. The increase is attributable to the sale of partnership interests
relating to six adult living communities in Fiscal 1995 compared to four in
Fiscal 1994. Sales for Fiscal 1994 were $29.0 million compared to $29.5
million for Fiscal 1993, representing a decrease of $500,000 or 1.7%. In
both Fiscal 1994 and 1993, the Company arranged for the sale of partnership
interests relating to four adult living communities.
There was no deferred income earned in the three months ended July
31, 1996 compared to $2.3 million for the three months ended July 31, 1995,
a decrease of $2.3 million or 100.0%. There was no deferred income earned
in the six months ended July 31, 1996 compared to $4.6 million for the six
months ended July 31, 1995, a decrease of $4.6 million or 100.0%. In
February and March 1996, the Company arranged for the refinancing
27
<PAGE>
of existing mortgages on six adult living communities and initial mortgage
financing on four adult living communities, which resulted in the return of
over $43.0 million of capital to limited partners and which reduced the
Company's obligations with respect to the guarantee of annual returns to
such limited partners. Because the refinancings were completed or
committed to before the completion of the Company's financial statements
for Fiscal 1995, the Company recognized deferred income with respect to
such refinanced properties in Fiscal 1995 rather than in the six months
ended July 31, 1996. Deferred income earned increased to $9.1 million in
Fiscal 1995 from $3.5 million in Fiscal 1994, representing an increase of
$5.6 million or 160%. The increase in the recognition of deferred income
earned is primarily as a result of increased cash flows from adult living
communities and the refinancing of a number of adult living communities in
March 1996, as described above. Deferred income earned in Fiscal 1994 were
$3.5 million compared to $6.7 million for Fiscal 1993, representing a
decrease of $3.2 million or 47.8%. This decrease is principally due to the
high amount of deferred income earned in Fiscal 1993 because of a
significant increase in the cash flow of a number of adult living
communities in that year as compared to previous years, thus allowing for
the realization of a substantial amount of deferred income in Fiscal 1993.
While cash flow from adult living communities continued to increase in
Fiscal 1994, it did not increase at the same rate as in Fiscal 1993,
resulting in the realization of less deferred income in Fiscal 1994 than in
Fiscal 1993.
Interest income for the three months ended July 31, 1996 was $1.9
million compared to $2.9 million for the three months ended July 31, 1995,
a decrease of $1.0 million or 34.5%. Interest income for the six months
ended July 31, 1996 was $7.9 million compared to $7.0 million for the six
months ended July 31, 1995, an increase of $900,000 million or 12.9%. The
refinancing of a number of adult living communities in February and March
1996 resulted in the return of over $43.0 million of capital to limited
partners, thereby accelerating the receipt of scheduled interest payments
received by the Company in the three months ending April 30, 1996. This
accelerated receipt of scheduled interest payments in the three months
ended April 30, 1996 caused interest income for the six months ended July
31, 1996 to be greater than interest income for the six months ended July
31, 1995, but also resulted in a reduction of the scheduled interest
payments that would otherwise have been received in the three months ended
July 31, 1996. The refinancings also resulted in a reduction of interest
income for the three months ended July 31, 1996 due to the prepayment of
mortgages held by the Company. In addition, cash flow generated by various
multi-family properties, which the Company receives as interest income on
the related Purchase Notes and which the Company receives in semi-annual
installments at varying dates which can change from year to year, was lower
in the three months ended July 31, 1996 as compared to the three months
ended July 31, 1995. Interest income for Fiscal 1995 was $12.7 million
compared to $9.5 million for Fiscal 1994, representing an increase of $3.2
million or 33.7%. Such increase reflects the increased aggregate interest
received on notes from limited partnerships as a result of an increase in
the aggregate principal amount of such notes. The increase in aggregate
principal amount reflects an increase in the number of existing adult
living communities operated by the Company and in the number of offerings
in connection with acquisitions of adult living communities to six in
Fiscal 1995, compared to four in Fiscal 1994. The increase in interest
income in Fiscal 1995 also reflects an interest payment realized in
connection with a mortgage debt restructuring for a multi-family property.
Interest income for Fiscal 1994 was $9.5 million compared to $13.3 million
for Fiscal 1993, representing a decrease of $3.8 million or 28.6%. This
decrease was primarily attributable to the continuing decline in the
amounts receivable and collected of investor notes relating to offerings in
connection with acquisitions of multi-family properties (which decline
reflects the Company's discontinuance of multi-family property acquisitions
and offerings after 1986), which investor note collections were applied as
interest payments under their respective limited partnership note payable
to the Company.
Property management fees from related parties for the three months
ended July 31, 1996 were $700,000 compared to $1.4 million for the three
months ended July 31, 1995, a decrease of 700,000 or 50.0%. Property
management fees from related parties for the six months ended July 31, 1996
were 1.6 million compared to $2.9 million for the six months ended July 31,
1995, a decrease of $1.3 million or 44.8%. These decreases are primarily
due to (i) an acceleration of the maintenance and repairs to various adult
living communities, which reduced cash flow and the incentive management
fees the properties generated, (ii) the increased debt service on various
adult living communities due to the refinancing of such properties in March
1996, which reduced the cash flow produced by such properties and the
incentive management fees these properties generate to a greater extent
than the reduction of the Company's guaranteed return obligation due to
said refinancing, and (iii) the establishment of capital
28
<PAGE>
improvement reserves pursuant to the terms of the newly refinanced loans,
which reserves reduce the cash flow and incentive management fees these
properties generate. Property management fees from related parties were
$4.6 million in Fiscal 1995 compared to $4.5 million in Fiscal 1994,
representing an increase of $100,000 or 2.2%. The increase is primarily
due to an increase of additional properties under management during the
period, as partially offset by a decrease in incentive management fees
received by the Company due to the Company's guarantee obligations
increasing at a rate faster than the rate of increase of the cash flow
generated by the respective adult living communities. Property management
fees from related parties increased to $4.5 million in Fiscal 1994 compared
to $4.1 million in Fiscal 1993, representing an increase of $400,000 or
9.8%. The increase is attributable to additional properties under
management during the period.
There was no other income for the three months ended July 31, 1996 as
compared to $1.0 million of other income for the three months ended July
31, 1995, a decrease of $1.0 million or 100.0%. There was no other income
for the six months ended July 31, 1996 as compared to $1.0 million for the
six months ended July 31, 1995, a decrease of $1.0 million or 100.0%. The
decreases are due to the non-recurring nature of the other income
recognized in the three months and six months ended July 31, 1995, which
resulted from the restructuring and reduction of a development fee
obligation of the Company. Other income increased to $1.0 million in
Fiscal 1995 from no other income earned in Fiscal 1994, representing an
increase of $1.0 million. The increase is due to the restructuring and
reduction of said development fee obligation of the Company. There was no
other income in Fiscal 1994 or Fiscal 1993.
. Cost of Sales
Cost of sales, which include the cash portion of the purchase price
for properties plus related transaction costs and expenses, for the three
months ended July 31, 1996 were $4.3 million compared to $10.8 million for
the three months ended July 31, 1995, a decrease of $6.5 million or 60.2%.
The decrease is due to the establishment in the three months ended July 31,
1995 of a deferred income liability relating to the acquisitions occurring
in said period, which increased the cost of sales, as compared to the three
months ended July 31, 1996, where no such liability was established. Cost
of sales as a percent of sales decreased from 75.5% for the three months
ended July 31, 1995 to 52.8% for the three months ended July 31, 1996. The
decrease can be attributed to the establishment in the three months ended
July 31, 1995 of a deferred income liability relating to the acquisitions
occurring in said period, which increased the cost of sales, as compared to
the three months ended July 31, 1996, where no such liability was
established and to the Company's ability to acquire properties on more
favorable terms and to obtain more favorable mortgage financings for its
acquisitions (i.e. - higher loan-to-value ratios). Cost of sales for the
six months ended July 31, 1996 were $9.3 million compared to $14.9 million
for the six months ended July 31, 1995, a decrease of $5.6 million or
37.6%. The decrease is primarily due to the establishment in the six
months ended July 31, 1995 of a deferred income liability relating to the
acquisitions occurring in said period, which increased the cost of sales,
as compared to the six months ended July 31, 1996, where no such liability
was established and is also due to the Company's ability to acquire
properties on more favorable terms and to obtain more favorable mortgage
financings for its acquisitions (i.e. - higher loan-to-value ratios and
preferred interest
29
<PAGE>
rates). Cost of sales as a percent of sales decreased from 74.1% for the
six months ended July 31, 1995 to 48.9% for the six months ended July 31,
1996. The decrease is primarily due to the establishment in the six months
ended July 31, 1995 of the deferred income liability referred to above.
Cost of sales for Fiscal 1995 was $27.1 million compared to $21.2 million
in Fiscal 1994, representing an increase of $5.9 million or 27.8%. The
increase can be primarily attributed to the acquisition by the Company of
six properties in Fiscal 1995 with combined purchase prices of $35 million
as compared to the acquisition of four properties in Fiscal 1994 with
combined purchase prices of $22.3 million. The increase in the aggregate
purchase price of properties acquired was partially offset by an increased
use of mortgage financing for acquisitions in Fiscal 1995 from levels of
mortgage financing for Fiscal 1994, which reduced cash expenditures by the
Company for such acquisitions. Cost of sales as a percent of sales
decreased from 73.2% in Fiscal 1994 to 65.5% in Fiscal 1995. The decrease
can be attributed principally to the Company's ability to obtain more
favorable mortgage financing for its acquisitions (i.e. - higher loan-to-
value ratios and preferred interest rates), which has contributed to the
decrease in the cost of sales, and has enabled the Company to also obtain
more favorable pricing when arranging for the sale of partnership
interests, which has contributed to the increase in sales, thus creating
larger gross margins. Cost of sales for Fiscal 1994 were $21.2 million
compared to $26.5 million for Fiscal 1993, a decrease of $5.3 million or
20%. This decrease was due primarily to the use of mortgage financing for
property acquisitions in Fiscal 1994, which reduced cash expenditures by
the Company for property acquisitions from such expenditures for Fiscal
1993 where no such mortgage financing was used. Cost of sales as a percent
of sales decreased from 90% in Fiscal 1993 to 73.2% in Fiscal 1994. This
decrease is principally due to the use of mortgage financing for property
acquisitions in Fiscal 1994, which reduced cash expenditures by the Company
for property acquisitions from such expenditures for Fiscal 1993, in which
mortgage financing was not used.
Several factors, including the collapse of the real estate market in
the late 1980's and early 1990's, which resulted in a number of distressed
property sales and limited competition from other prospective purchasers,
allowed the Company to acquire existing adult living communities at such
time on relatively favorable terms. Mortgage financing, however, was
generally either not available or available only on relatively unattractive
terms during this period, which made acquisitions more difficult because
they either required large outlays of cash or the use of mortgage financing
on relatively unfavorable terms. During the last several years, several
factors have contributed towards a trend to less favorable terms for
acquisitions of adult living communities, including a recovery in the
market for adult living communities and increased competition from other
prospective purchasers of adult living communities. The Company, however,
has been able to obtain mortgage financing on increasingly favorable terms
(i.e. - the Company has obtained mortgages for a greater percentage of the
purchase price and at preferred rates). These factors, combined with an
overall reduction of interest rates, have partially offset the factors that
have led to more unfavorable acquisition terms. A significant change in
these or other factors (including, in particular, a significant rise in
interest rates) could prevent the Company from acquiring communities on
terms favorable enough to offset the start-up losses of newly-developed
communities as well as the Company's debt service obligations, guaranty
obligations and the Company's selling, general and administrative expenses.
Although the Company has been able to acquire adult living communities on
more favorable terms in the six months ended July 31, 1996, there can be no
assurance that this nascent trend towards improving acquisition terms will
continue. Although the Company does not expect that this trend towards
improving acquisition terms will continue, if it does continue, the Company
may increase the number of existing adult living communities it acquires
and decrease the number it develops in that the continuation of this trend
would eventually result in it being more affordable to buy existing
communities than to build new ones.
. Selling Expenses
Selling expenses for the three months ended July 31, 1996 were $1.7
million compared to $2.5 million for the three months ended July 31, 1995,
a decrease of $800,000 or 32.0%. The decrease is attributable to lower
commissions and related selling costs in connection with the sale of
limited partnership interests in a partnership that acquired 83% of an
adult living community in the three months ended July 31, 1996 compared to
the sale of limited partnership interests in partnerships that acquired two
adult living community in the three months ended July 31, 1995. Selling
expenses for the six months ended July 31, 1996 were $3.5 million compared
to $3.9 million for the six months ended July 31, 1995, a decrease of
$400,000 or 10.3%. The decrease was attributable to the lower sale price
for, and the resulting lower commissions and related selling costs in
connection with, limited partnership interests in partnerships that
acquired three adult living communities in the six months ended July 31,
1996 compared to limited partnership interests in partnerships that
acquired three adult living communities in the six months ended July 31,
1995 and was partially offset by reductions in commissions payable relating
to the sale of limited partnership interests in partnerships that acquired
multi-family properties prior to 1986. Selling expenses for Fiscal 1995
were $7.6 million compared to $6.0 million in Fiscal 1994, representing an
increase of $1.6 million or 26.6%. The increase was attributable to
additional commissions paid for assistance in the sale of limited
partnership interests and related selling costs in connection with the sale
of limited partnership interests in partnerships that acquired six adult
living communities in Fiscal 1995 for $41.4 million compared to the sale of
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limited partnership interests in partnerships that acquired four adult
living communities in Fiscal 1994 for $29.0 million. Selling expenses for
Fiscal 1994 were $6.0 million compared to $6.7 million in Fiscal 1993,
representing a decrease of $700,000 or 10.4%. This decrease is due
primarily to reductions in the rate of commissions paid to brokers selling
limited partnership interests.
. Interest Expense
Interest expense for the three months ending July 31, 1996 was $3.8
million compared to $3.5 million for the three months ended July 31, 1995,
an increase of $300,000 or 7.9%. The increase can be primarily attributed
to increases in debt during the period as partially offset by decreases in
debt due to the refinancing of two adult living communities in March 1996.
Until the refinancings, the mortgages on the communities were direct
obligations of the Company and the corresponding interest payments were
included in the Company's interest expense. These mortgages are now direct
obligations of the Owning Partnerships that own these properties and the
corresponding interest payments are no longer included in interest expense.
Interest expense for the six months ended July 31, 1996 was $7.8 million as
compared to $7.9 million for the six months ended July 31, 1995 a decrease
of $100,000 or 1.3%. The decrease was due to the capitalization of certain
interest expenses relating to the construction and development of new adult
living communities. Interest expense for Fiscal 1995 was $15.8 million
compared to $13.6 million for Fiscal 1994, representing an increase of $2.2
million or 16.2%. Interest Expense included interest payments on Debenture
Debt which had an average interest rate of 11.95% per annum and was secured
by the Purchase Note Collateral. During Fiscal 1995, total interest
expense with respect to Debenture Debt was approximately $8.7 million,
Purchase Note Collateral produced approximately $3.0 million of interest
and related payments to the Company, which was $5.7 million less than the
amount required to pay interest on the Debenture Debt. Interest expense
for Fiscal 1994 was $13.6 million compared to $11.0 million for Fiscal
1993, an increase of $2.6 million or 23.6%. The increases can be attributed
to increases in debt during the periods and was somewhat offset by
reductions in interest rates during the periods. See "Liquidity and Capital
Resources."
. General and Administrative Expenses
General and administrative expenses were $1.5 million for the three
months ended July 31, 1996 as compared to $1.7 million for the three months
ended July 31, 1995, a decrease of $200,000 or 11.8%. The decrease is due
to the capitalization of expenses relating to the implementation of the
Company's new development program, which became significant in the current
fiscal year as partially offset by increases in professional fees and
salary costs associated with the new development plans. General and
administrative expenses were $4.1 million for the six months ended July 31,
1996 as compared to $3.6 million for the six months ended July 31, 1995, an
increase of $500,000 or 13.9%. The increases primarily reflect additional
professional fees and additional salary costs incurred in instituting the
Company's new development program and in managing and financing the
Company's portfolio of properties, which increased by three in the six
months ended July 31, 1996. General and administrative expenses were $8.5
million in Fiscal 1995 compared to $6.7 million in Fiscal 1994,
representing an increase of $1.8 million or 26.7%. The increase primarily
reflects additional salary costs incurred in instituting the Company's new
development program and in managing and financing the Company's portfolio
of properties, which increased by six in Fiscal 1995, and also reflects
increases in various office expenses. General and administrative expenses
were $6.7 million in Fiscal 1994 compared to $5.3 million in Fiscal 1993 or
an increase of $1.4 million or 26.4%. The increase primarily reflects the
write-off in Fiscal 1993 of previously existing accounts payable and
accrued expenses that the Company determined would not be paid.
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. Depreciation and Amortization
Depreciation and amortization for the three months ended July 31,
1996 was $800,000 compared to $900,000 for the three months ended July 31,
1995, a decrease of $100,000 or 11.1%. The decrease is primarily due to
the decrease in the issuance of Debenture Debt and Unsecured Debt during
the three months ended July 31, 1996. Depreciation and amortization for
the six months ended July 31, 1996 was $1.7 million as compared to $1.5
million for the six months ended July 31, 1995, an increase of $200,000 or
13.3%. The increase is attributable to the issuance of additional
Debenture Debt and Unsecured Debt in Fiscal 1995 which had its full
amortization impact in the six months ended July 31, 1996. Depreciation
and amortization for Fiscal 1995 was $2.6 million compared to $2.3 million
for Fiscal 1994. Depreciation and amortization consists of amortization of
deferred debt expense incurred in connection with debt issuance.
Depreciation and amortization for Fiscal 1994 was $2.3 million compared to
$1.4 million in Fiscal 1993. The increase can be attributable to the
issuance of additional Debenture Debt in Fiscal 1993 which had its full
amortization impact in Fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed operations through cash flow
generated by operations, by arranging for the sale of partnership interests
and through borrowings consisting of Investor Note Debt, Unsecured Debt,
Mortgage Debt and Debenture Debt. The Company's principal liquidity
requirements are for payment of operating expenses, costs associated with
development of new adult living communities, debt service obligations and
guaranteed return obligations to limited partners of Investing Partnerships
to the extent that guaranteed returns cannot be funded from the cash flow
of such partnerships.
The Company's cash and cash equivalents were $18.0 million at January
31, 1996, $11.0 million at January 31, 1995 and $9.3 million at January
31, 1994. The increase in cash and cash equivalents at January 31, 1996
reflects, among other things, (i) net income of $6.0 million for Fiscal
1995, compared to a loss of $4.5 million for Fiscal 1994, (ii) increases in
loans and accrued interest payable by $52.0 million, and (iii) amortization
and depreciation for Fiscal 1995 of $2.6 million, offset in part by, among
other things, (i) a decrease in loans payable by $39.3 million, (ii)
distributions of $1.7 million and (iii) payments of other notes payable of
$1.6 million. The increase in cash and equivalents at January 31, 1995
reflects, among other things, (i) increases in loans and accrued interest
payable by $44.0 million and (ii) amortization and depreciation of $2.3
million offset, in part, by (i) a loss of $4.5 million for Fiscal 1994,
(ii) a decrease in loans payable by $31.3 million, (iii) distributions of
$1.9 million and (iv) payments of notes payable of $2.6 million.
Cash flows provided by operating activities for the six months ended
July 31, 1996 were $1.5 million and were comprised of: (i) net income of
$908,000 and (ii) adjustments for non-cash items of $1.7 million less (iii)
the net change in operating assets and liabilities of 1.1 million. The
adjustments for non-cash items is comprised of depreciation and
amortization. Cash flows used by operating activities for the six months
ended July 31, 1995 were $5.1 million and were comprised of: (i) net income
of $3.1 million less (ii) adjustments for non-cash items of $3.1 million
less (iii) the net change in operating assets and liabilities of $5.1
million. The adjustments for non-cash items is comprised of depreciation
and amortization of $1.4 million offset by deferred income earned of $4.5
million. Cash flows provided by operating activities for Fiscal 1995 were
$1.2 million and were comprised of: (i) net income of $6.0 million less
(ii) adjustments for non-cash items of $6.5 million plus (iii) the net
change in operating assets and liabilities of $1.7 million. The
adjustments for non-cash items is comprised of depreciation and
amortization of $2.6 million offset by deferred income earned of $9.1
million. Cash flows provided by operating activities for Fiscal 1994 were
$1.3 million and were comprised of: (i) net loss of $4.5 million less
(ii) adjustments for non-cash items of $1.2 million plus (iii) the net
change in operating assets and liabilities of $7.0 million. The
adjustments for non-cash items is comprised of depreciation and
amortization of $2.3 million offset by deferred income earned of $3.5
million. Cash flows provided by operating activities for Fiscal 1993 were
$7.0 million and were comprised of: (i) net income of $1.4 million less
(ii) adjustments for non-cash items of $5.2 million plus (iii) the net
change in operating assets and liabilities of $10.8 million. The
adjustments for non-cash
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items is comprised of depreciation and amortization of $1.4 million offset
for deferred income earned of $6.7 million.
Net cash provided by investing activities for the six months ended
July 31, 1996 of $15,000 was comprised of the increase in investments for
the period offset by a decrease in investments due to the distribution of
refinancing proceeds due to the Company's portion of general partner
interests in adult living communities. Net cash used by investing
activities for the six months ended July 31, 1995 of $154,000 was comprised
of the increase in investments. Net cash used by investing activities for
Fiscal 1995 of $792,000 was comprised of the increase in investments. Net
cash used by investing activities for Fiscal 1994 of $736,000 was comprised
of the increase in investments. Net cash used by investing activities for
Fiscal 1993 of $641,000 was comprised of the increase in investments.
Net cash used by financing activities for the six months ended July
31, 1996 of $12.3 million was comprised of: (i) debt repayments of $32.3
million less proceeds from the issuance of new debt of $24.8 million less
(ii) payments of notes payable of $91,000 less (iii) dividends paid of
$900,000 less (iv) the increase in other assets of $3.8 million due to the
capitalization of costs relating to the development and construction of new
properties offset by the amortization of loan costs primarily in connection
with Debenture Debt. Net cash provided by financing activities for the six
months ended July 31, 1995 of $3.3 million was comprised of: (i) debt
repayments of $22.9 million less proceeds from the issuance of new debt of
$26.3 million less (ii) payments of notes payable of $1.1 million, less
(iii) dividends paid of $1.1 million plus (iv) the decrease in other assets
of $2.1 million due to the amortization of loan costs primarily in
connection with Debenture Debt. Net cash provided by financing activities
for Fiscal 1995 of $6.6 million was comprised of: (i) debt repayments of
$39.3 million less proceeds from the issuance of new debt of $52.1 million
less (ii) payments of notes payable of $1.6 million less (iii) dividends
paid of $1.7 million and less (iv) the increase in other assets of
$2.8 million due to the capitalization of loan costs primarily in
connection with Debenture Debt. Net cash provided by financing activities
for Fiscal 1994 of $1.1 million was comprised of: (i) debt repayments of
$31.3 million less proceeds from the issuance of new debt of $44.0 million
less (ii) payments of notes payable of $2.6 million less (iii) dividends
paid of $1.9 million less (iv) the increase in other assets of $7.2 million
due to the capitalization of loan costs primarily in connection with
Debenture Debt. Net cash used by financing activities for Fiscal 1993 of
$3.5 million was comprised of (i) debt repayments of $21.6 million less
proceeds from the issuance of new debt of $34.4 million less (ii) payments
of notes payable of $2.6 million less (iii) dividends paid of $11.0 million
less (iv) the increase in other assets of $2.7 million due to the
capitalization of loan costs primarily in connection with Debenture Debt.
At January 31, 1996, the Company had total indebtedness of $140.1
million, consisting of $78.3 million of Debenture Debt, $18.9 million of
Unsecured Debt, $12.0 million of Mortgage Debt and $30.0 million of
Investor Note Debt. As of July 31, 1996, the Company has reduced
outstanding Investor Note Debt from $30 million to $21.5 million, increased
Unsecured Debt from $18.9 million to $26.6 million, and decreased Mortgage
Debt from $12 million to $5.0 million. Since that date, Debenture Debt
increased from $78.3 million to $78.7 million. As a result, total
indebtedness, decreased from $140.1 million to $131.7 million and the
Company had cash and cash equivalents at July 31, 1996 of $7.2 million.
Contributing to this debt repayment was the refinancing in February and
March 1996 of certain adult living communities the Company manages
resulting in the return of over $43 million of capital to limited partners
and the reduction of both Investor Note Debt and Mortgage Debt.
Of the principal amount of total indebtedness at January 31, 1996,
$37.2 million becomes due in the fiscal year ending January 31, 1997; $12.9
million becomes due in the fiscal year ending January 31, 1998; $29.7
million becomes due in the fiscal year ending January 31, 1999; $15.4
million becomes due in the fiscal year ending January 31, 2000; $17.4
million becomes due in the fiscal year ending January 31, 2001, and the
balance of $26.6 million becomes due thereafter. Of the amount maturing in
the fiscal year ending January 31, 1997, $6.8 million is Investor Note Debt
which the Company repaid through the collection of investor notes. The
balance, approximately $30.4 million, included $9.9 million of Debenture
Debt, $5.2 million of Mortgage Debt and $15.3 million of Unsecured Debt.
During Fiscal 1996, the Company repaid approximately $1.2 million of
Debenture Debt and repaid $8.0 million of Unsecured Debt. The Company also
repaid the entire $5.2 million of Mortgage Debt
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due by January 31, 1997 by refinancing said debt, which refinanced debt
became obligations of the partnerships that own the properties and ceased
being obligations of the Company. The Company anticipates that the balance
of $8.7 million of Debenture Debt and $7.3 million of Unsecured Debt that
matures during the current fiscal year, together with interest on
outstanding debt, will be repaid from the Company s existing cash and cash
equivalents, which amounted to $7.2 million on July 31, 1996, along with
the proceeds of new Unsecured Debt the Company intends to issue, cash flow
that will be generated by property operations and by arranging for the sale
of partnership interests to finance the acquisition of additional existing
adult living communities. However, competition to acquire such communities
has intensified and there can be no assurance that the Company will be able
to acquire such communities on terms favorable enough to offset start-up
costs of newly developed communities and the cash requirements of the
Company's existing operations and debt service.
Certain Investor Note Debt obligations contain provisions requiring
the Company to maintain a net worth of $35,000,000. In addition, certain
obligations of the Company contain covenants requiring the Company to
maintain a consolidated debt to consolidated net worth ratio of, in the
most restrictive case, no more than 6.5 to 1. At January 31, 1996 and at
July 31, 1996, the Company's consolidated debt to net worth ratio was 6.3
to 1 and 6.2 to 1, respectively. In addition, one obligation of the
Company contains a covenant requiring the Company to maintain a debt for
borrowed money to consolidated net worth ratio of 5 to 1. At January 31,
1996 and at July 31, 1996, the Company's debt for borrowed money to
consolidated net worth ratio was 3.95 to 1 and 3.73 to 1, respectively.
The Company has financed the acquisition of the adult living
communities it operates by arranging for the private placement of limited
partnership interests, and intends to continue this practice for all of its
future acquisitions of existing communities. Past offerings have provided,
and it is anticipated that future offerings will provide, that the limited
partners will receive guaranteed distributions during each of the first
five years of their investment equal to 11% to 12% of their then paid-in
scheduled capital contributions. Pursuant to the management contracts with
the Owning Partnerships, the Company is required to pay to the Owning
Partnerships, and the Owning Partnerships distribute to the Investing
Partnerships for distribution to limited partners, amounts sufficient to
fund any part of such guaranteed return not paid from cash flow from the
related property. During Fiscal 1995 and the six months ended July 31,
1996, the Company paid approximately $1,025,000 and $2,202,000,
respectively, with respect to its guaranteed return obligations. Of the
amount the Company paid with respect to guaranteed return obligations in
the six month period ended July 31, 1996, $365,025 is due to the
refinancing of a number of its adult living communities and is offset and
exceeded by an increase in interest income received by the Company during
the six months ended July 31, 1996, which was also the result of such
refinancings. The refinancings resulted in the return of over $43 million
of capital to limited partners, which reduced the amount of capital upon
which the Company is obligated to guarantee a return. The refinancings
also resulted in increased debt service payments by the Owning Partnerships
which own the refinanced adult living communities and the establishment of
capital improvement reserves for the refinanced properties. These debt
service payments and capital improvement reserves reduced the cash flow
available to pay the guaranteed returns to limited partners during the six
months ended July 31, 1996. In addition, the Company accelerated its
program of maintenance and repairs of its adult living communities, which
also decreased the cash flow generated by these properties. The decrease
in available cash flow exceeded the reduction in the Company's guaranteed
returned obligations and, therefore, increased the amount required to be
paid by the Company with respect to such guaranteed return obligations.
The aggregate amount of the Company's guaranteed return obligations will
depend upon a number of factors, including, among others, the expiration of
such obligations for certain partnerships, the cash flow generated by the
properties and the terms of future offerings by Investing Partnerships.
The Company anticipates that for at least two years the guaranteed return
obligations with respect to existing and future Investing Partnerships will
exceed the cash flow generated by the related properties, which will result
in the need to utilize cash generated by the Company to make management
contract payments which are distributed by the Owning Partnerships to the
Investing Partnerships to pay limited partners in such partnerships their
guaranteed return.
The aggregate amount of guaranteed return obligations for each of the
fiscal years 1996 through 2001 based on existing management contracts is
$5,901,000, $13,396,000, $11,306,000, $11,809,000, $9,173,000 and
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$3,897,000, respectively. Such amounts of guaranteed return obligation are
calculated based upon paid-in capital contributions of limited partners as
of July 31, 1996 and remaining scheduled capital contributions. Actual
amounts of guaranteed return obligations in respect of such contracts will
vary based upon the timing and amount of such capital contributions.
Furthermore, such amounts of guaranteed return obligations are calculated
without regard to the cash flow the related properties will generate that
can be used to meet such obligations.
The Company will attempt to structure future offerings to minimize
the likelihood that it will be required to utilize the cash it generates to
pay amounts utilized to pay guaranteed returns, but there can be no
assurance that this will be the case. In addition, in the past, limited
partners have been allowed to prepay capital contributions. These
prepayments reduce the recorded value of the Company's note receivables and
reduce interest income received by the Company. Pursuant to the terms of
offerings, the Company, as the general partner of each Investing
Partnership, has the option not to accept future prepayments by limited
partners of capital contributions. The Company has not determined whether
it will continue to accept prepayments by limited partners of capital
contributions.
Because the Adult Living Notes held by the Company are recorded on
the Company's financial statements net of loans from the Investing
Partnerships (which loans represent the proceeds of investor note
prepayments), all but $2.2 million of the $176.5 million of "Notes and
Accrued Interest Receivable," and all but approximately $500,000 of the
$54.0 million of "Other Receivables" recorded on the Company's Consolidated
Financial Statements as of July 31, 1996 relate to Multi-Family Notes.
(See Note 4 to Consolidated Financial Statements.) The Company holds 169
Multi-Family Notes which are secured by controlling interests in 126 Multi-
Family Properties.
Twenty-seven of the 126 Multi-Family Properties are in default on
their respective mortgages. Thirty-six Multi-Family Notes are secured by
controlling interests in these 27 properties, which have a recorded value,
when combined with the "Other Receivables" relating to said properties, of
$72.9 million. The Owning Partnerships that own these 27 properties have
been negotiating with the respective mortgage holders and, in some cases,
have obtained workout agreements pursuant to which the lenders generally
agree during the term of the agreement not to take any action regarding the
mortgage default and to accept reduced debt service payments for a period
of time, with the goal of increasing property cash flow to enable the
property to fully service its mortgage. Seven of these Owning Partnerships
have filed petitions seeking protection from foreclosure actions under
Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11 Petitions") and the
Company anticipates that in the near future two additional Owning
Partnerships will similarly seek such protection by filing Chapter 11
Petitions (said nine Owning Partnerships are, collectively, the "Protected
Partnerships"). The aggregate "Notes and Accrued Interest Receivable" and
"Other Receivables" relating to the nine Multi-Family Notes whose nine
related Investing Partnerships own interests in the Protected Partnerships
was $24.1 million.
In order to support the recorded value of these nine Multi-Family
Notes, the Selling Stockholders and one of their affiliates have assigned
certain interests they own personally in various partnerships that own
multi-family properties (the "Assigned Interests") to these nine Investing
Partnerships, which Assigned Interests provide additional security for the
related nine Multi-Family Notes. In that the appraised value of the
Assigned Interests is approximately equal to the previous recorded value of
the Investing Partnerships' interests in the Protected Partnerships (which
are deemed to have no value due to the filing of the Chapter 11 Petitions),
the filing of these petitions by the Protected Partnerships has not
resulted in a reduction of the recorded value on the Company's financial
statements of these Multi-Family Notes. Each of these nine Investing
Partnerships will reassign to the Selling Stockholders and their affiliate
any portions of the Assigned Interests not required to maintain the
recorded value of its Multi-Family Note after the applicable Protected
Partnership emerges from its Chapter 11 proceeding.
It is possible that the other 18 Owning Partnerships that own Multi-
Family Properties that are in default on their mortgages will file
Chapter 11 Petitions or take similar actions seeking protection from their
creditors. In addition, many of the Multi-Family Properties are dependent
to varying degrees on Section 8 housing assistance payment contracts with
the United States Department of Housing and Urban Development ("HUD"), many
of which will expire over the next few years. HUD has introduced various
initiatives to restructure its housing subsidy
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programs by increasing reliance on prevailing market rents, by reducing
spending on future Section 8 contracts by, among other things, not renewing
expiring contracts and by restructuring mortgage debt on those properties
where a decline in rental revenues is anticipated. Due to uncertainty
regarding the final policies that will result from these initiatives and
numerous other factors that affect each property which can change over time
(including the local real estate market, the provisions of the mortgage
debt encumbering the property, prevailing interest rates and the general
state of the economy) it is impossible for the Company to determine whether
these initiatives will have an impact on the Multi-Family Properties and,
if there is an impact, whether the impact will be positive or negative.
In view of the foregoing, there can be no assurance that other Owning
Partnerships that own Multi-Family Properties will not default on their
mortgages, file Chapter 11 Petitions, and/or lose their properties through
foreclosure. Unless the Selling Stockholders contribute additional
property, and there can be no assurance that they will be willing or able
to do so, any future filings of Chapter 11 petitions by Owning Partnerships
that own Multi-Family Properties or the loss of any such property through
foreclosure would cause the Company to realize a loss equal to the recorded
value of the applicable Multi-Family Note plus any related advances, net of
any deferred income recorded for such Multi-Family Note which would reduce
such loss. In addition, the Company could be required to realize such a
loss even in the absence of Chapter 11 Petitions or loss of any such
property through foreclosure if, at any time in which the Company's
financial statements are issued, such property is considered impaired under
applicable accounting rules.
The future growth of the Company will be based upon the continued
acquisition of existing adult living communities and the development of
newly-constructed adult living communities. The Company anticipates that
it will acquire between four and eight existing adult living communities
over the next two years. It is anticipated that future acquisitions of
existing adult living communities will be financed by a combination of
mortgage financing and by arranging for the sale of partnership interests.
The Company has entered into contracts to acquire an adult living community
in Morristown, Tennessee containing 180 apartment units, an adult living
community in Tampa, Florida containing 164 apartment units and two adult
living communities in Sparks, Nevada containing 92 apartment units and 64
apartment units, respectively. In addition, the Company has acquired one
existing adult living community from an existing Owning Partnership and has
agreed to acquire one adult living community from another existing Owning
Partnerships, and may engage in other similar transactions. The aggregate
purchase price of the communities the Company has agreed to purchase is
approximately $43.1 million. The Company intends to finance approximately
$29.3 million of the purchase price these acquisitions through mortgage
financing with the remainder of the purchase price derived from the sale of
limited partnership interests in new Investing Partnerships which will own
interests in new Owning Partnerships. The Company regularly obtains such
acquisition financing from three different commercial mortgage lenders and,
in view of its ready access to such mortgage financing, has not sought any
specific commitments or letters of intent with regard to future ,
unidentified acquisitions. Similarly, the Company believes that it has
sufficient ability to finance its future acquisitions in part by arranging
for the sale of partnership interests. Limited partners typically agree to
pay their capital contributions over a five-year period, and deliver notes
representing the portion of their capital contribution that has not been
paid in cash. The Company borrows against the notes delivered by investors
to generate cash when needed, including to pursue its development plan and
to repay debt. The Company s present Investor Note Debt lenders do not
have sufficient lending capacity to meet all of the Company s future
requirements. However, the Company currently is negotiating with several
new Investor Note Debt lenders which the Company believes will have
sufficient lending capacity to meet all of the Company s foreseeable
Investor Note Debt borrowing requirements.
The Company also has implemented a new development plan pursuant to
which it currently intends to construct between 18 and 24 new adult living
communities during the next two years. The Company will utilize the
proceeds of this offering plus mortgage financing to construct, own and
operate new communities. The Company is negotiating with various
construction lenders to obtain mortgage financing. The Company also
intends to utilize long-term lease financing arrangements to develop and
operate new communities. The Company has obtained a letter of intent from
Capstone for up to $39.0 million for the development of four adult living
communities that will be operated by the Company pursuant to long-term
leases with Capstone. The Company is actively engaged in negotiations with
other mortgage and long-term lease lenders to provide additional
construction
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financing. The Company has not, to date, entered into any substantial
commitments of capital resources to develop new adult living communities.
The Company's letter of intent with Capstone contemplates the
development and operation of up to four adult living communities. Capstone
is expected to provide construction financing for 100% of the development
cost - up to $39 million - for the four communities which will be operated
by the Company pursuant to long-term leases. The letter of intent
contemplates that Capstone will acquire the properties and will enter into
a development agreement and a lease agreement with the Company with respect
to each property. Each development agreement is expected to require that
construction commence within 30 days after the acquisition of the property
and be complete within 15 months of commencement. Each lease agreement is
expected to have a term of 15 years with three optional five-year renewal
periods. The letter of intent anticipates a covenant that each community
financed by Capstone maintain annualized earnings before certain deductions
of at least 1.25 times the rent from the respective adult living community.
The Company anticipates that the obligations under the development
agreements and leases will be direct obligations of the Company and that
the leases will require the Company to maintain a net worth in an amount no
less than 75% of the net worth of the Company immediately after the closing
of this Offering. The Company also expects to be granted a right of first
refusal and an option to purchase the properties.
The Company anticipates that most of the construction mortgage loans
it obtains to finance the development and lease-up costs of new adult
living communities will contain terms where the lender will fund between
75% to 80% of such costs, requiring the Company to contribute 20% to 25% of
such costs. The Company arranged for the sale of limited partnership
interests in two partnerships organized to make second mortgage loans to
the Company to fund approximately 20% of the costs of developing three new
adult living communities. The Company will use its net proceeds of the
Offering (above the approximately $3 million to be used for working capital
and general corporate purposes) plus funds generated by its operations to
fund the 20% to 25% of development costs not provided by construction
loans. To the extent the Company does not sell sufficient shares of Common
Stock to complete the maximum offering, the Company may seek to obtain
construction financing from other sources, on terms similar to the
anticipated terms of the Capstone financing, which do not require such
levels of equity contributions from the developer, engage in refinancings
of newly developed adult living communities that have reached stabilized
occupancy or issue additional debt to generate additional funds to continue
its development program.
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BUSINESS
GENERAL
Grand Court Lifestyles, Inc. (the "Company") is a fully integrated
provider of adult living accommodations and services which acquires,
finances, develops and manages adult living communities. The Company's
revenues have been and are expected to continue to be, primarily derived
from sales of partnership interests in partnerships it organizes to finance
the acquisition of existing adult living communities. The Company manages
such adult living communities and, as a result, is one of the largest
operators of adult living communities in the United States, operating
communities offering both independent- and assisted-living services. The
American Seniors Housing Association ranks the Company as one of the top
ten owners and operators of adult living communities. The Company
currently operates 30 adult living communities containing 4,350 apartment
units in 11 states in the Sun Belt and the Midwest. The Company also
operates one skilled nursing facility containing 60 beds and one of the
adult living facilities it operates contains 70 skilled nursing beds. The
facilities operated by the Company had an average occupancy rate of
approximately 93% at July 31, 1996. The Company's operating objective is
to provide high-quality, personalized living services to senior residents,
primarily persons over the age of 75. To the extent that the development
plan described below is successfully implemented, the Company anticipates
that the percentage of its revenues derived from sales of partnership
interests would decrease and revenues derived from newly constructed
communities would increase.
Historically, the Company has financed the acquisition and
development of multi-family and adult living properties by utilizing
mortgage financing and by arranging for the sale of limited partnership
interests. The Company is the general partner of all but one of the
partnerships that owns the adult living communities in the Company's
portfolio and the Company manages all of the adult living communities in
its portfolio. The Company has a participation in the cash flow, sale
proceeds and refinancing proceeds of the properties after certain priority
payments to the limited partners. The existing adult living communities
managed by the Company are not owned by the Company. Future revenues, if
any, of the Company relating to such communities would primarily arise in
the form of (i) deferred income on sales of interests in the Owning
Partnerships for such communities, (ii) management fees and (iii) amounts
payable by the Investing Partnerships to the Company in the event of the
subsequent sale or refinancing of such communities. The Company intends to
continue to finance its future acquisitions of existing adult living
communities by utilizing mortgage financing and by arranging for the sale
of partnership interests, and anticipates acquiring four to eight such
communities during the next two years.
Current demographic trends suggest that demand for both independent-
living and assisted-living services will continue to grow. According to
U.S. Bureau of Census data, the Company's target market, people over age
75, is one of the fastest growing segments of the U.S. population and is
projected to increase by more than 24% to 16.3 million between 1990 and
2000. While the population of seniors grows, other demographic trends
suggest that an increasing number of them will choose adult living centers
as their residences. According to U.S. Bureau of Census data, the median
net worth of householders over age 75 has increased to over $75,000. At
the same time, the Census shows that the number of seniors living alone has
increased, while women, who have been the traditional care-givers, are more
likely to be working and unable to provide care in the home. The Company
believes that many seniors find that adult living centers provide them with
a number of services and features that increasingly they are unable to find
at home, including security, good nutritious food and companionship.
Furthermore, the National Long Term Care Surveys, a Federal study that
regularly surveys close to 20,000 people aged 65 and older, indicate that,
despite the growth in the elderly population, the percentage of elderly
that are disabled and need assistance with activities of daily living
("ADLs") has decreased substantially and is expected to continue to
decrease. This suggests that demand for independent living communities
will increase in the future.
Assisted-living supplements independent-living services with
assistance with ADLs in a cost effective manner while maintaining
residents' independence, dignity and quality of life. Such assistance
consists of
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personalized support services and health care in a non-institutional
setting designed to respond to the individual needs of the elderly who need
assistance but who do not need the level of health care provided in a
skilled nursing facility.
The Company has instituted a development plan which will result in
the new construction of between 18 and 24 adult living communities during
the next two years which it will own or will operate pursuant to long-term
leases or similar arrangements. The Company anticipates that each new
community to be developed by it will offer both independent- and assisted-
living. The Company's development plan contemplates its first new
communities being built in Texas, where, as of September 6, 1996, it owns
one site and holds options to acquire eight additional sites. The Company
generally plans to concentrate on developing projects in only a limited
number of states at any given time. The Company believes that this focus
will allow it to realize certain efficiencies in the development and
management of communities. The Company also plans to expand its portfolio
of adult living communities by acquiring between four and eight communities
during the next two years and to finance the acquisitions by arranging for
the sale of partnership interests in limited partnerships. The Company is
the managing general partner of the partnerships that own all but one of
the 30 adult living centers and one nursing home in its current portfolio
and will continue to act in this capacity for all future properties which
it acquires. All of the adult living communities and the one nursing home
are managed by the Company pursuant to written management contracts.
The Company's adult living communities offer personalized assistance,
supportive services and selected health care services in a professionally
managed group living environment. Residents may receive individualized
assistance which is available 24 hours a day, and is designed to meet their
scheduled and unscheduled needs. The services for independent-living
generally include three restaurant-style meals per day served in a common
dining room, weekly housekeeping and flat linen service, social and
recreational activities, transportation to shopping and medical
appointments, 24 hour security and emergency call systems in each unit.
The services for assisted-living residents generally include those provided
to independent-living residents, as supplemented by assistance with ADLs
including eating, bathing, dressing, grooming, personal hygiene and
ambulating; health monitoring; medication management; personal laundry
services; and daily housekeeping services.
The Company focuses exclusively on "private-pay" residents, who pay
for housing or related services out of their own funds or through private
insurance, rather than relying on the few states that have enacted
legislation enabling assisted-living facilities to receive Medicaid funding
similar to funding generally provided to skilled nursing facilities. The
Company intends to continue its "private-pay" focus as it believes this
market segment is, and will continue to be, the most profitable. This
focus will enable the Company to increase rental revenues as demographic
pressure increases demand for adult living facilities and avoid potential
financial difficulties it might encounter if it were dependent on Medicaid
or other government reimbursement programs that may suffer from health care
reform, budget deficit reduction or other pending or future government
initiatives.
PARTNERSHIP OFFERINGS
Historically, the Company has financed the acquisition and
development of adult living properties by utilizing mortgage financing and
by arranging for the sale of limited partnership interests in Investing
Partnerships formed to acquire controlling interests in Owning
Partnerships. The Company is the general partner of all but one of the
Owning Partnerships that own the adult living communities currently
included in the Company's portfolio and the Company manages all of the
adult living communities in its portfolio. The Company is also the general
partner of 22 of the 34 Investing Partnerships. As the general partner of
such partnerships the Company has a participation in the cash flow, sale
proceeds and refinancing proceeds of the properties after certain priority
payments to the limited partners. Typically, an Owning Partnership is
organized by the Company to acquire a property which the Company has
identified and selected based on a broad range of factors. Generally, 99%
to 100% of the partnership interests in an Owning Partnership initially are
owned by the Company. An Investing Partnership is formed as a limited
partnership for the purpose of acquiring all or substantially all of the
total partnership interests owned by the Company. Limited partnership
interests in the Investing Partnership are sold to investors in exchange
for (i) all cash or (ii) a cash down payment and full recourse promissory
notes (an "Investor Note"). In the case of an investor that does not
purchase a limited partnership interest for all cash, the investor's
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limited partnership interest (a "Limited Partnership Interest") serves as
collateral security for that investor's Investor Note. Under the terms of
an agreement (a "Purchase Agreement"), the Investing Partnership purchases
from the Company the partnership interests in the Owning Partnership
partially with cash raised from the cash down payment made by its investors
and the balance by the delivery of the Investing Partnership's promissory
note (a "Purchase Note"). The Purchase Notes executed by Investing
Partnerships prior to 1986 have balloon payments of principal due on
maturity. The Purchase Notes executed since January 1, 1987 are self-
liquidating (without balloon payments). The Investing Partnership, as
collateral security for its Purchase Note, pledges to the Company the
Investor Notes received from its investors, its interest in the Limited
Partnership Interests securing the Investor Notes, as well as the entire
partnership interest it holds in the Owning Partnership which it purchased
from the Company. In addition, each Purchase Agreement provides that the
Investing Partnership shall pay the Company an amount equal to a specified
percentage of the Investing Partnership's share of the net proceeds from
capital transactions (such as the sale or refinancing of the underlying
property) in excess of the return obligations and certain other amounts.
The limited partners in Investing Partnerships typically agree to pay
their capital contributions over a five-year period. Past offerings have
provided, and it is anticipated that future offerings will provide, that
the limited partners will receive guaranteed distributions during each of
first five years of their investment equal to between 11% to 12% of their
then paid-in scheduled capital contributions. Pursuant to the management
contracts with the Owning Partnerships, the Company is required to pay to
the Owning Partnerships, and the Owning Partnerships distribute to the
Investing Partnerships for distribution to limited partners, amounts
sufficient to fund any part of such guaranteed return not paid from cash
flow from the related property. During Fiscal 1995 and the six months
ended July 31, 1996, the Company paid approximately $1,025,000 and
$2,202,000, respectively, with respect to guaranteed return obligations.
The increase in the amount the Company paid with respect to guaranteed
return obligations in the six month period ended July 31, 1996 is due to
the refinancing of a number of its adult living communities and is offset
and exceeded by an increase in interest income received by the Company
during the six months ended July 31, 1996, which was also the result of
such refinancings. The refinancings resulted in the return of over $43
million of capital to limited partners, which reduced the amount of capital
upon which the Company is obligated to make payments which are distributed
to limited partners in respect of guaranteed returns. The refinancings
also resulted in increased debt service payments by the Owning Partnerships
which own the refinanced adult living communities. These debt service
payments reduced the cash flow available to pay the guaranteed return to
limited partners during the six months ended July 31, 1996. The decrease
in available cash flow exceeded the reduction in the guaranteed return
obligations and, therefore, increased the amount required to be paid by the
Company with respect to such guaranteed return obligations. The aggregate
amount which the Company will be required to pay under the management
contracts with respect to guaranteed return obligations will depend upon a
number of factors, including, among others, the expiration of such
obligations for certain partnerships, the cash flow generated by the
properties the Company currently operates, the terms of future offerings by
Investing Partnerships and the cash flow to be generated by the related
properties. Based upon its estimates of these factors, which estimates may
vary materially from actual results, the Company anticipates that for at
least the next two years, the guaranteed return obligations with respect to
existing and future Investing Partnerships will exceed the cash flow
generated by the related properties, which will result in the need to
utilize cash generated by the Company to meet guaranteed return
obligations. To the extent that the Company must expend funds to meet its
guaranteed return obligations, the Company will have fewer funds available
to utilize for other business purposes, including funds for application to
the new development plan, to meet other liquidity and capital resource
commitments and for dividends, if any. The Company will attempt to
structure future offerings to minimize the likelihood that it will be
required to utilize the cash it generates to pay guaranteed returns, but
there can be no assurance that this will be the case.
The Company's obligations with respect to guaranteed returns are
contractual obligations of the Company under the management contracts to
make payments to the Owning Partnerships. In general, the accrual of
expenses arising from obligations of the Company, including such
obligations under the management contracts, reduces the amount of earnings
that might otherwise be available for distribution to stockholders.
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In the past, limited partners have been allowed to prepay capital
contributions. Prepayments of capital contributions do not result in the
prepayment of the related Purchase Notes. Instead, such amounts are loaned
to the Company by the Investing Partnership. Loans made prior to the
reorganization of the Company in 1996 were made to J&B Management Company
and, as part of the reorganization, were assumed by the Company. The
purchase agreements provide that, should any failure to repay any such loan
occur, the Company must credit to the Investing Partnership the amounts
loaned at the time such amount would be required to be paid by the
Investing Partnership to meet its obligations then due under the Purchase
Note. As a result of such loans and such provisions of the purchase
agreements, the Company records the notes receivable corresponding to the
Purchase Notes net of such loans. Therefore, these prepayments act to
reduce the recorded value of the Company's note receivables and reduce
interest income received by the Company. Pursuant to the terms of
offerings, the Company has the option not to accept future prepayments by
limited partners of capital contributions. The Company has not determined
whether it will continue to accept prepayments by limited partners of
capital contributions.
After the initial five-year period, the limited partners are still
entitled to the same specified rate of return on their investment, but only
to the extent there are sufficient cash flows from the related adult living
communities. To the extent property cash flows are not sufficient to pay
the limited partners their specified return, the right to receive this
shortfall accrues until sufficient cash flow is available for distribution.
Under the management contracts, during the initial five-year period, the
Company is entitled to retain all cash flows in excess of the guaranteed
return as a management fee, thereafter the Company's management fee is 40%
of the excess of cash flow over the amount necessary to make the specified
return. The remaining 60% of cash flows are to be distributed by the
Owning Partnerships to the Investing Partnerships for distribution to
limited partners.
All of the adult living communities operated by the Company are
managed by the Company pursuant to written management contracts, which
generally have a five year term coterminous with the Company's guaranty of
annual distributions to limited partners. This five-year guaranty
obligation has terminated for four of the 34 Investing Partnerships. After
the initial five year term, the management contracts are automatically
renewed each year, but are cancelable on 30 to 60 days notice at the
election of either the Company or the related Owning Partnership. In
general, under the terms of the Investing Partnership's partnership
agreement, limited partners have no right to take part in the control,
conduct or operation of the partnership. Action can be taken in each
partnership by a majority in interest of partners on such major matters as
the removal of the general partners, the request for or approval or
disapproval of a sale of a property owned by a partnership or other
significant actions affecting the properties or the partnership. In these
cases, termination of the management contracts after their initial five-
year terms generally would require removal of the Company as general
partner of the Owning and/or Investing Partnership. Under certain limited
circumstances, the Company may be removed as the general partner of an
Investing Partnership. Such removal would require the vote of a majority
of the holders of limited partner interest and would result in loss of the
fee income under those contracts.
The Company intends to continue to finance its future acquisitions of
existing adult living communities by utilizing mortgage financing and by
arranging for the sale of partnership interests. The Company plans to
acquire between four to eight existing adult living communities over the
next two years. However, competition to acquire such communities has
intensified, and there can be no assurance that the Company will be able to
acquire such communities on terms favorable enough to offset the start-up
losses associated with newly developed communities and the costs and cash
requirements arising from the Company's overhead and existing debt and
guarantee obligations. The Company is, and will continue to be, the
managing general partner of the partnerships that own acquired communities.
In addition, the Company arranged for the sale of limited partnership
interests in two partnerships organized to make second mortgage loans to
the Company to fund approximately 20% of the costs of developing three new
adult living communities.
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THE LONG-TERM CARE MARKET
The long-term care services industry encompasses a broad range of
accommodations and healthcare services that are provided primarily to
seniors. Independent-living communities attract seniors who desire to be
freed from the burdens and expense of home ownership, food shopping and
meal preparation and who are interested in the companionship and social and
recreational opportunities offered by such communities. As a senior's need
for assistance increases, the provision of assisted-living services in a
community setting is more cost-effective than care in a nursing home. A
community which offers its residents assisted-living services can provide
assistance with various ADLs (such as bathing, dressing, personal hygiene,
grooming, ambulating and eating), support services (such as housekeeping
and laundry services) and health-related services (such as medication
supervision and health monitoring), while allowing seniors to preserve a
high degree of autonomy. Generally, residents of assisted-living
communities require higher levels of care than residents of independent-
living facilities, but require lower levels of care than residents of
skilled-nursing facilities.
FAVORABLE TRENDS
The Company believes its business benefits from significant trends
affecting the long-term care industry. The first is an increase in the
demand for elder care resulting from the continued aging of the U.S.
population. U.S. Bureau of Census shows that the average age of the
Company's residents (83 years old) places them within one of the fastest
growing segments of the U.S. population. While increasing numbers of
Americans are living longer and healthier lives, many choose community
living as a cost-effective method of obtaining the services and life-style
they desire. Adult living facilities that offer both independent and
assisted-living services give seniors the comfort of knowing that they will
be able to "age in place" something they are increasingly unable to do at
home.
The primary consumers of long-term care services are persons over the
age of 65. This group represents one of the fastest growing segments of
the population. According to U.S. Bureau of the Census data, the number of
people in the U.S. age 65 and older increased by more than 27% from 1981 to
1994, growing from 26.2 million to 33.2 million. Such census data also
shows that the segment of the population over 85 years of age, which
comprises the largest percentage of residents at long-term care facilities,
is projected to increase by more than 37% between the years 1990 and 2000,
growing from 3.0 million to 4.1 million. The Company believes that these
trends depicted in the graph below will contribute to continued strong
demand for adult living communities.
PROJECTED PERCENTAGE CHANGE IN THE ELDERLY POPULATION OF THE U.S.
1981 1990 1995 2000 2005 2010
---- ---- ---- ---- ---- ----
65-84 0 17.5% 25.2% 26.2% 27.3% 34.6%
85+ 0 28.4% 54.3% 76.3% 94.1% 112.7%
SOURCE: U.S. BUREAU OF THE CENSUS
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Other trends benefiting the Company include the increased financial
net worth of the elderly population, the changing role of women and the
increase in the population of individuals living alone. As the number of
elderly in need of assistance has increased, so too has the number of the
elderly able to afford residences in communities which offer independent
and/or assisted-living services. According to U.S. Bureau of the Census
data, the median net worth of householders age 75 or older has increased
from $55,178 in 1984 and $61,491 in 1988 to $76,541 in 1991. Furthermore,
according to the same source, the percentage of people 65 years and older
below the poverty line has decreased from 24.6% in 1970 to 15.7% in 1980 to
12.2% in 1990. Historically, unpaid women (mostly daughters or daughters-
in-law) represented a large portion of the care givers of the non-
institutionalized elderly. The increased number of women in the labor
force, however, has reduced the supply of care givers, and led many seniors
to choose adult living communities as an alternative. Since 1970, the
population of individuals living alone has increased significantly as a
percentage of the total elderly population. This increase has been the
result of an aging population in which women outlive men by an average of
6.9 years, rising divorce rates, and an increase in the number of unmarried
individuals. The increase in the number of the elderly living alone has
also led many seniors to choose to live in adult living communities.
The increased financial net worth of the elderly population is
illustrated by the following chart:
MEDIAN NET WORTH
1988 1991
---- ----
45-54 57,466 58,250
55-64 80,032 83,041
65+ 73,471 88,192
SOURCE: U.S. BUREAU OF THE CENSUS
A trend benefiting the Company, and especially its provision of
independent-living services, is that as the population of seniors swells,
the percentage of seniors that are disabled and need assistance with ADLs
has steadily declined. According to the National Long Term Care Surveys, a
federal study, disability rates for persons aged 65 and older have declined
by 1 to 2 percent each year since 1982, the year the study was commenced.
In 1982, approximately 21% of the 65 and over population was disabled and
in 1995 only 10% was disabled. This trend suggests that demand for
independent living services will increase in the future.
Another trend benefiting the Company, and especially its provision of
assisted-living services, is the effort by the government, private insurers
and managed care organizations to contain health care costs by limiting
lengths of stay, services, and reimbursement amounts. This has resulted in
hospitals discharging patients earlier and referring them to nursing homes.
At the same time, nursing home operators continue to focus on providing
services to sub-acute patients requiring significantly higher levels of
skilled nursing care. The Company believes that this "push down" effect
has and will continue to increase demand for assisted-living facilities
that offer the appropriate levels of care in a non-institutional setting in
a more cost-effective manner. The Company believes that all of these
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trends have, and will continue to, result in an increasing demand for adult
living facilities which provide both independent and assisted-living
services.
STRATEGY
Growth. The Company's growth strategy focuses on the development of
communities offering both independent and assisted-living apartment units
and on continued intensive communities management. The Company believes
that there are numerous markets that are not served or are underserved by
existing adult living communities and intends to take advantage of these
circumstances, plus the present availability of construction financing on
favorable terms, to develop new communities of its own design in desirable
markets. Historically, the Company has expanded by acquisition of existing
communities. The Company has taken advantage of the inexperience and
operating inefficiencies of the previous owners of these communities and
has improved the financial performance of these properties by implementing
its own management and marketing techniques. The Company's sophistication
in management and marketing is evidenced by its approximate 93% occupancy
rate at July 31, 1996 at its existing communities.
The Company will continue to acquire existing communities and intends
to finance these acquisitions, in part, by arranging for the sale of
partnership interests in such communities. The Company believes that its
continuing acquisition and financing of adult living communities will
provide additional cash flow to help the Company pursue its development
program. The Company also believes its established ability to privately
place equity and debt securities will help insure its ability to pursue its
development plan regardless of changes in the economy that may make
conventional and sale/leaseback construction financing unavailable or
available on only unfavorable terms.
Senior management, collectively, has over 80 years of experience in
the acquisition, financing, development and management of multi-family
housing, having acquired or developed and, in most cases, managed a
property portfolio consisting of approximately 20,000 multi-family
apartment units. In addition, senior management of the Company,
collectively, has over 40 years experience in the long-term care industry
including independent-living, assisted-living and, to a lesser extent,
skilled-nursing communities.
New Development. The Company's development plan emphasizes a
"prototype" adult living community that it has designed. The prototype
incorporates attributes of the various communities managed by the Company,
which it believes appeal to the elderly. The prototype has been designed
to be built in two sizes: one containing 126 apartment units and the other
142 apartment units. In all other respects, the two sizes of the prototype
are identical and both will be located on sites of up to seven acres. The
Company believes that its development prototype is larger than many
independent-living and most assisted-living communities, which typically
range from 40 to 80 units. The Company believes that the greater number of
units will allow the Company to achieve economies of scale in operations,
resulting in lower operating costs per unit, without sacrificing quality of
service. The Company designed its prototype to achieve economics of scale
in management and operations. These savings primarily are achieved through
lower staffing, maintenance and food preparation costs per unit, without
sacrificing quality of service. In that the time and effort required to
develop a community (including site selection, land acquisition, zoning
approvals, financing, and construction) do not vary materially for a larger
community than for a smaller one, developmental economics of sale are also
realized in that more apartment units are being produced for each community
that is developed.
Common areas will include recreation areas, dining rooms, a kitchen,
administrative offices, an arts and crafts room, a multi-purpose room,
laundry rooms for each floor, a beauty salon/barber shop, a library reading
area, card rooms, a billiards room, a health center to monitor residents'
medical needs and covered and assigned parking. The Company believes that
the common areas and amenities offered by prototype represent the state of
the art for independent-living communities and are superior to those
offered by smaller independent-living communities or by most communities
that offer only assisted living services. Unit sizes will range from 368
square
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feet for a studio to 871 square feet for a two bedroom/two bath unit. The
Company's 126-unit prototype contains 15 studio apartments, 105 one
bedroom/one bathroom units and six two bedroom/two bathroom units. The
126-unit prototype will encompass approximately 102,000 square feet. The
142 unit prototype contains 46 studio apartments, 92 one bedroom/one
bathroom apartments and 4 two bedroom/two bathroom apartments. The 142-
unit prototype will encompass approximately 108,000 square feet. Each
apartment unit will be a full apartment, including a kitchen or
kitchenette.
Each community will offer residents a choice between independent-
living and assisted-living services. As a result, the market for each
community will be broader than for communities that offer only either
independent-living or assisted-living services. Due to licensing
requirements and the expense and difficulty of converting existing
independent-living units to assisted-living units, independent-living and
assisted-living units in many communities generally are not
interchangeable. However, the prototype is designed to allow, at any time,
for conversion of units, at minimum expense, for use as either independent-
living or assisted-living units. Each community therefore may adjust its
mix of independent-living and assisted-living units as the market or
existing residents demand. The Company believes that part of the appeal
of this type of community is that residents will be able to "age in place"
with the knowledge that they need not move to another community if they
require assistance with ADLs. The Company believes that the ability to
retain residents by offering them higher levels of services will result in
stable occupancy with enhanced revenue streams.
Market Selection Process. In selecting geographic markets for
potential expansion, the Company considers such factors as a potential
market's population, demographics and income levels, including the existing
and anticipated future population of seniors who may benefit from the
Company's services, the number of existing long-term care communities in
the market area and the income level of the target population. While the
Company does not apply its market selection criteria mechanically or
inflexibly, it generally seeks to select adult living community locations
that are non-urban with populations of no more than 100,000 people and
containing 3,000 elderly households within a 20-mile radius with an annual
income of at least $35,000, and have a regulatory climate that the Company
considers favorable toward development. The Company has found that
communities with these characteristics, so-called "secondary markets,"
generally have a receptive population of seniors who desire and can afford
the services offered in the Company's adult living communities. In
focusing on secondary markets, the Company believes it will avoid
overdevelopment to which primary markets are prone and obtain the benefit
of demographic concentrations that do not exist in yet smaller markets.
While not limiting itself to any specific geographic market, the
Company generally plans to concentrate its development projects to only a
limited number of states at any given time. This focus will allow the
Company to realize certain efficiencies in the development process and in
the management of the communities. For 1996, the Company anticipates that
its development efforts will be focused primarily in the State of Texas.
The Company currently owns one development site in Corpus Christi, Texas
and has obtained a letter of intent from Capstone for $39 million of
sale/leaseback construction financing. Construction is expected to
commence in September 1996. The Company also has obtained options to
acquire eight additional sites in Abilene, Amarillo, El Paso, Round Rock,
San Angelo, Temple, Tyler and Wichita Falls, Texas. The Company
anticipates that it will commence construction on between 18 and 24 new
communities in the next two years. The Company also anticipates developing
adult living communities in one or more of the following states: New
Mexico, Georgia, North Carolina, South Carolina, and Kentucky.
Centralized Management. The adult living business is a highly
management intensive one. While the location of a community and its
physical layout are extremely important, another key to the success of an
adult living community lies in the ability to maximize its financial
potential through sophisticated, experienced management. Such success
requires the establishment and supervision of programs involving the
numerous facets of an adult living community, including menu planning, food
and supply purchasing, meal preparation and service, assistance with
"activities of daily living," recreational activities, social events,
health care services, housekeeping, maintenance and security. The Company's
strategy emphasizes centralized management in order to achieve
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operational efficiencies and ensure consistent quality of services. The
Company has established standardized policies and procedures governing,
among other things, social activities, maintenance and housekeeping, health
care services, and food services. An annual budget is established by the
Company for each community against which performance is tested each month.
Marketing. Marketing is critical to the rent up and continued high
occupancy of a community. The Company's marketing strategy focuses on
enhancing the reputation of the Company's communities and creating
awareness of the Company and its services among potential referral sources.
The Company's experience is that satisfied residents and their families are
an important source of referrals for the Company. In addition, the Company
plans to use its common community design and its "The Grand Court"
trademarked name to promote national brand-name recognition. The Company
has recently adopted the trademarked name. Historically, adult living
communities have generally been independently owned and operated and there
has been little national brand-name recognition. The Company believes that
national recognition will be increasingly important in the adult living
business. The Company intends to continuously use its trademarked name in
its business activities, and the life of this trademark will extend for the
duration of its use. The Company considers this trademark to be a valuable
intangible intellectual property asset.
SERVICES
It is important to identify the specific tastes and needs of the
residents of an adult living community, which can vary from region to
region and from one age group to the next. Residents who are 70 years old
have different needs than those who are 85. The Company has retained a
gerontologist to insure that programs and activities are suitable for all
of the residents in a community and that they are adjusted as these
residents "age in place". Both independent and assisted-living services
will be offered at all of the Company's newly, developed communities.
Basic Service and Care Package. The Company provides four levels of
service at its adult-living communities:
Level I is Independent Living which includes three meals per day,
weekly housekeeping, activities program, 24-hour security and
transportation for shopping and medical appointments.
Level II or Catered Living offers all of the amenities of Level I in
addition to all utilities, personal laundry and daily housekeeping.
Level III is Assisted Living, which offers three meals per day, daily
housekeeping, 24-hour security, all utilities, medication management,
activities and nurse's aides to assist the residents in daily bathing and
dressing.
Level IV is especially designed to meet the needs of our assisted
living residents who require increased assistance with the activities of
daily living. We are able to accommodate residents with walkers or
wheelchairs, or who suffer from the early stages of Alzheimer's.
Rehabilitative services such as physical and speech therapy are also
provided by licensed third party home health care providers. Each resident
can design a package of services that will be monitored by his or her own
physician.
The Company charges an average fee of $1,400 per month for Level I
services, $1,700 per month for Level II services, $2,000 per month for
Level III services, and $2,500 per month for Level IV services, but the fee
levels vary from community to community. As the residents of the
communities managed by the Company continue to age, the Company expects
that an increasing number of residents will utilize Level III and Level IV
services. The Company's internal growth plan is focused on increasing
revenue by continuing to expand the number and diversity of its tiered
additional assisted-living services and the number of residents using these
services.
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COMMUNITIES
The Company currently operates 30 communities containing 4,350 units
and one nursing home containing 60 beds. One of the Company's adult living
communities contains 70 nursing home beds. The following chart sets forth
information regarding the communities operated by the Company:
OCCUPANCY
YEAR % AT
NUMBER OF ACQUIRED MAY 31,
COMMUNITY (1) STATE UNITS (2) 1996
------------- ----- ----- --------- ----------
The Grand Court Arizona 136 1991 98%
Phoenix
The Grand Court Florida 184 1989 95%
Fort Myers
The Grand Court Florida 126 1996 85%
Lakeland
The Grand Court Florida 170 1992 91%
Lake Worth
The Grand Court Florida 189 1995 60%
North Miami
The Grand Court Florida 60 1994 91%
Pensacola
The Grand Court I Florida 72 1994 87%
Pompano Beach(3)
The Grand Court II Florida 42 1994 88%
Pompano Beach(3)
The Grand Court Florida 94 1995 97%
Tavares
The Grand Court Illinois 76 1993 100%
Belleville
The Grand Court II Kansas 127 1994 97%
Kansas City
The Grand Court Kansas 275 1990 97%
Overland Park
The Grand Court Michigan 164 1993 95%
Farmington Hills
The Grand Court Michigan 114 1994 98%
Novi
The Grand Court I Missouri 167 1989 97%
Kansas City
The Grand Court Missouri 217 1991 80%
III Kansas City
The Grand Court IV Missouri 237 1990 69%
Kansas City
The Grand Court Nevada 152 1991 100%
Las Vegas
The Grand Court Ohio 120 1994 100%
Columbus
The Grand Court Ohio 185 1994 99%
Dayton
The Grand Court Ohio 73 1992 99%
Findlay
The Grand Court Ohio 77 1992 100%
Springfield
The Grand Court I Tennessee 143(4) 1995 99%
Chattanooga
The Grand Court II Tennessee 146 1995 99%
Chattanooga
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OCCUPANCY
% AT
NUMBER OF YEAR MAY 31,
COMMUNITY(1) STATE UNITS ACQUIRED(2) 1996
------------ ----- --------- ----------- ---------
The Grand Court Tennessee 197 1992 98%
Memphis
The Grand Court Texas 180 1993 98%
Bryan
The Grand Court Texas 132 1990 96%
Longview
The Grand Court Texas 139 1991 99%
Lubbock
The Grand Court I Texas 198 1993 98%
San Antonio
The Grand Court II Texas 60(5) 1995 87%
San Antonio
The Grand Court Texas 60 1996 98%
Weatherford
The Grand Court Virginia 98 1995 97%
Bristol
--------------
(1) In certain cases, more than one Investing Partnership owns an
interest in one Owning Partnership. There are therefore, more
Investing Partnerships than there are Owning Partnership. One of the
Owning Partnerships owns two adult living communities, one Owning
Partnership owns one adult living community and one nursing home. In
addition, the Company's properties in Pompano Beach, Florida are
adjacent to one another and are counted as one property. As a
result, there are 32 properties listed, but only 29 Owning
Partnerships. See "--Partnership Offerings." In addition, the
Company has entered into contracts to acquire an adult living
community in Morristown, Tennessee containing 180 apartment units, an
adult living community in Tampa, Florida containing 164 apartment
units and two adult living communities in Sparks, Nevada containing
92 apartment units and 64 apartment units, respectively.
(2) Represents year in which an affiliate of the Company acquired the
community.
(3) These are adjacent properties and are counted as one adult living
community.
(4) Grand Court I Chattanooga's unit count includes a 70-bed nursing
wing.
(5) Grand Court II San Antonio is a 60-bed licensed nursing facility.
All 30 adult living communities and the nursing home are managed by
the Company in its capacity as property manager and, for all but one of the
related owning partnerships, as managing general partner. Because the
Company serves as both the managing general partner and the property
manager, it receives partnership administration fees and property
management fees. As the managing general partner of these partnerships, the
Company generally has full authority and power to act for the partnerships
as if it were the sole general partner. The Company has fiduciary
responsibility for the management and administration of these partnerships
and, subject to certain matters requiring the consent of the other partners
such as a sale of the related property, may generally, on behalf of the
partnerships, borrow money, execute contracts, employ persons and services,
compromise and settle claims, determine and pay distributions, prepare and
distribute reports, and take such other actions which are necessary or
desirable with respect to matters affecting the partnerships or individual
partners. See "--Partnership Offerings."
OPERATIONS
Corporate. Over the past ten years the Company has developed
extensive policies, procedures and systems for the operation of its adult-
living communities. The Company also has adopted a formal quality
assurance program. In connection with this program the Company requires a
minimum of two full-day annual quality assurance reviews at each community.
The entire regional staff team participates in the review which thoroughly
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examines all aspects of the long-term care community from the provision of
services to the maintenance of the physical buildings. The reports
generated from these quality assurance reviews are then implemented by the
community administrator. Corporate headquarters also provides human
resources services, a licensing facilitator, and in-house accounting and
legal support systems.
Regional. The Company has nine regional administrators: one
responsible for three communities in Florida, one responsible for six
communities in Tennessee, Texas, Arizona and Nevada, one responsible for
five communities in Texas and Virginia, one responsible for five
communities in Ohio and Tennessee, one responsible for five communities in
Missouri, Kansas, and Michigan, one responsible for four communities in
Florida, one responsible for three communities in Missouri and Illinois and
one who oversees the food division. In addition, one regional
administrator and various other Company personnel oversee the third-party
managing agents that operate multi-family properties in which the equity
interests are pledged to the Company to secure notes owed to it. Each
regional administrator is reported to by the manager of those communities
he oversees.
Community. The management team at each community consists of an
administrator, who has overall responsibility for the operation of the
community, an activity director, a marketing director and, at certain
larger communities, one or two assistant administrators. Each community
which offers assisted-living services has a staff responsible for the
assisted-living care giving services. This staff consists of a lead
resident aide, a medication room aide, certified nurse aides and trained
aides, and, in those states which so require, registered nurses. At least
one staff member is on duty 24 hours per day to respond to the emergency or
scheduled 24-hour assisted-living services available to the residents. Each
community has a kitchen staff, a housekeeping staff and a maintenance
staff. The average community currently operated by the Company has 40 to 50
full-time employees depending on the size of the community and the extent
of services provided in that community.
The Company places emphasis on diet and nutrition, as well as
preparing attractively presented healthy meals which can be enjoyed by the
residents. The Company's in-house food service program is led by a regional
administrator who reviews all menus and recipes for each community. The
menus and recipes are reviewed and changed based on consultation with the
food director and input from the residents. The Company provides special
meals for residents who require special diets.
Employees. The Company emphasizes maximizing each employee's
potential through support and training. The Company's training program is
conducted on three levels. Approximately six times per year, corporate
headquarters staff conduct training sessions for the management staff in
the areas of supervision and management skills, and caring for the needs of
an aging population. At the regional level, regional staff train the
community staff on issues such as policies, procedures and systems,
activities for the elderly, the administration and provision of specific
services, food service, maintenance, reporting systems and other
operational areas of the business. At the community level, the
administrators of each community conduct training sessions on at least a
monthly basis relating to various practical areas of care-giving at the
community. These monthly sessions cover, on an annual basis, all phases of
the community's operations, including special areas such as safety, fire
and disaster procedures, resident care, and policies and procedures.
COMPETITION
The senior housing and health care industries are highly competitive
and the Company expects that both the independent-living business, and
assisted-living businesses in particular, will become more competitive in
the future. The Company will continue to face competition from numerous
local, regional and national providers of long-term care whose communities
and services are on either end of the senior care continuum. The Company
will compete in providing independent-living services with home health care
providers and other providers of independent-living services, primarily on
the basis of quality and cost of communities and services offered. The
Company will compete in providing assisted-living with other providers of
assisted-living services, skilled nursing communities and acute care
hospitals primarily on the bases of cost, quality of care, array of
services provided and physician referrals. The Company also will compete
with companies providing home based health care, and even family members,
based on those factors as well as the reputation, geographic location,
physical appearance of
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communities and family preferences. In addition, the Company expects that
as the provision of long-term care receives increased attention,
competition from new market entrants, including, in particular, companies
focused on independent and assisted-living, will grow. Some of the
Company's competitors operate on a not-for-profit basis or as charitable
organizations, while others have, or may obtain, greater financial
resources than those of the Company. However, the Company anticipates that
its most significant competition will come from other adult living
communities within the same geographic area as the Company's communities
because management's experience indicates that senior citizens frequently
elect to move into communities near their homes.
Moreover, in the implementation of the Company's expansion program,
the Company expects to face competition for the development of adult living
communities. Some of the Company's present and potential competitors are
significantly larger or have, or may obtain, greater financial resources
than those of the Company. Consequently, 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
could have a material adverse effect on the Company's financial condition,
results of operations and prospects. In addition, if the development of
new adult living communities outpaces demand for those communities in
certain markets, such markets may become saturated. Such an oversupply of
facilities could cause the Company to experience decreased occupancy,
depressed margins and lower operating results.
COMPANY HISTORY
The predecessors of Grand Court Lifestyles, Inc. are J&B Management
Company, Leisure Centers, Inc. and their affiliates. J&B Management
Company is a private partnership founded in 1969 with a successful history
in the development and management of multi-family real estate and adult
living communities. J&B's headquarters are in Fort Lee, New Jersey and it
conducted its property development and management operations through its
affiliate, Leisure Centers, Inc., located in Boca Raton, Florida. Grand
Court Lifestyles, Inc., its subsidiaries, J&B Management Company and
Leisure Centers, Inc. and their affiliates are collectively referred to as
the "Company".
Through the 1970's and early 1980's, the Company's primary focus was
on the acquisition, development, finance and management of multi-family
properties. Senior management, collectively, has over 80 years of
experience in multi-family housing, having had interests in properties
containing approximately 20,000 apartment units located in 22 states,
primarily in the sun-belt. Beginning in the mid-1980's, the Company's sole
focus has been on the acquisition, finance and management of adult living
communities building one of the largest operating portfolios of adult
living communities in the nation, encompassing the entire spectrum of the
long-term care industry, from independent-living to assisted-living, with a
limited involvement in nursing homes. Senior management, collectively, has
over 40 years of experience in the adult living field. The Company is
ranked by the American Seniors Housing Association in the top ten owners
and managers of adult living properties and currently has ownership
interests in and manages 30 adult living communities containing 4,350
apartment units (including 70 skilled nursing beds) and one nursing home
containing 60 skilled nursing beds in 11 states.
GOVERNMENT REGULATION
Regulations applicable to the Company's operations vary among the
types of communities operated by the Company and from state to state.
Independent-living communities generally do not have any licensing
requirements. Assisted-living communities are subject to less regulation
than other licensed health care providers but more regulation than
independent-living communities. However, the Company anticipates that
additional regulations and licensing requirements will likely be imposed by
the states and the federal government. Currently, California, New Jersey,
Ohio, Massachusetts, Texas and Florida require licenses to provide the
assisted-living services provided by the Company. The licensing statutes
typically establish physical plant specifications, resident care policies
and services, administration and staffing requirements, financial
requirements and emergency service procedures. The licensing process can
take from two months to one year. New Jersey requires Certificates of Need
for assisted-living communities. The Company's communities must also
comply with the requirements of the Americans With Disabilities Act and are
subject to various local building codes and other ordinances, including
fire safety codes. While the Company relies almost exclusively on private
pay residents, the Company operates a nursing home
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containing 60 beds and one adult living community operated by the Company
contains 70 nursing home beds in which some residents rely on Medicaid. As
a provider of services under the Medicaid program, the Company would be
subject to Medicaid regulations designed to limit fraud and abuse,
violations of which could result in civil and criminal penalties and
exclusion from participation in the Medicaid program. Revenues derived
from Medicaid comprise less than 1% of the Company's revenues. The Company
does not intend to expand its nursing home activities and intends to pursue
an exclusively "private-pay" clientele. The Company believes it is in
substantial compliance with all applicable regulatory requirements. No
actions are pending against the Company for non-compliance with any
regulatory requirement.
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property
may be held liable for the costs of removal or remediation of certain
hazardous or toxic substances, including, without limitation, asbestos-
containing materials, that could be located on, in or under such property.
Such laws and regulations often impose liability whether or not the owner
or operator knows of, or was responsible for, the presence of the hazardous
or toxic substances. The costs of any required remediation or removal of
these substances could be substantial and the liability of an owner or
operator as to any property is generally not limited under such laws and
regulations, and could exceed the property's value and the aggregate assets
of the owner or operator. The presence of these substances or failure to
remediate such substances properly may also adversely affect the owner's
ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator or any
entity who arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may also be liable for
these costs, as well as certain other costs, including governmental fines
and injuries to persons or properties. As a result, the presence, with or
without the Company's knowledge, of hazardous or toxic substances at any
property held or operated by the Company could have an adverse effect on
the Company's business, operating results and financial condition.
Under 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 properties are substantially in compliance with present
requirements or are exempt therefrom, if required changes involve a greater
expenditure than anticipated or must be made on a more accelerated basis
than anticipated, additional costs would be incurred by the Company.
Further legislation may impose additional burdens or restrictions with
respect to access by disabled persons, the costs of compliance with which
could be substantial.
EMPLOYEES
As of the date hereof, the Company employs approximately 1,500
persons, including 25 in the Company's corporate headquarters. None of the
Company's employees is covered by collective bargaining agreements. The
Company believes its employee relations are good.
LEGAL PROCEEDINGS
J&B Management Company, a predecessor of the Company ("J&B Management
Company") that managed certain multi-family properties for which the United
States Department of Housing and Urban Development ("HUD") provided
mortgage insurance, was the subject of an audit and investigation by HUD
during 1990 and 1991. Pending the conclusion of the inquiry, J&B
Management Company, its partners and key employees were suspended by HUD
from the management of such multi-family properties. On April 10, 1991,
HUD and J&B Management Company entered into a Settlement Agreement which
provided, among other things, that HUD vacate the suspension retroactively.
Certain conditions were imposed in the Settlement Agreement, including that
J&B Management Company and such principals and employees not engage in the
management of HUD-insured properties for an indefinite period of time.
Pursuant to a letter agreement dated January 11, 1994, (i) J & B Management
Company agreed to reimburse various properties for certain expenses,
aggregating approximately $445,000, deemed not eligible by HUD, (ii) J & B
Management Company agreed to pay HUD's costs for the audit, and to
reimburse
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HUD for certain subsidy overpayments, aggregating approximately $861,000,
and (iii) all issues relating to the audit and investigation were concluded
and fully resolved.
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. The Company
business 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 claims,
many of which seek large amounts and result in significant legal costs.
The Company expects that from time to time it will be subject to such suits
as a result of the nature of its business. The Company currently maintains
insurance policies in amounts and with such coverage and deductibles as it
deems appropriate, based on the nature and risks of its business,
historical experience and industry standards. 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 will not arise. A
successful claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect on the Company's
operating results and financial condition. Claims against the Company,
regardless of their merit or eventual outcome, may also have a material
adverse effect on 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, and there can be no assurance
that the Company will be able to obtain liability insurance coverage in the
future or, if available, that such coverage will be on acceptable terms.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
John Luciani(1) 64 Chairman of the Board and Chief
Executive Officer
Bernard M. 66 Chief Operating Officer, President
Rodin(2) and Director
John W. Luciani 44 Executive Vice President and
III Director
Paul Jawin 40 Chief Financial Officer
Dorian Luciani 41 Senior Vice President - Acquisition
and Construction
Deborah Luciani 39 Vice President - New Business
Development and Acquisitions
Edward J. Glatz 54 Vice President - Construction
Catherine V. 31 Vice President and Treasurer
Merlino
Keith Marlowe 34 Secretary
Walter 78 Director
Feldesman(1)(2)
Leslie E. 53 Director
Goodman(1)(2)
-----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JOHN LUCIANI, Chief Executive Officer and Chairman of the Board of
Directors, founded the earliest predecessor of the Company in 1969 and has
been engaged in a number of business activities and investments since 1952.
Commencing in 1960, he entered into the real estate development and
construction business, concentrating initially on the development,
construction and sale of residential high-rise apartment buildings and
single-family homes and subsequently on the acquisition and development of
multi-family rental housing complexes. Since 1986, he has concentrated on
the acquisition, development and financing of adult living communities for
the elderly. Mr. Luciani founded the earliest predecessor of the Company
with Bernard M. Rodin in 1969.
BERNARD M. RODIN, Chief Operating Officer, President and Director, has
been engaged, since the formation of the earliest predecessor of the
Company in 1969, in the financing of property acquisitions by arranging for
the sale of partnership interests and in property management. This
activity initially focused on the Company's multi-family housing portfolio
and, since 1986, on the Company's adult living communities. Mr. Rodin is a
certified public accountant and was actively engaged in the practice of
public accounting prior to founding the earliest predecessor of the Company
with John Luciani in 1969.
JOHN W. LUCIANI III, Executive Vice President and Director, a son of
John Luciani, joined the Company in 1975 and has since been actively
involved in the management and operation of the Company's property
portfolios, initially focusing on multi-family housing and later on the
Company's adult-living communities.
PAUL JAWIN, Chief Financial Officer, a son-in-law of Bernard M. Rodin,
joined the Company in May 1991. His activities primarily involve the
various financial aspects of the Company's business including its debt
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financing and matters involving the Company's equity and debt securities.
Mr. Jawin is an attorney and was actively engaged in a real estate/
corporate practice prior to joining the Company.
DORIAN LUCIANI, Senior Vice President - Acquisition and Construction,
a son of John Luciani, joined the Company in 1977 and was initially
involved in the acquisition, development and management of the Company's
multi-family housing portfolio. Later, Mr. Luciani focused exclusively on
the acquisition and development of the Company's adult living communities.
DEBORAH LUCIANI, Vice President - New Business Development and
Acquisitions, a daughter of John Luciani, joined the Company in January
1992. Ms. Luciani is primarily involved in new business development,
acquisitions, obtaining financing and various marketing responsibilities
for the Company's existing and new adult living communities. Prior to
joining the Company, Ms. Luciani worked for Prudential Bache Securities as
an oil futures trader from November 1988 to December 1991.
EDWARD J. GLATZ, Vice President - Construction, joined the Company in
September 1992 and has been actively involved in the design, site selection
and construction for the new "Grand Court" adult living communities.
Additionally, Mr. Glatz supervises the capital improvements of the
Company's real estate holdings. Prior to joining the Company, Mr. Glatz
performed asset management duties for Kovens Enterprises, a real estate
development company, from June 1988 until September 1992.
CATHERINE V. MERLINO, Vice President and Treasurer, joined the Company
in September 1993, and has since been actively involved in the financial
reporting and analysis needs of the Company. Prior to joining the Company,
Mrs. Merlino was a Senior Accountant from June 1989 through June 1993 and a
Supervisor from June 1993 through September 1993 at Feldman Radin & Co.,
P.C., a public accounting firm located in New York City.
KEITH MARLOWE, Secretary of the Company, joined the Company in August
1994. From 1987 through August 1994, Mr. Marlowe, an attorney, was an
associate in the tax department at the law firm of Reid & Priest LLP where
he was involved in a general transactional tax practice.
WALTER FELDESMAN, Director, has been Of Counsel to the law firm of
Baer Marks & Upham LLP since March 1993 and for more than five years prior
thereto was a partner of Summit, Rovins and Feldesman. Mr. Feldesman is
currently a Director and Chairman of the Audit Committee of Sterling
Bancorp and a Director of its subsidiary, Sterling National Bank & Trust
Co. Mr. Feldesman is a member of the Board of Advisors of the National
Institute on Financial Services for Elders, the National Academy of Elder
Law Attorneys, the American Association of Homes for the Aging, the
National Council on the Aging and American Society on Aging. He has
authored an article entitled "Long-Term Care Insurance Helps Preserve an
Estate," and a soon-to-be published work entitled the Eldercare Primer
----------------
Series.
------
LESLIE E. GOODMAN, Director, is the Area President for the North
Jersey Region for First Union National Bank and a Senior Executive Vice
President of First Union Corporation. From September 1990 through January
1994, he served as President and Chief Executive Officer of First Fidelity
Bank, N.A., New Jersey. From January 1994 to December 1995, Mr. Goodman
served as a Senior Executive Vice President and a Director of First
Fidelity Bank, National Association until it was merged into First Union.
From January 1990 until December 1995, he also served as Senior Executive
Vice President, member of the Office of the Chairman and a Director of
First Fidelity Bancorporation. Mr. Goodman served as the Chairman of the
New Jersey Bankers Association from March 1995 to March 1996. He is a
member of the Board of Directors and Chairman of the Audit Committee of
Wawa Inc.
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DIRECTOR COMPANSATION
The Company will pay each Director who is not an employee of the
Company $1000 per Board meeting attended and $500 per Committee meeting
attended. All Directors are reimbursed by the Company for their out-of-
pocket expenses incurred in connection with attendance at meetings of, and
other activities related to service on, the Board of Directors or any Board
Committee.
AUDIT COMMITTEE
The Board of Directors established an Audit Committee in June 1996.
The Audit Committee is currently composed of Messrs. Rodin, Feldesman and
Goodman. The Audit Committee's duties include reviewing internal financial
information, monitoring cash flow, budget variances and credit
arrangements, reviewing the audit program of the Company, reviewing with
the Company's independent accountants the results of all audits upon their
completion, annually selecting and recommending independent accountants,
overseeing the quarterly unaudited reporting process and taking such other
action as may be necessary to assure the adequacy and integrity of all
financial information distributed by the Company.
COMPENSATION COMMITTEE
The Board of Directors established a Compensation Committee in June
1996. The Compensation Committee is currently composed of Messrs. John
Luciani, Feldesman and Goodman. The Compensation Committee recommends
compensation levels of senior management and works with senior management
on benefit and compensation programs for Company employees.
EXECUTIVE COMPENSATION
The following table shows, as to the Chief Executive Officer and each
of the four other most highly compensated executive officers information
concerning compensation accrued for services to the Company in all
capacities during the fiscal year ended January 31, 1996.
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------
Other All
Name and Annual Other
Principal Salary Bonus Compensation Compensation
Position Year ($) ($) ($) ($)
----------------- ---- ------ ----- ------------ ------------
John Luciani,
Chairman of the
Board and Chief
Executive fiscal
Officer(1) . . . 1995 --- --- --- $1,228,750
Bernard M. Rodin,
Chief Operating
Officer,
President and fiscal
Director(1) . . . 1995 --- --- --- $1,228,750
John W. Luciani,
III, Executive
Vice President fiscal
and Director . . 1995 $315,000 --- --- ---
Dorian Luciani,
Senior Vice fiscal
President . . . . 1995 $315,000 --- --- ---
Paul Jawin, Chief fiscal
Financial Officer 1995 $289,050 --- --- ---
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----------------------------------
(1) Messrs. Luciani and Rodin received dividends and distributions from
the Company's predecessors but did not receive salaries. As of April
1, 1996 a salary for each of Messrs. Luciani and Rodin was established
at the rate of $600,000 per year. In the first six months of fiscal
1996, such officers also received $450,000 each as a dividend.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a Compensation Committee in June
1996. The Compensation Committee currently consists of Messrs. John
Luciani, Feldesman and Goodman. None of the executive officers of the
Company currently serves on the compensation committee of another entity or
on any other committee of the board of directors of another entity
performing similar functions. For a description of transactions between
the Company and members of the Compensation Committee or their affiliates,
see "Certain Transactions."
STOCK PLANS
1996 Stock Option and Performance Award Plan
The Company has adopted the 1996 Stock Option and Performance Award
Plan (the "Plan"), which authorizes the grant to officers, key employees
and directors of the Company and any parent or subsidiary of the Company of
incentive or non-qualified stock options, stock appreciation rights,
performance shares, restricted shares and performance units. Under the
Plan, directors who are not employees of the Company may not be granted
incentive stock options. The Company plans to reserve 1,250,000 shares of
Common Stock for issuance pursuant to the Plan. As of the date hereof, no
options had been granted under the Plan.
The Plan will be administered by the Board of Directors. The Board of
Directors will determine the prices and terms at which options may be
granted. Options may be exercisable in installments over the option
period, but no options may be exercised after ten years from the date of
grant. Stock appreciation rights may be granted in tandem with options or
separately.
The exercise price of any incentive stock option granted to an
eligible employee may not be less than 100% of the fair market value of the
shares underlying such option on the date of grant, unless such employee
owns more than 10% of the outstanding Common Stock or stock of any
subsidiary or parent of the Company, in which case the exercise price of
any incentive stock option may not be less than 110% of such fair market
value. No option may be exercisable more than ten years after the date of
grant and, in the case of an incentive stock option granted to an eligible
employee owning more than 10% of the outstanding Common Stock or stock of
any subsidiary or parent of the Company, no more than five years from its
date of grant. Incentive stock options are not transferable, except upon
the death of the optionee. In general, upon termination of employment of
an optionee (other than due to death or disability), all options granted to
such person which are not exercisable on the date of such termination
immediately expire, and any options that are so exercisable will expire
three months following termination of employment in the case of incentive
stock options, but not until the date the options otherwise would expire in
the case of non-qualified stock options. However, all options will be
forfeited immediately upon an optionee's termination of employment for good
cause and upon an optionee's voluntary termination of employment without
the consent of the Board of Directors.
Upon an optionee's death or termination of employment due to
disability, all options will become 100% vested and will be exercisable (i)
in the case of death, by the estate or other beneficiary of the optionee at
any time prior to the date the option otherwise would expire and (ii) in
the case of the disability of the optionee, by the optionee within one year
of the date of such termination of employment in the case of incentive
stock options, or at any time prior to the date the option otherwise would
expire in the case of non-qualified stock options.
At the time each grant of restricted shares or performance shares or
units or stock appreciation rights is made, the Board of Directors will
determine the duration of the performance or restriction period, if any,
the
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performance targets, if any, for earning performance shares or units, and
the times at which restrictions placed on restricted shares shall lapse.
CERTAIN TRANSACTIONS
In the first quarter of 1996, the Selling Stockholders reorganized
their businesses by consolidating them into the Company. The Selling
Stockholders transferred all of the issued and outstanding stock of each of
16 Sub-chapter S corporations along with various other assets and
liabilities to the Company in exchange for 2,168,257 shares of the
Company's Common Stock. A partnership in which the Selling Stockholders
are the sole partners transferred to the Company substantially all of its
assets, subject to substantially all of its liabilities, in exchange for
1,084,128 shares of the Company's Common Stock. The partnership
distributed the shares received to the Selling Stockholders. Six Sub-
chapter S corporations which were wholly-owned by the Selling Stockholders
were merged into the Company. Pursuant to the mergers the shares of the
four merged companies were converted into an aggregate of 6,747,615 shares
of the Company's Common Stock. After the reorganization was complete, the
Selling Stockholders owned an aggregate of 10,000,000 shares of the
Company's Common Stock.
Prior to the reorganization discussed above, the business of the
Selling Stockholders was conducted through a partnership and various Sub-
chapter S corporations. These entities made distributions to each of the
Selling Stockholders of $5,495,500, $943,000, $850,000 and $124,500 in
Fiscal 1993, 1994 and 1995 and the first quarter of the current fiscal
year, respectively.
During Fiscal 1995 and the first quarter of the current fiscal year,
the Company paid to Francine Rodin, the wife of Bernard M. Rodin, the
Company's Chief Operating Officer, President and a Director, $121,876 and
$30,500, respectively, as fees for introducing to the Company
broker/dealers that have assisted the Company in the sale of limited
partnership interests in Investing Partnerships. Mrs. Rodin will receive a
fee with respect to any future sales of such limited partnership interests
and other securities offered by the Company, including shares of Common
Stock offered hereby, by such broker/dealers. During Fiscal 1995 and the
first half of the current fiscal year, Francine Rodin received consulting
fees of $51,510 and $132,560, respectively, in connection with coordinating
the Company's travel arrangements and marketing efforts. Mrs. Rodin is now
an employee of the Company and performs similar services.
Michele R. Jawin, the daughter of Mr. Rodin and wife of Paul Jawin,
the Company's Chief Financial Officer, is Of Counsel to Reid & Priest LLP,
which acts as securities counsel to the Company, including in connection
with this offering.
Messrs. Luciani and Rodin, the Chairman of the Board and President of
the Company, respectively, and entities controlled by them serve as general
partners (with interests ranging between 1% and 2%) of partnerships
directly and indirectly owning multi-family properties and on account of
such general partner status have personal liability for recourse
partnership obligations and own small equity ownership interests in the
partnerships. The Company holds notes, aggregating $163.6 million, that
are secured by the limited partnership interests in such partnerships.
These individuals have provided personal guarantees in certain
circumstances to obtain mortgage financing for certain adult living
communities operated by the Company and for certain of the Company's
Investor Note Debt and Unsecured Debt, and the obligations thereunder may
continue. The aggregate amount of such debt personally guaranteed by
Messrs. Luciani and Rodin is approximately $17.8 million and $30.6 million,
respectively. In addition, Messrs. Luciani and Rodin and certain employees
will devote a portion of their time to overseeing the third-party managers
of multi-family properties and one adult living community in which Messrs.
Luciani and Rodin have financial interests but the Company does not.
Walter Feldesman, a Director of the Company, is Of Counsel to the law
firm of Baer Marks & Upham LLP, which acts as counsel to the Company from
time to time.
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<PAGE>
Leslie E. Goodman, a Director of the Company, is Area President for
the North Jersey Region for First Union National Bank. First Union is the
registrar and transfer agent for the Common Stock and is a lender to the
Company with $1,000,500 aggregate principal amount of loans outstanding.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of August 31,
1996, before and after giving effect to the Minimum Offering and the
Maximum Offering, regarding the beneficial ownership of the Company's
Common Stock by (i) each executive officer and director of the Company,
(ii) each stockholder known by the Company to beneficially own 5% or more
of such Common Stock, (iii) each Selling Stockholder and (iv) all directors
and officers as a group. Except as otherwise indicated, the address of
each beneficial holder of 5% or more of such Common Stock is the same as
the Company.
AFTER AFTER
BEFORE MINIMUM MAXIMUM
OFFERING OFFERING OFFERING
------------ ------------- ------------
SHARES
OFFERED
BENEFICIAL OWNER NUMBER % (1) NUMBER % NUMBER %
---------------- ------ --- ------- ------ --- ------ ---
John Luciani..... 5,000,000 50% 138,889 4,930,555.5 44% 4,861,111 39%
Bernard M.
Rodin.......... 5,000,000 50% 138,889 4,930,555.5 44% 4,861,111 39%
All directors and
officers as
a group........10,000,000 100% 277,778 9,861,111.0 88% 9,722,222 78%
--------------
(1) The number of shares to be sold by the Selling Stockholders will equal
10% of the aggregate number of shares to be sold in this Offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately prior to the closing of this Offering, the Company will
file an Amended and Restated Certificate of Incorporation ("Certificate").
The Certificate will provide for 20,000,000 authorized shares of Common
Stock. The Certificate also will provide for 1,000,000 authorized shares
of Preferred Stock, par value $.0001 per share (the "Preferred Stock").
Upon completion of the Minimum Offering, there will be outstanding:
(a) 11,250,000 shares of Common Stock, consisting of (i) the 9,861,111
shares currently owned by the Selling Stockholders and not offered hereby;
(ii) the 1,250,000 shares to be sold by the Company hereby; and (iii) the
138,889 shares to be sold by the Selling Stockholders hereby; and (b) no
shares of Preferred Stock. Upon completion of the Maximum Offering, there
will be outstanding: (a) 12,500,000 shares of Common Stock, consisting of
(i) 9,722,222 shares currently owned by the Selling Stockholders and not
offered hereby; (ii) 2,500,000 shares to be sold by the Company hereby;
(iii) the 277,778 shares to be sold by the Selling Stockholders hereby and
(b) no shares of Preferred Stock.
The following summary description relating to the Common Stock, and
the Preferred Stock does not purport to be complete. A description of the
Company's capital stock is contained in the Certificate, which is filed as
an exhibit to the Registration Statement of which this Prospectus forms a
part. Reference is made to such exhibit for a detailed description of the
provisions thereof summarized below.
COMMON STOCK
The Certificate will authorize the Company to issue 20,000,000 shares
of Common Stock. All shares outstanding upon completion of this offering
will be validly issued, fully paid and non-assessable.
Stockholders of the Company have no preemptive rights or other rights
to subscribe for additional shares. Subject to the rights of holders of
Preferred Stock and Long-term Debt all holders of Common Stock, regardless
of class, are entitled to share equally on a share-for-share basis in any
assets available for distribution to stockholders on liquidation,
dissolution or winding up of the Company. No shares of any class of Common
Stock have conversion rights or are subject to redemption.
Holders of Common Stock are entitled to receive such dividends, if
any, as may be declared by the Company's Board of Directors out of funds
legally available therefor, but only if all dividends due on the
outstanding Preferred Stock have been paid.
PREFERRED STOCK
The authorized capital stock of the Company will include 1,000,000
shares of Preferred Stock. The Board of Directors is authorized to fix the
rights, preferences, privileges and restrictions of any series of Preferred
Stock, including the dividend rights, original issue price, conversion
rights, voting rights, terms of redemption, liquidation preferences and
sinking fund terms thereof, and the number of shares constituting any such
series and the designation thereof and to increase or decrease the number
of shares of such series subsequent to the issuance of shares of such
series (but not below the number of shares of such series then
outstanding). Because the terms of the Preferred Stock can be fixed by the
Board of Directors without stockholder action, the Preferred Stock could be
issued quickly with terms calculated to defeat a proposed takeover of the
Company or to make the removal of management more difficult. The Board of
Directors, without stockholder approval, could issue Preferred Stock with
dividend, voting and conversion rights which could adversely affect the
rights of the holders of Common Stock. At present, the Company has no
plans to issue any Preferred Stock.
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CERTAIN DELAWARE LAW PROVISIONS
Section 203 of the Delaware Law prevents an "interested stockholder"
(defined in Section 203, generally, as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a publicly held Delaware
corporation for three years following the date such person became an
interested stockholder unless: (i) before such person became an interested
stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested
stockholder or approved the business combination; (ii) upon consummation of
the transaction that resulted in the interested stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with
the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii) following
the date on which such person became an interested stockholder, the
business combination is approved by the board of directors of the
corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of 66-2/3% of the outstanding voting stock of the
corporation not owned by the interested stockholder. Section 203 may have
a depressive effect on the market price of the Common Stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BY-LAWS
Certain provisions of the Certificate and By-Laws of the Company
summarized in the following paragraphs will become operative immediately
prior to closing of this Offering and may be deemed to have an anti-
takeover effect and may delay or prevent a tender offer or takeover attempt
that a stockholder might consider in its best interest, including those
attempts that might result in a premium over the market price for the
shares held by stockholders. These provisions may have a depressive effect
on the market price of the Common Stock.
SPECIAL MEETING OF STOCKHOLDERS. The Certificate will provide that
special meetings of stockholders of the Company may be called only by the
Board of Directors. This provision will make it more difficult for
stockholders to take action opposed by the Board of Directors. This
provision of the Certificate may not be amended or repealed by the
stockholders of the Company, except with the approval of the holders of
two-thirds of the Company's outstanding Common Stock.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate will
provide that no action required or permitted to be taken at any annual or
special meeting of the stockholders of the Company may be taken without a
meeting, and the power of stockholders of the Company to consent in
writing, without a meeting, to the taking of any action is specifically
denied. Such provision limits the ability of any stockholders to take
action immediately and without prior notice to the Board of Directors.
Such a limitation on a majority stockholder's ability to act might impact
such person's or entity's decision to purchase voting securities of the
Company. This provision of the Certificate may not be amended or repealed
by the stockholders of the Company, except with the approval of the holders
of two-thirds of the Company's outstanding Common Stock.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The By-Laws will provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual or special meeting of
stockholders, must provide timely notice thereof in writing. To be timely,
a stockholder's notice must be delivered to, or mailed and received at, the
principal executive offices of the Company (a) in the case of an annual
meeting that is called for a date that is within 30 days before or after
the anniversary date of the immediately preceding annual meeting of
stockholders, not fewer than 60 days nor more than 90 days prior to such
anniversary date and (b) in the case of the annual meeting to be held
during the first complete fiscal year following the date of this Prospectus
and in the case of an annual meeting that is called for a date that is not
within 30 days before or after the anniversary date of the immediately
preceding annual meeting, or in the case of a special meeting of
stockholders called for the purpose of electing directors, not later than
the close of business on the tenth day following the day on which notice of
the date of the meeting was
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mailed or public disclosure of the date of the meeting was made, whichever
occurs first. The By-Laws also will specify certain requirements for a
stockholder's notice to be in proper written form. These provisions may
preclude some stockholders from bringing matters before the stockholders at
an annual or special meeting or from making nominations for directors at an
annual or special meeting. As set forth below, the By-Laws may not be
amended or repealed by the stockholders of the Company, except with the
approval of holders of two-thirds of the Company's outstanding Common
Stock.
ADJOURNMENT OF MEETINGS OF STOCKHOLDERS. The By-Laws will provide
that when a meeting of stockholders of the Company is convened, the
presiding officer, if directed by the Board of Directors, may adjourn the
meeting, if no quorum is present for the transaction of business or if the
Board of Directors determines that adjournment is necessary or appropriate
to enable the stockholders to consider fully information the Board of
Directors determines has not been made sufficiently or timely available to
stockholders or to otherwise effectively exercise their voting rights.
This provision will, under certain circumstances, make more difficult or
delay actions by the stockholders opposed by the Board of Directors. The
effect of such provision could be to delay the timing of a stockholders'
meeting, including in cases where stockholders have brought proposals
before the stockholders that are in opposition to those brought by the
Board of Directors and therefore may provide the Board of Directors with
additional flexibility in responding to such stockholder proposals. As set
forth below, the By-Laws may not be amended or repealed by the stockholders
of the Company, except with the approval of holders of two-thirds of the
Company's outstanding Common Stock.
AMENDMENT OF THE BY-LAWS. The Certificate will provide that the By-
Laws may be amended or repealed by the Board of Directors and may not be
amended or repealed by the stockholders of the Company, except with the
consent of holders of two-thirds of the Company's outstanding Common Stock.
This provision will make it more difficult for stockholders to make changes
to the By-Laws that are opposed by the Board of Directors. This provision
of the Certificate may not be amended or repealed by the stockholders of
the Company, except with the approval of the holders of two-thirds of the
Company's outstanding Common Stock.
Transfer Agent and Registrar
The Company's transfer agent and registrar will be First Union
National Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for securities
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 substantial amounts of Common Stock of the
Company in the public market after the lapse of the restrictions described
below could adversely affect the prevailing market price and the ability of
the Company to raise equity capital in the future at a time and price it
deems appropriate.
Upon completion of the Minimum Offering, the Company will have
outstanding 11,250,000 shares of Common Stock. Upon completion of the
Maximum Offering, the Company will have outstanding 12,500,000 shares of
Common Stock. Of these shares, 1,388,889 shares of Common Stock,
representing all of the shares sold in the Minimum Offering, or 2,777,778
shares of Common Stock, representing all of the shares sold in the Maximum
Offering, as the case may be, will be freely tradeable without restriction
or limitation under the Securities Act, except for shares, if any,
purchased by an "affiliate" of the Company (as defined in the rules and
regulations of the Commission under the Securities Act) which shares will
be subject to the resale limitations of Rule 144 under the Securities Act.
The remaining outstanding shares are "restricted" shares within the meaning
of Rule 144 (the "Restricted Shares"). The Restricted Shares outstanding
on the date hereof were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the
Securities Act and may be sold only
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if they are registered under the Securities Act or unless an exemption from
registration, such as the exemption provided by Rule 144 under the
Securities Act, is available.
In general, under Rule 144, as currently in effect, any person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned Restricted Shares for at least a two-year period (as
computed under Rule 144) is entitled to sell within any three-month period
a number of such shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock (approximately 112,500 shares after
giving effect to the Minimum Offering and approximately 125,000 shares
after giving effect to the Maximum Offering) and (ii) the average weekly
trading volume in the Company's Common Stock during the four calendar weeks
immediately preceding such sale. Sales under Rule 144 are also subject to
certain provisions relating to the manner and notice of sale and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed an affiliate of the
Company at any time during the 90 days immediately preceding a sale, and
who has beneficially owned Restricted Shares for at least a three-year
period (as computed under Rule 144), would be entitled to sell such shares
under Rule 144(k) without regard to the volume limitation and other
conditions described above.
PLAN OF DISTRIBUTION
The shares of Common Stock are being offered on a "best-efforts" basis
through Participating Dealers ("Participating Dealers") who are members of
the National Association of Securities Dealers, Inc. (the "NASD"). The
Company also intends to offer shares of the Common Stock directly through
the efforts of its officers, directors and employees. Bernard M. Rodin,
the Company's Chief Operating Officer, President and Director, and Noel
Marcus, Director of Investor Relations of the Company, will act as the
principal selling agents of the Company in connection with such direct
offerings.
The Company has agreed to indemnify all Participating Dealers against
certain liabilities, including liabilities under the Securities Act of
1933. The Company will pay the Participating Dealers a selling commission
of up to 6% of the offering price ($1.08 per share) for all shares of
Common Stock sold. The foregoing will be paid upon the closing of the
offering. In addition, the Company will reimburse Participating Dealers
for due diligence expenses and provide a non-accountable expense allowance
in the aggregate amount of up to 1% per share ($.18 per share) and will pay
wholesalers or finders fees in the aggregate amount of up to 1% per share
($.18 per share). No Participating Dealers are affiliated with the
Company.
The following Participating Dealers have entered into Selling Agency
Agreements with the Company:
Ameriprop, Inc. KRK Ltd.
Asset Allocations Securities Corp. NI Securities Corporation
Buckhead Financial Corporation Princeton Equity
Securities, Inc.
Centennial Capital Management Retirement Investment Group
Chapel Hill Securities Round Hill Securities
Dominion Capital Corporation SFI Investment, Inc.
First Associated Securities Schild Asset Management, Inc.
1st Global Capital Corp. Strategic Assets Inc.
FFP Securities, Inc. Sunpoint Securities, Inc.
H.J. Meyers & Co., Inc. TFS Securities, Inc.
Investech Capital Corporation Wharton Equity Corporation
Investment Opportunity Corporation World Invest Corporation
There is no lead underwriter for this offering. Participating
Dealers will execute Selling Agency Agreements with the Company; however,
such Participating Dealers will be under no obligation to sell any or all
of the Shares of Common Stock offered hereby. Under the Selling Agency
Agreement, the Participating Dealers
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will agree to use their best efforts to solicit indications of interest
and, after the effective date of the Registration Statement for which this
Prospectus constitutes a part, subscriptions for the purchase of the shares
of Common Stock. Each Selling Agency Agreement may be terminated by either
party thereto at any time. There are no volume sales limitation in any
such agreements. The Division of Corporation Finance of the U.S.
Securities and Exchange Commission has taken the position that any
broker/dealer that sells shares of Common Stock in the offering may be
deemed an underwriter as defined in Section 2(11) of the Securities Act of
1933, as amended. The Company reserves the right to enter into Selling
Agency Agreements with additional Participating Dealers after the
commencement of this offering. There is no assurance that, even if any
Participating Dealers sell the shares of Common Stock offered hereby, a
court of competent jurisdiction or arbitration panel would deem any such
Participating Dealer to be an underwriter as so defined.
The shares of Common Stock are being offered subject to prior sale,
withdrawal, cancellation or modification of the offer, including its
structure, terms and conditions, without notice. The Company reserves the
right, in its sole discretion, to reject, in whole or in part, any offer to
purchase the shares of Common Stock.
The Company intends to sell the shares of Common Stock in this
offering only in the states in which the offering is qualified. An offer
to purchase may only be made and the purchase of the shares of Common Stock
may only be negotiated and consummated in such states. The Subscription
Form for the shares of Common Stock must be executed, and the shares of
Common Stock may be delivered only in, such states. Resale or transfer of
the shares of Common Stock may be restricted under state law.
Until at least 1,388,889 shares of Common Stock are sold, the
proceeds of the offering will be held in escrow by First Union National
Bank (the "Escrow Agent"). If at least 1,388,889 shares of Common Stock
are not sold within 60 days from the date of this Prospectus (subject to an
extension of up to 60 days at the sole discretion of the Company), the
offering will terminate and such proceeds will be promptly returned to
subscribers, without interest or deductions. Shares of Common Stock sold to
officers, directors or employees of the Company or its affiliates will not
be counted for purposes of determining whether such number of shares has
been sold.
If the Company does not terminate the offering earlier, which it may,
in its sole discretion, the offering of shares of Common Stock will
continue until the Company raises an aggregate of $50,000,004, provided
that the offering period for all of the shares of Common Stock of the
Company will not exceed 120 days from the date of this Prospectus.
No sale of the shares of Common Stock will be made by the Company to
any prospective investor who has not received a copy of this Prospectus at
least 48 hours prior to the confirmation of a sale of shares hereunder.
Upon reaching a decision to invest in the shares, prospective
investors who intend to purchase shares directly from the Company must
deliver to the Company a completed Subscription Form and payment in the
appropriate amount. Prospective investors who intend to purchase shares
through a Participating Dealer should also deliver a completed Subscription
Form and payment in the appropriate amount directly to that Participating
Dealer. Regardless of whether prospective investors offer to purchase
shares of Common Stock from the Company or from a Participating Dealer, all
checks for the purchase of shares should be made payable to "First Union
National Bank - Grand Court Lifestyles, Inc. -Escrow Account."
Acceptance of a prospective investor as a purchaser of the shares of
Common Stock will occur when the Company executes the Subscription Form.
The Company will send an executed copy of the Subscription Form to each
investor who purchases shares of Common Stock after acceptance by the
Company, or will direct the Escrow Agent to return the prospective
investor's check should the offer to invest not be accepted.
The Participating Dealers have agreed in accordance with the
provisions of Rule 15c2-4 promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, to cause
all funds received upon subscription for shares of Common Stock to be
forwarded to the Escrow Agent upon the receipt of
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the executed Subscription Form and related funds by the Participating
Dealer by or before noon of the next business day following the
subscription for said shares of Common Stock.
Prior to this offering, there has been no public market for the
Common Stock. The initial public offering price has been unilaterally
determined by the Company without being negotiated with an underwriter or
other third party. Among the factors considered by the Company in
determining the price were the history of, and the prospects for, the
Company and the industry in which it competes, its past and present
operations, its past and present earnings and the trend of such earnings,
the prospects for future earnings, the present state of the Company's
development, the general condition of the securities markets at the time of
this offering, and the recent market prices of publicly traded common
stocks of comparable companies.
Francine Rodin, the wife of Bernard M. Rodin, has been a paid
consultant to the Company, and is now an employee of the Company, who
coordinates the Company's travel arrangements and marketing efforts. Mrs.
Rodin is also a registered representative of a Participating Dealer and
will receive approximately 83% of the commissions earned by said
Participating Dealer for shares sold by her. Mrs. Rodin will also receive
finders fees equal to 1% of purchase price of shares sold by other
Participating Dealers she introduces to the Company.
Noel Marcus, the Company's Director of Investor Relations, is a
registered representative of a Participating Dealer. He will receive
commissions for shares of Common Stock sold by him in that capacity.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed
upon for the Company by Reid & Priest LLP.
EXPERTS
The consolidated financial statements and financial statement
schedule of the Company as of January 31, 1995 and 1996 and for each of the
three years in the period ended January 31, 1996, included in this
Prospectus and Registration Statement have been audited by Deloitte &
Touche LLP, independent accountants, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration
Statement, omits certain of the information contained in the Registration
Statement and the exhibits and schedules thereto on file with the
Commission pursuant to the Securities Act and the rules and regulations of
the Commission thereunder. For further information with respect to the
Company and the Common Stock, reference is made to the Registration
Statement and the exhibits and schedules thereto. The Registration
Statement, including exhibits and schedules thereto, may be inspected and
copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, New York, New York
10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies may be obtained at the prescribed rates
from the Public Reference Section of the Commission at its principal office
in Washington, D.C. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
64
<PAGE>
The Company intends to furnish to its stockholders annual reports
containing financial statements audited by an independent certified public
accounting firm and quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year.
65
<PAGE>
GRAND COURT LIFESTYLES, INC. and SUBSIDIARIES
----------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 1995
and 1996 and July 31, 1996 F-3
Consolidated Statements of Operations for the Years
ended January 31, 1994, 1995 and 1996, the Three
Months ended July 31, 1995 and 1996 and the Six
Months ended July 31, 1995 and 1996 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended January 31, 1994, 1995
and 1996 and the Six Months ended July 31, 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended January 31, 1994, 1995 and 1996 and the Six
Months ended July 31, 1996 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Grand Court Lifestyles, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Grand Court
Lifestyles, Inc. and subsidiaries as of January 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31,
1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Grand
Court Lifestyles, Inc. and subsidiaries as of January 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the
three years in the period ended January 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
April 26, 1996, except for Note 11, which is as of June 11, 1996
F-2
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share data)
-------------------------------------------------------------------------
JANUARY 31, JULY 31,
------------------ ----------
(UNAUDITED)
1995 1996 1996
---- ---- ----
ASSETS
Cash and cash
equivalents . . . . . . $ 10,950 $ 17,961 $ 7,190
Notes and receivables -
net . . . . . . . . . . 220,014 223,736 226,044
Investments in
partnerships . . . . . 3,002 3,794 3,779
15,081 15,251 17,351
Other assets - net . . -------- -------- --------
$249,047 $260,742 $254,364
Total assets . . . . . ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Loans and accrued
interest payable . . . $127,355 $140,094 $132,631
Notes and commissions
payable . . . . . . . . 3,569 1,684 1,374
Other liabilities . . . 2,000 4,018 7,099
84,955 79,442 77,748
Deferred income . . . . -------- -------- --------
Total liabilities . . . 217,879 225,238 218,852
Commitments and
contingencies
Stockholders' equity
Common Stock, $.10 par
value - authorized,
10,000 shares; issued
and outstanding, 9,224
shares . . . . . . . . 1 1 1
Paid-in capital . . . . 31,167 35,503 35,916
-- -- (405)
Accumulated deficit . . -------- -------- --------
TOTAL STOCKHOLDERS' 31,168 35,504 35,512
EQUITY . . . . . . . . -------- -------- --------
Total liabilities and $249,047 $260,742 $254,364
stockholders' equity . ======== ======== ========
<?r>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
----------------------------------------------------------------------
YEARS ENDED
JANUARY 31,
------------------------------
1994 1995 1996
---- ---- ----
Revenues:
Sales . . . . . . $29,461 $29,000 $41,407
Deferred income
earned . . . . . 6,668 3,518 9,140
Interest income . 13,315 9,503 12,689
Property
management fees
from related
parties . . . . . 4,124 4,516 4,666
-- -- 1,013
Other income . . -------- -------- -------
53,568 46,537 68,915
-------- -------- -------
Cost and Expenses:
Cost of sales . . 26,548 21,249 27,112
Selling . . . . . 6,706 6,002 7,664
Interest . . . . 10,991 13,610 15,808
General and
administrative . 5,271 6,688 8,475
Officers'
Compensation . . 1,200 1,200 1,200
Depreciation and 1,433 2,290 2,620
amortization . . -------- -------- --------
52,149 51,039 62,879
-------- -------- --------
Income (loss)
before provision
(benefit) for
income taxes . . . 1,419 (4,502) 6,036
Provision (benefit) -- -- --
for income taxes . -------- -------- --------
Net income (loss) . 1,419 (4,502) 6,036
Pro forma income
tax provision 568 (1,801) 2,414
(benefit) . . . . . -------- -------- --------
Pro forma net $ 851 $ (2,701) $ 3,622
income (loss) . . . ======== ======== ========
Pro forma earnings
(loss) per common $ .09 $ (.27) $ .36
share . . . . . . . ======== ======= ========
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31
------------------ ----------------
(UNAUDITED) (UNAUDITED)
1995 1996 1995 1996
---- ---- ---- ----
Revenues:
Sales . . . . . . . $14,209 $ 8,093 $19,991 $18,836
Deferred income
earned . . . . . . 2,285 -- 4,570 --
Interest income . . 2,919 1,938 7,030 7,886
Property management
fees from related
parties . . . . . . 1,361 696 2,890 1,559
925 -- 925 --
Other income . . . ------- ------- ------- -------
21,699 10,727 35,406 28,281
------- ------- ------- -------
Cost and Expenses:
Cost of sales . . . 10,797 4,338 14,855 9,323
Selling . . . . . . 2,462 1,692 3,854 3,489
Interest . . . . . 3,489 3,774 7,891 7,802
General and
administrative . . 1,722 1,543 3,586 4,099
Officers'
Compensation . . . 300 300 600 600
Depreciation and 928 795 1,491 1,730
amortization . . . ------- ------- ------- -------
19,698 12,442 32,277 27,043
------- ------- ------- -------
Income (loss) before
provision (benefit)
for income taxes . . 2,001 (1,715) 3,129 1,238
Provision (benefit) -- (64) -- 330
for income taxes . . ------- ------- ------- -------
Net income (loss) . . 2,001 (1,651) 3,129 908
Pro forma income tax 800 (830) 1,252 165
provision (benefit) . ------- ------- ------- -------
Pro forma $ 1,201 $ (821) $ 1,877 $ 743
net income (loss) . . ======= ======= ======= =======
Pro forma earnings
(loss) per common $ .12 $ (.08) $ .19 $ .07
share . . . . . . . . ======= ======= ======= =======
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JULY 31,
1996
(In Thousands)
-----------------------------------------------------------------
Stockholders' equity,
January 31, 1993 . . . . . . . $47,128
Net income . . . . . . . . . 1,419
Dividends . . . . . . . . . . (10,991)
-------
Stockholders' equity,
January 31, 1994 . . . . . . . 37,556
Net loss . . . . . . . . . . (4,502)
Dividends . . . . . . . . . . (1,886)
-------
Stockholders' equity,
January 31, 1995 . . . . . . . 31,168
Net income . . . . . . . . . 6,036
Dividends . . . . . . . . . . (1,700)
-------
Stockholders' equity,
January 31, 1996 . . . . . . . $35,504
Net income (unaudited) . . . 908
Dividends (unaudited) . . . . (900)
-------
Stockholders' equity, $35,512
July 31, 1996 (unaudited) . . =======
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
--------------------------------------------------------------------------
YEARS ENDED JANUARY 31,
----------------------
1994 1995 1996
---- ---- ----
Cash flows from operating
activities:
Net income (loss) . . . . . . . $ 1,419 $(4,502) $ 6,036
------- ------- -------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Amortization and depreciation 1,433 2,290 2,620
Deferred income earned . . . (6,668) (3,518) (9,140)
Adjustment for changes in
assets and liabilities:
Accrued interest income on
notes receivable and receipt
of notes receivable . . . . . (1,241) 174 (2,560)
(Increase) decrease in notes
and receivables . . . . . . . 7,945 7,223 (1,162)
Increase (decrease) in
commissions payable . . . . . 1,011 (501) (244)
Increase (decrease) in other
liabilities . . . . . . . . . (1,278) (506) 2,018
Increase (decrease) in 4,401 632 3,627
deferred income . . . . . . . ------- ------- -------
5,603 5,794 (4,841)
------- ------- -------
Net cash provided (used) by 7,022 1,292 1,195
operating activities . . . ------- ------- -------
Cash flows from investing
activities:
(Increase) decrease in (641) (736) (792)
investments . . . . . . . . . . ------- ------- -------
Net cash provided (used) by (641) (736) (792)
investing activities . . . ------- ------- -------
Cash flows used in financing
activities:
Decrease in loans payable . . . (21,629) (31,311) (39,326)
Increase in loans and accrued
interest payable . . . . . . . 34,429 44,014 52,065
(Increase) decrease in other
assets . . . . . . . . . . . . (2,701) (7,180) (2,790)
Payments of notes payable . . . (2,609) (2,578) (1,641)
(Dividends) Contributions . . . (10,991) (1,886) (1,700)
------- ------- -------
Net cash provided (used) in (3,501) 1,059 6,608
financing activities . . . ------- ------- -------
Increase (decrease) in cash and
cash equivalents . . . . . . . . 2,880 1,615 7,011
Cash and cash equivalents, 6,455 9,335 10,950
beginning of period . . . . . . . ------- ------- -------
Cash and cash equivalents, end of $ 9,335 $10,950 $17,961
period . . . . . . . . . . . . . ======= ======= =======
Supplemental information:
Interest paid . . . . . . . . . $10,710 $12,914 $16,922
======= ======= =======
SIX MONTHS ENDED JULY 31,
-------------------------
(UNAUDITED)
1995 1996
---- ----
Cash flows from operating activities:
Net income (loss) . . . . . . . . . $ 3,129 $ 908
------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization and depreciation . . 1,491 1,730
Deferred income earned . . . . . (4,570) --
Adjustment for changes in assets and
liabilities:
Accrued interest income on notes
receivable and receipt of notes
receivable . . . . . . . . . . . 1,800 5,234
(Increase) decrease in notes and
receivables . . . . . . . . . . . (10,167) (7,542)
Increase (decrease) in commissions
payable . . . . . . . . . . . . . (653) (219)
Increase (decrease) in other
liabilities . . . . . . . . . . . 515 3,081
Increase (decrease) in deferred 3,392 (1,694)
income . . . . . . . . . . . . . ------- -------
(8,192) 590
------- -------
Net cash provided (used) by (5,063) 1,498
operating activities . . . . . ------- -------
Cash flows from investing activities:
(Increase) decrease in investments (154) 15
------- -------
Net cash provided (used) by (154) 15
investing activities . . . . . ------- -------
Cash flows used in financing
activities:
Decrease in loans payable . . . . . (22,891) (32,307)
Increase in loans and accrued
interest payable . . . . . . . . . 26,328 24,844
(Increase) decrease in other assets 2,062 (3,830)
Payments of notes payable . . . . . (1,079) (91)
(Dividends) Contributions . . . . . (1,127) (900)
------- -------
Net cash provided (used) in 3,293 (12,284)
financing activities . . . . . ------- -------
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . (1,924) (10,771)
Cash and cash equivalents, beginning 10,950 17,961
of period . . . . . . . . . . . . . . ------- -------
Cash and cash equivalents, end of $ 9,026 $ 7,190
period . . . . . . . . . . . . . . . ======= =======
Supplemental information:
Interest paid . . . . . . . . . . . $ 7,326 $ 7,650
======= =======
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1994, 1995 AND 1996, THREE MONTHS ENDED JULY 31,
1996 AND THE SIX MONTHS ENDED JULY 31, 1996
(Information pertaining to the period July 31, 1996 is unaudited)
(In Thousands)
-------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
Grand Court Lifestyles, Inc. (the "Company") was formed pursuant to
the merger of various Sub-chapter S corporations which were wholly-
owned by the Selling Stockholders and the transfer of certain assets
by and assumption of certain liabilities of (i) a partnership that was
wholly-owned by the Selling Stockholders and (ii) the Selling
Stockholders individually. In exchange for the transfer of such
stock, assets and liabilities, the Selling Stockholders received
shares of the Company's common stock. These transactions are
collectively called the"reorganization". All of the assets and
liabilities of the reorganization were transferred at historical cost.
The reorganization was effective as of April 1, 1996. Prior to the
reorganization, the various Sub-chapter S corporations and the
partnership, which were wholly-owned by the Selling Stockholders, were
historically reported on a combined basis. The Company, a fully
integrated provider of adult living accommodations and services,
acquires, finances, develops and manages adult living communities. As
a result of the Company's financing activities, limited partnerships
("Investing Partnerships") are formed whereby the Company retains a 1%
to 1.5% general partnership interest.
LINE OF BUSINESS -- The Company's revenues have been and are expected
to continue to be primarily derived from sales of partnership
interests in partnerships it organizes to finance the acquisition of
existing adult living communities. Investing Partnerships generally
own a 98.5% to 99% interest in partnerships that own adult living
communities ("Owning Partnerships"). The Company also arranges for
the mortgage financing of the adult living communities and is involved
in the development and management of adult living communities.
Another source of income is interest income on notes receivable.
The adult living communities and multi-family properties are located
throughout the United States. The Company as of January 31, 1996
manages approximately 28 adult living centers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS -- The Company considers cash and cash
equivalents to include cash on hand, demand deposits and highly liquid
investments with maturities of three months or less.
REVENUE RECOGNITION -- Revenue from sales of interests in partnerships
as discussed in Note 1, is recognized under the full accrual method of
accounting when the profit on the transaction is determinable, that
is, the collectibility of the sales price is reasonably assured and
the earnings process is virtually complete. The Company determines
the collectibility of the sales price by evidence supporting the
buyers' substantial initial and continuing investment in the adult
living communities as well as other factors such as age, location and
cash flow of the underlying property.
The Company has deferred income on sales to Investing Partnerships of
interests in Owning Partnerships. The Company has arranged for the
private placement of limited partnership interests in Investing
Partnerships. Offerings of interests in Investing Partnerships which
were formed to acquire controlling interests in Owning Partnerships
which own adult living properties ("Adult Living Owning Partnerships")
provide that the limited partners will receive guaranteed
distributions during each of the first five years of their investment
equal to between 11% to 12% of their then paid-in capital
contributions. Pursuant to management contracts with the Adult Living
Owning Partnerships, the Company is required to pay to the Adult
Living Owning Partnerships, and the Adult Living Owning Partnerships
distribute to the Investing Partnership for distribution to limited
partners, amounts sufficient to fund any part of such guaranteed
return not paid from cash flow from the related property. The amount
of deferred income for each property is calculated at the beginning of
each fiscal year in a multi-step process. First, based on the
property's cash flow in the previous fiscal year, the probable cash
flow for the property for the current fiscal year is determined and
that amount is initially assumed to be constant for each remaining
year of the guaranty period (the "Initial Cash Flow"). The Initial
Cash Flow is then compared to the guaranteed return obligation for the
property for each remaining year of the guaranty period. If the
Initial Cash Flow exceeds the guaranteed return
F-7
<PAGE>
obligation for any fiscal year, the excess Initial Cash Flow is added
to the assumed Initial Cash Flow for the following fiscal year and
this adjusted Initial Cash Flow is then compared to the guaranteed
return obligation for said following fiscal year. If the Initial
Cash Flow is less than the guaranteed return obligation for any
fiscal year, a deferred income liability is created in an amount
equal to such shortfall and no adjustment is made to the Initial Cash
Flow for the following year. As this process is performed for each
property every year, changes in a property's actual cash flow will
result in changes to the assumed Initial Cash Flow utilized in this
process and will result in increases or decreases to the deferred
income liability for the property. Any deferred income liability
created in the year the interest in the Owning Partnership is sold
reduces revenues relating to the sale. The payment of the
guaranteed obligations, however, will generally not result in the
recognition of expense unless the property's actual cash flow for
the year is less than the Initial Cash Flow for the year, as
adjusted, and as a result thereof, the amount paid by the Company
in respect of the guaranteed return obligations is greater than
the amount assumed in establishing the deferred income liability.
If, however, the property's actual cash flow is greater than the
Initial Cash Flow for the year, as adjusted, the Company's earnings
will be enhanced by the recognition of deferred income earned
and, to the extent cash flow exceeds guaranteed returns, management
fees.
The Company accounts for the sales of controlling interests in Owning
Partnerships which own multi-family properties ("Multi-Family Owning
Partnerships") under the installment method. Under the installment
method the gross profit is determined at the time of sale. The
revenue recorded in any given year would equal the cash collections
multiplied by the gross profit percentage. The Company has deferred
all future income to be recognized on these transactions. Losses on
these projects are recognized immediately upon sale.
ALLOWANCE ON NOTES RECEIVABLE -- In the event that the facts and
circumstances indicate that the collectibility of a note may be
impaired, an evaluation of recoverability is performed. If an
evaluation is performed, the Company compares the recorded value of
the note to the value of the underlying property less any encumbrances
to determine if a write-down to market value is required. Interest
income on impaired notes is recognized on the cash basis.
ACCOUNTING ESTIMATES -- The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make significant estimates and assumptions that affect
the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
DEFERRED FINANCING AND DEBT EXPENSE -- Costs incurred in connection
with obtaining long-term financing have been capitalized and are
amortized over the term of the financing.
DEFERRED PROJECT COSTS -- Costs incurred in connection with the
construction and development of adult living communities the Company
intends to build. Such costs include the capitalization of interest
during the construction period.
INVESTMENTS -- The Company accounts for its interest in limited
partnerships under the equity method of accounting. The Company uses
this method because as the general partner it can exercise significant
influence over the operating and financial policies of such
partnerships. Under this method the Company records its share of
income and loss of the entity as well as any distributions or
contributions as an increase or decrease to the investment account.
The carrying amount of the investments in limited partnerships differs
from the Company's underlying equity interest based upon its stated
ownership percentages. Such differences are attributable to the
disproportionate amount of money and notes invested in the entities by
the Company for its equity interest as compared to the other
investors. This difference is being amortized over the life of the
underlying partnership assets.
MANAGEMENT FEES -- Property management fees earned for services
provided to related parties are recognized as revenue when related
services have been performed.
PRO FORMA INCOME TAXES -- The Reorganization occurred subsequent to
year end and, as such, income tax provisions at a combined Federal and
state tax rate of 40% have been provided on a pro forma basis. The
various Sub-chapter S corporations which were either merged into or
acquired by the Company and the partnership which transferred assets
to the Company were not required to pay taxes because any taxes were
the responsibility of the Seller Stockholders who were the sole
shareholders and partners of those entities.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments." The Company is unable to
determine the fair value of its notes and receivables as such
instruments do not have a ready market. Other financial instruments
are believed to be stated at approximately their fair value.
F-8
<PAGE>
4. NOTES AND RECEIVABLES
Notes and other receivables are from related parties and consist of
the following:
JANUARY 31, JULY 31,
----------- --------
1995 1996 1996
---- ---- ----
Notes and accrued interest
receivable (a) and (b) . . . . . $178,706 $176,403 $176,478
Other receivables (c) . . . . . . 46,984 53,145 53,955
7,324 7,188 7,111
Mortgages (d) . . . . . . . . . . -------- -------- --------
233,014 236,736 237,544
Less allowance for uncollectible 13,000 13,000 11,500
receivables . . . . . . . . . . . -------- -------- --------
$220,014 $223,736 $226,044
======== ======== ========
At January 31, 1996 and July 31, 1996 the carrying value of impaired
notes receivable, net of deferred income, were approximately $48,900 and
$30,600, respectively.
(a) The Company has notes receivable from the Investing Partnerships
which were formed to acquire controlling interests in Owning
Partnerships which own adult living communities. Such notes
generally have interest rates ranging from 11% to 13.875% and are
due in installments over five years from the date of acquisition
of the respective controlling interests. The notes represent
senior indebtedness of the related Investing Partnerships, and
are collateralized by the respective interests in the Owning
Partnerships. Principal and interest payments on each note are
also collateralized by the investor notes payable to the
Investing Partnerships to which the investors are admitted. The
Company has recorded the notes receivable net of loans from the
Investing Partnerships (which loans represent the proceeds of the
investor note prepayments) and, as a result thereof, such notes
receivable constitute none of the amounts shown for January 31,
1995 and $2,378 of the amount shown for January 31, 1996 and
$2,182 of the amounts shown for July 31, 1996.
(b) The Company has notes receivable from the Investing Partnerships
which were formed to acquire controlling interests in Owning
Partnerships which own multi-family properties. The notes have
maturity dates ranging from ten to fifteen years from the date of
the acquisition of the respective controlling interests. Several
notes have reached their final maturity dates and these final
maturity dates have been extended by the Company. It is the
Company's intention to collect the principal and interest
payments on the aforementioned notes from the cash flows
distributed by the related multi-family properties and the
proceeds in the event of a sale or refinancing. Except as set
forth in footnote (a), all amounts shown in notes and accrued
interest receivable relate to the aforementioned notes receivable
in respect of multi-family properties.
(c) Other receivables represent reimbursable expenses and advances
made to the limited partnerships. These amounts do not bear
interest and have no specific repayment date.
(d) The mortgages bear interest at rates ranging from 8% to 9%. The
mortgages are generally collateralized by a mortgage lien on the
related adult living communities. As of July 31, 1996 all
mortgage receivables were paid in full. The Company extended a
bridge loan in the amount of approximately $7,000 to one of the
Owning Partnerships as of July 31, 1996. The loan bore interest
at 8.5% and was paid in full by mid August, 1996.
F-9
<PAGE>
5. OTHER ASSETS
Other assets is comprised as follows:
JANUARY 31, JULY 31,
----------- --------
1995 1996 1996
---- ---- ----
Deferred loan costs . . (a) 6,910 7,994 6,945
Investment in Caton . . (b) 1,854 1,854 1,854
Unsold subscription (c) -- 595 971
units . . . . . . . . .
Investment held for (d) 4,396 -- --
resale . . . . . . . .
Deferred registration (e) 833 1,329
costs . . . . . . . . .
Deferred project costs (f) -- -- 2,033
Other assets 1,921 3,975 4,219
------- ------- -------
15,081 15,251 17,351
======= ======= =======
(a) Financing costs of $2,410, $3,578 and $589 were capitalized during the
years ended January 31, 1995, 1996 and the period ended July 31, 1996
respectively. These costs are being amortized over periods ranging
from one to ten years.
(b) The Company has approximately a 50% equity interest in Caton
Associates, a limited partnership which owns a mortgage loan
collateralized by interests in a cooperative apartment building. The
Company's equity interest in this partnership totaled $466 at
January 31, 1995, 1996 and July 31, 1996. Additionally, the Company
owns certain cooperative apartments recorded at $1,388 at January 31,
1995, 1996 and July 31, 1996.
(c) The Company has capitalized $595 and $971 of remaining costs
associated with the financing of the acquisition of adult living
communities by arranging for the sale of partnership interests, which
were substantially sold at January 31, 1996 and July 31, 1996
respectively. Upon completion of these transactions such costs will
be charged to cost of sales.
(d) The Company capitalized as an investment held for resale costs
associated with the financing of the acquisition of adult living
communities. The costs associated with the financing accrued during
the fiscal year ending January 31, 1996 at which time the investment
was charged to cost of sales.
(e) The Company has capitalized costs relating to this initial public
offering. Upon the closing of this offering, these costs will be
charged against additional paid-in capital. However, in the event the
public offering does not close these costs will be charged against
operations.
(f) The Company has capitalized costs which include interest associated
with its construction and development of properties it intends to
build. If a project is discontinued, any deferred project costs are
expensed.
F-10
<PAGE>
6. LOANS AND ACCRUED INTEREST PAYABLE
Loans payable consists of the following:
JANUARY 31, JULY 31,
--------------------- ----------
1995 1996 1996
---- ---- ----
Banks (including mortgages) (a)
(b) (c) . . . . . . . . . . . . . $ 39,261 $ 41,361 $ 30,740
Other, principally debentures (d) 88,094 98,733 101,891
-------- -------- --------
$127,355 $140,094 $132,631
======== ======== ========
(a) The bank loans bear interest per annum at the banks' prime rate plus
1% to 3%. The bank loans generally have terms of at least one year,
but in the event a particular bank elects not to renew or extend the
credit, the entire unpaid balance is converted to a term loan which
self-liquidates in four to five years. Generally the bank loans are
collateralized by the Company's entitlement to the assigned limited
partner investor notes which serve as collateral for the respective
purchase notes. The prime interest rate at January 31, 1996 and July
31, 1996 was 8.5% and 8.25% respectively.
(b) In addition to the aforementioned bank loans, the Company had three
additional loans from banks. Each of the loans were collateralized by
an assignment of the first mortgage loans payable to the Company. Two
of the loans bore interest at rates varying from 8% to 9% per annum
and were scheduled to come due on various dates through 1996. In
March 1996, the partnerships that own these properties refinanced two
of these mortgages, which eliminated them as obligations of the
Company. The third loan bore interest at the rate of 9.5% per annum
and was scheduled to mature on March 31, 1997. All three loans have
been paid in full as of July 31, 1996.
(c) The formation of the Company, pursuant to the merger into the Company
of various affiliated corporations and asset transfers, resulted in
defaults of approximately $6.3 million aggregate principal amount of
bank loans. None of the lenders have commenced any action to pursue
remedies in respect of such debt. The Company is currently working
with the lenders of such debt on amendments to the underlying debt
instruments which would give effect to the formation of the Company
and waive any such defaults. The Company anticipates that all such
amendments and waivers will be entered into prior to the date of this
Prospectus.
(d) Debentures are collateralized by various purchase notes and investor
notes related to multi-family property financing. They mature in 1996
through 2004 and bear interest rates of 11% to 12% per annum.
Future annual maturities, excluding interest, over the next five
years and thereafter, are as follows:
Year Ending
January 31
-----------
1997 . . . . . . . . . . $ 37,170
1998 . . . . . . . . . . 12,887
1999 . . . . . . . . . . 29,660
2000 . . . . . . . . . . 15,426
2001 . . . . . . . . . . 17,428
Thereafter . . . . . . . 26,628
--------
139,199
Accrued interest . . . . 895
--------
$140,094
========
7. OTHER LIABILITIES
a. Other liabilities include advances and certain
expenses. These amounts do not bear interest and have
no specific repayment date.
F-11
<PAGE>
b. Unearned income of $963 and $1,534 was recorded for the
amount of unsubscribed partnership interests in adult
living communities financed during the year ended
January 31, 1996 and the period ended July 31, 1996,
respectively. Upon full subscription these amounts
will be recognized as income.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the
amount used for income taxes purposes. The tax effects of
temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are
presented below:
Deferred tax assets: January 31,
1996
-----------
Notes and receivables . . . . . . $ 8,920
Accrued expenses and other 1,257
liabilities . . . . . . . . . . . -------
Total gross deferred tax assets . 10,177
Less valuation allowance . . . . 2,760
-------
Deferred tax assets net of valuation 7,417
allowance . . . . . . . . . . . . . -------
Deferred tax liabilities:
Deferred income . . . . . . . . . 4,560
Other assets . . . . . . . . . . 2,492
Investment in partnerships . . . 365
-------
Total gross deferred tax 7,417
liabilities . . . . . . . . . . . -------
Net deferred tax assets $ --
(liabilities) . . . . . . . . . . . =======
As discussed in Note 1, the Company became a taxable entity
as of April 1, 1996,therefore the current and prior year tax
provision (benefit) is presented on a pro forma basis at an
effective tax rate of approximately 40%. The Company has
recorded a valuation allowance of $2,760, because it was
uncertain that such deferred tax assets in excess of
deferred tax liabilities would be realizable in future
years.
9. COMMITMENTS AND CONTINGENCIES
The Company rents office space under a lease expiring
February 1997. Annual base rent under such lease is
approximately $178. The Company entered into a ten year
lease for additional office space, commencing September 1,
1991. The annual base rent is approximately $113 and will
increase 5% each year for ten years.
10. RELATED PARTY TRANSACTIONS
The Company has transactions with related parties that are
unconsolidated affiliates of the Company. The Company
provides management, accounting and bookkeeping services to
such affiliates. The Company receives a monthly fee in
return for such management services rendered on behalf of
its affiliates for each of their adult living communities.
Aggregate fees for such services for the years ended January
31, 1994, 1995 and 1996 and the six month period ended July
31, 1996 totaled $4,124, $4,516 and $4,666 and $1,559,
respectively.
In addition, the Company has amounts due from unconsolidated
affiliates of $413, $248 and $453 as of January 31, 1995 and
1996 and the period ended July 31, 1996, respectively.
The Chairman of the Board and President of the Company and
entities controlled by them serve as general partners of
partnerships directly and indirectly owning multi-family
properties and on account of such general partner status
have personal liability for recourse partnership obligations
and own small equity ownership interests in the
partnerships. The Company holds note receivables,
aggregating $163,608, that are secured by the equity
interests in such partnerships. These individuals have
provided personal guarantees in certain circumstances to
obtain mortgage financing for certain adult living
properties operated by the Company and for certain of the
Company's Investor Note
F-12
<PAGE>
Debt, and the obligations thereunder may continue. In addition,
such officers and certain employees will devote a portion of
their time to overseeing the third-party managers of multi-family
properties and one adult living community in which such officers
have financial interests but the Company does not. These
activities, ownership interests and general partner interests
create actual or potential conflicts of interest on the part of
these officers.
The Company is the managing general partner for 28 of the 29
owning partnerships which own the 30 adult living
communities and one nursing home which the Company operates.
The Company also is the general partner for 22 of the 34
Investing Partnerships that own 98.5% to 99% partnership
interests in these owning partnerships. In addition, the
Company is the managing agent for all of the Company's 30
adult living communities and one nursing home. The Company
has financed the acquisition of adult living communities
through the sales of limited partnership interests in the
Investing Partnerships. By serving in all of these
capacities, the Company may have conflicts of interest in
that it has both a duty to act in the best interests of
partners of various partnerships, including the limited
partners of the Investing Partnerships, and the desire to
maximize earnings for the Company's stockholders in the
operation of such adult living communities and nursing home.
11. SUBSEQUENT EVENTS
a. Refinancings
In February and March of 1996, the Company arranged for the
refinancing of existing mortgages on six adult living
communities and initial mortgage financing on four adult living
communities. Substantially all of the refinancing proceeds
from the mortgages over and above the transaction costs and the
existing mortgage, if any, were distributed to the investors as
a return of capital based upon the investor's ownership
percentage in the respective limited partnership. The
resultant return of capital to the investors was approximately
$43,717. As the Company has guaranteed the investors a return
based on their capital contribution the return of a portion of
the investors capital contributions has reduced the Company's
obligation under the guarantee. This reduction, however, is
offset and exceeded by the decrease in available cash flow to
fund the guarantee. The decrease in available cash flow
exceeded the reduction in the guaranteed return obligation, and
therefore, increased the amount required to be paid by the
Company with respect to such guarantee return obligation.
Accordingly, the deferred income which reflects the Company's
guaranteed obligation has been increased at January 31, 1996 as
the negotiations for the mortgage commitments started as early
as the fourth quarter of Fiscal 1995 and were substantially
agreed to by January 31, 1996.
As a result of this refinancing the Company reflected a
reduction in assets of $6,000, a reduction in debt of $8,900
and additional interest income of $2,900 during the six month
period ended July 31, 1996.
b. Letters of Intent
The Company has obtained a letter of intent, dated April 25,
1996, from Capstone Capital Corporation ("Capstone") to provide
up to $39 million for the development of up to four new adult
living communities that will be operated by the Company
pursuant to long-term leases with Capstone.
c. Capitalization
The Board of Directors and the stockholders have approved, to
be effective immediately prior to the closing of the proposed
public offering of the Company's Common Stock, (i) the filing
of a Restated Certificate of Incorporation that would provide
for, among other things, the authorization of 20,000,000 shares
of Common Stock and 1,000,000 shares of Preferred Stock and an
approximate 1084.1-for-1 stock split of the issued and
outstanding Common Stock and (ii) a Stock Option Plan reserving
for issuance up to 1,250,000 shares of Common Stock pursuant to
stock options and other stock awards. The following sets forth
the pro forma effect of the stock split.
F-13
<PAGE>
JANUARY 31 JULY 31
---------- -------
1995 1996 1996
---- ---- ----
Preferred Stock, -- -- --
$.0001 par value;
1,000,000 shares
authorized; none
issued and outstanding
Common Stock, $.01 par 100 100 100
value; authorized,
20,000,000 shares;
issued and
outstanding,
10,000,000 shares
Paid-in capital 31,068 35,404 35,817
Accumulated deficit -- -- (405)
F-14
<PAGE>
====================================
UNTIL _____, 1996 (25 DAYS
AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTIC-
IPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRIT-
ERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
--------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary . . . . . . 1
Risk Factors . . . . . . . . . 8
Use of Proceeds . . . . . . . 19
Dividend Policy . . . . . . . 20
Capitalization . . . . . . . 21
Dilution . . . . . . . . . . 22
Selected Consolidated Financial
Data . . . . . . . . . . . . 23
Management's Discussion and Analysis
of Financial Condition and
Results of Operations . . . 25
Business . . . . . . . . . . 38
Management . . . . . . . . . 53
Certain Transactions . . . . 57
Principal and Selling Stockholders
58
Description of Capital Stock 59
Shares Eligible for Future Sale 61
Plan of Distribution . . . . 62
Legal Matters . . . . . . . . 64
Experts . . . . . . . . . . . 64
Additional Information . . . 64
Index to Consolidated Financial
Statements . . . . . . . . . F-1
--------------------
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION
AND REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE SELLING
STOCKHOLDERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY THE
SHARES BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. UNDER NO CIRCUMSTANCES
SHALL THE DELIVERY OF THIS
PROSPECTUS, OR ANY SALE MADE
PURSUANT TO THIS PROSPECTUS,
CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
====================================
====================================
2,777,778 SHARES
GRAND COURT
LIFESTYLES, INC.
COMMON STOCK
------------
PROSPECTUS
------------
__________, 1996
====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be
incurred in connection with the issuance and distribution of the
Common Stock being registered assuming both the Minimum Offering
and the Maximum Offering. All expenses will be borne by the
Company, except that the Selling Stockholders will pay a 10% pro
rata share of the non-accountable expense allowances and the
wholesalers or finders fees.
MINIMUM MAXIMUM
________ _______
Securities and Exchange
Commission registration fee $17,241.38 $17,241.38
NASDAQ National Market 50,000 50,000
listing fee . . . . . . . .
Accounting fees and expenses.900,000 * 900,000 *
Legal fees and expenses . . 250,000 * 250,000 *
Printing and engraving 99,000 * 99,000 *
expenses . . . . . . . . .
Nonaccountable expense
allowances
Minimum . . . . . . . 250,000 * -
Maximum . . . . . . . - 500,000 *
Wholesalers or finders fees
Minimum . . . . . . . 250,000 * -
Maximum . . . . . . . - 500,000 *
Blue Sky fees and expenses 21,000 * 21,000 *
Transfer agent and registrar 3,000 * 3,000 *
fees and expenses . . . . .
Escrow agent . . . . . . . 5,000 * 5,000 *
Miscellaneous . . . . . . .
14,758.62* 14,758.62*
__________ __________
Total
Minimum . . . . .
$1,860,000 *
_____________
_____________
Maximum . . . . . $2,360,000 *
_____________
_____________
______________________
* estimated
Item 14. Indemnification of Directors and Officers
Article IX of the Company's Restated Certificate of Incorpo-
ration will provide that:
"The Corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened,
pending or complete action, suit or proceeding, whether civil,
criminal, administrative or investigative, or by or in the right
of the Corporation to procure judgment in its favor, by reason of
the fact that he is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests
of the Corporation, in accordance with and to the full extent
permitted by statute. Expenses incurred in defending a civil or
criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action,
suit or proceeding as authorized by the Board of Directors in the
specific case upon receipt of an undertaking by or on behalf of
the director, officer, employee or agent to repay such amount
unless it shall ultimately be determined that he is entitled to be
indemnified by the Corporation as authorized in this section. The
indemnification provided by
II-1
<PAGE>
this section shall not be deemed exclusive of any other rights to
which those seeking indemnification may be entitled under this
Restated Certificate of Incorporation or any agreement or vote of
stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another
capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent
and shall inure to the benefit of the heirs, executors and
administrators of such a person."
Article X of the Company's By-Laws will provide that:
"Any person made or threatened to be made a party to or
involved in any action, suit or proceeding, whether civil or
criminal, administrative or investigative (hereinafter,
"proceeding") by reason of the fact that he, his testator or
intestate, is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit
plans, shall be indemnified and held harmless by the Corporation
to the fullest extent authorized by the General Corporation Law
of the State of Delaware as the same exists or may hereafter be
amended (but in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide
broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment) against all
expense, loss and liability (including, without limitation,
judgments, fines, amounts paid in settlement and reasonable
expenses, including attorneys' fees), actually and necessarily
incurred or suffered by him in connection with the defense of or
as a result of such proceeding, or in connection with any appeal
therein. The Corporation shall have the power to purchase and
maintain insurance for the indemnification of such directors,
officers and employees to the full extent permitted under the
laws of the State of Delaware from time to time in effect. Such
right of indemnification shall not be deemed exclusive of any
other rights of indemnification to which such director, officer
or employee may be entitled.
The right to indemnification conferred in this By-Law
shall be a contract right and shall include the right to be paid
by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however
-------- -------
that if the General Corporation Law of the State of Delaware
requires, the payment of such expenses incurred by a director or
officer in his or her capacity as a director or officer (and not
in any other capacity in which services were or are rendered by
such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of
the final disposition of a proceeding, shall be made only upon
delivery to the Corporation of an undertaking by or on behalf of
such director or officer, to repay all amounts so advanced if it
shall ultimately be determined that such director or officer is
not entitled to be indemnified under this By-Law or otherwise."
Statutory
Generally, Section 145 of the General Corporation Law
of the State of Delaware authorizes Delaware corporations, under
certain circumstances, to indemnify their officers and directors
against all expenses and liabilities (including attorneys' fees)
incurred by them as a result of any suit brought against them in
their capacity as a director or an officer, if they acted in good
faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, if they had no
reasonable cause to believe their conduct was unlawful. A
director or officer may also be indemnified against expenses
incurred in connection with a suit by or in the right of the
corporation if such director or officer acted in good faith and
in a manner reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification
may be made without court approval if such person was adjudged
liable to the corporation.
II-2
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since January 31, 1993, the Company issued Debentures
in eleven series and Bonds in two series, with interest rates
ranging from 11% to 12.375%, and maturity dates from 1996 to 2004
in an aggregate principal amount of $68,927,157.08. Each series
was issued in reliance on exemptions from the registration
requirements under the Securities Act of 1933, as amended (the
"1933 Act") under Sections 3(b) and 4(2) of such act and
Regulation D promulgated thereunder to accredited investors and
up to 35 non-accredited investors. In connection with such
issuances, the Company paid commissions to qualified broker
dealers of between 10% and 15%.
In connection with offerings of limited partnership
interests in limited partnerships organized to invest in adult
living communities and for which the Company has acted as general
partner, the terms of the partnership offerings provide that
limited partners will receive distributions during each of the
first five years equal to between 11% and 12% of their paid-in
capital. Pursuant to the management contracts with the
partnerships which own such communities, the Company is required
to pay such Owning Partnerships, and the Owning Partnerships
distribute to the Investing Partnerships for distribution to
limited partners, amounts sufficient to fund any part of such
return not paid from cash flow from the related property. Since
January 31, 1993, there were 17 such limited partnership
offerings for an aggregate of $164,000,000. Each such offering
was issued in reliance on exemptions from the registration
requirements under the 1933 Act under Sections 3(b) and 4(2) of
such act and Regulation D promulgated thereunder to accredited
investors and up to 35 non-accredited investors. In connection
with such issuances, the Company paid commissions to qualified
brokers and dealers of between 10% and 15%.
Two limited partnerships for which the Company is
general partner have issued limited partnership interests for, in
the aggregate, $9,250,000, the net proceeds of which have been
used to make second mortgage loans to the Company to fund
approximately 20% of the costs of developing three new adult
living communities. Each such offering was issued in reliance on
exemptions from the registration requirements under the 1933 Act
under Sections 3(b) and 4(2) of such act and Regulation D
promulgated thereunder to accredited investors and up to 35 non-
accredited investors. In connection with such issuances, the
Company paid commissions to qualified brokers and dealers of
between 10% and 15%.
In connection with the reorganization of the Company's
businesses, the Company issued 10,000,000 shares of Common Stock
to Messrs. Luciani and Rodin in exchange for assets having an
aggregate value of $35,917,000. This offering was issued in
reliance on exemptions from the registration requirements under
the 1933 Act under Sections 3(b) and 4(2) of such act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
*1.1 - Form of Selling Agency Agreement.
*1.2 - Form of Subscription Form.
*2.1 - Consolidation Agreement dated as of April 1,
1996 among John Luciani, Bernard M. Rodin,
J&B Management Company and the Company.
*2.1(a) - First Amendment dated as of April 1,
1996 to Consolidation Agreement dated as
of April 1, 1996 among John Luciani,
Bernard M. Rodin, J&B Management Company
and the Company.
*2.1(b) - Second Amendment dated as of April 1,
1996 to Consolidation Agreement dated as
of April 1, 1996 among John Luciani,
Bernard M. Rodin, J&B Management Company
and the Company.
*2.2(a) - Merger Agreement dated as of April 1,
1996 between Leisure Centers, Inc. and
the Company.
*2.2(b) - Merger Agreement dated as of April 1,
1996 between Leisure Centers
Development, Inc. and the Company.
*2.2(c) - Merger Agreement dated as of April 1,
1996 between J&B Management Corp. and
the Company.
*2.2(d) - Merger Agreement dated as of April 1,
1996 between Wilmart Development Corp.
and the Company.
*2.2(e) - Merger Agreement dated as of April 1,
1996 between Sulgrave Realty Corporation
and the Company.
*2.2(f) - Merger Agreement dated as of April 1,
1996 between Riv Development Inc. and
the Company.
II-3
<PAGE>
3.1 - Form of Restated Certificate of
Incorporation of the Company.
*3.2 - By-Laws of the Company.
5(a) - Opinion of Reid & Priest LLP.
*10.1 - 1996 Stock Option and Performance Award
Plan.
*10.3 - Letter of Intent dated April 25, 1996 from
Capstone Capital Corp. to the Company.
*10.4(a) - Form of 12% Debenture due June 16, 2000
- Series 1.
*10.4(b) - Form of 12% Debenture due April 15, 1999
- Series 2.
*10.4(c) - Form of 11% Debenture due December 31,
1996 - Series 3.
*10.4(d) - Form of 11.5% Debenture due April 15,
2000 - Series 4.
*10.4(e) - Form of 12% Debenture due January 15,
2003 - Series 5.
*10.4(f) - Form of 12% Debenture due April 15, 2003
- Series 6.
*10.4(g) - Form of 11% Debenture due January 15,
2002 - Series 7.
*10.4(h) - Form of 11% Debenture due January 15,
2002 - Series 8.
*10.4(i) - Form of 12% Debenture due September 15,
2001 - Series 9.
*10.4(j) - Form of 12% Debenture due January 15,
2004 - Series 10.
*10.5(a) - Bank Agreement dated August 14, 1990
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 1.
*10.5(b) - First Amendment dated as of August 21,
1992 to Bank Agreement dated August 14,
1990 between The Bank of New York and
the Company with respect to 12%
Debentures, Series 1.
*10.5(c) - Bank Agreement dated October 11, 1991
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 2.
*10.5(d) - Bank Agreement dated October 17, 1991
between The Bank of New York and the
Company with respect to 11% Debentures,
Series 3.
*10.5(e) - Bank Agreement dated April 1, 1992
between The Bank of New York and the
Company with respect to 11.5%
Debentures, Series 4.
*10.5(f) - Bank Agreement dated October 30, 1992
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 5.
*10.5(g) - Bank Agreement dated May 24, 1993
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 6.
*10.5(h) - Bank Agreement dated October 27, 1993
between The Bank of New York and the
Company with respect to 11% Debentures,
Series 7.
*10.5(i) - First Amendment dated November 29, 1993
to Bank Agreement dated October 27, 1993
between The Bank of New York and the
Company with respect to 11%
Debentures,Series 7.
*10.5(j) - Bank Agreement dated November 29, 1993
between The Bank of New York and the
Company with respect to 11% Debentures,
Series 8.
*10.5(k) - Bank Agreement dated September 12, 1994
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 9.
*10.5(l) - Bank Agreement dated July 12, 1995
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 10.
*10.6(a) - Form of Short-term Step-up Bond due
March 15, 2001 - Series 1.
*10.6(b) - Form of 12.375% Bond due April 15, 2003 -
Series 2.
*10.7(a) - Bank Agreement between The Bank of New
York and the Company with respect to
Short-term Step-up Bonds - Series 1.
*10.7(b) - Bank Agreement between The Bank of New
York and the Company with respect to
12.375% Bonds -Series 2.
*10.8 - Revolving Credit Agreement dated as of
May 7, 1985 between Sterling National Bank
& Trust Company and the Company.
10.9 - Assumption Agreement dated as of September
10, 1996 among Sterling National Bank &
Trust, the Company, Bernard M. Rodin and
John Luciani
*21 - List of Subsidiaries of the Company.
23.1 - Consent of Reid & Priest LLP (included in
Exhibit 5 hereto).
II-4
<PAGE>
23.2 - Consent of DELOITTE & TOUCHE LLP.
*24 - Power of Attorney.
27.1 - Financial Data Schedule for the period
ended July 31, 1996.
27.2 - Amended Financial Data Schedule for the
period ended January 31, 1996.
_______________________
* Previously filed.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Securities Act of
1933");
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) under the
Securities Act of 1933 if, in the aggregate, the changes in the
volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.
(2) That, 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 this offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) To provide to the Transfer Agent at the closing cer-
tificates in such denominations and registered in such names as
required by the Transfer Agent to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the town of Fort Lee, the State of
New Jersey, on September 13, 1996.
GRAND COURT LIFESTYLES, Inc.
By: /s/ Paul Jawin
_______________
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following
persons in the capacities and on the dates indicated:
Signature Title Date
___________________ _______________ ___________
/s/ John Luciani * Chairman of the September 13, 1996
___________________ Board
John Luciani of Directors and
Chief Executive
Officer (Principal
Executive
Officer)
/s/ Bernard M. Rodin * President and September 13, 1996
______________________ Chief Operating
Bernard M. Rodin Officer and
Director
(Principal
Executive Officer)
/s/ John W. Luciani, III * Executive Vice September 13, 1996
__________________________ President and
John W. Luciani, III Director
/s/ Paul Jawin Chief Financial September 13, 1996
__________________________ Officer (Principal
Paul Jawin Financial Officer
and Principal
Accounting
Officer)
/s/ Walter Feldesman * Director September 13, 1996
______________________
Walter Feldesman
/s/ Leslie E. Goodman * Director September 13, 1996
________________________
Leslie E. Goodman
By: */s/ Paul Jawin
______________________
Paul Jawin,
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
Exhibit Description
-------- -----------
*1.1 - Form of Selling Agency Agreement.
*1.2 - Form of Subscription Form.
*2.1 - Consolidation Agreement dated as of April 1,
1996 among John Luciani, Bernard M. Rodin,
J&B Management Company and the Company.
*2.1(a) - First Amendment dated as of April 1,
1996 to Consolidation Agreement dated as
of April 1, 1996 among John Luciani,
Bernard M. Rodin, J&B Management Company
and the Company.
*2.1(b) - Second Amendment dated as of April 1,
1996 to Consolidation Agreement dated as
of April 1, 1996 among John Luciani,
Bernard M. Rodin, J&B Management Company
and the Company.
*2.2(a) - Merger Agreement dated as of April 1,
1996 between Leisure Centers, Inc. and
the Company.
*2.2(b) - Merger Agreement dated as of April 1,
1996 between Leisure Centers
Development, Inc. and the Company.
*2.2(c) - Merger Agreement dated as of April 1,
1996 between J&B Management Corp. and
the Company.
*2.2(d) - Merger Agreement dated as of April 1,
1996 between Wilmart Development Corp.
and the Company.
*2.2(e) - Merger Agreement dated as of April 1,
1996 between Sulgrave Realty Corporation
and the Company.
*2.2(f) - Merger Agreement dated as of April 1,
1996 between Riv Development Inc. and
the Company.
3.1 - Form of Restated Certificate of
Incorporation of the Company.
*3.2 - By-Laws of the Company.
5(a) - Opinion of Reid & Priest LLP.
*10.1 - 1996 Stock Option and Performance Award
Plan.
*10.3 - Letter of Intent dated April 25, 1996 from
Capstone Capital Corp. to the Company.
*10.4(a) - Form of 12% Debenture due June 16, 2000
- Series 1.
*10.4(b) - Form of 12% Debenture due April 15, 1999
- Series 2.
*10.4(c) - Form of 11% Debenture due December 31,
1996 - Series 3.
*10.4(d) - Form of 11.5% Debenture due April 15,
2000 - Series 4.
*10.4(e) - Form of 12% Debenture due January 15,
2003 - Series 5.
*10.4(f) - Form of 12% Debenture due April 15, 2003
- Series 6.
*10.4(g) - Form of 11% Debenture due January 15,
2002 - Series 7.
*10.4(h) - Form of 11% Debenture due January 15,
2002 - Series 8.
*10.4(i) - Form of 12% Debenture due September 15,
2001 - Series 9.
*10.4(j) - Form of 12% Debenture due January 15,
2004 - Series 10.
*10.5(a) - Bank Agreement dated August 14, 1990
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 1.
*10.5(b) - First Amendment dated as of August 21,
1992 to Bank Agreement dated August 14,
1990 between The Bank of New York and
the Company with respect to 12%
Debentures, Series 1.
*10.5(c) - Bank Agreement dated October 11, 1991
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 2.
*10.5(d) - Bank Agreement dated October 17, 1991
between The Bank of New York and the
Company with respect to 11% Debentures,
Series 3.
*10.5(e) - Bank Agreement dated April 1, 1992
between The Bank of New York and the
Company with respect to 11.5%
Debentures, Series 4.
*10.5(f) - Bank Agreement dated October 30, 1992
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 5.
*10.5(g) - Bank Agreement dated May 24, 1993
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 6.
*10.5(h) - Bank Agreement dated October 27, 1993
between The Bank of New York and the
Company with respect to 11% Debentures,
Series 7.
*10.5(i) - First Amendment dated November 29, 1993
to Bank Agreement dated October 27, 1993
between The Bank of New York and the
Company with respect to 11%
Debentures,Series 7.
*10.5(j) - Bank Agreement dated November 29, 1993
between The Bank of New York and the
Company with respect to 11% Debentures,
Series 8.
*10.5(k) - Bank Agreement dated September 12, 1994
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 9.
*10.5(l) - Bank Agreement dated July 12, 1995
between The Bank of New York and the
Company with respect to 12% Debentures,
Series 10.
*10.6(a) - Form of Short-term Step-up Bond due
March 15, 2001 - Series 1.
*10.6(b) - Form of 12.375% Bond due April 15, 2003 -
Series 2.
*10.7(a) - Bank Agreement between The Bank of New
York and the Company with respect to
Short-term Step-up Bonds - Series 1.
*10.7(b) - Bank Agreement between The Bank of New
York and the Company with respect to
12.375% Bonds -Series 2.
*10.8 - Revolving Credit Agreement dated as of
May 7, 1985 between Sterling National Bank
& Trust Company and the Company.
10.9 - Assumption Agreement dated as of September
10, 1996 among Sterling National Bank &
Trust, the Company, Bernard M. Rodin and
John Luciani
*21 - List of Subsidiaries of the Company.
23.1 - Consent of Reid & Priest LLP (included in
Exhibit 5 hereto).
23.2 - Consent of DELOITTE & TOUCHE LLP.
*24 - Power of Attorney.
27.1 - Financial Data Schedule for the period
ended July 31, 1996.
27.2 - Amended Financial Data Schedule for the
period ended January 31, 1996.
_______________
* Previously filed.
Exhibit 3.1
FORM OF RESTATED
CERTIFICATE OF INCORPORATION
OF
GRAND COURT LIFESTYLES, INC.
(Pursuant to Section 245 of the General
Corporation Law of the State of Delaware)
GRAND COURT LIFESTYLES, INC., a corporation organized
and existing under the laws of the State of Delaware, hereby
certifies as follows:
1. The original Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of
Delaware on January 25, 1996.
2. The original Certificate of Incorporation of the
Corporation was amended by a Certificate of Amendment filed with
the Secretary of State of the State of Delaware on February 20,
1996.
3. The original Certificate of Incorporation of the
Corporation was further amended by a Certificate of Amendment
filed with the Secretary of State of Delaware on May 21, 1996.
4. This Restated Certificate of Incorporation amends,
restates and integrates the provisions of the original
Certificate of Incorporation of the Corporation as amended to the
date hereof, and was duly adopted in accordance with the
provisions of Section 245 of the General Corporation Law of the
State of Delaware.
5. The text of the Certificate of Incorporation is
hereby restated to read in its entirety as follows:
ARTICLE I
---------
The name of the Corporation is Grand Court Lifestyles, Inc.
ARTICLE II
----------
The address of the Corporation's registered office in
the State of Delaware is 9 East Loockerman Street, City of Dover,
County of Kent, Delaware 19901. The name of its registered agent
at such address is National Corporate Research, Ltd.
ARTICLE III
-----------
The nature of the business or purposes to be conducted
or promoted by the Corporation are to engage in any lawful act or
activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
ARTICLE IV
----------
Section 4.1. Authorized Capital.
------------------
The total number of shares of all classes of stock
which the Corporation shall have authority to issue is Twenty-One
Million (21,000,000) shares, consisting of:
(a) One Million (1,000,000) shares of preferred
stock, $.0001 par value (the "Preferred Stock"), and
(b) Twenty Million (20,000,000) shares of common
stock, $.01 par value ("Common Stock").
Section 4.2. Preferred Stock.
----------------
Shares of the preferred stock of the Corporation may be
issued by the Board of Directors, without stockholder approval,
from time to time in one or more classes or series, each of which
class or series shall have such distinctive designation or title
as shall be fixed by the Board of Directors of the Corporation
prior to the issuance of any shares thereof. Each such class or
series of preferred stock shall have such voting powers, full or
limited, or no voting powers, and such other relative rights,
powers and preferences, including, without limitation, the
dividend rate, conversion rights, if any, redemption price and
liquidation preference, and such qualifications, limitations or
restrictions thereof, as shall be stated in such resolution or
resolutions providing for the issuance of such class or series of
preferred stock as may be adopted from time to time by the Board
of Directors prior to the issuance of any shares thereof pursuant
to the authority hereby expressly vested in it, all in accordance
with the laws of the State of Delaware.
Section 4.3 Common Stock.
-------------
The powers, rights and other matters relating to the
Common Stock are as follows:
(a) Dividends.
----------
Subject to the limitations set forth in this
Article IV, dividends may be paid on Common Stock out of any
funds legally available for that purpose, when, as and if
declared by the Board of Directors.
(b) Liquidation Rights.
-------------------
In the event of any liquidation, dissolution or
winding up of the Corporation, after there shall have been paid
to or set aside for the holders of outstanding shares having
superior liquidation preferences to Common Stock the full
preferential amounts to which they are respectively entitled, the
holders of outstanding shares of all classes of Common Stock
shall be entitled to receive pro rata, according to the number of
shares held by them, the remaining assets of the Corporation
legally available for distribution to the stockholders.
(c) Voting Rights.
--------------
(1) Except as set forth in this Article IV or as
by statute or otherwise mandatorily provided, the holders of the
outstanding shares of Common Stock shall exclusively possess full
voting powers for the election of directors of the Corporation
and for all other corporate purposes.
(2) Any action required or permitted to be taken
at any annual or special meeting of stockholders may be taken
only upon the vote of the stockholders at an annual or special
meeting duly noticed and called, as provided in the By-Laws of
the Corporation, and may not be taken by a written consent of the
stockholders pursuant to the General Corporation Law of the State
of Delaware.
(3) Special meetings of the stockholders of the
Corporation for any purpose or purposes may be called at any time
by the Board of Directors or the Chairman of the Board of
Directors. Special meetings of the stockholders of the
Corporation may not be called by any other Person or Persons.
(d) Definitions.
------------
For purposes of Article IV of this Restated
Certificate of Incorporation:
"Person"
-------
means an individual, a partnership, a joint venture, a
corporation, an association, a trust, or any other entity or
organization.
ARTICLE V
---------
In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors of the Corporation
is expressly authorized to adopt, alter or repeal its By-Laws.
In addition, the By-Laws may be made, altered, amended, changed
or repealed by the stockholders of the Corporation upon the
affirmative vote of the holders of at least 66-2/3% of the
outstanding Common Stock entitled to vote thereon.
ARTICLE VI
----------
Election of directors need not be by written ballot
unless the By-Laws of the Corporation shall so provide.
ARTICLE VII
-----------
Whenever a compromise or arrangement is proposed
between the Corporation and its creditors or any class of them
and/or between the Corporation and its stockholders or any class
of them, any court of equitable jurisdiction within the State of
Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the
Corporation under the provisions of Section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or
of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of the Corporation, as
the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in
value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any
reorganization of the Corporation as a consequence of such
compromise or arrangement, the said compromise or arrangement and
the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders
or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
ARTICLE VIII
------------
A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary
damages for injury resulting from a breach of his fiduciary duty
as a director, except for liability (i) for injury resulting from
a breach of his duty of loyalty to the Corporation and its
stockholders, (ii) for injury resulting from acts or omissions
not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, as the same exists or hereafter may be
amended, or (iv) for injury resulting from any transaction from
which the director derives an improper personal benefit. If the
Delaware General Corporation Law hereafter is amended so as to
authorize the further elimination or limitation of the liability
of directors to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, then the
liability of a director of the Corporation for monetary damages,
in addition to the limitation on personal liability provided in
the preceding sentence, shall automatically, by virtue hereof and
without any further action on the part of the Corporation or its
stockholders, be further limited so as to be limited to the
fullest extent permitted by the Delaware General Corporation
Law. Any repeal or modification of this Section by the
stockholders of the Corporation shall be prospective only, and
shall not adversely affect any limitation on the personal
liability of a director of the Corporation with regard to actions
taken or omitted before such repeal or modification.
ARTICLE IX
----------
The Corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened,
pending or complete action, suit or proceeding, whether civil,
criminal, administrative or investigative, or by or in the right
of the Corporation to procure judgment in its favor, by reason of
the fact that he is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests
of the Corporation, in accordance with and to the full extent
permitted by statute. Expenses incurred in defending a civil or
criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action,
suit or proceeding as authorized by the Board of Directors in the
specific case upon receipt of an undertaking by or on behalf of
the director, officer, employee or agent to repay such amount
unless it shall ultimately be determined that he is entitled to
be indemnified by the Corporation as authorized in this section.
The indemnification provided by this section shall not be deemed
exclusive of any other rights to which those seeking
indemnification may be entitled under this Restated Certificate
of Incorporation or any agreement or vote of stockholders or
disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators
of such a person.
ARTICLE X
---------
Notwithstanding anything contained in this Restated
Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 66-2/3% of the outstanding shares
of Common Stock shall be required to amend, repeal, or adopt any
provision inconsistent with Sections 4.3(c)(2) or 4.3(c)(3) of
Article IV, Article V or this Article X of this Restated
Certificate of Incorporation.
IN WITNESS WHEREOF, this Restated Certificate of
Incorporation has been executed on behalf of the Corporation this
____ day of ____________, 1996.
GRAND COURT LIFESTYLES, INC.
By:
----------------------------
Bernard M. Rodin, President
Attest:
----------------------------
Keith E. Marlowe, Secretary
Exhibit 5(a)
REID & PRIEST LLP
40 WEST 57th STREET
NEW YORK, N.Y. 10019-4097
TELEPHONE 212 603-2000
FAX 212 603-2001
New York, New York
September 13, 1996
Grand Court Lifestyles, Inc.
One Executive Drive
Fort Lee, New Jersey 07024
Ladies and Gentlemen:
We are acting as special counsel to Grand Court
Lifestyles, Inc., a Delaware corporation (the "Company"), in
connection with the proposed issuance and sale of up to 2,777,778
shares of its Common Stock, $.01 par value (the "Common Stock"),
of which 10% will be sold by selling stockholders (the "Selling
Stockholders"), as contemplated by the registration statement on
Form S-1 filed by the Company with the Securities and Exchange
Commission on June 14, 1996 for the registration of the Common
Stock under the Securities Act of 1933, as amended (the "Act"),
as amended, said registration statement being hereinafter called
the "Registration Statement".
We are of the opinion that, subject to the
qualifications hereinafter expressed:
1. The Company is a corporation validly organized and
existing under the laws of the State of Delaware.
2. The Common Stock sold by the Company and the
Selling Stockholders will have been validly issued and will be
fully paid and non-assessable when:
(a) the Registration Statement shall have become
effective under the Act;
(b) the Company's Board of Directors or a duly
authorized committee thereof shall have taken such action as
may be necessary to authorize the issuance and sale of the
Common Stock on the terms set forth in or contemplated by
the Registration Statement, as to be amended or
supplemented, and the exhibits thereto, and to authorize
such other action as may be necessary in connection with the
consummation of the issuance and sale of the Common Stock;
(c) the Company's Board of Directors or a duly
authorized committee thereof and the Company's stockholders
shall have taken such action as may be necessary to authorize
an amendment to the Company's Certificate of Incorporation to
reflect the change in the Company's capitalization as
contemplated by the Registration Statement;
(d) the Company shall have caused to be filed with the
Secretary of State of Delaware such Restated Certificate of
Incorporation;
(e) the Company's Board of Directors or a duly
authorized committee thereof shall have taken such action as
may be necessary to authorize a 1,084.1-for-1 split of the
Common Stock; and
(f) the Common Stock shall have been issued, sold and
delivered by the Company to the purchasers against payment
therefor or sold and delivered by Selling Stockholders to the
purchasers against payment therefor, all as contemplated by, and
in conformity with, the acts and documents referred to above and
the Company's Restated Certificate of Incorporation.
We are members of the Bar of the State of New York.
This opinion is limited to the laws of the State of New York, the
General Corporate Law of the State of Delaware and the Federal
law of the United States.
We hereby authorize and consent to the use of this
opinion as Exhibit 5(a) to the Registration Statement, and
authorize and consent to the references to our firm in the
Registration Statement and in the prospectus constituting a part
thereof.
Very truly yours,
/s/ Reid & Priest LLP
REID & PRIEST LLP
Exhibit 10.9
ASSUMPTION AGREEMENT
-----------------------
ASSUMPTION AGREEMENT dated this 10th day of September, 1996
between GRAND COURT LIFESTYLES, INC., a Delaware corporation,
having an office at One Executive Drive, Fort Lee, New Jersey
07204 ("Grand") and Sterling National Bank & Trust Company of New
York, having an office at 540 Madison Avenue, New York, New York
10022 ("Sterling").
W I T N E S S E T H:
WHEREAS, J&B Management Company ("J&B") executed that
certain Loan Agreement dated May 7, 1985 (the "Loan Agreement"),
between J&B and Sterling to borrow from and repay Sterling, on a
revolving basis, an amount not to exceed $15 million, secured by
(i) certain property described in the General Loan and Security
Agreement executed and delivered by J&B (the "J&B Security
Agreement"), (ii) certain property described in the Hypothecation
and Security Agreement executed and delivered by Bernard M. Rodin
("Rodin") and John Luciani ("Luciani") [the "Hypothecation
Agreement"] and (iii) a Guaranty of all Liability and Security
Agreement executed and delivered by J&B Management Corp., a New
Jersey corporation ("Corp'), Executive Offices Realty Corp., a
New Jersey corporation ("Realty Corp."), Realty Executive
Associates a joint venture comprised of John W. Luciani III and
Bernard M. Rodin ("Realty Associates") and Woodlands Associates,
a joint Venture comprised of Dorian Luciani and John W. Luciani
(collectively the "Affiliates");
WHEREAS, the period in which Grand may borrow under the
terms of the Loan Agreement has been extended from time to time
and most recently has been extended to December 31, 1996 pursuant
to the letter agreement dated as of January 1, 1996 (the
"Extension Agreement") and the Loan Agreement is being amended
hereby to reflect such extension;
WHEREAS, J&B had granted a security interest under the J&B
Security Agreement in certain Investor Notes in substitution for
certain Investor Notes originally listed therein and the J&B
Security Agreement is being amended hereby to reflect such
substitution;
WHEREAS, Executive Offices Realty Corp. has merged with and
into Corp.;
WHEREAS, Corp. has merged with and into Grand as of April 1,
1996;
WHEREAS, Realty Associates and Woodlands Associates are no
longer in existence;
WHEREAS, each of Rodin, Luciani and J&B transferred certain
of their interests to Grand pursuant to that certain
Consolidation Agreement dated as of April 1, 1996 among Rodin,
Luciani, J&B, and Grand as amended by the First Amendment to the
Consolidation Agreement (the "Consolidation Agreement"), a copy
of which is annexed hereto as Exhibit A;
NOW THEREFORE,in consideration of Ten Dollars ($10.00) and
other good and valuable consideration, each party to the other
paid, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Except as limited by this Assumption Agreement, Grand
hereby assumes and undertakes to pay and perform each and every
obligation and liability under and arising out of or related to
the Loan Agreement, J&B Security Agreement and any other
document, instrument or agreement executed by J&B and delivered
to Sterling in connection therewith (collectively, the "Loan
Documents") in the place and stead of J&B as fully as if Grand
had originally made, executed and delivered the Loan Documents.
Notwithstanding the previous sentence, Grand is not assuming the
liabilities under the Loan Documents which are secured with
investor notes payable to Golden Home Associates, Drake
Associates or Gateway 10 Associates. Any reference in the Loan
Documents to J&B shall be deemed to mean Grand.
2. (a) The Loan Agreement is amended as follows. Section
1.1 of the Loan Agreement is amended to delete the reference to
"March 1, 1989" and insert, in lieu thereof, the phrase "December
31, 1996. Section 3.11 of the Loan Agreement is amended to
delete the reference to "1610 Woodstead Court, Suite 460, the
Woodlands, Texas 77380". Section 3.15(a) of the Loan Agreement
is amended to (i) delete the phrase "150%" and insert, in lieu
thereof, the phrase "500%" and (ii) delete the reference to "for
the semi-annual period ended December 31, 1984". Section 3.15(b)
of the Loan Agreement is amended to delete the phrase "evidenced
by HUD insured or HUD held mortgages". Section 3.18 of the Loan
Agreement is amended to delete the phrase "$60 million" and
insert, in lieu thereof, the phrase "$30 million". The reference
to "sole general partners" in Section 3.20 shall be deleted and
the phrase "officers, directors and shareholders" shall be
inserted in lieu thereof.
(b) The J&B Security Agreement is amended to delete
Schedule B thereto and to attach, in lieu thereof, Schedule B
hereto.
3. Grand hereby ratifies and confirms all of the terms,
covenants and conditions contained in the Loan Documents, and
represents that all representations and warranties set forth in
the Loan Documents, as modified by this Assumption Agreement, are
true and correct as of the date hereof.
4. Grand hereby certifies that all of the provisions of
the Loan Documents, except as modified by this Assumption
Agreement and the new Schedule B attached to the J&B Security
Agreement are, and shall remain, in full force and effect.
5. Luciani and Rodin certify that all of the provisions of
the Hypothecation Agreement, to the extent still relevant, are
and shall remain in full force and effect.
6. Luciani, Rodin and Grand Court represent, warrant and
covenant that (i) Corp. has merged with and into Grand as of
April 1, 1996 and (ii) the Consolidation Agreement was executed
as of April 1, 1996.
7. Sterling hereby (i) acknowledges that Grand is the
successor to J&B under the Loan Agreement and consents to the
assumption by Grand of J&B's obligations under the Loan Agreement
as limited by paragraph 1 above, and paragraph 7 (iii), below;
(ii) consents to the transfer of assets under the Consolidation
Agreement and waives any rights or claims against J&B or any of
the Affiliates pursuant to the Loan Documents by reason of any
violation of or default thereof as a result of such Consolidation
Agreement or the merger of Corp. with and into Grand; and (iii)
releases J&B and its partners from all obligations relating to
the Loan Documents other than the liabilities owing to Sterling
which are secured with investor notes payable to Golden Home
Associates, Drake Associates, or Gateway 10 Associates.
8. The Hypothecation Agreement, to the extent relevant, is
unaffected by this Assumption Agreement.
9. Tto the extent that any of the terms, covenants and
provisions of this Assumption Agreement shall be inconsistent
with the provisions contained in the Loan Documents, then the
provisions hereof shall govern and control.
10. This Assumption Agreement may not be terminated or
modified, except by an instrument in writing subscribed by the
party against whom enforcement of such modification, change,
waiver, discharge or termination is sought.
11. All of the terms, conditions, warranties,
representations and covenants of this Agreement shall apply and
be binding upon, and shall inure to the benefit of, each party,
and their respective successors and assigns.
12. This Agreement may be executed in any number of
counterparts and each counterpart will, for all purposes, be
deemed to be an original, and all counterparts will together
constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Assumption Agreement on the date and year first above written.
GRAND COURT LIFESTYLES, INC.
By: /s/ Bernard M. Rodin
----------------------------
Bernard M. Rodin, President
/s/ John Luciani
----------------------------
John Luciani
/s/ Bernard M. Rodin
----------------------------
Bernard M. Rodin
STERLING NATIONAL BANK & TRUST
COMPANY OF NEW YORK
By: /s/ S.V. Colonna
----------------------------
Executive Vice President
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to the Registration
Statement (No. 333-05955) of Grand Court Lifestyles, Inc. on Form
S-1 of our report dated April 26, 1996, except for Note 11 which
is as of June 11, 1996, appearing in the Prospectus, which is
part of this Amendment No. 3 to the Registration Statement.
We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
September 13, 1996
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THIS AMENDED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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