AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1997
REGISTRATION NO. 333-05955
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
GRAND COURT LIFESTYLES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8059 22-3423087
-------- ---- ----------
(State or other (Primary standard (I.R.S. employer
jurisdiction of industrial classification identification
incorporation or 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. Stephen A. Weiss, Esq.
Reid & Priest LLP Greenberg Traurig Hoffman
40 West 57th Street Lipoff Rosen & Quentel
New York, New York 10019 153 East 53rd Street
(212) 603-2000 New York, New York 10022
(212) 801-9200
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: [ ]
CALCULATION OF REGISTRATION FEE
=========================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE(1) PRICE(1) FEE(2)
------------------------------------------------------------------------
Common Stock, $.01
par value 2,625,834 $10.00 $13,800,000 None
per share shares(3)
------------------------------------------------------------------------
Preferred Stock,
$.0001 par 1,495,000 $10.00 $14,950,000 None
value per share shares
------------------------------------------------------------------------
Common Stock,
$.01 par value 228,334 $16.50 $ 1,980,000 None
per share shares(4)(5)
------------------------------------------------------------------------
Preferred Stock,
$.0001 par value 130,000 $16.50 $ 2,145,000 None
per share shares(6)
========================================================================
(1) Estimated solely for the purpose of computing the registration fee.
(2) Excludes a registration fee of $32,374.71 which previously has been
paid and, pursuant to Rule 457(i), was calculated on the basis of the
proposed offering price of the Common Stock and the Convertible
Preferred Stock, excluding any shares of Common Stock issuable upon
conversion of Convertible Preferred Stock.
(3) Includes approximately 1,245,834 shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock; provided however that
the number of shares of Common Stock issuable upon the conversion of
Convertible Preferred Stock is subject to adjustment in certain
circumstances pursuant to anti-dilution provisions of the Convertible
Preferred Stock, and any additional shares issued pursuant to such
provisions shall be deemed to be covered by this Registration
Statement, pursuant to Rule 416(a).
(4) Includes approximately 108,334 shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock issuable upon exercise
of the Underwriters' Warrants; provided however that the number of
shares of Common Stock issuable upon the conversion of Convertible
Preferred Stock is subject to adjustment in certain circumstances
pursuant to anti-dilution provisions of the Convertible Preferred
Stock, and any additional shares issued pursuant to such provisions
shall be deemed to be covered by this Registration Statement, pursuant
to Rule 416(a).
(5) Represents shares of Common Stock issuable upon exercise of
Underwriters' Warrants.
(6) Represents shares of Convertible Preferred Stock issuable upon
exercise of Underwriters' Warrants.
-------------------
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.
===========================================================================
<PAGE>
Subject to Completion, Dated May 15, 1997
1,300,000 SHARES OF % SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND
1,200,000 SHARES OF COMMON STOCK
GRAND COURT LIFESTYLES, INC.
This Prospectus relates to an offering (the "Offering") of (a)
1,300,000 shares of % Senior Convertible Redeemable Preferred Stock,
$.0001 par value, and $10.00 liquidation preference per share (the
"Convertible Preferred Stock") and (b) 1,200,000 shares of Common Stock,
$.01 par value per share ("Common Stock") of Grand Court Lifestyles, Inc.
(the "Company"), of which 950,000 shares are being sold by the Company and
250,000 shares are being sold by certain principal stockholders of the
Company (the "Selling Stockholders"). The Convertible Preferred Stock and
Common Stock are sometimes collectively referred to as the "Securities".
The Company will not receive any of the proceeds from the sale of Common
Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
The Convertible Preferred Stock is convertible into Common Stock at
any time prior to redemption at the rate determined by dividing $10.00 (the
initial offering price per share of Common Stock) by $12.00 (120% of the
initial offering price per share of Common Stock), an effective conversion
rate of approximately 0.8333 shares of Common Stock for each share of
Convertible Preferred Stock (subject to adjustment under certain
circumstances). Commencing , 2000, the Convertible Preferred
Stock is subject to redemption by the Company, in whole or in part, at
$10.00 per share, plus accumulated and unpaid dividends, on 30 days' prior
written notice, provided that the closing bid price of the Common Stock for
at least 20 consecutive trading days ending not more than 10 trading days
prior to the date of the notice of redemption equals or exceeds $15.00 per
share (150% of the per share initial offering price), or after ,
2001, at the cash redemption prices set forth herein, plus accumulated and
unpaid dividends. Cumulative dividends on the Convertible Preferred Stock
at the rate of $ per share per annum are payable quarterly, out of funds
legally available therefor, on the last business day of January, April,
July and October of each year, commencing October 31, 1997.
The holders of Convertible Preferred Stock have the right, voting as a
class, to approve or disapprove of the issuance of any class or series of
stock ranking senior to or on a parity with the Convertible Preferred Stock
with respect to the declaration and payment of dividends or the
distribution of assets on liquidation, dissolution or winding-up.
Prior to this Offering, there has been no market for the Securities
and there can be no assurance that such a market will develop after the
completion of this Offering or, if developed, that it will be sustained.
It is anticipated that the initial offering price of both the Convertible
Preferred Stock and the Common Stock will be $10 per share. For
information regarding the factors considered in determining the initial
public offering price of the Securities and the terms of the Convertible
Preferred Stock, see "Risk Factors" and "Underwriting." The Common Stock
and the Convertible Preferred Stock have been approved for listing on the
Nasdaq National Market under the symbols "GCLI" and "GCLIP," respectively.
AN INVESTMENT IN THE SECURITIES INVOLVES SUBSTANTIAL RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 11 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.
==================================================================
PROCEEDS
TO
PROCEEDS SELLING
PRICE UNDERWRITING TO STOCK-
TO DISCOUNTS COMPANY HOLDERS
PUBLIC (1) (2)(3) (2)(3)
------------------------------------------------------------------
Per Share of
Convertible
Preferred Stock . . . $ $ $ $
------------------------------------------------------------------
Per Share of
Common Stock . . . . $ $ $ $
------------------------------------------------------------------
Total $ $ $ $
==================================================================
(see footnotes on following page)
-------------------
The Securities are being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by their counsel and subject
to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify this Offering and to reject any order in whole
or in part. It is expected that delivery of the Securities will be made in
Seattle, Washington, on or about ______________, 1997.
-------------------
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is , 1997
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>
(continued from cover page)
(1) Does not include additional compensation payable to (i) National
Securities Corporation, the representative of the several Underwriters
(the "Representative"), in the form of a non-accountable expense
allowance of up to 2.15% of the gross proceeds of the Offering, of
which $50,000 has been paid by the Company to date and (ii) the
Underwriters and selected dealers who sell in excess of $1.0 million
of Securities, on a pro rata basis, in the form of warrants to
purchase from the Company up to 120,000 shares of Common Stock and
130,000 shares of Convertible Preferred Stock ("Underwriters'
Warrants") at a price equal to 165% of the per share price to the
public of the Common Stock and the Convertible Preferred Stock,
respectively, exercisable over a period of four years commencing one
year after the date of this Prospectus. In addition, the Company and
the Selling Stockholders have agreed to indemnify the Underwriters for
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company and the Selling
Stockholders (which include, but are not limited to, (i) the 2.15%
non-accountable expense allowance payable to the Representative and
(ii) a finders fee payable to Norbert J. Zeelander, a third party, of
$250,000), estimated at approximately $3,757,500. All expenses of the
Offering will be paid by the Company, except that (i) the Selling
Stockholders will pay underwriting discounts and a pro rata share of
the non-accountable expense allowance with respect to shares sold by
them and (ii) the Representative will pay certain expenses of the
Offering incurred after April 7, 1997. See "Underwriting."
(3) The Company and the Selling Stockholders have granted to the
Underwriters an option exercisable within 45 days after the date of
this Prospectus to purchase up to 180,000 additional shares of Common
Stock, of which up to 142,500 shares will be sold by the Company and
up to 37,500 shares will be sold by the Selling Stockholders, and up
to 195,000 additional shares of Convertible Preferred Stock, upon the
same terms and conditions as set forth above, solely to cover over-
allotments, if any (the "Over-allotment Option"). If such Over-
allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts, Proceeds to the Company and Proceeds to
Selling Stockholders will be $ , $ , $
and $ , respectively.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE CONVERTIBLE PREFERRED STOCK AND
COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
CONVERTIBLE PREFERRED STOCK AND THE COMMON STOCK, INCLUDING SYNDICATE
COVERING TRANSACTIONS, PENALTY BIDS AND SHORT SALES. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
<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, (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) and (iii) all information in this
Prospectus assumes an initial offering price of $10.00 per share of Common
Stock and $10.00 per share of Convertible Preferred Stock and no exercise
of the Over-allotment Option, and (iv) all information in this Prospectus
assumes a dividend rate on the Convertible Preferred Stock of 9.0%. All
share and per share data has been restated to give effect to a 1,626.19-
for-1 stock split and reduction in par value per share of Common Stock from
$.10 to $.01 which occurred after the beginning of the current fiscal year.
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
General
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 32 adult living communities containing 4,654 apartment
units in 11 states in the Sun Belt and the Midwest. The Company also
operates one nursing home and one residential apartment complex. To the
extent that the development plan to construct new adult living communities,
as 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. As a result of anticipated
start-up losses from the Company's new adult living communities, the
Company anticipates that it will incur operating losses for at least two
years.
Partnership Offerings
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 32 adult living communities and other properties that it operates by
utilizing mortgage financing and by arranging for the sale of limited
partnership interests in 37 limited partnerships ("Investing Partnerships")
formed to acquire interests in the 32 other partnerships that own adult
living communities and other properties ("Owning Partnerships"). The
Company is the managing general partner of all but one of the Owning
Partnerships and manages all of the adult living communities, the one
nursing home and the one residential apartment complex in its portfolio.
The Company is also the general partner of 26 of the 37 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, for such five-year period, the Company is required to
pay to the Owning Partnerships, amounts sufficient to fund (i) any
operating cash deficiencies of such Owning Partnerships and (ii) any part
of such guaranteed return not paid from cash flow from the related property
(which the Owning Partnerships distribute to the Investing Partnerships for
distribution to limited partners). During the fiscal year ended January
31, 1997, the Company paid approximately $5.2 million with respect to
guaranteed return obligations, and paid approximately $1.9 million with
respect to operating cash deficiencies. 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
1
<PAGE>
returns and operating cash deficiencies 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 1997 through 2002 based on
existing management contracts is $15.1 million, $13.8 million, $15.1
million, $13.3 million, $7.4 million and $300,000, respectively. Such
amounts of guaranteed return obligation are calculated based upon paid-in
capital contributions of limited partners as of January 31, 1997 with
respect to fiscal 1997 and remaining scheduled capital contributions with
respect to fiscal years 1998 through 2002. 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.
In the past, limited partners have been allowed to prepay capital
contributions. The percentage of the prepayments received upon the
closings of the sales of limited partnership interests in Investing
Partnerships averaged 71.7% in fiscal 1994, 60.9% in fiscal 1995 and 67.6%
in fiscal 1996. Prepayments of capital contributions do not result in the
prepayment of the related purchase notes held by the Company. Instead,
such amounts are loaned to the Company by the Investing Partnership. As a
result of such loans and crediting provisions of the related purchase
agreements, the Company records 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 the 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.
The existing adult living communities and the other properties managed
by the Company are owned by the Owning Partnerships and not 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 January 31, 1997, the Company had approximately $20.8 million
principal amount of debt ("Investor Note Debt") secured by notes from
investors in offerings of limited partnership interests, which debt has an
average interest rate of 10.69% per annum. The average collection rate
with respect to such investor notes in the last five years was in excess of
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.
Although the Company is no longer either a general or limited partner in
the partnerships relating to multi-family properties, the Company holds
promissory notes from Investing Partnerships which were formed to acquire
interests in Owning Partnerships which own multi-family properties. As of
January 31, 1997, the recorded value, net of deferred income, of multi-
family notes was $106.7 million. All but $262,000 of the $53.2 million of
"Other Partnership Receivables" recorded on the Company's Consolidated
Balance Sheet as of January 31, 1997 relate to multi-family notes. Twenty-
seven of the Owning Partnerships for such multi-family properties are in
default on their respective mortgages. Nine of such Owning Partnerships
have filed bankruptcy petitions seeking protection from foreclosure
actions. The Company anticipates that one of such Owning Partnerships will
lose its property pursuant to an uncontested foreclosure sale of such
property (such Owning Partnership, together with the nine Owning
Partnerships that have filed bankruptcy petitions, are referred to herein
as the "Protected Partnerships"). The Company neither owns nor manages
these properties, nor is it the general partner of these Owning
Partnerships, but rather merely holds the related multi-family notes as
receivables. The Company, therefore, has no liability in connection with
these mortgage defaults or bankruptcy proceedings. The Company anticipates
that seven of the bankruptcy proceedings will result in the respective
Protected Partnerships losing their properties through foreclosure or
voluntary conveyances of their properties and that two of the bankruptcy
proceedings will result in the respective Protected Partnerships paying off
their mortgages at a discount with the proceeds of new mortgage financing,
resulting in these properties having current, fully performing mortgages.
2
<PAGE>
The Selling Stockholders and one of their affiliates have assigned
certain interests they owned personally (the Assigned Interests ) to the
Investing Partnerships which own interests in the Protected Partnerships,
which Assigned Interests provide additional security for the multi-family
notes issued to the Company by such Investing Partnerships. In that the
Selling Stockholders transferred the Assigned Interests in July 1996, the
Company recorded a $21.3 million capital contribution in fiscal 1996. The
bankruptcy petitions and risk of loss faced by the Protected Partnerships
resulted in the Company recording a loss for the year ending January 31,
1997 in the amount of $18.4 million (representing the recorded value of
these multi-family notes, net of deferred income and net of any previously
established reserves) due to the deemed full impairment of these multi-
family notes. As a result of the transfers by the Selling Stockholders and
their affiliate of the Assigned Interests and the additional security
provided thereby, the Company believes that the outcome of the bankruptcy
proceedings will not affect its ability to collect on these multi-family
notes.
There are 17 remaining Owning Partnerships which own multi-family
properties and which are in default of their mortgages. As of January 31,
1997, the recorded value, net of deferred income, of the multi-family notes
and "Other Partnership Receivables" held by the Company relating to these
17 Owning Partnerships was $34.7 million. Two of such Owning Partnerships
have agreed with their mortgage lenders to pay off their mortgages, in one
case at a discount and in the other case in full, with the proceeds of
anticipated new mortgage financing, which would result in the related
properties having current, fully performing mortgages. As of January 31,
1997, the recorded value, net of deferred income, of the multi-family notes
and "Other Partnership Receivables" relating to these two Owning
Partnerships was $3.1 million, and the recorded value, net of deferred
income, of the multi-family notes and "Other Partnership Receivables"
relating to the 15 remaining Owning Partnerships whose mortgages are in
default was $31.6 million. The Company has established reserves of $10.1
million to address the possibility that these notes may not be collected in
full. It is possible that other Owning Partnerships which own multi-family
properties and which are in default of their mortgages will file bankruptcy
petitions or take similar actions seeking protection from their creditors.
In addition, many of the multi-family properties are dependent to
varying degrees on housing assistance payment contracts with United States
government, most of which will expire over the next few years. 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
bankruptcy petitions, and/or lose their properties through foreclosure.
The Company neither owns nor manages these properties, nor is it the
general partner of these Owning Partnerships, but, rather, holds the
related multi-family notes as receivables. The Company, therefore, would
have no liability in connection with any such mortgage defaults or possible
bankruptcy proceedings. The Company, however, could be required to realize
a loss if any such property is considered impaired under applicable
accounting rules, which loss would be reduced by any deferred income
recorded for the related note and any reserve for said note previously
established by the Company. Such losses, if any, could adversely affect
the Company's business, operating results and financial condition.
Business Development Strategy
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 primarily on adult living communities. According to a study
conducted by the American Senior Housing Association, the Company currently
operates one of the ten 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 32 adult
living communities containing 4,654 apartment units. The Company also
operates one nursing home and one residential apartment complex. 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 plans to continue to acquire existing adult living
communities, and currently plans to acquire between four and eight existing
communities over the next two years. The Company has recently acquired an
adult living community in Mesa, Arizona containing 174 apartment units and
has entered into contracts to acquire one adult living community in Winter
Haven, Florida containing 133 apartment units, one adult living community
in Albuquerque, New Mexico containing 140 apartment units and one adult
3
<PAGE>
living community in Westland, Michigan containing 153 apartment units. In
addition, the Company has acquired two adult living communities from
existing Owning Partnerships, and may engage in other similar transactions.
The Company intends to continue to finance its future acquisitions of adult
living communities 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 adult living communities acquired in the future.
The Company has instituted a development plan pursuant to which it
currently intends to commence construction on between 18 and 24 adult
living communities during the next two years containing between 2,556 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's development plan
contemplates its first new communities being built in Texas. The Company
has entered into an agreement with Capstone Capital Corporation
("Capstone") pursuant to which Capstone will 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 has closed the development financing with Capstone and has begun
construction on all four of these adult living communities which are
located in San Angelo, Wichita Falls, El Paso and Abilene, Texas. The
Company also has commenced construction, with mortgage financing from Bank
United of Texas ("Bank United") for up to $7 million, on an adult living
community in Corpus Christi, Texas, and for up to $7.3 million, on an adult
living community in Temple, Texas, and, with a commitment for mortgage
financing from Hillcrest Bank for up to $7.6 million, on an adult living
community in Round Rock, Texas. The Company also holds options to acquire
three additional sites in Texas and is actively negotiating with several
additional lenders to obtain financing to develop these 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 contains 142 apartment units and 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 costs per unit, without
sacrificing quality of service. Each such 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 or that the
Company will not suffer delays or cost overruns in instituting its
development plan. In addition, there can be no assurance that adequate
financing will be available as needed or on terms acceptable to the
Company which may require the Company to delay, scale back or eliminate
some of the adult living communities contemplated in its development plan.
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.
4
<PAGE>
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 April
25, 1997 at existing adult living communities managed by the Company for at
least one year of approximately 90.7%. In addition, the Company plans to
use the common facility design of its prototype and its "The Grand
Court"(R) 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.
5
<PAGE>
The following diagram illustrates the typical 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.}
6
<PAGE>
THE OFFERING
Securities Offered(1) . 1,300,000 shares of Convertible
Preferred Stock and 1,200,000 shares
of Common Stock
Common Stock to be sold by
the Company(1) . . . 950,000 shares
Common Stock to be sold
by Selling
Stockholders(1) . . . 250,000 shares
Convertible Preferred Stock
to be Sold by the
Company(1) . . . . . 1,300,000 shares
Securities outstanding before
this Offering . . . . 15,000,000 shares of Common Stock; no
shares of Convertible Preferred Stock
Securities to be outstanding
after this Offering(1)(2):
Prior to conversion of the
Convertible
Preferred Stock . . . 15,950,000 shares of Common Stock;
1,300,000 shares of Convertible
Preferred Stock
Giving effect to full
conversion of the
Convertible Preferred
Stock . . . . . . . . 17,033,334 shares of Common Stock
Terms of Convertible
Preferred Stock:
Dividend Rate and Payment
Dates . . . . . . . . Cumulative dividends on the Convertible
Preferred Stock are payable at the rate of
$ per share per annum, quarterly on the
last business day of January, April, July and
October of each year, commencing October 31,
1997, before any dividends are declared or
paid on the Common Stock or any capital
ranking junior to the Convertible Preferred
Stock. See "Dividend Policy" and
"Description of Capital Stock -- Convertible
Preferred Stock."
Conversion Rights . . . Convertible into Common Stock at any time
prior to redemption at a conversion rate
determined by dividing $10.00 (the initial
offering price per share of Common Stock) by
$12.00 (120% of the initial offering price
per share of Common Stock), an effective
conversion rate of approximately 0.8333
shares of Common Stock for each share of
Convertible Preferred Stock. See
"Description of Capital Stock -- Convertible
Preferred Stock."
Optional Cash Redemption Redeemable, in whole or in part on a pro rata
basis, by the Company upon 30 days' prior
written notice (i) after ______, 2000 at
$10.00 per share, plus accumulated and unpaid
dividends, provided that the closing bid
price of the Common Stock for at least 20
consecutive trading days ending not more than
10 trading days prior to the date of the
notice of redemption equals or exceeds $15.00
per share (150% of the initial public
offering price per share) or, (ii) after
7
<PAGE>
_____________, 2001, at the cash redemption
prices set forth herein, plus accumulated and
unpaid dividends. See "Description of
Capital Stock -- Convertible Preferred
Stock."
Voting Rights . . . . . The holders of Convertible Preferred Stock
have the right, voting as a class, to approve
or disapprove of the issuance of any class or
series of stock ranking senior to or on a
parity with the Convertible Preferred Stock
with respect to declaration and payment of
dividends or the distribution of assets on
liquidation, dissolution or winding-up. In
addition, if the Company fails to pay
dividends on the Convertible Preferred Stock
for four consecutive quarterly dividend
payment periods, holders of Convertible
Preferred Stock voting separately as a class
will be entitled to elect one director; such
voting right will be terminated as of the
next annual meeting of stockholders of the
Company following payment of all accrued
dividends. See "Description of Capital Stock
-- Convertible Preferred Stock."
Liquidation Preference Upon liquidation, dissolution or winding up
of the Company, holders of Convertible
Preferred Stock are entitled to receive
liquidation distributions equivalent to
$10.00 per share (plus accumulated and unpaid
dividends) before any distribution to holders
of the Common Stock or any capital stock
ranking junior to the Convertible Preferred
Stock. See "Description of Capital Stock --
Convertible Preferred Stock."
Priority . . . . . . . The Convertible Preferred Stock will be
senior to and have priority over the Common
Stock with respect to the payment of
dividends and upon liquidation, dissolution
or winding-up of the Company.
Use of proceeds . . . . The Company intends to use (i) approximately
$3 million of its net proceeds from the
Offering for working capital and general
corporate purposes and (ii) the balance of
approximately $14.1 million to finance
development of new adult living communities.
_____________
(1) Excludes a maximum of 142,500 additional shares of Common Stock
to be sold by the Company, a maximum of 195,000 additional shares
of Convertible Preferred Stock to be sold by the Company and a
maximum of 37,500 additional shares of Common Stock to be sold by
the Selling Stockholders upon exercise of the Over-allotment
Option. See "Underwriting".
(2) Excludes 2,500,000 shares of Common Stock 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".
8
<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. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEARS ENDED JANUARY 31,
-----------------------
1993 1994
---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales . . . . . . . . . . . . . $ 18,170 $ 21,807
Syndication fee income . . . . 6,484 7,654
Deferred income earned . . . . 792 6,668
Interest income . . . . . . . . 13,209 13,315
Property management fees from
related parties . . . . . . 560 3,899
Equity in earnings from
partnership . . . . . . . . 129 206
-- --
Other income . . . . . . . . . ------- -------
39,344 53,549
------- -------
Costs and expenses:
Cost of sales . . . . . . . . . 14,411 26,876
Selling . . . . . . . . . . . . 7,027 6,706
Interest . . . . . . . . . . . 11,874 10,991
General and administrative . . 5,617 5,226
Property management expense . . -- 45
Loss on impairment of notes
and receivables . . . . . . . -- --
Officers' compensation(1) . . . 1,200 1,200
975 1,433
Depreciation and amortization . ------- -------
41,104 52,477
------- -------
Income (loss) before provision for
income taxes . . . . . . . . . (1,760) 1,072
-- --
Provision for income taxes . . . ------- -------
Net income (loss) . . . . . . . . (1,760) 1,072
Pro-forma income tax provisions (704) 429
(benefit)(2) . . . . . . . . . ------- -------
$ (1,056) $ 643
Pro-forma net income (loss)(2) . ======= =======
Pro-forma earnings (loss) per $ (.07) $ .04
common share(2) . . . . . . . . ======= =======
Pro-forma weighted average 15,000 15,000
common shares used . . . . . . ======= =======
Ratio of earnings to combined
fixed charges and preferred -- 1.09
stock dividends . . . . . . . . ======= =======
Deficiency in combined fixed
charges and preferred stock $ 1,760 --
dividends . . . . . . . . . . . ======= =======
OTHER DATA:
Adult living communities 14 18
operated (end of period) . . ======= =======
Number of units (end of 2,336 2,834
period) . . . . . . . . . . . ======= =======
Average occupancy 90.6% 90.4%
percentage (3) . . . . . . . ======= =======
YEARS ENDED JANUARY 31,
-------------------------------
1995 1996 1997
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales . . . . . . . . . . . . . $ 23,413 $ 32,804 $ 36,965
Syndication fee income . . . . 5,587 8,603 7,690
Deferred income earned . . . . 3,518 9,140 4,093
Interest income . . . . . . . . 9,503 12,689 13,773
Property management fees from
related parties . . . . . . 4,360 4,379 3,171
Equity in earnings from
partnership . . . . . . . . 276 356 423
-- 1,013 --
Other income . . . . . . . . . ------- ------- -------
46,657 68,984 66,115
------- ------- -------
Costs and expenses:
Cost of sales . . . . . . . . . 21,514 27,406 31,470
Selling . . . . . . . . . . . . 6,002 7,664 7,176
Interest . . . . . . . . . . . 13,610 15,808 16,394
General and administrative . . 6,450 7,871 7,796
Property management expense . . 238 604 3,627
Loss on impairment of notes
and receivables . . . . . . . -- -- 18,442
Officers' compensation(1) . . . 1,200 1,200 1,200
2,290 2,620 3,331
Depreciation and amortization . ------- ------- -------
51,304 63,173 89,436
------- ------- -------
Income (loss) before provision for
income taxes . . . . . . . . . (4,647) 5,811 (23,321)
-- -- --
Provision for income taxes . . . ------- ------- -------
Net income (loss) . . . . . . . . (4,647) 5,811 (23,321)
Pro-forma income tax provisions (1,859) 2,324 --
(benefit)(2) . . . . . . . . . ------- ------- -------
$ (2,788) $ 3,487 $(23,321)
Pro-forma net income (loss)(2) . ======= ======= =======
Pro-forma earnings (loss) per $ (.19) $ .23 $ (1.55)
common share(2) . . . . . . . . ======= ======= =======
Pro-forma weighted average 15,000 15,000 15,000
common shares used . . . . . . ======= ======= =======
Ratio of earnings to combined
fixed charges and preferred -- 1.32 --
stock dividends . . . . . . . . ======= ======= =======
Deficiency in combined fixed
charges and preferred stock $ 4,647 -- $ 23,624
dividends . . . . . . . . . . . ======= ======= =======
OTHER DATA:
Adult living communities 24 28 31(4)
operated (end of period) . . ======= ======= =======
Number of units (end of 3,683 4,164 4,480(4)
period) . . . . . . . . . . . ======= ======= =======
Average occupancy 89.3% 94.7% 91.27%
percentage (3) . . . . . . . ======= ======= =======
9
<PAGE>
AS OF JANUARY 31,
-------------------------------
1993 1994 1995
---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents . . $ 6,455 $ 9,335 $ 10,950
Notes and receivables-net . . 234,115 227,411 220,014
Total assets . . . . . . . . 250,648 248,386 248,085
Total liabilities . . . . . . 203,990 211,647 217,879
Stockholders' equity . . . . 46,658 36,739 30,206
AS OF JANUARY 31,
---------------------------------
1996 1997
---- ----
ACTUAL ADJUSTED(5)
BALANCE SHEET DATA: ------ -----------
Cash and cash equivalents . . $ 17,961 $ 14,111 $ 31,220
Notes and receivables-net . . 223,736 221,931 221,931
Total assets . . . . . . . . 259,555 261,193 278,302
Total liabilities . . . . . . 225,238 229,658 229,658
Stockholders' equity . . . . 34,317 31,535 48,644
--------------------------
(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 fiscal 1996, such
officers also received $397,000 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) One adult living community containing 174 units was acquired by
the Company after January 31, 1997.
(5) "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 $10.00 per share of Common Stock
and $10.00 per share of Convertible Preferred Stock, after
deducting underwriting discounts and other offering expenses
payable by the Company, and excluding the Over--allotment
Option). See "Capitalization."
10
<PAGE>
RISK FACTORS
Prospective purchasers of the Securities 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 Securities offered hereby.
RECENT NET LOSSES AND ANTICIPATED OPERATING LOSSES
The Company incurred net losses of approximately $1.8 million, $4.6
million and $23.3 million for the fiscal years ended January 31, 1993, 1995
and 1997, respectively. As a result of start-up losses anticipated to
result from the implementation of the Company's development plan for the
construction of new adult living communities, the Company anticipates that
it will incur operating losses for at least two years.
The Company began construction of the first of its new adult living
communities in November 1996. The Company anticipates that the
construction of each community will take at least 12 months and expects
each newly constructed community to incur start-up losses for at least nine
months after commencing operations. 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. Factors that have impacted earnings related to
existing adult living communities during a particular period have included
(i) the amount of partnership interests sold, (ii) the terms for the sale
of such partnership interests and (iii) the amount of deferred income
recognized. Competition to acquire existing adult living communities has
intensified, and the Company anticipates that, for at least the next two
years, it will not be able to arrange for the acquisition of such
communities on terms favorable enough to offset both the anticipated start-
up losses associated with newly developed communities and the costs and
cash requirements arising from the Company's existing and expected
additional overhead and debt and guaranteed return obligations. As a
result the Company expects to incur operating losses until, at least, its
newly constructed communities are completed, leased up and begin generating
positive cash flow. There can be no assurance that such newly constructed
communities will generate positive cash flow at any time, and the resulting
operating losses could have a material adverse effect on the Company's
business, operating results and financial condition. 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."
SUBSTANTIAL DEBT OBLIGATIONS OF THE COMPANY
At January 31, 1997 the Company had approximately $141.8 million
principal amount of debt, excluding accrued interest of $839,000 ("Total
Debt"), at an average interest rate of 12.23% per annum. Of the principal
amount of Total Debt, $21.4 million becomes due in the fiscal year ending
January 31, 1998; $33.6 million becomes due in the fiscal year ending
January 31, 1999; $20.9 million becomes due in the fiscal year ending
January 31, 2000; $21.1 million becomes due in the fiscal year ending
January 31, 2001; $25.6 becomes due in the fiscal year ending January 31,
2002, and the balance of $19.2 million becomes due thereafter.
Of the Total Debt, $69.9 million principal amount were debentures
("Debenture Debt") issued in eleven separate series, secured by notes (the
"Multi-Family Notes") owed to the Company by partnerships formed to invest
in multi-family housing, 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 12.05% per annum and has
maturities ranging from 1997 through 2004. During the fiscal year ended
January 31, 1997, total interest expense with respect to Debenture Debt was
approximately $9.2 million. The Purchase Note Collateral produced
approximately $2.3 million of interest and related payments to the Company,
which was approximately $6.9 million less than the amount required to pay
interest on the Debenture Debt. The Company paid the shortfall from cash
generated by its operations. Debenture Debt in the aggregate principal
amount of approximately $2.7 million, $19.0 million, $10.3 million,
$15.1 million and $16.4 million will mature in the respective fiscal years
1997 through 2001. 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. Fifty-one of the 169 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.
11
<PAGE>
Of the Company's Total Debt, an additional $46.1 million principal
amount was unsecured, having an average interest rate of 13.49% 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 an adult living
community, in order to facilitate the acquisition financing for such
community. At January 31, 1997, the Company had approximately
$20.8 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 10.69% per annum.
The average collection rate with respect to such investor notes in the last
5 years was in excess of 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 also intends to issue up to $7.5 million of
Unsecured Debt which will be used to retire existing Unsecured Debt. The
Company intends to incur additional Debenture Debt or Unsecured Debt as a
means of refinancing existing debt, and may incur additional debt to
finance a portion of costs associated with the Company's development plan
for new adult living communities or for working capital purposes; provided,
however, that any such issuances will be subject to market conditions and
the availability of funds generated by the Company's operations. Neither
the Company nor the Owning Partnerships have policies limiting the amount
or proportion of indebtedness incurred.
The Company's debt obligations contain various covenants and default
provisions, including provisions relating to, in some obligations, certain
Investing Partnerships, Owning Partnerships or affiliates of the Company.
Certain obligations contain provisions requiring the Company to maintain a
net worth of, in the most restrictive case, $30,000,000, except that, under
the Capstone agreements the Company will be required 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. Certain obligations of the
Company contain covenants requiring the Company to maintain a debt for
borrowed money to consolidated net worth ratio of, in the most restrictive
case, no more than 5 to 1. At January 31, 1997, the Company's debt for
borrowed money to consolidated net worth ratio was 4.6 to 1. In addition,
certain obligations of the Company provide that an event of default will
arise upon the occurrence of a material adverse change in the financial
condition of the Company.
INADEQUATE DIVIDEND COVERAGE
The annual dividend requirement on the Convertible Preferred Stock is
$1,170,000 ($1,345,500 if the Over-allotment Option is exercised in full).
The Company anticipates that the future earnings of the Company, if any,
will not initially be adequate to pay the dividends on the Convertible
Preferred Stock out of earnings, and, although the Company has the right
and intends to pay quarterly dividends out of available surplus, there can
be no assurance that the Company will maintain sufficient surplus or that
future earnings, if any, will be adequate to pay the dividends on the
Convertible Preferred Stock. Under the Delaware General Corporation Law,
dividends may be paid only out of legally available funds, which includes
current and the prior fiscal year's net profits as well as surplus.
Failure to pay a total of four consecutive quarterly dividends will entitle
the holders of the Convertible Preferred Stock, voting separately as a
class, to elect one director. In addition, no dividends or distributions
may be declared, paid or made if the Company is or would be rendered
insolvent or in default under the terms of senior securities or obligations
by virtue of such dividend or distribution. Currently, the most
restrictive of such obligations are the Capstone agreements, which require
that the Company maintain a net worth of 75% of its net worth upon
completion of this Offering. On a pro forma basis, after giving effect to
this Offering, the Company would have had a net worth of approximately
$48.6 million at January 31, 1997. The Company, therefore, would have
available approximately $12.1 million of its surplus for the payment of
dividends based on its net worth at January 31, 1997 and after giving
effect to this Offering. In addition, as a result of start-up losses
anticipated to result from the Company's development plan for the
construction of new adult living communities, the Company anticipates that
it will incur operating losses for at least two years. Any such operating
losses would further reduce surplus otherwise available for the payment of
dividends. See --"Recent Net Losses and Anticipated Operating Losses",
"Substantial Debt Obligations of the Company", "Dividend Policy" and
"Description of Capital Stock -- Convertible Preferred Stock."
12
<PAGE>
POTENTIAL INCREASES IN DEBT SERVICE OBLIGATIONS RELATING TO VARIABLE RATE
DEBT
The Investor Note Debt, which totaled $20.8 million in aggregate
principal amount at January 31, 1997, 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 $208,000. Therefore, increases in interest rates could
adversely affect the operating results and financial condition of the
Company.
GUARANTEED RETURN OBLIGATIONS, OPERATING CASH DEFICIENCIES OF OWNING
PARTNERSHIPS 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 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, for such five-year period, the Company is required
to pay to the Owning Partnerships, amounts sufficient to fund (i) any
operating cash deficiencies of such Owning Partnerships and (ii) any part
of such guaranteed return obligation not paid from cash flow from the
related property (which the Owning Partnerships distribute to the Investing
Partnerships for distribution to limited partners). During the fiscal year
ended January 31, 1997, the Company paid approximately $5.2 million with
respect to guaranteed return obligations, and paid approximately $1.9
million with respect to operating cash deficiencies. The amount the
Company paid with respect to guaranteed return obligations for fiscal 1996
was attributable to the increase in the amount of capital contributions
from limited partners which were subject to guaranteed return obligations
along with (i) operating expenses (including maintenance and repair costs)
increasing at a greater rate than historically, as partially offset by
increases in rental revenues, (ii) a decrease in the average occupancy of
the Company's portfolio of adult living communities owned for the entire
fiscal 1996 period by slightly more than one percent, (iii) the increased
debt service on various adult living communities due to the refinancing of
such adult living communities (which include the initial mortgage financing
of certain adult living communities that had been previously acquired
without a mortgage), which reduced the cash flow generated by such adult
living communities to a greater extent than the resulting reduction of the
Company's guaranteed return obligations, and (iv) the establishment of
capital improvement reserves pursuant to the terms of the newly refinanced
mortgages. The refinancings resulted in the return of over $43 million to
limited partners, which reduced the amount of capital upon which the
Company is obligated to make payments in respect of guaranteed returns.
The amount paid by the Company with respect to its guaranteed return
obligations for fiscal 1996 was partially offset by an increase in interest
income received by the Company during fiscal 1996, which was also a result
of the refinancings. The aggregate amount which the Company will be
required to pay with respect to guaranteed return obligations and operating
cash deficiencies 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 1997 through
2002 based on existing management contracts is $15.1 million, $13.8
million, $15.1 million, $13.3 million, $7.4 million and $300,000,
respectively. Such amounts of guaranteed return obligation are calculated
based upon paid-in capital contributions of limited partners as of January
31, 1997 with respect to fiscal 1997 and remaining scheduled capital
contributions with respect to fiscal years 1998 through 2002. 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.
To the extent that the Company must expend funds to meet its
guaranteed return obligations and operating cash deficiencies, 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. The Company
will attempt to structure future offerings by Investing Partnerships to
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minimize the likelihood that it will be required to utilize the cash it
generates to pay guaranteed returns and operating cash deficiencies, but
there can be no assurance that this will be the case.
In the past, limited partners have been allowed to prepay capital
contributions. The percentage of these prepayments received upon the
closings of the sales of limited partnership interests in Investing
Partnerships, averaged 71.7% in fiscal 1994, 60.9% in fiscal 1995 and 67.6%
for fiscal 1996. 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. As a result of such loans and
crediting provisions of the related 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, as the
general partner of such 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 agreements
or management contracts and of applicable federal and state securities and
blue sky laws and regulations.
The Company's obligations with respect to guaranteed returns and
operating cash deficiencies 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. Payments in respect of operating cash deficiencies are
recorded as a cost of sales expense in the period such amounts are paid.
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 guaranteed return obligations. As a result
of such deferrals, the revenues relating to sales are reduced and actual
payments of such guaranteed return 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."
NEED FOR ADDITIONAL FINANCING
The Company has adopted a development plan pursuant to which it
intends to commence construction of between 18 and 24 adult living
communities during the next two years. The Company will use approximately
$14.1 million of its net proceeds of this Offering to fund a portion of
development costs not provided by mortgage loans, which is currently
anticipated to be sufficient to permit the development of up to seven new
adult living communities, if such proceeds funded 20% to 25% of the
development costs. The Company also will utilize funds generated by its
operations to fund the 20% to 25% of development costs not provided by
mortgage loans for the development of additional communities. In addition,
in connection with the development of additional communities, the Company
will utilize long term leases and similar forms of financings which require
the investment of little or no capital on the part of the Company. There
can be no assurance that funds generated by its operations, long term
leases and similar forms of financings will be available or sufficient to
complete the Company's development plan. In addition, the Company intends
to refinance the approximately $21.4 million and $33.6 million in principal
amount of indebtedness that becomes due in fiscal 1997 and fiscal 1998,
respectively. There can be no assurance that the Company will be able to
refinance such obligations in a timely manner or on acceptable terms. In
addition, there are a number of circumstances beyond the Company's control
and which the Company cannot predict that may result in the Company's
financial resources being inadequate to meet its needs. The Company may
need to seek additional funding through public or private financing,
including equity financing, to satisfy these obligations. If additional
funds are raised by issuing equity securities, the Company's shareholders
may experience dilution. There can be no assurance, however, that adequate
financing will be available as needed or on terms acceptable to the
Company. A lack of available funds may require the Company to delay, scale
back or eliminate some of the adult living communities that are currently
contemplated in its development plan. See "Use of Proceeds" and
"Managements Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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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 January
31, 1997, the aggregate principal amount of the mortgage debt of the Owning
Partnerships was approximately $159.4 million and the aggregate annual debt
service obligations, excluding any balloon amounts payable at maturity, was
approximately $14.7 million. Most of this debt contains provisions which
limit the ability of the respective Owning Partnerships to further encumber
the property. Through January 31, 2002, approximately $144.6 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 new adult living
communities through mortgage financing and other types of financing,
including long-term operating leases arising through sale/leaseback
transactions and may issue additional debt or equity securities, to the
extent necessary. 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.
EXISTING DEFAULTS AND BANKRUPTCIES OF OWNING PARTNERSHIPS OWNING MULTI-
FAMILY PROPERTIES
The Company holds promissory notes ("Adult Living Notes", and,
together with the Multi-Family Notes, "Purchase Notes") from Investing
Partnerships which were formed to acquire controlling interests in Owning
Partnerships which own adult living communities and Multi-Family Notes from
Investing Partnerships which were formed to acquire controlling interests
in Owning Partnerships which own multi-family properties ("Multi-Family
Properties"). As of January 31, 1997, the recorded value, net of deferred
income, of Multi-Family Notes was $106.7 million. All but approximately
$262,000 of the $53.2 million of "Other Partnership Receivables" recorded
on the Company's Consolidated Balance Sheet as of January 31, 1997 relate
to Multi-Family Notes. (See Note 4 of Notes to the Company's Consolidated
Financial Statements.) The Company holds 169 Multi-Family Notes which are
secured by controlling interests in 126 Multi-Family Properties. As a
result of the Company not being the sole payee with regard to 28 of the 169
Multi-Family Notes, the values reflected on the Company's Consolidated
Financial Statements relate to only the Company's proportionate interests
in these 28 Multi-Family Notes, which is typically a 50% interest. Due to
the interests of third parties in these 28 Multi-Family Notes, the Company
will not have sole discretion as to certain actions taken with regard to
said notes, as it would if it were the only payee on the notes. 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 Owning Partnerships which own Multi-Family
Properties are in default on their respective mortgages. These Owning
Partnerships 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, with the goal of increasing property cash
flow to enable the property to fully service its mortgage. Nine 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 one additional Owning Partnership will lose its property pursuant to
an uncontested foreclosure sale of such property (said ten Owning
Partnerships are, collectively, the "Protected Partnerships"). The Company
anticipates that seven of the bankruptcy proceedings will result in the
respective Protected Partnerships losing their properties through
foreclosure or voluntary conveyance of their properties and that two of the
bankruptcy proceedings will result in the respective Protected Partnerships
paying off their mortgages at a discount with the proceeds of new mortgage
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financing, resulting in these properties having current, fully performing
mortgages. The Company neither owns nor manages, nor is the general
partner of these Owning Partnerships, but, rather, holds the related Multi-
Family Notes as receivables. The Company, therefore, has no liability in
connection with these mortgage defaults or bankruptcy proceedings.
The Selling Stockholders and one of their affiliates have assigned
certain interests which they owned personally in various partnerships that
own multi-family properties (the "Assigned Interests") to the Investing
Partnerships that own interests in the Protected Partnerships, which
Assigned Interests provide additional assets at the Investing Partnership
level and, as a result, additional security for the related Multi-Family
Notes. In that the Selling Stockholders transferred the Assigned Interests
in July 1996, the Company recorded a $21.3 million capital contribution in
fiscal 1996. The bankruptcy petitions and risk of loss faced by the
Protected Partnerships resulted in the Company recording a loss for the
year ended January 31, 1997 in the amount of $18.4 million (representing
the recorded value of those Multi-Family Notes, net of deferred income and
net of any previously established reserves) due to the deemed full
impairment of these Multi-Family Notes. Each of the Investing Partnerships
that has filed a Chapter 11 Petition has agreed to transfer the specific
Assigned Interest back to the Selling Stockholders and their affiliate if
the applicable Protected Partnership emerges from its bankruptcy proceeding
with possession of the real property and improvements which it owned at the
time of its Chapter 11 Petition.
There are 17 remaining Owning Partnerships which own multi-family
properties and which are in default of their mortgages. As of January 31,
1997, the recorded value, net of deferred income of the Multi-Family Notes
and Other Partnership Receivables held by the Company relating to these
17 Owning Partnerships was $34.7 million. Two of such Owning Partnerships
have agreed with their mortgage lenders to pay off their mortgages, in one
case at a discount and in the other case in full, with the proceeds of
anticipated new mortgage financing, which would result in the related
properties having current, fully performing mortgages. As of January 31,
1997, the recorded value, net of deferred income, of the Multi-Family Notes
and "Other Partnership Receivables" relating to these two Owning
Partnerships was $3.1 million, and the recorded value, net of deferred
income, of the Multi-Family Notes and "Other Partnership Receivables"
relating to the 15 remaining Owning Partnerships whose mortgages are in
default was $31.6 million. The Company has established reserves of $10.1
million to address the possibility that these notes may not be collected in
full. It is possible that other Owning Partnerships that own Multi-Family
Properties that are in default of their mortgages will file bankruptcy
petitions or take similar actions seeking protection from their creditors.
The Company neither owns nor manages these properties, nor it is the
general partner of these Owning Partnerships, but, rather, holds the
related Multi-Family Notes as receivables. The Company, therefore, would
have no liability in connection with any such mortgage defaults or possible
bankruptcy proceedings.
The Multi-Family Properties were typically built or acquired with the
assistance of programs administered by the United States Department of
Housing and Urban Development ("HUD") that provide mortgage insurance,
favorable financing terms and/or rental assistance payments to the owners.
As a condition to the receipt of assistance under these and other HUD
programs, the properties must comply with various HUD requirements,
including limiting rents on these properties to amounts approved by HUD.
Most of the rental assistance payment contracts relating to the Multi-
Family Properties 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, and by reducing spending on
future rental assistance payment 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. Although the Company would have no liability in connection
therewith, any such future mortgage defaults could, and, any such future
filings of Chapter 11 petitions or losses 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
and any reserves for such note previously established by the Company, which
would reduce such loss. In addition, the Company could be required to
realize such a loss even in the absence of mortgage defaults, Chapter 11
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Petitions or the 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".
Fifty-one of the 169 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.
LIABILITIES ARISING FROM GENERAL PARTNER STATUS
The Company is a general partner of all but one of the Adult Living
Owning Partnerships and the general partner of 26 of 37 Investing
Partnerships. The mortgage financing of the adult living communities and
other properties 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 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.
DEVELOPMENT DELAYS AND COST OVERRUNS
The Company has instituted a development plan pursuant to which it has
commenced construction of seven new adult living communities and intends to
commence construction of between 18 and 24 additional 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. 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 or
scaled back, 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 -- Strategy" and "-- Operations."
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."
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RIGHT OF PARTNERSHIPS TO TERMINATE MANAGEMENT CONTRACTS
All of the adult living communities, the nursing home and the
residential apartment complex 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 obligation under such
contracts to pay the Owning Partnerships amounts sufficient to fund any
part of guaranteed return obligations not paid from cash flow. The five-
year guaranteed return period has terminated for eight of the 37 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. In
general, under the terms of the Investing Partnership's partnership
agreement, limited partners have only limited rights to take part in the
conduct, control or operation of the partnership. The Company is the
general partner of 31 of the 32 Owning Partnerships that own the adult
living communities, the nursing home and the residential apartment complex
operated by the Company. The Company is also the general partner of 26 of
the 37 Investing Partnerships formed to acquire 98.5% to 99% of the equity
interests in said Owning Partnerships. The termination of any management
contracts would result in the loss of fee income, if any, under those
contracts. See "-- Conflicts of Interest" and "Business -- Partnership
Offerings."
RIGHT TO REMOVE GENERAL PARTNER
The partnership agreements for the 26 Investing Partnerships where the
Company is the general partner provide that a majority in ownership
interests of the limited partners can remove the Company as the general
partner at any time. It is anticipated that all future Investing
Partnership agreements will contain the same right to remove the Company as
the general partner. The Investing Partnerships, acting through their
general partners, have various rights relating to matters affecting the
business and affairs of the Owning Partnerships. In addition, the
partnership agreements for two Owning Partnerships which are limited
partnerships and for which the Company is the managing general partner
provide that a majority in interest of the limited partners of the
Investing Partnership and the general partner of the Investing Partnership
can remove the Company as the managing general partner of the Owning
Partnership. The removal of the Company as the general partner of an
Investing Partnership or as the managing general partner of such an Owning
Partnership could have adverse effects on the business, operating results
and financial condition of the Company, especially if such removal occurs
during the five-year guaranteed return period for the respective Investing
Partnership. Such period has expired with respect to the Investing
Partnerships related to such two Owning Partnerships and such period has
not expired with respect to any of the 26 Investing Partnerships for which
the Company is the general partner.
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. As a result of their general partner status, such persons have
personal liability for recourse partnership obligations and own small
equity ownership interests in the partnerships. The Company held (i)
notes, aggregating $106.7 million, net of deferred income, at January 31,
1997 that were secured by the limited partnership interests in such
partnerships and (ii) other partnership receivables of $52.9 million from
such partnerships at January 31, 1997. 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 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 11 of Notes to the Company's Consolidated Financial
Statements.
The Company is the managing general partner for 31 of the 32 Owning
Partnerships which own the 32 adult living communities, one nursing home
and the one residential apartment complex 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 26 of the 37 Investing Partnerships that own
partnership interests of 98.5% to 99% in these Owning Partnerships. In
addition, the Company is the managing agent for the 32 adult living
communities, one nursing home and one residential apartment complex that
the Company operates. The Company has financed the acquisition of adult
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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 other properties. See "Business -- Partnership
Offerings" and Note 11 of Notes to the Company's Consolidated Financial
Statements.
The Company has acquired two adult living communities from existing
Owning Partnerships. The Company financed these acquisitions using
mortgage financing and by arranging for the sale of limited partnership
interests in new Investing Partnerships. The Company 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 were 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 services 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 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
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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."
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 92.48% of the Company's Common Stock (approximately 86.59%
assuming conversion of all Convertible Preferred Stock), excluding any
additional shares of Common Stock and Convertible Preferred Stock issued
pursuant to the Over-allotment Option. 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
20
<PAGE>
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.
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
existing properties and its prototype for new development 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."
21
<PAGE>
LIMITED UNDERWRITING HISTORY
The Representative has participated in only 18 public offerings as an
underwriter in the last 18 months and had not participated in any public
offerings prior to that time. In evaluating an investment in the Company,
prospective investors in the Securities offered hereby should consider the
Representative's limited experience. See "Underwriting."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF MARKET PRICE OF SECURITIES
Prior to the Offering, there have been no public markets for the
Securities and there can be no assurance that active trading markets will
develop or, if developed, be sustained after the Offering. The Common
Stock and the Convertible Preferred Stock have been approved for quotation
on the NASDAQ National Market, subject to certain conditions. After
completion of the Offering, the market prices of the Securities could be
subject to significant fluctuations in response to various factors and
events, including the liquidity of the markets for the shares of
Securities, market sales of shares of Securities, the conversion of the
Convertible Preferred Stock, the exercise of the Underwriters' Warrants,
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 prices of
the shares of Securities. See "Shares Eligible for Future Sale" and
"Underwriting."
NEGOTIATED OFFERING PRICE
The initial public offering prices of the Securities were determined
based upon negotiations between the Company and the Representative and do
not necessarily bear any relationship to the Company's assets, book value,
results of operations or any other generally accepted criteria. Among the
factors considered 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 securities of comparable companies.
There can be no assurance that the Securities can be resold at the initial
offering price, if at all. Purchasers of the Securities will be exposed to
a substantial risk of a decline in the market price of the Securities after
the Offering, if a market develops. See "Underwriting."
POLICY NOT TO PAY DIVIDENDS ON COMMON STOCK AND POTENTIAL LIMITATIONS ON
ABILITY TO PAY DIVIDENDS
The Company does not anticipate paying dividends on its Common Stock
subsequent to January 31, 1997. Furthermore, pursuant to terms governing
the Convertible Preferred Stock, the Company's Board of Directors may not
declare dividends payable to holders of Common Stock unless and until all
accrued cash dividends through the most recent past annual dividend payment
date have been paid in full to holders of the Convertible Preferred Stock.
Earnings of the Company, if any, not paid as dividends to holders of the
Convertible Preferred Stock are expected to be retained to finance the
expansion of the Company's business. The payment of dividends on its
Common Stock 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."
POSSIBLE ISSUANCE OF ADDITIONAL PREFERRED STOCK SENIOR TO THE CONVERTIBLE
PREFERRED STOCK
In addition to the Convertible Preferred Stock, the Company will have
approximately 13,375,000 shares of Preferred Stock authorized after the
designation of Convertible Preferred Stock which may be issued with
dividend, liquidation, voting and redemption rights senior to the
Convertible Preferred Stock; provided, however, that any such issuance of
senior preferred stock must be approved by the holders of a majority of the
outstanding shares of Convertible Preferred Stock. See "Description of
Capital Stock -- Convertible Preferred Stock."
22
<PAGE>
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF CONVERTIBLE PREFERRED STOCK
Commencing ______________, 2000 [the third anniversary of the date of
the Prospectus] and extending through ___________________, 2001 [the fourth
anniversary of the date of the Prospectus], the Convertible Preferred Stock
may be redeemed by the Company in whole or in part, provided certain market
conditions are met. After _______________, 2001, the Convertible Preferred
Stock may be redeemed by the Company in whole or in part at any time at
specified premiums in excess of the initial public offering price of the
Convertible Preferred Stock. The Company may choose to redeem the
Convertible Preferred Stock rather than incur the cost of keeping a
registration statement current with the Securities and Exchange Commission
(the "Commission") for the shares of Common Stock underlying the
Convertible Preferred Stock. Redemption or automatic conversion of the
Convertible Preferred Stock could force the holders to convert the
Convertible Preferred Stock at a time when it may be disadvantageous for
the holders to do so, to sell the Convertible Preferred Stock at the then
current market price when they might otherwise wish to hold the Convertible
Preferred Stock for possible additional appreciation and receipt of
dividends, or to accept the redemption price, which is likely to be
substantially less than the market value of the Convertible Preferred Stock
at the time of redemption. See "Description of the Capital Stock --
Convertible Preferred Stock."
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, 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 AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE
OF SECURITIES FROM ISSUANCE OF PREFERRED STOCK
The Company's Board of Directors (the "Board of Directors") has the
authority to issue up to 13,375,000 additional shares of Preferred Stock,
par value $.0001 per share and to fix the rights and preferences of such
shares. Such issuance could occur without action by the holders of the
Common Stock and, in certain circumstances, without action of the holders
of the Convertible Preferred Stock. Such preferred stock could have voting
and conversion rights that adversely affect the voting power of the holders
of Convertible Preferred Stock and/or Common Stock, or could result in one
or more classes of outstanding securities that would have dividend,
liquidation or other rights superior to those of the Convertible Preferred
Stock and/or Common Stock. Issuance of such preferred stock may have an
adverse effect on the then prevailing market price of the Convertible
Preferred Stock and/or Common Stock. 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
Convertible Preferred Stock and/or Common Stock at a premium over the
market price of the Convertible Preferred Stock and/or Common Stock, and
may adversely affect the market price of, and the voting and other rights
of the holders of, Convertible Preferred Stock and/or the Common Stock.
Additionally, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits the
Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction
in which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. Section 203 could have the
effect of delaying or preventing a change of control of the Company. 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 $10.00 per share, will be $8.18 per share, excluding
23
<PAGE>
exercise of the Over-allotment Option. Additional dilution may occur upon
exercise of the Underwriters' Warrants and may occur, in addition, if the
Company issues additional equity securities in the future, including
issuances of Common Stock pursuant to the conversion of the Convertible
Preferred Stock. 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 Securities and the Company's
ability to raise equity. Upon completion of the Offering, the Company will
have 15,950,000 shares of Common Stock outstanding (excluding the Over-
allotment Option and the exercise of the Underwriters' Warrants). Of the
shares of Common Stock 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 of Common Stock 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 2,500,000 shares of Common Stock reserved for issuance
pursuant to the Company's stock option plans. However, the Company and the
Selling Stockholders have agreed that, except under limited circumstances,
they will not, directly or indirectly, offer, sell, transfer, pledge,
assign, hypothecate or otherwise encumber any shares of Common Stock or
securities convertible into Common Stock, whether or not owned, or dispose
of any interest therein under Rule 144 or otherwise for a period of 13
months following the date of this Prospectus without the prior written
consent of the Representative; provided, however, that the Selling
Stockholders may, in certain circumstances, sell or transfer a portion of
their shares of Common Stock without the consent of the Representative. In
addition, certain of the Underwriters hold Underwriters' Warrants which
entitle them to purchase an aggregate of up to 120,000 shares of the
Company's Common Stock and 130,000 shares of Convertible Preferred Stock at
a price equal to 165% of the per share price to the public of the Common
Stock and Convertible Preferred Stock, respectively. The Underwriters'
Warrants are exercisable for a period of four years, commencing one year
after their issuance. The Company has agreed that, under certain
circumstances, it will use its best efforts to register the Underwriters'
Warrants and/or the underlying Common Stock for sale in the public market.
See "Shares Eligible for Future Sale."
USE OF PROCEEDS
The net proceeds to the Company from the Offering (excluding the Over-
allotment Option and the exercise of the Underwriters' Warrants), after
deducting estimated underwriting discounts and offering expenses payable by
the Company, are estimated to be approximately $17.1 million. The Company
intends to use (i) approximately $3 million of such proceeds for working
capital and general corporate purposes and (ii) the balance of
approximately $14.1 million to finance the development of new adult living
communities. However, 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% 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 estimates that the cost of
developing each new adult living community utilizing mortgage financing
(including reserves necessary to carry the community through its lease-up
period) will be approximately $9.5 million. The Company will use
approximately $14.1 million of its net proceeds of the Offering to fund the
portion of development costs not provided by mortgage loans, which is
currently anticipated to be sufficient to permit the development of up to
seven new adult living communities if such proceeds funded 20% to 25% of
the development costs. The Company also will utilize funds generated by
its operations and may use funds raised through the issuance of additional
debt or equity securities to fund the 20% to 25% of development costs not
provided by mortgage loans for the development of additional communities.
In addition, in connection with the development of additional communities,
the Company will utilize long term leases and similar forms of financings
which require the investment of little or no capital on the part of the
Company. See "Risk Factors -- Need for Additional Financing,"
"-- Discretionary Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources" and "Business -- Strategy".
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<PAGE>
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 on its Common Stock
subsequent to January 31, 1997. Pursuant to the terms governing the
Convertible Preferred Stock, the Company's Board of Directors may not
declare dividends payable to holders of Common Stock unless and until all
accrued cash dividends through the most recent past quarterly payment date
have been paid in full to holders of the Convertible Preferred Stock.
Earnings of the Company, if any, not paid as dividends to holders of the
Convertible Preferred Stock are expected to be retained to finance the
expansion of the Company's business. The payment of dividends on its
Common Stock 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. The
Company anticipates that its future earnings, if any, for at least the next
two years will not be adequate for the payment of dividends on the
Convertible Preferred Stock out of earnings, in which event such dividends
will be paid out of the Company's then surplus (the Company's net assets
minus the aggregate par or stated value of the outstanding shares of the
Company's capital stock), if any. On a pro forma basis, after giving
effect to this Offering, the Company's surplus as of January 31, 1997 was
approximately $48.6 million. The payment of dividends or any future
operating losses will reduce such surplus, which may adversely affect the
Company's ability to continue to pay dividends on the Convertible Preferred
Stock. In addition, no dividends or distributions may be declared, paid or
made if the Company is or would be rendered insolvent or in default under
the terms of senior securities or obligations by virtue of such dividend or
distribution. Currently, the most restrictive of such obligations are the
Capstone agreements, which require that the Company maintain a net worth of
75% of its net worth upon completion of this Offering. On a pro forma
basis, after giving effect to this Offering, the Company would have had a
net worth of approximately $48.6 million at January 31, 1997. The Company,
therefore, would have available approximately $12.1 million of its surplus
for the payment of dividends based on its net worth at January 31, 1997 and
after giving effect to this Offering. In addition, as a result of start-up
losses anticipated to result from the Company's development plan for the
construction of new adult living communities, the Company anticipates that
it will incur operating losses for at least two years. Any such operating
losses would further reduce surplus otherwise available for the payment of
dividends. During fiscal 1995 and fiscal 1996, the Company and its
predecessors paid dividends and other distributions of $1,700,000, and
$794,000, 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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<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization
of the Company at January 31, 1997, and as adjusted to reflect (i) the sale
of the Securities by the Company in this Offering (excluding the Over-
allotment Option and the exercise of the Underwriters' Warrants) 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 JANUARY 31, 1997
----------------------
ACTUAL AS ADJUSTED
------ ----------
(IN THOUSANDS)
-------------
Bank Debt . . . . . . . . . . . . . . . . . . . . $ 32,044 $32,044
Other debt, principally debentures . . . . . . . 110,584 110,584
Stockholders' equity:
Preferred Stock, $.0001 par value; 15,000,000
shares authorized; none issued and
outstanding; 1,300,000 shares issued
and outstanding as adjusted . . . . . . . . . -- --
Common Stock, $.01 par value;
40,000,000 shares authorized; 15,000,000
shares issued and outstanding; 15,950,000
shares issued and outstanding as
adjusted(1) . . . . . . . . . . . . . . . . . 150 160
Additional paid-in capital (1) . . . . . . . . 53,853 70,952
(22,468) (22,468)
Accumulated deficit . . . . . . . . . . . . . . -------- --------
31,535 48,644
Total stockholders' equity . . . . . . . . -------- --------
$174,163 $191,272
Total capitalization . . . . . . . . . . ======== ========
(1) Does not include 2,500,000 shares reserved for issuance under the
Company's stock option plan.
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<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock at January
31, 1997 was approximately $21,726,000, or $1.45 per share of Common Stock.
Net tangible book value per share of Common Stock 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 $31,535,000 less intangible
assets of $9,809,000). After giving effect to the sale of the Securities
offered hereby (based upon an assumed initial public offering price of
$10.00 per share of Common Stock, and after deduction of underwriting
discounts and estimated offering expenses payable by the Company), pro
forma net tangible book value of the Common Stock as of January 31, 1997
would have been $28,989,000 or $1.82 per share, representing an immediate
increase in pro forma net tangible book value of $.37 per share to existing
shareholders and an immediate dilution of $8.18 per share to new investors
purchasing Common Stock. The following table illustrates the immediate per
share dilution:
Assumed initial public offering price per share . . . . $10.00
Net tangible book value per share as of
January 31, 1997 . . . . . . . . . . . . . . . . . 1.45
Increase per share attributable to new investors . . .37
------
Pro forma net tangible book value per share
after offering . . . . . . . . . . . . . . . . . . . 1.82
------
Net tangible book value dilution per share to new
investors . . . . . . . . . . . . . . . . . . . . . . $ 8.18
------
In the event the Over-allotment Option is exercised in full, the net
tangible book value at January 31, 1997 would have been approximately
$30,281,000 and the dilution of net tangible book value per share to new
investors would have been approximately $8.12.
The following tables summarize, on a pro forma basis at January 31,
1997, 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 January 31,
1997) and new investors after giving effect to the Offering:
SHARES PURCHASED
----------------
NUMBER PERCENT
------ -------
Selling Stockholders(1) . . 14,750,000 92.48
New investors(1) . . . . . 1,200,000 7.52
---------- -----
Total . . . . . . . . 15,950,000 100
========== =====
TOTAL CONSIDERATION PAID
------------------------
AVERAGE PRICE
AMOUNT PERCENT PER SHARE
------ ------- -------------
Selling Stockholders(1) . . $31,535,000 72.44 $2.14
New investors(1) . . . . . 12,000,000 27.56 $10.00
----------- -----
Total . . . . . . . . $43,535,000(2) 100
=========== =====
(1) Upon completion of the Offering (excluding the Over-allotment
Option), the Selling Stockholders will own 14,750,000 shares of
Common Stock, and the new investors will own 1,200,000 shares of
Common Stock, representing 100% of the outstanding shares of
Common Stock.
(2) Does not include $13,000,000 paid by new investors for 1,300,000
shares of Convertible Preferred Stock. If all such shares of
Convertible Preferred Stock are subsequently converted into
Common Stock at an assumed conversion price of $12.00 per share,
the new investors would own an aggregate of approximately
2,283,334 shares of Common Stock or 13.41% of the aggregate
number of shares of Common Stock which would be then outstanding.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data and other data)
The following selected consolidated financial data, except as
noted herein, have been taken or derived from the Company's consolidated
financial statements and should be read in conjunction with the
consolidated financial statements and the related notes thereto included
herein. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
YEARS ENDED JANUARY 31,
---------------------------
1993 1994 1995
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales . . . . . . . . . . . . . . . . . .$ 18,170 $ 21,807 $ 23,413
Syndication fee income . . . . . . . . . 6,484 7,654 5,587
Deferred income earned . . . . . . . . . 792 6,668 3,518
Interest income . . . . . . . . . . . . . 13,209 13,315 9,503
Property management fees from
related parties . . . . . . . . . . . . 560 3,899 4,360
Equity in earnings from
partnerships . . . . . . . . . . . . . 129 206 276
Other income . . . . . . . . . . . . . . -- -- --
-------- -------- --------
39,344 53,549 46,657
-------- -------- --------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . 14,411 26,876 21,514
Selling . . . . . . . . . . . . . . . . . 7,027 6,706 6,002
Interest . . . . . . . . . . . . . . . . 11,874 10,991 13,610
General and administrative . . . . . . . 5,617 5,226 6,450
Property management expense . . . . . . . -- 45 238
Loss on impairment of notes
and receivables . . . . . . . . . . . . -- -- --
Officers' compensation(1) . . . . . . . . 1,200 1,200 1,200
Depreciation and amortization . . . . . . 975 1,433 2,290
-------- -------- --------
41,104 52,477 51,304
-------- -------- --------
Income (loss) before provision for
income taxes . . . . . . . . . . . . . . (1,760) 1,072 (4,647)
Provision for income taxes . . . . . . . . -- -- --
-------- -------- --------
Net income (loss) . . . . . . . . . . . . . (1,760) 1,072 (4,647)
Pro-forma income tax provisions
(benefit)(2) . . . . . . . . . . . . . . (704) 429 (1,859)
-------- -------- --------
Pro-forma net income (loss)(2) . . . . . .$ (1,056) $ 643 $ (2,788)
======== ======== ========
Pro-forma earnings (loss) per
common share(2) . . . . . . . . . . . . .$ (.07) $ .04 $ (.19)
======== ======== ========
Pro-forma weighted average
common shares used . . . . . . . . . . . 15,000 15,000 15,000
======== ======== ========
Ratio of earnings to combined
fixed charges and preferred
stock dividends . . . . . . . . . . . . . -- 1.09 --
======== ======== ========
Deficiency in combined fixed
charges and preferred stock
dividends . . . . . . . . . . . . . . . .$ 1,760 -- $ 4,647
======== ======== ========
OTHER DATA:
Adult living communities
operated (end of period) . . . . . . . 14 18 24
======== ======== ========
Number of units (end of period) . . . . . 2,336 2,834 3,683
======== ======== ========
Average occupancy percentage (3) . . . . 90.6% 90.4% 89.3%
======== ======== ========
YEARS ENDED JANUARY 31,
--------------------------
1996 1997
---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales . . . . . . . . . . . . . . . $ 32,804 $ 36,965
Syndication fee income . . . . . . 8,603 7,690
Deferred income earned . . . . . . 9,140 4,093
Interest income . . . . . . . . . . 12,689 13,773
Property management fees from
related parties . . . . . . . . . 4,379 3,171
Equity in earnings from
partnerships . . . . . . . . . . 356 423
1,013 --
Other income . . . . . . . . . . . -------- --------
68,984 66,115
-------- --------
Costs and expenses:
Cost of sales . . . . . . . . . . . 27,406 31,470
Selling . . . . . . . . . . . . . . 7,664 7,176
Interest . . . . . . . . . . . . . 15,808 16,394
General and administrative . . . . 7,871 7,796
Property management expense . . . . 604 3,627
Loss on impairment of notes
and receivables . . . . . . . . . -- 18,442
Officers' compensation(1) . . . . . 1,200 1,200
2,620 3,331
Depreciation and amortization . . . -------- --------
63,173 89,436
-------- --------
Income (loss) before provision for
income taxes . . . . . . . . . . . 5,811 (23,321)
-- --
Provision for income taxes . . . . . -------- --------
Net income (loss) . . . . . . . . . . 5,811 (23,321)
Pro-forma income tax provisions 2,324 --
(benefit)(2) . . . . . . . . . . . -------- --------
$ 3,487 (23,321)
Pro-forma net income (loss)(2) . . . ======== ========
Pro-forma earnings (loss) per $ .23 (1.55)
common share(2) . . . . . . . . . . ======== ========
Pro-forma weighted average 15,000 15,000
common shares used . . . . . . . . ======== ========
Ratio of earnings to combined
fixed charges and preferred 1.32 --
stock dividends . . . . . . . . . . ======== ========
Deficiency in combined fixed
charges and preferred stock -- $ 23,624
dividends . . . . . . . . . . . . . ======== ========
OTHER DATA:
Adult living communities 28 31(4)
operated (end of period) . . . . ======== ========
4,164 4,480(4)
Number of units (end of period) . . ======== ========
94.7% 91.27%
Average occupancy percentage (3) . ======== ========
28
<PAGE>
AS OF JANUARY 31,
-----------------------------------
1993 1994 1995
---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents . . . $ 6,455 $ 9,335 $ 10,950
Notes and receivables-net . . . 234,115 227,411 220,014
Total assets . . . . . . . . . 250,648 248,386 248,085
Total liabilities . . . . . . . 203,990 211,647 217,879
Stockholders' equity . . . . . 46,658 36,739 30,206
AS OF JANUARY 31,
-----------------------
1996 1997
---- ----
BALANCE SHEET DATA:
Cash and cash equivalents . . $ 17,961 $ 14,111
Notes and receivables-net . . 223,736 221,931
Total assets . . . . . . . . 259,555 261,193
Total liabilities . . . . . . 225,238 229,658
Stockholders' equity . . . . 34,317 31,535
------------------
(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 fiscal 1996, such
officers also received $397,000 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) One adult living community containing 174 units was acquired by
the Company after January 31, 1997.
29
<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 32 adult living communities containing 4,654 apartment units in 11
states in the Sun Belt and the Mid-West. The Company also operates one 57-
bed skilled nursing facility and one 237-unit residential apartment
complex. 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 recently acquired an adult living
community in Mesa, Arizona containing 174 apartment units and has entered
into contracts to acquire one adult living community in Winter Haven,
Florida containing 133 apartment units, one adult living community in
Albuquerque, New Mexico containing 140 apartment units and one adult living
community in Westland, Michigan containing 153 apartment units. In
addition, the Company has acquired two adult living communities from
existing Owning Partnerships, and may engage in other similar transactions.
The Company has adopted a development plan pursuant to which it
intends to commence construction of between 18 and 24 adult living
communities during the next two years containing between 2,556 and 3,408
apartment units. Construction on seven new adult living communities has
already commenced. 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 a portion of the
proceeds of this Offering, funds generated by its operations, mortgage
financing and long-term leases or similar arrangements to finance the
development, construction and initial operating costs of these new adult
30
<PAGE>
living communities. In addition, the Company may use funds raised through
the issuance of additional debt or equity securities, to the extent such
funds are necessary to fund the Company's development plan.
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.
. Syndication Fee Income. The Company earns syndication fee income equal
to the expenses of the syndication which include commissions.
. 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, for such
five-year period, 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 (the amount of any
such excess being recognized as property management expense). 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 86%
of the Company's deferred income.
31
<PAGE>
. Interest Income. The Company has note receivables from Investing
Partnerships which were formed to acquire interests in Adult Living Owning
Partnerships. Such Adult Living 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
Adult Living Owning Partnership. Each Adult Living Note represents senior
indebtedness of the related Investing Partnership and is collateralized by
the Investing Partnership's interest in the Adult Living Owning Partnership
that owns the related adult living community. These properties generally
are encumbered by mortgages. The mortgages generally bear interest at
rates ranging from 8% to 9.5% per annum. The mortgages generally are
collateralized by a mortgage lien on the related adult living communities.
Principal and interest payments on each Adult Living Note also are
collateralized by the investor notes payable to the Investing Partnership
to which the limited partners are admitted.
The Company also has note receivables from Investing Partnerships
which were formed to acquire controlling interests in Owning Partnerships
which own Multi-Family Properties. The Multi-Family Notes have maturity
dates ranging from ten to fifteen years from the date the partnership
interests were sold. Fifty-one of the 169 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. The notes represent senior indebtedness of the related
Investing Partnership and are collateralized by a 99% partnership interest
in the Multi-Family Owning Partnership that owns the related multi-family
property. These properties are encumbered by mortgages, which generally
bear interest at 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 Multi-Family Note also are collateralized by the
investor notes.
. Property Management Fees. Property management fees earned for services
provided to related parties are recognized as revenue when related services
have been performed.
. Equity in Earnings from Partnerships. The Company accounts for its
interest in limited partnerships under the equity method of accounting.
Under this method the Company records its share of income and loss of the
entity based upon its general partnership interest.
. Existing Defaults and Bankruptcies of Owning Partnerships. As described
in "Liquidity and Capital Resources", a number of the Owning Partnerships
which own Multi-Family Properties are in default on their mortgages and
nine of them have filed, petitions seeking protection from foreclosure
under Chapter 11 of the U.S. Bankruptcy Code. It is possible that the
other Owning Partnerships that own Multi-Family Properties that are in
default on their mortgages will also file Chapter 11 Petitions. In
addition, 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. The
Company neither owns, nor manages these properties, nor is it the general
partner of these Owning Partnerships. Rather, the Company holds the
related Multi-Family Notes as receivables. The Company, therefore, would
have no liability in connection with any such mortgage defaults or
bankruptcy proceedings. Any such future mortgage defaults, however, could,
and any such future filings of Chapter 11 Petitions or the loss of any such
property through foreclosure would, cause the Company to realize a loss of
up to the recorded value for such Multi-Family Note plus any related
advances, net of any deferred income recorded for such Multi-Family Note
and any reserve for said note previously established by the Company (which
would reduce such loss).
RESULTS OF OPERATION
. Revenues
Revenues for the year ended January 31, 1997 ( Fiscal 1996") were
$66.1 million compared to $69.0 million for the year ended January 31, 1996
( Fiscal 1995"), representing a decrease of $2.9 million or 4.2%. Revenues
32
<PAGE>
for Fiscal 1995 were $69.0 million compared to $46.7 million for year
ending January 31, 1995, ( Fiscal 1994"), representing an increase of $22.3
million or 47.8%.
Sales for Fiscal 1996 were $37.0 million compared to $32.8 million
for Fiscal 1995, representing an increase of $4.2 million or 12.8%. The
increase is attributable to greater aggregate sales prices obtained when
arranging for the sale of partnership interests relating to six adult
living communities in Fiscal 1996, as compared to the sales prices obtained
when arranging for the sale of partnership interests relating to six adult
living communities in Fiscal 1995. Notwithstanding the increase in sales,
the sales which occurred in Fiscal 1996 were consummated with less
favorable terms (in view of the relationship between the initial cash flow
generated by such communities and the prices paid by the purchasers of the
partnership interests) when arranging for the sale of such partnership
interests in Fiscal 1996 as compared to Fiscal 1995. Sales for Fiscal 1995
were $32.8 million compared to $23.4 million for Fiscal 1994, representing
an increase of $9.4 million or 40.2%. The increase is attributable to the
sale of partnership interests relating to six adult living communities in
Fiscal 1995 compared to four adult living communities in Fiscal 1994 and
the more favorable terms obtained (in view of the relationship between the
initial cash flow generated by such communities and the prices paid by the
buyers of the partnership interests) when arranging for the sale of such
partnership interest in Fiscal 1995 as compared to Fiscal 1994.
Syndication fee income for Fiscal 1996 was $7.7 million compared to
$8.6 million for Fiscal 1995, a decrease of $900,000 or 10.5%. The
decrease is attributable to a slightly lower commission rate for the sale
or partnership interests relating to six adult living communities during
Fiscal 1996 as compared to the commission rate for the sale of partnership
interests relating to six adult living communities during Fiscal 1995.
Syndication fee income for Fiscal 1995 was $8.6 million as compared to $5.6
million for Fiscal 1994, an increase of $3.0 million or 53.6%. The
increase is attributable to higher total commissions paid for the sale of
partnership interest relating to six adult living communities in Fiscal
1995 as compared to the total commissions paid for the sale of partnership
interest relating to four adult living communities in Fiscal 1994.
Deferred income realized for Fiscal 1996 was $4.1 million as compared
to $9.1 million for the Fiscal 1995, representing a decrease of $5.0
million or 54.9%. The decrease is attributable to (i) the cash flows
generated by adult living communities in Fiscal 1995 exceeding the
estimates used to establish deferred income liabilities for Fiscal 1995 to
a greater degree than such cash flow in Fiscal 1996 exceeded estimates used
to establish deferred income liabilities for Fiscal 1996; and (ii) the
refinancing of a number of adult living communities during March 1996 which
resulted in additional deferred income being earned in Fiscal 1995. In
March 1996, the Company arranged for the refinancing of existing mortgages
on seven adult living communities and initial mortgage financing on four
adult living communities which had previously been acquired on an all cash
basis, 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 the
effect on deferred income with respect to such refinanced properties in
Fiscal 1995 rather than Fiscal 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 160.0%. 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.
Interest income for Fiscal 1996 was $13.8 million compared to $12.7
million for Fiscal 1995, an increase of $1.1 million or 8.7%. The
refinancing of a number of adult living communities in 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 Fiscal 1996 to be greater than interest
income for Fiscal 1995, but was partially offset by (a) a reduction of the
scheduled interest payments and (b) a reduction of interest income due to
the prepayment of mortgages held by the Company, which resulted from the
refinancings. In addition, this increase in interest income was partially
offset by a decrease in Fiscal 1996 of the cash flow generated by various
Multi-Family Properties, which the Company receives as interest income, as
33
<PAGE>
compared to such cash flows generated in Fiscal 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 arranging for the
sale of partnership interest in six adult living communities in Fiscal
1995, compared to the number of offerings in connection with arranging for
the sale of partnership interests in four adult living communities 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. The revenues of the Company in
the periods covered in the Consolidated Financial Statements reflect little
or no cash flow throughout such periods (which the Company would receive as
interest income on Multi-Family Notes) from those Multi-Family Properties
with respect to which there are existing mortgage defaults.
Property management fees from related parties was $3.2 million in
Fiscal 1996 as compared to $4.4 million in Fiscal 1995, representing a
decrease of $1.2 million or 27.3%. This decrease is attributable to (i)
operating expenses (including maintenance and repair expenses) increasing
at a rate greater than historically, as partially offset by increases in
rental revenues, (ii) a decrease in the average occupancy of the Company's
portfolio of adult living communities owned for the entire Fiscal 1996
period by slightly more than one percent, (iii) the increased debt service
on various adult living communities due to the refinancing of such
properties (which include the initial mortgage financing of certain
properties that had been previously acquired without mortgage financing) 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 resulting reduction of the Company's guaranteed return obligation
in Fiscal 1996 due to said refinancing, and (iv) the establishment of
capital improvement reserves pursuant to the terms of the newly refinanced
loans, which reserves reduce the cash flow and incentive management fees
these properties generate. There was no change in property management fees
from related parties from Fiscal 1994 to Fiscal 1995.
Equity in earnings from partnerships was $400,000 for Fiscal 1996 and
Fiscal 1995. Equity in earnings from partnerships was $400,000 in Fiscal
1995 as compared to $300,000 in Fiscal 1994, representing an increase of
$100,000 or 33.3%. The increase is attributable to additional properties
in which the Company retains a general partnership interest.
The Company recognized other income for Fiscal 1995 of $1.0 million
which resulted from the restructuring and reduction of a development fee
obligation of the Company, which was a non-recurring event. There was no
other income in either Fiscal 1996 or Fiscal 1994.
. Cost of Sales
Cost of sales, (which include (i) the cash portion of the purchase
price for properties plus related transaction costs and expenses (ii) any
payments by the Company in respect of operating cash deficiencies of Owning
Partnerships, (iii) and any deferred income liabilities that are
established during the applicable period), for Fiscal 1996 was $31.5
million as compared to $27.4 million, representing an increase of $4.1
million or 15.0%. The increase is attributable to the establishment of
greater deferred income liabilities in Fiscal 1996 relating to adult living
communities acquired in and prior to said period as compared to deferred
income liabilities established in Fiscal 1995. Cost of sales as a
percentage of sales and syndication fee income was 70.5% in Fiscal 1996 as
compared to 66.2% in Fiscal 1995. This increase is attributable to the
establishment of greater deferred income liabilities as described above as
partially offset by the Company's ability to acquire properties on more
favorable terms and to obtain more favorable mortgages financings for its
acquisitions (i.e. higher loan-to-value ratios which reduces the cash
portion of the purchase price and preferred interest rates). Cost of sales
for Fiscal 1995 was $27.4 million compared to $21.5 million in Fiscal 1994,
representing an increase of $5.9 million or 27.4%. The increase can be
primarily attributed to the acquisition by the Company of six properties in
Fiscal 1995 with combined purchase prices of $35.0 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
34
<PAGE>
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 the cash expenditures by the Company for
such acquisitions. Cost of sales as a percentage of sales and syndication
fee income decreased from 74.1% in Fiscal 1994 to 66.2% 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 terms when arranging for the sale of partnership
interests, which has contributed to the increase in sales, thus creating
larger gross margins.
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 interest 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, operating cash deficiencies and the
Company's selling, and general and administrative expenses. Although the
Company has been able to acquire adult living communities on more favorable
terms in Fiscal 1996, there can be no assurance that this recent 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 Fiscal 1996 was $7.2 million as compared to $7.7
million for Fiscal 1995, representing a decrease of $500,000 or 6.5%. The
decrease is attributable to a lower commission rate paid on a higher sales
volume when arranging for the sale of limited partnership interests
relating to six adult living communities in Fiscal 1996 as compared to the
commission rate and sales volume when arranging for the sale of limited
partnership interests relating to six adult living communities in Fiscal
1995. Selling expenses for Fiscal 1995 were $7.7 million compared to $6.0
million in Fiscal 1994, representing an increase of $1.7 million or 28.3%.
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 as compared to
commissions and related selling costs when arranging for the sale of
limited partnership interests in partnerships in connection with four adult
living communities in Fiscal 1994.
. Interest Expense
Interest expense for Fiscal 1996 was $16.4 million as compared to
$15.8 million in Fiscal 1995, representing an increase of $600,000 or 3.8%.
The increase can be primarily attributed to increases in debt and related
interest rates on such 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 two 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 the Company's interest expense. Interest Expense included interest
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payments on Debenture Debt which had an average interest rate of 12.05% per
annum in Fiscal 1996 and was secured by the Purchase Note Collateral.
During Fiscal 1996, total interest expense with respect to Debenture Debt
was approximately $9.2 million and the Purchase Note Collateral produced
approximately $2.3 million of interest and related payments to the Company,
which was $6.9 million less than the amount required to pay interest on the
Debenture Debt. 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 in Fiscal 1995
and was secured by the Purchase Note Collateral. During Fiscal 1995, total
interest expense with respect to Debenture Debt was approximately $8.7
million and the Purchase Note Collateral produced approximately $2.0
million of interest and related payments to the Company, which was $6.7
million less than the amount required to pay interest on the Debenture
Debt.
. General and Administrative Expenses
General and administrative expenses for Fiscal 1996 was $7.8 million
as compared to $7.9 million in Fiscal 1995, representing a decrease of
$100,000 or 1.3%. The decrease is attributable to the capitalization of
expenses relating to the implementation of the Company's development
program, which became significant during the year as partially offset by
increases in salary costs and other office expenses in implementing the
Company's development program and in managing and financing the Company's
adult living communities portfolio which increased by four adult living
communities in Fiscal 1996. General and administrative expenses were $7.9
million in Fiscal 1995 compared to $6.5 million in Fiscal 1994,
representing an increase of $1.4 million or 21.5%. The increase primarily
reflects additional salary costs incurred in instituting the Company's new
development program and in managing and financing the Company's adult
living communities portfolio of properties, which increased by six adult
living communities in Fiscal 1995, and also reflects increases in various
office expenses.
. Property Management Expense
Property management expense was $3.6 million Fiscal 1996 as compared
to $600,000 in Fiscal 1995, representing an increase of $3.0 million or
500%. This increase is primarily due to (i) operating expenses increasing
at a higher rate greater than historically, as partially offset by
increases in rental revenues, (ii) a decrease in the average occupancy of
the Company's portfolio of adult living communities owned for the entire
Fiscal 1996 period by slightly more than one percent, (iii) an acceleration
of the maintenance and repairs to various adult living communities, which
reduced cash flow generated by these properties. Property management
expense for Fiscal 1995 was $600,000 as compared to $200,000 for Fiscal
1994, an increase of $400,000 or 200%. The increase is primarily due to an
increase in the amount of capital contributions from limited partners which
were subject to guaranteed return obligations. See " -- Liquidity and
Capital Resources" for a quantification of the amount of guaranteed return
obligations and factors affecting the amount of guaranteed return
obligations and operating cash deficiencies.
. Loss on Impairment of Notes and Receivables
The Company realized a loss on impairment of notes and receivables of
$18.4 million in Fiscal 1996 as compared to no such loss for Fiscal 1995 or
Fiscal 1994. These losses equal the recorded value, net of deferred income
and reserves, of Multi-Family Notes and the related "Other Partnership
Receivables" relating to nine Owning Partnerships which have filed
petitions under Chapter 11 of the U.S. Bankruptcy Code seeking protection
from foreclosure actions and one Owning Partnership that is expected to
lose its property pursuant to an uncontested foreclosure sale of such
property. As a result of the transfers by the Selling Stockholders and one
of their affiliates of additional assets to the Investing Partnerships
which issued such Multi-Family Notes, the Company recorded a contribution
to capital of $21.3 million. See -- "Liquidity and Capital Resources."
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. Officers' Compensation
Officers' compensation was $1.2 million for Fiscal 1996, Fiscal 1995
and Fiscal 1994.
. Depreciation and Amortization
Depreciation and amortization consists of amortization of deferred
debt expense incurred in connection with debt issuance. Depreciation and
amortization was $3.3 million in Fiscal 1996 as compared to $2.6 million in
Fiscal 1995, an increase of $700,000 or 26.9%. The increase primarily is
attributable to the prepayment of debt which resulted in the acceleration
of the unamortized portion of the related costs and also to the issuance of
additional Debenture Debt and Unsecured Debt in Fiscal 1995 which had its
full amortization impact in Fiscal 1996. Depreciation and amortization for
Fiscal 1995 was $2.6 million compared to $2.3 million for Fiscal 1994, an
increase of $300,000 or 13.0%. The increase is attributable to the
issuance of additional Debenture Debt in Fiscal 1994, which has a full
amortization impact in Fiscal 1995.
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,
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 and operating cash deficiencies of Owning
Partnerships.
Cash flows provided by operating activities for Fiscal 1996 were
$2.5 million and were comprised of: (i) net loss of $23.3 million plus
(ii) adjustments for non-cash items of $17.7 million plus (iii) the net
change in operating assets and liabilities of $8.1 million. The
adjustments for non-cash items is comprised of depreciation and
amortization of $3.3 million and loss on impairment of receivables of $18.4
million less deferred income earned of $4.0 million. Cash flows provided
by operating activities for Fiscal 1995 were $1.0 million and were
comprised of: (i) net income of $5.8 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 $1.1 million and were comprised of: (i)
net loss of $4.6 million less (ii) adjustments for non-cash items of $1.2
million plus (iii) the net change in operating assets and liabilities of
$6.9 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.
Net cash used by investing activities for Fiscal 1996 of $449,000 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 Fiscal 1995 of
$567,000 was comprised of the increase in investments. Net cash used by
investing activities for Fiscal 1994 of $591,000 was comprised of the
increase in investments.
Net cash used by financing activities for Fiscal 1996 of $5.9 million
was comprised of: (i) proceeds from the issuance of new debt of $57.8
million less debt repayments of $55.3 million plus (ii) proceeds from
construction mortgage financing of $2.8 million less (iii) payments of
notes payable of $200,000 less (iv) dividends paid of $800,000 and less (v)
the increase in other assets $10.2 million due to the capitalization of
costs relating to the development and construction of new properties and
the issuance of new debt offset by 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) proceeds
from the issuance of new debt of $52.0 million less debt repayments of
$39.3 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
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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 $7.1 million
due to the capitalization of loan costs primarily in connection with
Debenture Debt.
At January 31, 1997, the Company had total indebtedness, excluding
accrued interest, of $141.8 million, consisting of $69.9 million of
Debenture Debt, $46.1 million of Unsecured Debt, $5.0 million of Mortgage
Debt and $20.8 million of Investor Note Debt.
Of the principal amount of total indebtedness at January 31, 1997,
$21.4 million becomes due in the fiscal year ending January 31, 1998; $33.6
million becomes due in the fiscal year ending January 31, 1999; $20.9
million becomes due in the fiscal year ending January 31, 2000; $21.1
million becomes due in the fiscal year ending January 31, 2001; $25.6
million becomes due in the fiscal year ending January 31, 2002, and the
balance of $19.2 million becomes due thereafter. Of the amount maturing in
the fiscal year ending January 31, 1998, $900,000 is Investor Note Debt
which the Company will repay through the collection of investor notes. The
balance, approximately $20.5 million, includes $2.7 million of Debenture
Debt, and $17.8 million of Unsecured Debt. The Company anticipates that
the Debenture Debt and Unsecured Debt that matures during the current
fiscal year, together with interest on outstanding debt, will be repaid
from the proceeds of the $7.5 million of new Unsecured Debt the Company
intends to issue, the issuance of additional debt or equity securities and
funds generated by the Company's operations. 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.
The Company's debt obligations contain various covenants and default
provisions, including provisions relating to, in some obligations, certain
Investing Partnerships, Owning Partnerships or affiliates of the Company.
Certain obligations contain provisions requiring the Company to maintain a
net worth of, in the most restrictive case, $30,000,000, except that, under
the Capstone agreements the Company will be required 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. Certain obligations of the
Company contain covenants requiring the Company to maintain a debt for
borrowed money to consolidated net worth ratio of, in the most restrictive
case, no more than 5 to 1. At January 31, 1997, the Company's debt for
borrowed money to consolidated net worth ratio was 4.6 to 1. In addition,
certain obligations of the Company provide that an event of default will
arise upon the occurrence of a material adverse change in the financial
condition of the Company.
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 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, for such five-year period, the Company is required
to pay to the Owning Partnerships, amounts sufficient to fund (i) any
operating cash deficiencies of such Owning Partnerships and (ii) any part
of such guaranteed return not paid from cash flow from the related property
(which the Owning Partnerships distribute to the Investing Partnerships for
distribution to limited partners). During Fiscal 1995 and Fiscal 1996, the
properties with respect to which the Company had such funding obligations
distributed to the Company, after payment of all operating expenses and
debt service, $9.7 million and $8.3 million, respectively, for application
to the Company's guaranteed return obligations. During such periods, the
Company funded $1.6 million and $1.9 million, respectively, to cover
operating cash deficiencies. These operating cash deficiencies primarily
relate to the Company's attempts to convert two multi-family properties to
adult living communities. One conversion is not yet completed; the second
conversion attempt was unsuccessful and this property is currently being
operated as a residential apartment complex. These conversions account for
69.7% and 63.4%, respectively, of the operating deficiency funding by the
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Company during these periods. The Company's funding obligations relating
to one of these two properties expired on December 31, 1996, and will
expire with respect to the other on June 30, 1997.
The guaranteed return obligations of the Company were greater in
Fiscal 1995 and Fiscal 1996 than the amounts the properties distributed to
the Company for application to such guaranteed return obligations.
Therefore, the Company funded approximately $917,000 and $5.2 million,
respectively, to meet such obligations in these periods. The increase in
the amount the Company paid with respect to guaranteed return obligations
for the year ended January 31, 1997 was attributable to the increase in the
amount of capital contributions from limited partners which were subject to
guaranteed return obligations along with (i) operating expenses (including
maintenance and repair costs) increasing at a greater rate than
historically, as partially offset by increases in rental revenues, (ii) a
decrease in the average occupancy of the Company's portfolio of adult
living communities owned for the entire fiscal 1996 period by slightly more
than one percent, (iii) the increased debt service on various adult living
communities due to the refinancing of such adult living communities (which
include the initial mortgage financing of certain adult living communities
that had been previously acquired without a mortgage), which reduced the
cash flow generated by such adult living communities to a greater extent
than the resulting reduction of the Company's guaranteed return
obligations, and (iv) the establishment of capital improvement reserves
pursuant to the terms of the newly refinanced mortgages. The refinancings
resulted in the return of over $43 million being returned to limited
partners, which reduced the amount of capital upon which the Company is
obligated to make payments in respect of guaranteed returns. The amount
paid by the Company with respect to its guaranteed return obligations for
the year ended January 31, 1997 was partially offset by an increase in
interest income received by the Company during the year ended January 31,
1997, which was also the result of the refinancings. While the
refinancings increased the Company's funding of guaranteed return
obligations in the short term, the long term effect will be a reduction of
the Company's guaranteed return obligations relating to the refinanced
properties. The capital that was returned to the limited partners (which
causes the reduction in the Company's guaranteed return obligations) was
applied first to the later years in which their capital contributions are
due and then to the earlier years. The refinancings, therefore, reduce the
Company's guaranteed return obligations more in future years than in the
current year and the following year. The aggregate amount of guaranteed
return obligations for fiscal years 1997 through 2002 based on existing
management contracts will increase to $15.1 million in Fiscal 1997, then
decrease to $13.8 million for Fiscal 1998, increase to $15.1 in Fiscal
1999, and decrease to $13.3 million in Fiscal 2000, to $7.4 million in
Fiscal 2001 and to $300,000 in Fiscal 2002. Such amounts of guaranteed
return obligation are calculated based upon paid-in contributions of
limited partners as of January 31, 1997 with respect to Fiscal 1997 and
remaining scheduled capital contributions with respect to fiscal years 1998
through 2002. Actual amounts of guaranteed return obligations in respect
of such contracts will vary based upon the timing and amount of such
capital contributions. Furthermore, these amounts are calculated without
regard to the cash flow the related properties will generate to meet
guaranteed return obligations. The aggregate amount of the Company's
guaranteed return obligations and operating cash deficiencies 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 funds generated by the Company's operations 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 Company intends 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 and operating cash deficiencies, but there can be no assurance that
this will be the case.
In the past, limited partners have been allowed to prepay capital
contributions. The percentage of these prepayments received upon the
closings of the sales of limited partnership interests in Investing
Partnerships averaged 71.7% in Fiscal 1994, 60.9% in Fiscal 1995 and 67.6%
for Fiscal 1996. 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. As a result of such loans and
crediting provisions of the related 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
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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.
As of January 31, 1997, the recorded value, net of deferred income,
of Multi-Family Notes was $106.7 million. All but approximately $262,000
of the $53.2 million of "Other Partnership Receivables" recorded on the
Company's Consolidated Financial Statements as of January 31, 1997 relate
to Multi-Family Notes. (See Note 4 of Notes to the Company's 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 Owning Partnerships which own Multi-Family
Properties are in default on their respective mortgages. The Multi-Family
Notes relating to the Protected Partnerships were first deemed impaired
when the mortgages on their respective properties went into default, which
defaults occurred between August 1989 and June 1994. Once in default, the
holders of these mortgages assigned them to the United States Department of
Housing and Urban Development ("HUD"). The Protected Partnerships then
attempted to negotiate, and in some cases obtained, workout agreements with
HUD. Although it could temporarily lower or suspend debt service payments
during the term of a workout agreement, HUD, unlike a conventional lender,
does not have the legal authority to restructure the defaulted mortgages it
holds by permanently lowering interest rates or reducing the principal
amount of such mortgages. HUD then sold the mortgages (subject to those
workout agreements which were in place) at auctions in September 1995 and
June 1996. Since the new mortgage holders did not have HUD's legal
constraints as to the restructuring of mortgages they hold, the Protected
Partnerships began negotiations with the new holders to restructure their
mortgages or purchase them at a discount. The new mortgage holders would
not negotiate in good faith with the Protected Partnerships and began to
threaten and institute foreclosure proceedings. In July 1996, the Selling
Stockholders and one of their affiliates assigned certain interests they
own personally in various partnerships that own Multi-Family Properties
(the "Assigned Interests") to the Investing Partnerships that own interests
in the Protected Partnerships, which Assigned Interests provide additional
assets at the Investing Partnership level and, as a result, additional
security for the related Multi-Family Notes. Each of the Investing
Partnerships related to Protected Partnerships which have filed Chapter 11
Petitions has agreed to transfer the Assigned Interests back to the Selling
Stockholders and their affiliate if the applicable Protected Partnership
emerges from its bankruptcy proceeding with possession of the real property
and improvements which it owned at the time of its Chapter 11 Petition.
Seven of the Protected Partnerships filed Chapter 11 Petitions in August
1996, two of the Protected Partnerships filed Chapter 11 Petitions in
February 1997, and one of the Protected Partnerships did not file a Chapter
11 Petition and allowed the holder of the mortgage to foreclose on its
property due to the unlikelihood of confirming a plan of reorganization.
The Company neither owns nor manages these properties, nor is it the
general partner of these Owning Partnerships, but, rather, holds the
related Multi-Family Notes as receivables. The Company, therefore, has no
liability in connection with these mortgage defaults or bankruptcy
proceedings.
The Company established appropriate reserves during these time
periods to reflect the varying extent of impairment of the applicable
Multi-Family Notes in view of the state of facts at such time. In that the
Selling Stockholders transferred the Assigned Interests in July 1996, the
Company recorded a $21.3 million capital contribution in Fiscal 1996. The
bankruptcy petitions and risk of loss faced by the Protected Partnerships
resulted in the Company recording a loss for fiscal 1996 in the amount of
$18.4 million (representing the recorded value of these Multi-Family Notes,
net of deferred income and net of any previously established reserves) due
to the deemed full impairment of these Multi-Family Notes. The Company
anticipates that seven of the bankruptcy proceedings will result in the
respective Protected Partnerships losing their properties through
foreclosure or voluntary conveyance of their properties and that two of the
bankruptcy proceedings will result in the respective Protected Partnerships
paying off their mortgages at a discount with the proceeds of new mortgage
financing, resulting in these properties having current, fully performing
mortgages. Due to the additional collateral provided by the Assigned
Interests, the Company anticipates that the outcome of the bankruptcy
proceedings will not affect its ability to collect on those Multi-Family
Notes.
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There are 17 remaining Owning Partnerships which own Multi-Family
Properties and which are in default of their mortgages. As of January 31,
1997, the recorded value, net of deferred income, of the Multi-Family Notes
and "Other Partnership Receivables" relating to these 17 Owning
Partnerships was $34.7 million. Two of such Owning Partnerships have
agreed with their mortgage lenders to pay off their mortgages, in one case
at a discount and in the other case in full, with the proceeds of
anticipated new mortgage financing, which would result in the related
properties having current, fully performing mortgages. As of January 31,
1997, the recorded value, net of deferred income, of the Multi-Family Notes
and "Other Partnership Receivables" relating to these two Owning
Partnerships was $3.1 million, and the recorded value, net of deferred
income of the Multi-Family Notes and "Other Partnership Receivables"
relating to the 15 remaining Owning Partnerships whose mortgages are in
default was $31.6 million. The Company has established reserves of $10.1
million to address the possibility that these Multi-Family Notes and "Other
Partnership Receivables" may not be collected in full. It is possible that
the 17 Owning Partnerships which own Multi-Family Properties and which are
in default on their mortgages will file Chapter 11 Petitions or take
similar actions seeking protection from their creditors. The Company
neither owns nor manages these properties, nor is it the general partner of
these Owning Partnerships, but, rather, holds the related Multi-Family
Notes as receivables. The Company, therefore, would have no liability in
connection with any such mortgage defaults or bankruptcy proceedings.
The Multi-Family Properties were typically built or acquired with the
assistance of programs administered by HUD that provide mortgage insurance,
favorable financing terms and/or rental assistance payments to the owners.
As a condition to the receipt of assistance under these and other HUD
programs, the properties must comply with various HUD requirements,
including limiting rents on these properties to amounts approved by HUD.
Most of the rental assistance payment contracts relating to the Multi-
Family Properties 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, and by reducing spending on
future rental assistance payment 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. The Company neither owns nor manages these properties, nor is
it the general partner of these Owning Partnerships, but, rather, holds the
related Multi-Family Notes as receivables. The Company, therefore, would
have no liability in connection with any such mortgage defaults or
bankruptcy proceedings. Any such future mortgage defaults could, and any
such future filings of Chapter 11 petitions 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 and any reserves for such note previously established by the Company
which would reduce such loss. In addition, the Company could be required
to realize such a loss even in the absence of mortgage defaults, Chapter 11
Petitions or the 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.
As previously described, the Protected Partnerships (and the other
defaulting Owning Partnerships) have generated little or no cash flow and,
therefore, the related Multi-Family Notes have contributed little or no
interest income in the periods covered in the Consolidated Financial
Statements of the Company. The Assigned Interests have, prior to their
assignment to the Investing Partnerships, generated positive cash flows.
To the extent the Assigned Interests continue to generate positive cash
flows, the Company will be entitled to receive such amounts as interest
income on the related Multi-Family Notes.
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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 recently acquired an adult living community in Mesa, Arizona
containing 174 units and has entered into contracts to acquire one adult
living community in Winter Haven, Florida containing 133 apartment units,
one adult living community in Albuquerque, New Mexico containing 140
apartment units and one adult living community in Westland, Michigan
containing 153 apartment units. The aggregate purchase price of the above
communities the Company has recently purchased and has agreed to purchase
is approximately $42.2 million. The Company has financed and intends to
finance approximately $31.1 million of the purchase price for 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 of existing adult living communities in part by arranging for
the sale of partnership interests. In addition, the Company has acquired
two existing adult living communities from existing Owning Partnerships,
and may engage in other similar transactions. 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 plan for
the development of new adult living communities 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 commence construction on between 18 and 24
new adult living communities during the next two years. The Company will
utilize a portion of the proceeds of this Offering, funds generated by its
operations, mortgage financing and long-term leases or similar arrangements
to construct, own and operate new adult living communities. In addition,
the Company may use funds raised through the issuance of additional debt or
equity securities, to the extent such funds are necessary to fund the
Company's development plan. The Company's development plan contemplates
its first new communities being built in Texas. The Company has commenced
construction, with mortgage financing from Bank United for up to $7.0
million and $7.3 million, respectively, on two adult living communities in
Corpus Christi and Temple, Texas, respectively, and, with a commitment for
mortgage financing from Hillcrest Bank for up to $7.6 million, on an adult
living community in Round Rock, Texas. The Company holds options to
acquire three additional sites in Texas and is negotiating with several
additional lenders to obtain financing to develop these sites.
The Company also intends to utilize long-term lease financing
arrangements to develop and operate new communities. The Company has
entered into an agreement with Capstone pursuant to which Capstone will
provide up to $39.0 million for 100% of the development cost of four adult
living communities that will be operated by the Company pursuant to long-
term leases with Capstone. The Company has closed the development
financing with Capstone and begun construction on four communities which
are located in San Angelo, Wichita Falls, El Paso and Abilene, Texas. The
agreement 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 requires that
construction commence within 30 days after the acquisition of the property
and be complete within 15 months of commencement. Each lease agreement
will have a term of 15 years with three optional five-year renewal periods.
The agreement requires 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 obligations
under the development agreements are, and the obligations under the leases
will be, direct obligations of the Company. The Company will be required
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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
will be granted a right of first refusal and an option to purchase the
properties.
The Company is actively engaged in negotiations with other mortgage
and long-term lease lenders to provide additional construction financing.
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, including the loans closed with Bank United, 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 estimates that the cost of developing and leasing
each new adult living community financed with mortgage financing will be
approximately $9.5 million.
The Company will use approximately $14.1 million of its net proceeds
of this Offering to fund a portion of development costs not provided by
mortgage loans, which is currently anticipated to be sufficient to permit
the development of up to seven new adult living communities, if such
proceeds funded 20% to 25% of the development costs. The Company also will
utilize funds generated by its operations to fund the 20% to 25% of
development costs not provided by mortgage loans for the development of
additional communities. In addition, in connection with the development of
additional communities, the Company will utilize long term leases and
similar forms of financings which require the investment of little or no
capital on the part of the Company. There can be no assurance that funds
generated by its operations, long term leases and similar forms of
financings will be available or sufficient to complete the Company's
development plan. In addition, the Company intends to refinance the
approximately $21.4 million and $33.6 million in principal amount of
indebtedness that becomes due in Fiscal 1997 and Fiscal 1998, respectively.
There can be no assurance that the Company will be able to refinance such
obligations in a timely manner or on acceptable terms. In addition, there
are a number of circumstances beyond the Company's control and which the
Company cannot predict that may result in the Company's financial resources
being inadequate to meet its needs. The Company may need to seek
additional funding through public or private financing, including equity
financing, to satisfy these obligations. If additional funds are raised by
issuing equity securities, the Company's shareholders may experience
dilution. There can be no assurance, however, that adequate financing will
be available as needed or on terms acceptable to the Company. A lack of
available funds may require the Company to delay, scale back or eliminate
some of the adult living communities that are currently contemplated in its
development plan. See "Risk Factors -- Need for Additional Financing" and
"Use of Proceeds."
The annual dividend requirement on the Convertible Preferred Stock is
$1,170,000 ($1,345,500 if the Over-allotment Option is exercised in full).
The Company anticipates that the future earnings of the Company, if any,
will not initially be adequate to pay the dividends on the Convertible
Preferred Stock out of earnings. Although the Company intends to pay
quarterly dividends out of available surplus, there can be no assurance
that the Company will maintain sufficient surplus or that future earnings,
if any, will be adequate to pay the dividends on the Convertible Preferred
Stock. Under the Delaware General Corporation Law, dividends may be paid
only out of legally available funds, which includes current and the prior
fiscal year's net profits as well as surplus. Failure to pay a total of
four consecutive quarterly dividends will entitle the holders of the
Convertible Preferred Stock, voting separately as a class, to elect one
director. In addition, no dividends or distributions may be declared, paid
or made if the Company is or would be rendered insolvent or in default
under the terms of senior securities or obligations by virtue of such
dividend or distribution. See "Risk Factors -- Inadequate Dividend
Coverage," "Dividend Policy" and "Description of Capital Stock --
Convertible Preferred Stock."
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BUSINESS
GENERAL
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 32
adult living communities containing 4,654 apartment units in 11 states in
the Sun Belt and the Midwest. The Company also operates one skilled
nursing facility containing 57 beds and one residential apartment complex
containing 237 units. One of the adult living facilities the Company
operates contains 70 skilled nursing beds. At April 25, 1997, the
facilities operated by the Company for at least one year had an average
occupancy rate of approximately 90.7%. 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 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.
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The Company has instituted a development plan which will result in
the commencement of 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 services. The Company's development plan
contemplates its first new communities being built in Texas. Construction
has commenced on seven adult living communities. The Company also holds
options to acquire three 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 32
adult living communities, the nursing home and the residential apartment
complex 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 other properties 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 managing 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 26 of the 37 Investing Partnerships. As a 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
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
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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 amounts sufficient to fund (i) any operating cash
deficiencies of such Owning Partnerships and (ii) any part of such
guaranteed return not paid from cash flow from the related property (which
the Owning Partnerships distribute to the Investing Partnerships for
distribution to limited partners). During Fiscal 1996, the Company paid
approximately $5.2 million with respect to guaranteed return obligations,
and paid approximately $1.9 million with respect to operating cash
deficiencies. The aggregate amount which the Company will be required to
pay under the management contracts with respect to guaranteed return
obligations and cash operating deficiencies 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 make payments which are distributed to the Investing
Partnerships to pay limited partners of such Investing Partnerships their
guaranteed return pursuant to the terms of the management contracts. To
the extent that the Company must expend funds to meet its guaranteed return
obligations and operating cash deficiencies, 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. The Company intends to
structure future offerings to minimize the likelihood that it will be
required to utilize the cash it generates to pay guaranteed returns and
operating cash deficiencies, but there can be no assurance that this will
be the case.
The Company's obligations with respect to guaranteed returns and
operating cash deficiencies 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.
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 notes receivable and reduce
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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 proceeds are available from a sale or refinancing
of the property. 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, the nursing home and the
residential apartment complex 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 obligations in respect of
operating cash deficiencies and guaranteed returns. These five-year
obligations have terminated for eight of the 37 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.
The termination of any management contracts would result in the loss of fee
income, if any, under those contracts. The Company is the managing general
partner of 31 of the 32 Owning Partnerships that own the adult living
communities, the nursing home and the residential apartment complex
operated by the Company. The Company also is the general partner of 26 of
the 37 Investing Partnerships formed to acquire 98.5% to 99% of the equity
interests in said Owning Partnerships. In general, under the terms of the
Investing Partnerships' partnership agreements, limited partners have only
limited rights to take part in the control, conduct or operation of the
partnerships. The partnership agreements for the 26 Investing Partnerships
for which the Company is the general partner provide that a majority in
ownership interests of the limited partners can remove the Company as the
general partner at any time. It is anticipated that all future Investing
Partnership agreements will contain the same right to remove the Company as
a general partner. In addition, the consent of a majority in ownership
interests of limited partners in such Investing Partnerships is required to
be obtained in connection with any sale or disposition of the underlying
property.
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.
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
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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.
INDUSTRY 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
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.
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
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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
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
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
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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 90.7% occupancy
rate at April 25, 1997 at the existing adult living communities managed by
the Company for at least one year.
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. Competition to acquire existing adult living communities has
intensified, and the Company anticipates that, for at least the next two
years, it will not be able to acquire such communities on terms favorable
enough to offset the startup losses associated with newly developed
communities and the costs and cash requirements arising from the Company's
overhead and existing debt and guaranty obligations. The Company also
believes its established ability to privately place equity and debt
securities could enhance its ability to pursue its development plan.
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 contains 142
apartment units and 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 also are
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 its 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 feet for a studio to 871 square feet for a two bedroom/two bath
unit. The Company's prototype contains 46 studio apartments, 92 one
bedroom/one bathroom apartments and 4 two bedroom/two bathroom apartments,
encompassing 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
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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 1997, the Company anticipates that
its development efforts will be focused primarily in the State of Texas.
The Company has commenced construction on two development sites in Corpus
Christi, Texas and Temple, Texas with mortgage financing for up to $7
million and $7.3 million, respectively, from Bank United. The Company has
commenced construction on development sites in San Angelo, Wichita Falls,
El Paso and Abilene, Texas, under the Company's $39 million development
agreement with Capstone. The Company also has commenced construction, with
a commitment from Hillcrest Bank for $7.6 million in mortgage financing, of
a new adult living community on a development site in Round Rock, Texas.
The Company also has obtained options to acquire three additional sites in
Amarillo, Greatwood and Tyler, Texas and is actively negotiating with
several lenders to obtain construction financing for these sites. The
Company anticipates that it will commence construction on between 18 and 24
new adult living communities in the next two years. The Company also
anticipates developing adult living communities in one or more of the
following states: Tennessee, Kentucky, Georgia, North Carolina, South
Carolina, and New Mexico.
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 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"(R)
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.
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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.
COMMUNITIES
The Company currently operates 32 adult living communities containing
4,654 units, one nursing home containing 57 beds and one residential
apartment complex containing 237 units. 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
Number Year % at
of Acquired April 25,
Community (1) State Units (2) 1997
--------------------------- -------- ------- ------- ---------
The Grand Court Mesa Arizona 174 1997 96%
The Grand Court Phoenix Arizona 136 1991 99%
The Grand Court Fort Myers Florida 184 1989 92%
The Grand Court Lakeland Florida 126 1996 71%(8)
The Grand Court Lake Worth Florida 170 1992 87%
The Grand Court North Miami Florida 189 1995 60%(8)
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Occupancy
Number Year % at
of Acquired April 25,
Community (1) State Units (2) 1997
----------------------------- ---------- ------- --------- ---------
The Grand Court Pensacola Florida 60 1993 98%
The Grand Court I Pompano Beach(3) Florida 72 1994 93%
The Grand Court II Pompano Beach(3) Florida 42 1994 79%(8)
The Grand Court Tampa Florida 164 1997 99%
The Grand Court Tavares Florida 94 1995 95%
The Grand Court Belleville Illinois 76 1993 99%
The Grand Court II Kansas City Kansas 127 1994 98%
The Grand Court Overland Park Kansas 275 1990 99%(8)
The Grand Court Farmington Hills Michigan 164 1993 99%
The Grand Court Novi Michigan 114 1994 96%
The Grand Court I Kansas City Missouri 173 1989 100%
The Grand Court III Kansas City(4) Missouri 217 1989 76%
600 E. 8th St. Missouri 237(5) 1990 87%
The Grand Court Las Vegas Nevada 152 1991 96%
The Grand Court Columbus Ohio 120 1994 99%
The Grand Court Dayton Ohio 185 1994 100%
The Grand Court Findlay Ohio 73 1992 86%
The Grand Court Springfield Ohio 77 1992 86%
The Grand Court I Chattanooga Tennessee 143(6) 1995 85%(8)
The Grand Court II Chattanooga Tennessee 146 1995 100%
The Grand Court Memphis Tennessee 197 1992 90%
The Grand Court Morristown Tennessee 197 1996 58%(8)
The Grand Court Bryan Texas 180 1992 89%
The Grand Court Longview Texas 132 1990 97%
The Grand Court Lubbock Texas 139 1991 91%
The Grand Court I San Antonio Texas 198 1993 94%
The Grand Court II San Antonio Texas 57(7) 1995 86%
The Grand Court Weatherford Texas 60 1996 67%
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Occupancy
Number Year % at
of Acquired April 25,
Community (1) State Units (2) 1997
----------------------------- ---------- ------- --------- ---------
The Grand Court Bristol Virginia 98 1995 100%
-----------------------
(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 and another
Owning Partnership owns one adult living community and one nursing
home. In addition, the Company's communities in Pompano Beach,
Florida are adjacent to one another and are counted as one property.
As a result, there are 35 properties listed, but only 32 Owning
Partnerships. In addition, the Company has entered into contracts to
acquire one adult living community in Winter Haven, Florida
containing 133 apartment units, one adult living community in
Albuquerque, New Mexico containing 140 apartment units and one adult
living community in Westland, Michigan containing 153 apartment
units.
(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) A portion of the units at The Grand Court III Kansas City are rented,
from time to time, as residential apartment units.
(5) 600 E. 8th St. is a 237-unit residential apartment complex.
(6) Grand Court I Chattanooga's unit count includes a 70-bed nursing
wing.
(7) Grand Court II San Antonio is a 57-bed licensed nursing facility.
(8) Occupancy percentage includes 1-2 units occupied by staff.
All 32 adult living communities, the nursing home and the residential
apartment complex 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.
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
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.
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Regional. The Company has ten regional administrators: three
responsible for eight Florida communities, one responsible for three
communities in Tennessee, one responsible for two communities in Arizona,
one in Nevada, and two in Texas, including the nursing home operated by the
Company, one responsible for two communities in Missouri, two communities
in Kansas, two communities in Michigan and one in Tennessee, one
responsible for four communities in Ohio, one in Illinois and one in
Virginia, one responsible for three communities in Texas and one
responsible for the one residential apartment complex operated by the
Company. The Company also has a regional administrator and a registered
dietician who oversee the food division. 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 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
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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 properties in 11 states including 32 adult living
communities containing 4,654 apartment units (including 70 skilled nursing
beds), one nursing home containing 57 skilled nursing beds and one
residential apartment complex containing 237 apartment units.
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 also must
comply with the requirements of the ADA 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 containing 57 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%
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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 HUD for certain subsidy overpayments, aggregating approximately
$861,000, and (iii) all issues relating to the audit and investigation were
concluded and fully resolved.
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On February 16, 1995, an investor in certain securities issued by the
Company and certain Investing Partnerships filed a lawsuit in a Wisconsin
state court against the sales representative, the broker/dealer employing
the sales representative (the "Broker"), neither of whom are affiliated
with the Company and the Company, alleging that the sales representative,
as agent of the Broker, and the Broker, as agent of the Company,
fraudulently induced the investor to purchase such securities. There are
no allegations that the Company, or its officers, directors or employees,
engaged in any improper sales practices or misrepresentations. The
plaintiffs in BOND, ET AL. V. HENNING, ET AL., which was removed to and is
--------------------------------
currently pending before the United States District Court for the Eastern
District of Wisconsin, are seeking (i) rescission of the sale of
approximately $2.0 million of securities and (ii) unspecified damages. The
Company filed a Motion to Dismiss which, on August 21, 1996, the Magistrate
Judge recommended that the District Court deny. A notice of appeal and
objections to the Magistrate Judge's recommendation was filed by the
Company in the District Court. The Company believes the lawsuit is without
merit and is vigorously contesting the case.
The Company is involved in various lawsuits and other matters arising
in the normal course of business, including employment-related claims. 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) 65 Chairman of the Board and Chief
Executive Officer
Bernard M. Rodin(2) 66 Chief Operating Officer, President
and Director
John W. Luciani III 44 Executive Vice President and
Director
Paul Jawin 41 Chief Financial Officer
Dorian Luciani 42 Senior Vice President Acquisition
and Construction
Deborah Luciani 40 Vice President New Business
Development and Acquisitions
Edward J. Glatz 54 Vice President Construction
Catherine V. Merlino 32 Vice President and Treasurer
Keith Marlowe 34 Secretary
Walter Feldesman(1)(2) 78 Director
Leslie E. Goodman(1)(2) 53 Director
----------------------
(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. Mr. Luciani was a general partner of three
Protected Partnerships, but withdrew as a general partner prior to their
filing the respective Chapter 11 Petitions.
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. Mr. Rodin was a general partner of three
Protected Partnerships, but withdrew as a general partner prior to their
filing the respective Chapter 11 Petitions.
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.
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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
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, has been the Chairman of CREOL Inc.,
Commercial Real Estate On-line, which provides information over the
Internet to real estate professionals, since January 1997. Until December
1996 Mr. Goodman was 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. and a member of the Board
of Directors of Tear Drop Golf Company, Inc.
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DIRECTOR COMPENSATION
The Company will pay each Director who is not an employee of the
Company $1,000 per Board meeting attended and $500 per Committee meeting
attended. All Directors are reimbursed by the Company for their out-of-
pocket expenses incurred in connection with attendance at meetings of, and
other activities related to service on, the Board of Directors or any Board
Committee.
AUDIT COMMITTEE
The Board of Directors established an Audit Committee in June 1996.
The Audit Committee is currently composed of Messrs. Rodin, Feldesman and
Goodman. The Audit Committee's duties include reviewing internal financial
information, monitoring cash flow, budget variances and credit
arrangements, reviewing the audit program of the Company, reviewing with
the Company's independent accountants the results of all audits upon their
completion, annually selecting and recommending independent accountants,
overseeing the quarterly unaudited reporting process and taking such other
action as may be necessary to assure the adequacy and integrity of all
financial information distributed by the Company.
COMPENSATION COMMITTEE
The Board of Directors established a Compensation Committee in June
1996. The Compensation Committee is currently composed of Messrs. John
Luciani, Feldesman and Goodman. The Compensation Committee recommends
compensation levels of senior management and works with senior management
on benefit and compensation programs for Company employees.
EXECUTIVE COMPENSATION
The following table shows, as to the Chief Executive Officer and each
of the four other most highly compensated executive officers information
concerning compensation accrued for services to the Company in all
capacities during the fiscal years ended January 31, 1996 and 1997,
respectively.
Summary Compensation Table
ANNUAL COMPENSATION
--------------------------
OTHER
ANNUAL All
NAME AND PRINCIPAL SALARY BONUS COMPEN- Other
POSITION YEAR ($) ($) SATION Compensation
($) ($)
----------------- ---- ----- ----- ----- ----------
John Luciani,
Chairman of the Board
and Chief Executive fiscal -- -- --
Officer(1) . . . . . 1995 $1,450,000
fiscal
1996 $500,000 -- -- $497,000
Bernard M. Rodin,
Chief Operating
Officer, President fiscal
and Director(1) . . . 1995 -- -- -- $1,450,000
fiscal
1996 $500,000 -- -- $497,000
John W. Luciani, III,
Executive Vice
President and fiscal
Director . . . . . . 1995 $315,000 -- -- --
fiscal
1996 $350,000 -- -- --
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ANNUAL COMPENSATION
--------------------------
OTHER
ANNUAL All
NAME AND PRINCIPAL SALARY BONUS COMPEN- Other
POSITION YEAR ($) ($) SATION Compensation
($) ($)
----------------- ---- ----- ----- ----- ----------
Dorian Luciani, fiscal
Senior Vice President 1995 $315,000 -- -- --
fiscal
1996 $350,000 -- -- --
Paul Jawin, Chief fiscal
Financial Officer . . 1995 $289,050 -- -- --
fiscal
1996 $325,000 -- -- --
---------------------------------
(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 fiscal 1996, such
officers also received $397,000 each as a dividend and $100,000 each
for the period from February 1, 1996 until April 1, 1996, which was
in the form of a dividend but which is classified as officers'
compensation for financial statement purposes.
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 2,500,000 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
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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 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 and one Sub-chapter C corporation along with
various other assets and liabilities to the Company in exchange for
3,252,380 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 1,626,190 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 six merged companies were converted into an
aggregate of 10,121,430 shares of the Company's Common Stock. After the
reorganization was complete, the Selling Stockholders owned an aggregate of
15,000,000 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 and the Company paid dividends and
other distributions to each of the Selling Stockholders of $943,000,
$850,000 and $397,000 in Fiscal 1994, 1995 and 1996, respectively,
exclusive of amounts reflected as officers' compensation.
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 (i) notes, aggregating $106.7 million, net
of deferred income, as of January 31, 1997, that are secured by the limited
partnership interests in such partnerships and (ii) other partnership
receivables aggregating $52.9 million from such partnerships at January 31,
1997. Messrs. Luciani and Rodin 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 each
of Messrs. Luciani and Rodin is approximately $43.5 million. In addition,
Messrs. Luciani and Rodin and certain employees will
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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.
Subsequent to the reorganization, the Selling Stockholders and one of
their affiliates assigned certain interests they own personally in various
partnerships that own multi-family properties ("Assigned Interests") to the
Investing Partnerships that own interests in nine Owning Partnerships which
have filed petitions seeking protection from foreclosure actions under
Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11 Petitions") and one
Owning Partnership which is expected to lose its property pursuant to an
uncontested foreclosure sale of such property (collectively, the "Protected
Partnerships"). The Assigned Interests provide additional assets at the
Investing Partnership level and, as a result, additional security for the
related Multi-Family Notes. Each of these Investing Partnerships related
to Protected Partnerships which have filed a Chapter 11 Petition has agreed
to transfer the Assigned Interests back to the Selling Stockholders and
their affiliate if the applicable Protected Partnership emerges from its
bankruptcy proceeding with possession of the real property and improvements
which it owned at the time of its Chapter 11 Petition. In that the Selling
Stockholders transferred the Assigned Interests in July 1996, the Company
recorded a $21.3 million capital contribution in fiscal 1996. The
bankruptcy petitions and risk of loss faced by the Protected Partnerships
resulted in the Company recording a loss for fiscal 1996 in the amount of
$18.4 million (representing the recorded value of these multi-family notes,
net of deferred income and net of any previously established reserves) due
to the deemed full impairment of the multi-family notes. Each of the
Selling Stockholders was a general partner of three of the Protected
Partnerships, but withdrew as a general partner prior to such partnerships'
filings of the respective Chapter 11 Petitions.
During Fiscal 1996 the Company paid to Francine Rodin, the wife of
Bernard M. Rodin, the Company's Chief Operating Officer, President and a
Director, $154,875, 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, excluding shares of Securities offered hereby, by
such broker/dealers. During Fiscal 1996 Francine Rodin received consulting
fees of $49,435 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.
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. In addition, Mr. Feldesman is a director of Sterling
National Bank & Trust Co. which has entered into a revolving credit
agreement with the Company which permits the Company to borrow up to
$8,000,000, of which $4,589,127 was outstanding at January 31, 1997.
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.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of January 31,
1997, before and after giving effect to the 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
BEFORE OFFERING OFFERING
--------------- ---------------
SHARES
BENEFICIAL OWNER NUMBER % OFFERED(1) NUMBER %(2)
---------------- ------ -- --------- ----- ------
John Luciani . . 7,500,000 50% 125,000 7,375,000 46.24%
Bernard M. Rodin 7,500,000 50% 125,000 7,375,000 46.24%
All directors and
officers
as a group . . 15,000,000 100% 250,000 14,750,000 92.48%
------------------------
(1) Excluding any additional shares of Common Stock issued pursuant to
the Over-allotment Option. Each of the Selling Stockholders has
granted to the Underwriters an Over-allotment Option exercisable
within 45 days after the date of this Prospectus to purchase up to
18,750 shares of Common Stock.
(2) Excluding any additional shares of Common Stock issued pursuant to
the Over-allotment Option and prior to any conversion of the
Convertible Preferred Stock into shares of Common Stock. Assuming
the full exercise of the Over-allotment Option (but excluding any
conversion of the Convertible Preferred Stock into shares of Common
Stock), the Selling Stockholders would beneficially own 91.42% of the
Common Stock. Assuming the full conversion of the Convertible
Preferred Stock (but excluding any additional shares of Common Stock
or Convertible Preferred Stock issued pursuant to the Over-allotment
Option), the Selling Stockholders would beneficially own 86.59% of
the outstanding Common Stock. Assuming the full exercise of the
Over-allotment Option and the full conversion of Convertible
Preferred Stock into shares of Common Stock, the Selling Stockholders
would beneficially own 84.86% of the Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate provides for 40,000,000 authorized shares
of Common Stock. The Certificate also provides for 15,000,000 authorized
shares of Preferred Stock, par value $.0001 per share (the "Preferred
Stock"). Upon completion of the Offering (excluding any additional
Securities issued pursuant to the Over-allotment Option and the exercise of
the Underwriters' Warrants), there will be outstanding: (a) 15,950,000
shares of Common Stock, consisting of (i) 14,750,000 shares currently owned
by the Selling Stockholders and not offered hereby; (ii) 950,000 shares to
be sold by the Company hereby; (iii) the 250,000 shares to be sold by the
Selling Stockholders hereby and (b) 1,300,000 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
Holders of the Common Stock are entitled to one vote per share and,
subject to the rights of the holders of the Preferred Stock (discussed
below), to receive dividends when and as declared by the Board of
Directors, and to share ratably in the assets of the Company legally
available for distribution in the event of the liquidation, dissolution or
winding up of the Company. Holders of the Common Stock do not have
subscription, redemption or conversion rights, nor do they have any
preemptive rights. In the event the Company were to elect to sell
additional shares of its Common Stock following this Offering, investors in
this Offering would have no right to purchase such additional shares. As a
result, their percentage equity interest in the Company would be diluted.
The shares of Common Stock offered hereby will be, when issued and paid
for, fully-paid and not liable for further call or assessment. Holders of
the Common Stock do not have cumulative voting rights, which means that the
holders of more than half of the outstanding shares of Common Stock
(subject to the rights of the holders of the Preferred Stock) can elect all
of the Company's directors, if they choose to do so. In such event, the
holders of the remaining shares would not be able to elect any directors.
The Board is empowered to fill any vacancies on the Board. Except as
otherwise required by the Delaware Law, all stockholder action is taken by
vote of a majority of the outstanding shares of Common Stock voting as a
single class present at a meeting of stockholders at which a quorum
(consisting of a majority of the outstanding shares of the Company's Common
Stock) is present in person or by proxy.
PREFERRED STOCK
The Company is authorized by the Certificate to issue a maximum of
15,000,000 shares of Preferred Stock, in one or more series and containing
such rights, privileges and limitations, including voting rights,
conversion privileges and/or redemption rights, as may, from time to time,
be determined by the Board of Directors. Preferred Stock may be issued in
the future in connection with acquisitions, financings or such other
matters as the Board of Directors deems to be appropriate. In the event
that any such shares of Preferred Stock shall be issued, a Certificate of
Designation, setting forth the series of such Preferred Stock and the
relative rights, privileges and limitations with respect thereto, shall be
filed with the Secretary of State of the State of Delaware. The effect of
such Preferred Stock is that the Company's Board of Directors alone, within
the bounds and subject to the federal securities laws and the Delaware Law,
may be able to authorize the issuance of Preferred Stock which could have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect
the voting and other rights of holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may also adversely affect
the voting power of the holders of Common Stock, including the loss of
voting control to others.
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CONVERTIBLE PREFERRED STOCK
The issuance of up to 1,625,000 shares of Convertible Preferred Stock
has been authorized by resolutions adopted by the Board of Directors and
set forth in a Certificate of Designation, Preferences and Rights of %
Senior Convertible Redeemable Preferred Stock filed with the Secretary of
State of the State of Delaware, which contains the designations, rights,
powers, preferences, qualifications and limitations of the Convertible
Preferred Stock. Upon issuance, the shares of Convertible Preferred Stock
offered hereby will be fully paid and non-assessable.
DIVIDENDS The holders of the Convertible Preferred Stock are
entitled to receive, out of funds legally available therefor, cumulative
dividends at the rate of $ per share per annum, payable quarterly on the
last business day of January, April, July and October of each year,
commencing October 31, 1997 (each a "Dividend Payment Date"), to the
holders of record as of a date, not more than 60 days prior to the Dividend
Payment Date, as may be fixed by the Board of Directors. Dividends accrue
from the first day of the year in which such dividend may be payable,
except with respect to the first quarterly dividend which shall accrue from
the date of initial issuance of the Convertible Preferred Stock.
Dividends on the Convertible Preferred Stock will accrue whether or
not the Company has earnings, whether or not there are funds legally
available for the payment of such dividends and whether or not such
dividends are declared. Dividends accumulate to the extent they are not
paid on the Dividend Payment Date to which they relate. Accumulated unpaid
dividends will not bear interest. Under Delaware Law, the Company may
declare and pay dividends or make other distributions on its stock only out
of surplus, as defined in the Delaware Law or, in case there shall be no
such surplus, out of net profits for the fiscal year in which the dividend
is declared and/or the preceding fiscal year. The Company intends to pay
quarterly dividends out of available net profits or surplus. On January
31, 1997, the Company had available surplus of approximately $31 million
(or approximately $48.6 million after giving effect to this Offering).
There were no net profits for the current fiscal year, and $5.8 million of
net profits for Fiscal 1995. The payment of dividends and any future
operating losses will reduce such surplus of the Company, and reduce or
eliminate net profits, which may adversely affect the ability of the
Company to continue to pay dividends on the Convertible Preferred Stock.
In addition, no dividends or distributions may be declared, paid or made if
the Company is or would be rendered insolvent or in default under the terms
of senior securities or obligations by virtue of such dividend or
distribution. Currently, the most restrictive of such obligations are the
Capstone agreements, which require that the Company maintain a net worth of
75% of its net worth upon completion of the Offering. On a pro forma
basis, after giving effect to this Offering, the Company would have had a
net worth of approximately $48.6 million at January 31, 1997. The Company,
therefore, would have available approximately $12.1 million of its surplus
for the payment of dividends based on its net worth at January 31, 1997 and
after giving effect to this Offering. In addition, as a result of start-up
losses anticipated to result from the Company's development plan for the
construction of new adult living communities, the Company anticipates that
it will incur operating losses for at least two years. Any such operating
losses would further reduce surplus otherwise available for the payment of
dividends.
No dividends may be paid on any shares of capital stock ranking
junior to the Convertible Preferred Stock (including the Common Stock)
unless and until all accumulated and unpaid dividends on the Convertible
Preferred Stock have been declared and paid in full.
CONVERSION. At the election of the holder thereof, each share of
Convertible Preferred Stock will be convertible into Common Stock at any
time on or after the date of issuance and prior to redemption. The number
of shares of Common Stock to which a holder of Convertible Preferred Stock
will be entitled upon conversion is the product obtained by multiplying the
number of shares to be converted by the Conversion Rate. The "Conversion
Rate" is determined by dividing $10.00 [the initial offering price per
share of Common Stock] by $12.00 [120% of the initial offering price per
share of Common Stock] (the "Conversion Price"), an effective conversion
rate of approximately 0.8333 shares of Common Stock for each share of
Convertible Preferred Stock. The Conversion Price is subject to adjustment
from time to time in the event of (i) the issuance of Common Stock as a
dividend or
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distribution on any class of capital stock of the Company; (ii) the
combination, subdivision or reclassification of the Common Stock; (iii)
the distribution to all holders of Common Stock of evidences of the
Company's indebtedness or assets (including securities, but excluding cash
dividends or distributions paid out of earned surplus); or (iv) the sale of
Common Stock at a price, or the issuance of options, warrants or
convertible securities with an exercise or conversion price per share, less
than the lower of the then current Conversion Price or the then current
market price of the Common Stock (except upon (a) exercise of the
Underwriters' Warrants or (b) the issuance of Common Stock or options to
employees, officers, directors, stockholders or consultants pursuant to the
Plan or any other stock plans, provided that, in the case of all such stock
plans, including the Plan, the aggregate amount of Common Stock issued
thereunder does not exceed 15% of the number of shares of Common Stock then
outstanding after giving effect to the conversion, exchange or exercise of
all securities convertible, exchangeable or exercisable for Common Stock
including the Convertible Preferred Stock then outstanding). No adjustment
in the Conversion Price will be required until cumulative adjustments
require an adjustment of at least 5% in the Conversion Price. No
fractional shares will be issued upon conversion, but any fractions will be
adjusted in cash on the basis of the then current market price of the
Common Stock. Payment of accumulated and unpaid dividends will be made
upon conversion to the extent of legally available funds. The right to
convert the Convertible Preferred Stock terminates on the date fixed for
redemption.
In case of any consolidation or merger to which the Company is a
party (other than a consolidation or merger in which the Company is the
surviving party and the Common Stock is not changed or exchanged), or in
case of any sale or conveyance of all or substantially all the property and
assets of the Company, each share of Convertible Preferred Stock then
outstanding will be convertible from and after such merger, consolidation
or sale or conveyance of property and assets into the kind and amount of
shares of stock or other securities and property receivable as a result of
such consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock into which such share of Convertible Preferred Stock
could have been converted immediately prior to such merger, consolidation,
sale or conveyance.
OPTIONAL CASH REDEMPTION. The Company may, at its option, redeem the
Convertible Preferred Stock, in whole or in part, upon 30 days prior
written notice at any time after ___________ , 2000 [three years after the
date of this Prospectus] at a redemption price of $10.00 per share, plus
accumulated and unpaid dividends, if the Market Price of the Common Stock
(as defined below) equals or exceeds $15.00 per share (150% of the initial
offering price per share of Common Stock) for at least 20 consecutive
trading days ending not more than 10 trading days prior to the date of the
notice of redemption. The term "Market Price" means the closing sale price
as reported by the principal securities exchange on which the Common Stock
is listed or admitted to trading, or by the Nasdaq National Market or, if
not traded thereon, the closing bid price as reported by the Nasdaq
SmallCap Market or, if not quoted thereon, the high bid price on the OTC
Bulletin Board or in the National Quotation Bureau sheet listing for the
Common Stock, or, if not listed therein, as determined in good faith by the
Board of Directors.
In addition, the Company may, at its option, redeem the Convertible
Preferred Stock in whole or in part, at any time after ___________ , 2001
[four years after the date of this Prospectus] at the redemption prices set
forth below, plus accumulated and unpaid dividends:
REDEMPTION
PRICE
DATE OF REDEMPTION PER SHARE
------------------ ---------
, 2001 to , 2002 . . . . . . . . . . $12.50
------- ------
, 2002 to , 2003 . . . . . . . . . . $12.00
------- -------
, 2003 to , 2004 . . . . . . . . . . $11.50
------- -------
, 2004 and thereafter . . . . . . . . . . . $10.00
-------
PROVISIONS RELATING TO OPTIONAL CASH REDEMPTION. Notice of
redemption must be mailed to each holder of Convertible Preferred Stock to
be redeemed at his last address as it appears upon the Company's registry
books at least 30 days prior to the date fixed for redemption (the
"Redemption Date"); provided that if the Company shall
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not have funds legally available for the redemption of the shares to be
redeemed on the Redemption Date, the notice of redemption shall be null
and void and the Redemption Date shall not occur. On and after
the Redemption Date, dividends will cease to accumulate on shares of
Convertible Preferred Stock called for redemption.
On or after the Redemption Date, holders of Convertible Preferred
Stock which have been redeemed shall surrender their certificates
representing such shares to the Company at its principal place of business
or as otherwise specified in the notice of redemption or exchange and
thereupon either (i) the redemption price of such shares shall be payable
to the order of, or (ii) the shares of Common Stock shall be issued, in the
event of conversion to Common Stock prior to the Redemption Date, to the
person whose name appears on such certificate or certificates as the owner
thereof. Holders of Convertible Preferred Stock may elect to convert such
shares into Common Stock at any time prior to the Redemption Date.
From and after the Redemption Date, all rights of the holders of
redeemed shares shall cease with respect to such shares and such shares
shall not thereafter be transferred on the books of the Company or be
deemed to be outstanding for any purpose whatsoever.
VOTING RIGHTS. The holders of Convertible Preferred Stock are not
entitled to vote, except as set forth below and as provided by applicable
law. On matters subject to a vote by holders of Convertible Preferred
Stock, the holders are entitled to one vote per share.
The affirmative vote of at least a majority of the shares of
Convertible Preferred Stock, voting as a class, shall be required to
authorize, effect or validate the creation and issuance of any class or
series of stock ranking superior to or on parity with the Convertible
Preferred Stock with respect to the declaration and payment of dividends or
distribution of assets on liquidation, dissolution or winding-up. In the
event that the Company has the right to redeem the Convertible Preferred
Stock, no such vote is required if, prior to the time such class is issued,
provision is made for the redemption of all shares of Convertible Preferred
Stock and such Convertible Preferred Stock is redeemed on or prior to the
issuance of such class.
In the event that the Company fails to pay any dividends for four
consecutive quarterly dividend payment periods, the holders of the
Convertible Preferred Stock, voting separately as a class, shall be
entitled to elect one director. Such right will be terminated as of the
next annual meeting of stockholders of the Company following payment of all
accrued dividends.
LIQUIDATION. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, before any payment
or distribution of the assets of the Company (whether capital or surplus),
or the proceeds thereof, may be made or set apart for the holders of Common
Stock or any stock ranking junior to Convertible Preferred Stock, the
holders of Convertible Preferred Stock will be entitled to receive, out of
the assets of the Company available for distribution to stockholders, a
liquidating distribution of $10.00 per share, plus any accumulated and
unpaid dividends. If, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the assets of the Company are
insufficient to make the full payment of $10.00 per share, plus all
accumulated and unpaid dividends on the Convertible Preferred Stock and
similar payments on any other class of stock ranking on a parity with the
Convertible Preferred Stock upon liquidation, then the holders of
Convertible Preferred Stock and such other shares will share ratably in any
such distribution of the Company's assets in proportion to the full
respective distributable amounts to which they are entitled.
A consolidation or merger of the Company with or into another
corporation or sale or conveyance of all or substantially all the property
and assets of the Company will not be deemed to be a liquidation,
dissolution or winding-up, voluntary or involuntary, of the Company for the
purposes of the foregoing. See "Conversion."
MISCELLANEOUS. The Company is not subject to any mandatory
redemption or sinking fund provision with respect to the Convertible
Preferred Stock. The holders of the Convertible Preferred Stock are not
entitled to preemptive rights to subscribe for or to purchase any shares or
securities of any class which may at any time be
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issued, sold or offered for sale by the Company. Shares of Convertible
Preferred Stock redeemed or otherwise reacquired by the Company shall
be retired by the Company and shall be unavailable for subsequent
issuance as any class of the Company's Preferred Stock.
SECTION 203 OF DELAWARE LAW
Section 203 of the Delaware Law prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction
in which the person became an interested stockholder, unless (i) prior to
the date of the business combination, the transaction is approved by the
board of directors of the corporation; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock, or (iii) on or after such date, the business
combination is approved by the board of directors and by the affirmative
vote of at least 66-2/3% of the outstanding voting stock that is not owned
by the interested stockholder. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
stockholder. An "interested stockholder" is a person, who, together with
affiliates and associates, owns (or within three years, did own) 15% or
more of the corporation's voting stock. Section 203 may have a depressive
effect on the market price of the Common Stock and/or the Convertible
Preferred 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 and/or the Convertible Preferred
Stock.
SPECIAL MEETING OF STOCKHOLDERS. The Certificate provides 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 provides
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 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
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close of business on the tenth day following the day on which notice of
the date of the meeting was 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 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 provides 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 Transfer Agent and Registrar for the Common Stock and the
Convertible Preferred Stock is 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 Securities, the availability of Securities for
sale or the exercise of the Underwriters' Warrants will have on the market
price of the Common Stock and Convertible Preferred Stock prevailing from
time to time. Nevertheless, sales of substantial amounts of Common Stock
or Convertible Preferred Stock of the Company, or the perception that such
sales could occur, 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 Offering, the Company will have outstanding
15,950,000 shares of Common Stock. Of these shares, 1,200,000 shares of
Common Stock, representing all of the shares sold in the Offering, 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 14,750,000 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 if they are registered
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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 one-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 159,500 shares after
giving effect to the 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 two-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.
The Company and the Selling Stockholders have agreed not to, directly
or indirectly, offer, sell, transfer, pledge, assign, hypothecate or
otherwise encumber any shares of Common Stock or securities convertible
into Common Stock, whether or not owed, or otherwise dispose of any
interest in such securities under Rule 144 or otherwise for a period of 13
months following the date of this Prospectus without the prior written
consent of the Representative; provided, that issuance and exercise of
stock options under the Plan, certain sales or transfers by the Selling
Stockholders and certain restricted transfers to and by the estate of the
Selling Stockholders are permitted. The sale or issuance, or the potential
for sale or issuance, of Common Stock during or after such 13-month period
could have an adverse impact on the market price of the Common Stock and
Convertible Preferred Stock offered hereby. In addition, certain of the
Underwriters hold Underwriters' Warrants which entitle them to purchase an
aggregate of up to approximately 228,334 shares of the Company's Common
Stock (including approximately 108,334 shares of Common Stock to be
acquired upon conversion of the 130,000 shares of Convertible Preferred
Stock which may be acquired upon exercise of the Underwriters' Warrants).
The Underwriters' Warrants are exercisable for a period of four years,
commencing one year after their issuance. The Company has agreed that,
under certain circumstances, it will use its best efforts to register the
Underwriters' Warrants and/or the underlying Common Stock for sale in the
public market. The issuance of Common Stock pursuant to the exercise of
the Underwriters' Warrants, the sale of such Common Stock or the potential
for such issuance or sale of Common Stock could have an adverse impact on
the market price of the Common Stock and Convertible Preferred Stock
offered hereby.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Reid & Priest LLP, counsel to the Company, the
material federal income tax consequences of acquiring, owning and disposing
of the Convertible Preferred Stock, the Common Stock and the Warrants are
as follows, subject to the qualifications set forth in the two immediately
following paragraphs.
This discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, and Internal Revenue Service
(the "IRS") rulings and judicial decisions now in effect, all of which are
subject to change at any time by legislative, judicial or administrative
action; any such changes could be retroactively applied in a manner that
could adversely affect a holder of the Convertible Preferred Stock or
Common Stock. The following does not discuss all of the tax consequences
that may be relevant to a purchaser in light of particular circumstances or
to purchasers subject to special rules, such as foreign investors,
retirement trusts, and life insurance companies. No information is
provided with respect to foreign, state or local tax laws, estate or gift
tax considerations, or other tax laws that may be applicable to particular
categories of investors.
The discussion assumes that purchasers of the Convertible Preferred
Stock or Common Stock will hold the Convertible Preferred Stock or Common
Stock as a "capital asset" within the meaning of Code Section 1221.
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PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS AS TO ANY FEDERAL,
STATE, LOCAL AND FOREIGN OR OTHER TAX CONSIDERATIONS RELEVANT TO THEM.
DISTRIBUTIONS
Distributions with respect to the Convertible Preferred Stock and the
Common Stock will be treated as dividends and taxable as ordinary income to
the extent that the distributions are made out of the Company's current or
accumulated earnings and profits. To the extent that a distribution is not
made out of the Company's current or accumulated earnings and profits, the
distribution will not constitute a dividend, will not be eligible for the
dividends received deduction and will constitute a non-taxable return of
capital to the extent described below under "Non-Taxable Distributions."
The Company has advised that it had a deficit in earnings and profits as of
January 31, 1997. The treatment of distributions with respect to the
Convertible Preferred Stock and Common Stock will be determined by the
Company's future earnings and profits.
Under certain circumstances, the operation of the conversion price
adjustment provisions of the Convertible Preferred Stock (or its non-
operation) may result in the holders of Convertible Preferred Stock (or in
some circumstances, holders of Common Stock) being deemed to have received
a constructive distribution, which may be taxable as a dividend, even
though the holders do not actually receive cash or property.
Under Code Section 305 and the Treasury regulations thereunder, if a
redemption price of preferred stock that is subject to optional redemption
by the issuer exceeds its issue price, the entire amount of the redemption
premium can be treated as being distributed to the holders of such stock if
redemption is more likely than not to occur. Such distributions would be
taxable as described above on an economic accrual basis over the period
from issuance of the preferred stock until the date the stock is most
likely to be redeemed. Because the Company does not have a redemption
option with respect to the Convertible Preferred Stock the exercise of
which would reduce the yield to the Company on such stock, the Company
intends to take the position that the redemption premium accrual rules are
not applicable with respect to the Convertible Preferred Stock.
NON-TAXABLE DISTRIBUTIONS
To the extent that distributions are received with respect to the
Common Stock and Convertible Preferred Stock in excess of such stocks'
ratable share of the Company's current or accumulated earnings and profits,
such distributions will reduce the holder's adjusted tax basis in the
shares of Convertible Preferred Stock or Common Stock held. To the extent
that such non-taxable distributions exceed the basis of the shares in
respect of which the distribution is made, the excess distribution will be
treated as proceeds from the disposition of the shares under the rules
described under "Disposition" below. Because the tax basis of the shares
is reduced by/ any non-taxable distributions, the holder of such shares
would incur a greater gain or less loss upon the disposition or redemption
of such shares.
TAXABLE DISTRIBUTIONS TO INDIVIDUALS
Distributions to individual holders of Convertible Preferred Stock
and Common Stock that are treated as dividends under the rules set forth
above will be taxable as ordinary income to them when received or accrued
in accordance with their method of accounting. Dividend income of
individuals (and certain closely held corporations and personal service
corporations as defined in Code Section 469(j)) may not be offset by losses
or credits from "passive activities," such as losses or credits incurred in
connection with certain rental activities or the ownership of limited
partnership interests.
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TAXABLE DISTRIBUTIONS TO CORPORATIONS
Corporate stockholders will be eligible to claim a dividends-received
deduction (currently 70% of the amount of the dividend for most corporate
stockholders) with respect to distributions that are treated as dividends
on the Convertible Preferred Stock and Common Stock in calculating their
taxable income.
Under Code Section 246(c), the dividends-received deduction will not
be available with respect to any dividend on the shares of Convertible
Preferred Stock and Common Stock if such shares have been held for 45 days
or less (or 90 days or less if the holder of the shares of Convertible
Preferred Stock received dividends with respect to the shares of
Convertible Preferred Stock which are attributable to a period or periods
aggregating in excess of 366 days). The holding period of the shares of
Common Stock and Convertible Preferred Stock for this purpose is determined
in accordance with certain specific rules set forth in Code Section 246(c),
which reduces the holding period for any period where the holder's risk of
loss, as to such stock, is diminished by certain arrangements, such as the
holding of an option to sell the same, or substantially identical,
securities.
Code Section 246A provides a further restriction on the availability
of the dividends-received deduction on the shares of Convertible Preferred
Stock and Common Stock if the shares are classified as "debt-financed
portfolio stock." The shares of Common Stock and Convertible Preferred
Stock will be classified as debt-financed portfolio stock when the holder
incurs indebtedness directly attributable to the investment in the shares
of Common Stock and Convertible Preferred Stock. In that event, the
dividends-received deduction would be reduced to take into account the
average amount of such indebtedness.
A corporate shareholder will be required to reduce its basis in
shares of the Convertible Preferred Stock and Common Stock (but not below
zero) by the amount of any "extraordinary dividend" which is not taxed
because of the dividends-received deduction if such holder is not
considered to have held such stock for more than two years before the
"dividend announcement date," within the meaning of Code Section 1059. The
amount, if any, by which such reduction exceeds the corporate shareholder's
basis in such shares will be treated as gain on the subsequent sale or
disposition of the stock. With respect to the Convertible Preferred Stock,
an "extraordinary dividend" would be a dividend that (i) equals or exceeds
5% of the holder's adjusted basis in the Convertible Preferred Stock or 10%
in the Common Stock (treating all dividends having ex-dividends dates
within an 85-day period as a single dividend) or (ii) exceeds 20% of the
holder's adjusted basis in the stock (treating all dividends having ex-
dividend dates within a 365-day period as a single dividend). If an
election is made by the holder, under certain circumstances the fair market
value of the stock as of the day before the ex-dividend date may be
substituted for the holder's basis in applying these tests. An
"extraordinary dividend" would also include any amount treated as a
dividend in the case of a redemption of the Convertible Preferred Stock and
the Common Stock that is non-pro rata as to all shareholders, without
regard to the period the holder held the stock.
Special rules apply with respect to "qualified preferred dividends."
A qualified preferred dividend is any fixed dividend payable with respect
to preferred stock which (i) provides for fixed preferred dividends payable
no less often than annually and (ii) is not in arrears as to dividends when
acquired, provided the actual rate of return as determined under Section
1059(e)(3) of the Code, on such stock does not exceed 15%. Where a
qualified preferred dividend exceeds the 5% or 20% limitation described
above, (1) the extraordinary dividend rules will not apply if the taxpayer
hold the stock for more than five years, and (2) if the taxpayer disposes
of the stock before it has been held for more than five years, the
aggregate reduction in basis will not exceed the excess of the qualified
preferred dividends paid on such stock during the period held by the
taxpayer over the qualified preferred dividends which would have been paid
during such period on the basis of the stated rate of return as determined
under Section 1059(e)(3) of the Code. The length of time that a taxpayer
is deemed to have held stock for the purposes of the extraordinary dividend
rules is determined under principles similar to those applicable for
purposes of the dividends-received deduction discussed above.
A corporate holder may be required to include in determining its
alternative minimum taxable income an amount equal to a portion of any
dividends-received deduction allowed in computing regular taxable income.
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DISPOSITION
Except as described above, the holder of Convertible Preferred Stock
or Common Stock will recognize gain or loss upon the sale, exchange,
redemption, retirement or other disposition of such securities measured by
the difference between (a) the amount of cash and the fair market value of
property received and (b) the holder's adjusted tax basis in the security
disposed of. Any gain or loss on such sale, exchange, redemption,
retirement or other disposition will be long-term capital gain provided the
holding period of the security being disposed of exceeds one year. For
corporate taxpayers, long-term capital gains are taxed at the same rate as
ordinary income. For individual taxpayers, net capital gains (the excess
of the taxpayer's net long-term capital gains over his net short-term
capital losses) are subject to a maximum tax rate of 28%. The
deductibility of capital losses are restricted and, in general, may only be
used to reduce capital gains to the extent thereof. However, individual
taxpayers may deduct $3,000 of capital losses in excess of their capital
gains. Capital losses which cannot be utilized because of the
aforementioned limitation are, for corporate taxpayers, carried back three
years and, in most circumstances, carried forward for five years; for
individual taxpayers, capital losses may only be carried forward but
without a time limitation.
OPTIONAL CASH REDEMPTION
In the event the Company exercises its right to redeem the
Convertible Preferred Stock, the surrender of the Convertible Preferred
Stock for the redemption proceeds by the holders will be treated as a sale
or exchange and the surrendering holder will recognize capital gain or loss
equal to the difference between the redemption proceeds (other than
proceeds attributable to declared but unpaid dividends, which will be taxed
as dividends as described above) and the holder's adjusted tax basis in the
Convertible Preferred Stock, provided the redemption (1) results in a
"complete termination" of the holder's stock interest in the Company
(inclusive of any Common Stock owned) under Section 302(b)(3) of the Code,
(2) is "substantially disproportionate" with respect to the holder under
Section 302(b)(2) of the Code, (3) is "not essentially equivalent to a
dividend" with respect to the holder under Section 302(b)(1) of the Code,
or (4) is from a noncorporate holder in partial liquidation of the Company
under Section 302(b)(4) of the Code. The constructive ownership rules of
the Code must be taken into consideration in determining whether any of
these tests has been met. If a redemption of the Convertible Preferred
Stock does not meet any of these tests, then the gross proceeds received
would be treated as a distribution taxable to the holder in the manner
described under "Distributions" above.
CONVERSION
Conversion of the Convertible Preferred Stock into Common Stock will
not result in the recognition of gain or loss (except with respect to cash
received in lieu of fractional shares). The holder's adjusted tax basis in
the Common Stock received upon conversion would be equal to the holder's
tax basis in the shares of Convertible Preferred Stock converted, reduced
by the portion of such basis allocable to the fractional share interest
exchanged for cash. The holding period for the Common Stock received upon
conversion would include the holding period of the Convertible Preferred
Stock converted. The payment of accumulated and unpaid dividends in
respect of Convertible Preferred Stock that is converted to Common Stock
will be taxable in accordance with the rules discussed under
"Distributions" above.
BACKUP WITHHOLDING
A holder of any of the Convertible Preferred Stock or Common Stock
may be subject to backup withholding at the rate of 31% with respect to
dividends thereon unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact,
or (b) provides a correct taxpayer identification number, certifies as to
no loss of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. Further, a holder
who does not provide the Company with a correct taxpayer identification
number may be subject to penalties imposed by the IRS in addition to the
backup withholding. Any amount paid as backup withholding will be
creditable against the holder's Federal income tax
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liability. Holders should consult their tax advisors regarding
their qualification for exemption from backup withholding and
the procedure for obtaining any applicable exemptions.
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and
conditions of the Underwriting Agreement (the "Underwriting Agreement"), to
purchase from the Company and the Selling Stockholders, and the Company and
the Selling Stockholders have agreed to sell to the Underwriters on a firm
commitment basis, the respective number of shares of Common Stock and
Convertible Preferred Stock set forth opposite their names:
NUMBER OF NUMBER OF SHARES
SHARES OF OF CONVERTIBLE
UNDERWRITERS COMMON STOCK PREFERRED STOCK
---------------------- ---------------- --------------------
National Securities
Corporation . . . . . . .
------------- -------------
Total . . . . . . . . . . 1,200,000 1,300,000
============ ==============
The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Stockholders.
The Underwriters are committed to purchase all the shares of Common
Stock and Convertible Preferred Stock offered hereby, if any of such
Securities are purchased. Under certain circumstances, the commitments of
non-defaulting Underwriters may be increased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to
conditions precedent specified therein.
Princeton Equity Securities, Inc. ("Princeton") may participate in the
Offering as an underwriter or dealer. Princeton may not have sufficient
net capital on deposit with its clearing broker to participate in this
Offering. To facilitate the participation by Princeton in this Offering,
the Company may loan up to $3.5 million to Princeton which Princeton would
deposit with its clearing broker. It is anticipated that any such loan
would be payable on demand and would be repaid within 45 days after the
completion of this Offering. The Company also has loaned $81,607 to
Princeton. This loan is required to be repaid on demand by the Company and
bears no interest.
The Company has been advised by the Representative that the
Underwriters propose initially to offer the Securities to the public at the
initial public offering prices set forth on the cover page of this
Prospectus and to certain dealers at such prices less concessions not in
excess of $ per share of Common Stock and $ per share of
Convertible Preferred Stock. Such dealers may reallow a concession not in
excess of $ per share of Common Stock and $ per share of
Convertible Preferred Stock to certain other dealers. After the
commencement of the Offering, the public offering price, concession and
reallowance may be changed by the Representative. The Representative has
informed the Company that it does not expect sales to discretionary
accounts by the Underwriters to exceed five percent of the Common Stock
offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof. The Company and the Selling
Stockholders have also agreed to pay to the Representative a non-
accountable expense allowance equal to 2.15% of the gross proceeds derived
from the sale of the Securities offered hereby, of which $50,000 has been
paid to date. The Representative has agreed to pay certain expenses of the
Offering, including printing and miscellaneous selling expenses incurred
after April 7, 1997.
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The Company and the Selling Stockholders have granted to the
Underwriters the Over-allotment Option, exercisable during the 45-day
period from the date of this Prospectus, to purchase from the Company up to
an additional 142,500 shares of Common Stock and up to 195,000 shares of
Convertible Preferred Stock and to purchase from the Selling Stockholders
up to an additional 37,500 shares of Common Stock at the initial public
offering price per share offered hereby, less underwriting discounts and
the non-accountable expense allowance. Such option may be exercised only
for the purpose of covering over-allotments, if any, incurred in the sale
of the Securities offered hereby. To the extent such option is exercised
in whole or in part, each Underwriter will have a firm commitment, subject
to certain conditions, to purchase the number of the additional shares of
Securities proportionate to its initial commitment. In the event and to
the extent that such over-allotment option is partially exercised in
respect of Common Stock, approximately 80% of all such shares of Common
Stock purchased shall be purchased from the Company and approximately 20%
of such purchases shall be from the Selling Stockholders.
The Company and the Selling Stockholders have agreed not to, directly
or indirectly, offer, sell, transfer, pledge, assign, hypothecate or
otherwise encumber any shares of Common Stock or securities convertible
into Common Stock, whether or not owned, or otherwise dispose of any
interest in such securities for a period of 13 months following the date of
this Prospectus without the prior written consent of the Representative;
provided, that issuances of shares of Common Stock or options to purchase
Common Stock under the Plan, certain private sales or transfers by each of
the Selling Stockholders of up to 10% of his shares of Common Stock to not
more than five individuals and certain restricted transfers to and by the
estates of the Selling Stockholders are permitted. An appropriate legend
shall be marked on the face of certificates representing all such
securities.
In connection with this Offering, the Company has agreed to sell to
the Representative, at a price of $.0001 per warrant, the Underwriters'
Warrants to purchase from the Company up to 120,000 shares of Common Stock
and up to 130,000 shares of Convertible Preferred Stock. To the extent any
Underwriter or selected dealer sells in excess of $1.0 million of
Securities, it shall be permitted to participate, on a pro rata basis, in
the Underwriters' Warrants. The Underwriters' Warrants are initially
exercisable at a price of $16.50 per share (165% of the initial public
offering price per share of Common Stock and the Convertible Preferred
Stock, respectively) for a period of four years, commencing one year after
the date of this Prospectus and are restricted from sale, transfer,
assignment or hypothecation for a period of 12 months from the date of this
Prospectus, except to officers of the Representative. The Representative
has agreed to assign a pro rata share of the Underwriters' Warrants to each
Underwriter or selected dealer entitled to participate therein after the
expiration of the 12-month period. The Underwriters' Warrants provide for
adjustment in the number of securities issuable upon the exercise thereof
as a result of certain subdivisions and combinations of the Common Stock
and the Convertible Preferred Stock, respectively. The Underwriters'
Warrants contain anti-dilution provisions providing for the adjustment of
the exercise price and the number of shares of Common Stock and the
Convertible Preferred Stock, respectively issuable upon exercise of the
Underwriters' Warrants upon the occurrence of certain events. The
Underwriters' Warrants grant to the holders thereof certain rights of
registration under the Securities Act of the securities issuable upon
exercise thereof.
The Company has agreed to pay, upon completion of this Offering, to
Norbert J. Zeelander the sum of $250,000, as a finder's fee in connection
with his introduction of the Company to the Representative. Mr. Zeelander
is not affiliated with the Company, the Representative or any other member
of the National Association of Securities Dealers, Inc.
Although the Representative has been in business for over 40 years,
the Representative has participated in only 18 public offerings as an
underwriter, all in the last 18 months. In evaluating an investment in the
Company, prospective purchasers of the Securities offered hereby should
consider the Representative's limited experience.
Prior to this Offering, there has been no public market for the
Securities. Consequently, the public offering prices of the Securities and
the terms of the Convertible Preferred Stock were determined based upon
negotiations between the Company and the Representative and do not
necessarily bear any relationship to the Company's asset value, net worth,
or other established criteria of value. Among the factors considered in
determining the price were
77
<PAGE>
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 Securities can be resold at their offering prices,
if at all. Purchasers of the Securities will be exposed to a
substantial risk of a decline in the market prices of the
Securities after the Offering, if a market develops.
The Underwriters may engage in permitted passive market making
transactions whereby the Underwriter shall effect transactions in an
eligible security at a price that exceeds the highest independent bid for
the eligible security at the time of the transaction.
The Underwriters may engage in transactions that stabilize, maintain,
or otherwise affect the price of the Convertible Preferred Stock and the
Common Stock, including (i) syndicate covering transactions, which consist
of the placing of any bid or the effecting of any purchase on behalf of the
Underwriters to reduce a short position created in connection with the
Offering; (ii) penalty bids, which permit the Representative to reclaim
from an Underwriter a selling concession accruing to such Underwriter in
connection with the Offering when securities originally sold by such
Underwriter are purchased in syndicate covering transactions; and (iii)
short sales, by which the Underwriters sell securities which they do not
own at the time that the sale transaction becomes a binding obligation.
The foregoing is a summary of the principal terms of the Underwriting
Agreement described above. Reference is made to a copy of such agreement
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part for a more complete description thereof. See
"Additional Information."
LEGAL MATTERS
The validity of the issuance of the Securities offered hereby will be
passed upon for the Company by the law firm of Reid & Priest LLP, New York,
New York, as counsel to the Company in connection with this Offering.
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, New York, New York,
has acted as counsel to the Underwriters in connection with this Offering.
EXPERTS
The consolidated financial statements of the Company as of January 31,
1996 and 1997 and for each of the three years in the period ended January
31, 1997, included in this Prospectus and Registration Statement have been
audited by Deloitte & Touche LLP, independent accountants, as set forth in
their report 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.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington D.C., a Registration Statement under the
Securities Act with respect to the Securities offered hereby. This
prospectus, filed as a part of the Registration Statement, does not contain
certain information set forth in or annexed as exhibits to the Registration
Statement. For further information regarding the Company and the
Securities offered hereby, reference is made to the Registration Statement
and to the exhibits filed as a part thereof, which may be inspected at the
office of the Commission without charge or copies of which may be obtained
therefrom upon request to the Commission and payment of the prescribed fee.
With respect to each contract, agreement or other document referred to in
this Prospectus and filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the
matter involved.
78
<PAGE>
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, will file reports and other information with the
Commission. Reports, proxy statements and other information filed by the
Company, including the Registration Statement and the exhibits filed as a
part thereof, can be inspected and copied at the public reference
facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W. Washington, D.C. 20549, at the following regional offices: New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York
10048, and Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a
World Wide Web site (http://www.sec.gov) that contains reports, proxy
statements and other information filed electronically by the Company,
including the Registration Statement.
79
<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, 1996 and 1997 F-3
Consolidated Statements of Operations for the Years ended
January 31, 1995, 1996 and 1997 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended January 31, 1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1995, 1996 and 1997 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, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31,
1997. 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, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years in the period ended January 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
--------------------------
DELOITTE & TOUCHE LLP
New York, New York
April 28, 1997
F-2
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share data)
-------------------------------------------------------------------------
JANUARY 31,
-----------------------------
1996 1997
----------- ----------
ASSETS
Cash and cash equivalents . . . . . . . . . $17,961 $14,111
Notes and receivables net . . . . . . . . . 223,736 221,931
Investments in partnerships . . . . . . . . 2,607 3,056
15,251 22,095
Other assets net . . . . . . . . . . . . . ------ ------
Total Assets . . . . . . . . . . . . . $259,555 $261,193
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans and accrued interest payable . . . $140,094 $142,628
Construction loan payable . . . . . . . . . -- 2,750
Notes and commissions payable . . . . . . . 1,684 1,716
Other liabilities . . . . . . . . . . . . . 4,018 4,393
79,442 78,171
Deferred income . . . . . . . . . . . . . . ------ ------
225,238 229,658
Total liabilities . . . . . . . . . . . . . ------ ------
Commitments and contingencies
Stockholders' equity
Preferred Stock, $.0001 par value
authorized, 15,000,000 shares;
none issued and outstanding . . . . . . . . -- --
Common Stock, $.01 par value authorized,
40,000,000 shares; issued
and outstanding, 15,000,000 shares . . . . 150 150
Paid-in capital . . . . . . . . . . . . . . 34,167 53,853
-- (22,468)
Accumulated deficit . . . . . . . . . . . .
------ ------
34,317 31,535
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . ------ ------
Total liabilities and $259,555 $261,193
and stockholders' equity ========= =========
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,
-----------------------
1995 1996 1997
---- ---- ----
Revenues:
Sales . . . . . . . . . . . . . $23,413 $32,804 $36,965
Syndication fee income . . . . 5,587 8,603 7,690
Deferred income earned . . . . 3,518 9,140 4,093
Interest income . . . . . . . . 9,503 12,689 13,773
Property management fees
from related parties . . . . . 4,360 4,379 3,171
Equity in earnings from
partnerships . . . . . . . . 276 356 423
1,013 --
Other income . . . . . . . . . ------- -------- --------
46,657 68,984 66,115
-------- -------- --------
Cost and Expenses:
Cost of sales . . . . . . . . . 21,514 27,406 31,470
Selling . . . . . . . . . . . . 6,002 7,664 7,176
Interest . . . . . . . . . . . 13,610 15,808 16,394
General and administrative . . 6,450 7,871 7,796
Property management
expense . . . . . . . . . . . 238 604 3,627
Loss on impairment of
notes and receivables . . . . -- -- 18,442
Officers' compensation . . . . 1,200 1,200 1,200
Depreciation and 2,290 2,620 3,331
amortization . . . . . . . . -------- -------- --------
51,304 63,173 89,436
-------- -------- --------
Income (loss) before
provision (benefit) for
income taxes . . . . . . . . . (4,647) 5,811 (23,321)
Provision (benefit) for -- -- --
income taxes . . . . . . . . . -------- -------- --------
Net income (loss) . . . . . . . . (4,647) 5,811 (23,321)
Pro forma income tax (1,859) 2,324 --
provision (benefit) . . . . . . -------- -------- --------
$(2,788) $3,487 $(23,321)
Pro forma net income (loss) . . . ========= ======== ========
Pro forma earnings (loss) $(.19) $.23 $(1.55)
per common share . . . . . . . ======== ======== ========
Pro forma weighted average 15,000 15,000 15,000
common shares used . . . . . . ======== ======== ========
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1995, 1996 AND 1997
(In Thousands)
-------------------------------------------------------------------------
Stockholders' equity, January $36,739
31, 1994 . . . . . . . . . . .
Net loss . . . . . . . . . . (4,647)
Dividends . . . . . . . . . . (1,886)
--------
Stockholders' equity, January 30,206
31, 1995 . . . . . . . . . . .
Net income . . . . . . . . . 5,811
Dividends . . . . . . . . . . (1,700)
--------
Stockholders' equity, January 34,317
31, 1996 . . . . . . . . . . .
Net loss . . . . . . . . . . (23,321)
Capital Contribution . . . . 21,333
Dividends . . . . . . . . . (794)
--------
Stockholders' equity, January $31,535
31, 1997 . . . . . . . . . . . ========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
-----------------------------------------------------------------------
Years ended January 31,
-----------------------
1995 1996 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . $(4,647) $5,811 $(23,321)
-------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization and depreciation . . . . 2,290 2,620 3,331
Loss on impairment of notes and
receivables . . . . . . . . . . . . -- -- 18,442
Deferred income earned . . . . . . . (3,518) (9,140) (4,093)
Adjustment for changes in assets and
liabilities:
Accrued interest income on notes
receivable and receipt of notes
receivable . . . . . . . . . . . . 174 (2,560) 1,530
(Increase) decrease in notes and
receivables . . . . . . . . . . . . 7,223 (1,162) 3,166
Increase (decrease) in commissions
payable . . . . . . . . . . . . . . (501) (244) 211
Increase (decrease) in other
liabilities . . . . . . . . . . . . (506) 2,018 375
Increase in deferred income . . . . . 632 3,627 2,822
-------- -------- --------
5,794 (4,841) 25,784
-------- -------- --------
Net cash provided by operating 1,147 970 2,463
activities . . . . . . . . . . . -------- -------- --------
Cash flows from investing activities:
Increase in investments . . . . . . . . (591) (567) (449)
-------- -------- --------
Net cash used by investing (591) (567) (449)
activities . . . . . . . . . . . . -------- -------- --------
Cash flows from financing activities:
Decrease in loans payable . . . . . . . (31,311) (39,326) (55,340)
Increase in loans and accrued interest
payable . . . . . . . . . . . . . . . 44,014 52,065 57,874
Increase in construction loan payable . -- -- 2,750
Increase in other assets . . . . . . . (7,180) (2,790) (10,175)
Payments of notes payable . . . . . . . (2,578) (1,641) (179)
Dividends . . . . . . . . . . . . . . . (1,886) (1,700) (794)
-------- -------- --------
Net cash provided (used) in 1,059 6,608 (5,864)
financing activities . . . . . . . -------- -------- --------
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . 1,615 7,011 (3,850)
Cash and cash equivalents, beginning of 9,335 10,950 17,961
period . . . . . . . . . . . . . . . . . -------- -------- --------
Cash and cash equivalents, end of period $10,950 $17,961 $14,111
======== ======== ========
Supplemental information:
Interest paid . . . . . . . . . . . . . $12,914 $16,922 $16,739
======== ======== ========
Non cash capital contribution . . . . . -- -- $21,333
======== ======== ========
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1995, 1996 AND 1997
(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 certain principal stockholders of the Company (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 were transferred
at historical cost. The reorganization was effective as of April 1,
1996 and accordingly, accumulated deficit represents results of
operations subsequent to that date. 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 (i) has filed a Restated Certificate of Incorporation on
March 13, 1997 that provides for, among other things, the
authorization of 40,000,000 shares of Common Stock and 15,000,000
shares of Preferred Stock, (ii) on March 13, 1997 effected an
approximate 1,626.19-for-1 stock split of the issued and outstanding
Common Stock and (iii) adopted a Stock Option Plan reserving for
issuance up to 2,500,000 shares of Common Stock pursuant to stock
options and other stock awards.
LINE OF BUSINESS - 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. 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. 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.
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,
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 profit recognized has been reduced by the
maximum reasonably possible exposure to loss. Revenue from sales of
interests in partnerships includes any syndication fees earned by the
Company. 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, for such five-year period, the Company is
required to pay to the Adult Living Owning Partnerships, amounts
sufficient to fund (i) any operating cash deficiencies and (ii) any
part of such guaranteed return not paid from cash flow from the
related property (which the Adult Living Owning Partnerships
distribute to the Investing Partnerships for distribution to limited
partners). 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
F-7
<PAGE>
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. Such deferred income liability represents the maximum
reasonably possible exposure to loss as discussed above. 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 an
individual 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
expected Initial Cash Flow for that 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 (the amount of any such excess being
recognized as "property management expense"). 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, "property management fees".
The Company accounted for the sales of 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 until cash is
received. Losses on these projects were 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 and other partnership receivables, if any, to the value of
the underlying property less any encumbrances to determine if an
allowance is required for impairment. Interest income on multi-family
notes is recognized as cash is collected.
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.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include those of the Company and its subsidiaries. The effects of all
significant intercompany transactions have been eliminated.
DEFERRED LOAN COSTS - Costs incurred in connection with obtaining
long-term financing have been deferred 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 are deferred. Such costs include the capitalization
of interest during the construction period. If a project is
discontinued or capitalized costs are deemed not recoverable, the
applicable deferred project costs are expensed.
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 estimated life
of the underlying partnership.
F-8
<PAGE>
PROPERTY 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 - 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 Selling Stockholders who were the sole
shareholders and partners of those entities.
EARNINGS PER SHARE - The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" in February 1997. This pronouncement establishes standards for
computing and presenting earnings per share, and is effective for the
Company's Fiscal 1997 year-end financial statements. The Company's
management has determined that this standard will not have a
significant impact on the Company's computation or presentation of net
income per common share.
3. 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.
4. NOTES AND RECEIVABLES
Notes and other receivables are from related parties and consist of
the following:
January 31,
-----------
1996 1997
---- ----
Notes receivable - multi-family
(a)(f) . . . . . . . . . . . . $174,025 $174,164
Notes and accrued interest
receivable
- Adult living (b) . . . . . . 3,228 3,906
Other partnership receivables
(c)(f) . . . . . . . . . . . . 52,295 53,154
Mortgages (d) . . . . . . . . . 7,188 --
-- 816
Accrued interest receivable . .
-------- --------
236,736 232,040
Less allowance for uncollectible 13,000 10,109
receivables (e) . . . . . . . . -------- --------
$223,736 $221,931
======== ========
At January 31, 1996 and 1997 the carrying value of impaired notes
receivable, net of related deferred income, were approximately $48,900
and $34,742, respectively. Interest income on impaired notes is
recognized on the cash basis. Such income recognized was $2,272 and
$1,926 for the years ended January 31, 1996 and 1997, respectively.
(a) 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 partnership interests. At
January 31, 1997, 51 of the 169 notes (approximate face value
$29,600) 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. The Company
expects that it may need to extend maturities of other multi-
family notes. Interest income on these notes amounted to $6,764
and $6,949 for the years ended January 31, 1996 and 1997,
respectively.
(b) 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 partnership 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.
Limited Partners are allowed to prepay their capital
contributions. These prepayments of capital contributions do not
result in the prepayment of the related purchase notes held by
the Company. Instead, such amounts are loaned to the Company
F-9
<PAGE>
at a rate of between 11% and 12% by the Investing Partnerships.
As a result of such loans and the crediting provisions of the
related 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.
(c) Other partnership receivables substantially represent
reimbursable expenses and advances made to the multi-family
partnerships. These amounts do not bear interest and have no
specific repayment date. It is the Company's intention to
collect these notes from the excess cash flows distributed by the
related multi-family properties and the proceeds in the event of
a sale or refinancing.
(d) The mortgages bore interest at rates ranging from 8% to 9%. The
mortgages were generally collateralized by a mortgage lien on the
related adult living communities. As of January 31, 1997 all
mortgage receivables were paid in full.
(e) Allowance of Uncollectible Receivables:
Balance at Charged to Deductions Balance at
Beginning Costs and to End of
of Period Expenses Allowance Period
--------- ---------- --------- ------
Year Ended
January 31, 1996
Allowance for
notes
receivable $13,000,000 -- -- $13,000,000
Year Ended
January 31, 1997
Allowance for
notes
receivable $13,000,000 18,442,000 21,333,000 $10,109,000
The multi-family notes receivable relating to the nine Owning
Partnerships that filed petitions under Chapter 11 of the U.S.
Bankruptcy Code (the "Chapter 11 Petitions") and the one Owning
Partnership which is expected to lose its property pursuant to an
uncontested foreclosure sale of its property (said ten Owning
Partnerships are, collectively, the "Protected Partnerships")
were first deemed impaired when the mortgages on their respective
properties went into default, which defaults occurred between
August 1989 and June 1994. Once in default, the holders of these
mortgages assigned them to the United States Department of
Housing and Urban Development ("HUD"). The Protected
Partnerships then attempted to negotiate, and in some cases
obtained, workout agreements with HUD. Although it could
temporarily lower or suspend debt service payments during the
term of a workout agreement, HUD, unlike a conventional lender,
does not have the legal authority to restructure the defaulted
mortgages it holds by permanently lowering interest rates or
reducing the principal amount of such mortgages. HUD then sold
the mortgages (subject to those workout agreements which were in
place) at auctions in September 1995 and June 1996. Since the
new mortgage holders did not have HUD's legal constraints as to
the restructuring of mortgages they hold, the Protected
Partnerships began negotiations with the new holders to
restructure their mortgages or purchase them at a discount. The
new mortgage holders would not negotiate in good faith with the
Protected Partnerships and began to threaten and institute
foreclosure proceedings. The Selling Stockholders and one of
their affiliates transferred the interests they owned personally
in various partnerships that own multi-family properties (the
"Assigned Interests") to the Investing Partnerships that owned
interests in the Protected Partnerships in July 1996. Seven of
the Protected Partnerships filed Chapter 11 Petitions in August
1996, two of the Protected Partnerships filed Chapter 11
Petitions in February 1997, and one of the Protected Partnerships
did not file a Chapter 11 Petition and allowed the holder of the
mortgage to foreclose on its property due to the unlikelihood of
confirming a plan of reorganization. The Company established
appropriate reserves during these time periods to reflect the
varying extent of impairment of these Multi-Family Notes in view
of the state of facts at such time. In that the Selling
Stockholders transferred the Assigned Interests in July 1996, the
Company recorded a $21.3 million capital contribution in Fiscal
1996. The bankruptcy petitions and risk of loss faced by the
Protected Partnerships resulted in the Company recording a loss
of $18.4 million in the year ending January 31, 1997
(representing the recorded value of the notes receivable relating
to the Protected Partnerships, net of deferred income and net of
any previously established reserves) due to the deemed full
impairment of these notes receivable. The Company neither owns
nor manages these properties, nor is it the general partner of
these Owning Partnerships, but, rather, holds the related Multi-
Family Notes as receivables. The Company, therefore, has no
liability in connection with these mortgage defaults or
bankruptcy proceedings. As a result of the transfers by the
Selling Stockholders and their affiliate of the Assigned
Interests and the additional security provided thereby, the
F-10
<PAGE>
Company believes that the outcome of the bankruptcy proceedings
will not affect its ability to collect on these Multi-Family
Notes.
(f) The Multi-Family properties were typically built or acquired with
the assistance of programs administered by HUD that provide
mortgage insurance, favorable financing terms and/or rental
assistance payments to the owners. As a condition to the receipt
of assistance under these and other HUD programs, the properties
must comply with various HUD requirements including limiting
rents on these properties to amounts approved by HUD. Various
proposals are pending before Congress proposing reorganization of
HUD and a restructuring of certain of its housing assistance
programs. It is too early in the legislative process to predict
which, if any, changes might be implemented. Further, there can
be no assurance that changes in federal subsidies will not be
more restrictive than those currently proposed or that other
changes in policy will not occur. Any such changes could have an
adverse effect on the Company's ability to collect its
receivables from the partnerships owning multi-family properties.
5. OTHER ASSETS
Other assets are comprised as follows:
January 31,
-----------
1996 1997
---- ----
Deferred loan costs (a) . . . $ 7,994 $ 7,452
Investment in cooperative
apartment
building (b) . . . . . . . 1,854 1,782
Unsold subscription units (c) 595 1,176
Deferred registration costs
(d) . . . . . . . . . . . . . 833 2,357
Deferred project costs (e) . -- 6,742
Other assets . . . . . . . . 3,975 2,586
-------- --------
$15,251 $22,095
======== ========
(a) Financing costs of $3,578 and $2,588 were deferred during the
years ended January 31, 1996 and 1997, respectively. These costs
are being amortized using the straight-line method over periods
ranging from one to ten years.
(b) The Company owns shares in a cooperative apartment building and
owns interests in a second mortgage collateralized by such
cooperative apartment building.
(c) The Company has deferred $595 and $1,176 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 1997,
respectively. Upon completion of these transactions such costs
will be charged to cost of sales.
(d) The Company has capitalized costs relating to the initial public
offering. Upon the closing of the public 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.
(e) The Company has deferred 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-11
<PAGE>
6. LOANS AND ACCRUED INTEREST PAYABLE
Loans payable consists of the following:
January 31,
----------
1996 1997
---- ----
Banks (including mortgages) (a) (b) (c) . . $41,361 $32,044
Other, principally debentures (d) . . . . . 98,733 110,584
-------- --------
$140,094 $142,628
======== ========
(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 is payable 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 1997 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 mature 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. The remaining loan has been paid in full as of
January 31, 1997.
(c) The Company's debt obligations contain various covenants and
default provisions, including provisions relating to, in the
case of certain of such obligations, certain Investing
Partnerships, Owning Partnerships or affiliates of the
Company. Certain obligations contain provisions requiring
the Company to maintain a net worth of, in the most
restrictive case, $30,000,000, except that, under the
Capstone agreements the Company will be required to maintain
a net worth in an amount no less than 75% of the net worth
of the Company immediately after the closing of the public
offering. Certain obligations of the Company contain
covenants requiring the Company to maintain a debt for
borrowed money to consolidated net worth ratio of, in the
most restrictive case, no more than 5 to 1.
(d) Debentures are collateralized by various purchase notes and
investor notes related to multi-family property financing.
All loans mature in 1997 through 2004 and bear interest
rates of 11% to 15% per annum.
Future annual maturities, excluding interest, over the next five
years and thereafter, are as follows:
Year Ending
January 31
-----------
1998 . . . . . . . . . . $21,372
1999 . . . . . . . . . . 33,602
2000 . . . . . . . . . . 20,872
2001 . . . . . . . . . . 21,110
2002 . . . . . . . . . . 25,612
Thereafter . . . . . . . 19,221
-------
$141,789
Accrued interest . . . . 839
--------
$142,628
========
F-12
<PAGE>
7. OTHER LIABILITIES
Unearned income of $963 and $1,888 was recorded for the
amount of unsubscribed partnership interests in adult living
communities financed during the year ended January 31, 1996
and 1997, respectively. Upon full subscription these
amounts will be recognized as income.
8. DEFERRED INCOME
Deferred income is comprised of:
January 31,
-----------
1996 1997
---- ----
Multi-family . . . . . .$68,447 $67,453
Adult living(a) . . . . . 10,995 10,718
-------- --------
$79,442 $78,171
======== ========
a. The aggregate amount of guaranteed return obligations
for each of the fiscal years 1997 through 2002 based on
existing management contracts is $15.1 million, $13.8
million, $15.1 million, $13.3 million, $7.4 million and
$300,000, respectively. Such amounts of guaranteed
return obligation are calculated based upon paid-in
capital contributions of limited partners as of January
31, 1997 with respect to fiscal 1997 and remaining
scheduled capital contributions with respect to fiscal
years 1998 through 2002. 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.
9. INCOME TAXES
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 increased the
valuation allowance from $3,214 to $4,540, because it was
uncertain that such deferred tax assets in excess of
deferred tax liabilities would be realizable in future
years. 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:
January 31,
-----------
Deferred tax assets: 1996 1997
---- ----
Notes and receivables . . . . . . $8,920 $8,904
Accrued expenses and other 1,257 89
liabilities . . . . . . . . . . . .
Investment in partnerships . . . 89 1,337
Net operating loss carryforward . -- 1,339
-------- --------
Total gross deferred tax assets . 10,266 11,669
Less valuation allowance . . . . 3,214 4,540
-------- --------
Deferred tax assets net of 7,052 7,129
valuation allowance . . . . . . . . -------- --------
Deferred tax liabilities:
Deferred income . . . . . . . . . 4,560 4,272
Other assets . . . . . . . . . . 2,492 2,857
-------- --------
Total gross deferred tax 7,052 7,129
liabilities . . . . . . . . . . . . -------- --------
Net deferred tax assets $ - $ -
(liabilities) . . . . . . . . . . . ======== ========
F-13
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
The Company rents office space under a lease expiring February
1998. Annual base rent under such lease is approximately $197.
The Company entered into a ten year lease for additional office
space, commencing September 1, 1991. The annual base rent is
approximately $150 and will increase 5% each year for ten years.
On February 16, 1995, an investor in certain securities issued by
the Company and certain Investing Partnerships filed a lawsuit in
a Wisconsin state court against the sales representative, the
broker/dealer employing the sales representative (the "Broker"),
neither of whom are affiliated with the Company and the Company
alleging that the sales representative, as agent of the Broker,
and the Broker, as agent of the Company, fraudulently induced the
investor to purchase such securities. There are no allegations
that the Company, or its officers, directors or employees,
engaged in any improper sales practices or misrepresentations.
The plaintiffs in Bond, et al. v. Henning, et al., which was
removed to and is currently pending before the United States
District Court for the Eastern District of Wisconsin, are seeking
(i) rescission of the sale of approximately $2.0 million of
securities and (ii) unspecified damages. The Company filed a
Motion to Dismiss which, on August 21, 1996, the Magistrate Judge
recommended that the District Court deny. A notice of appeal and
objections to the Magistrate Judge's recommendation was filed by
the Company in the District Court. The Company believes the
lawsuit is without merit and is vigorously contesting the case.
It is anticipated that the outcome of the lawsuit will not have a
material effect on the Financial Statements.
11. 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.
In addition, the Company has amounts due from unconsolidated
affiliates of $248 and $262 as of January 31, 1996 and 1997,
respectively.
The Company has included in Cost of Sales amounts necessary to
fund operating cash deficiencies of Owning Partnerships pursuant
to management contracts for the years ending January 31, 1995,
1996 and 1997 of $731, $1,600 and $1,878 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 held note receivables, aggregating $106.7 million net of
deferred income, at January 31, 1997 that were collateralized 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 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 31 of the 32
Owning Partnerships which owned the 32 adult living communities,
one nursing home and one residential apartment complex which the
Company operates. The Company also is the general partner for 26
of the 37 Investing Partnerships that own 98.5% to 99%
partnership interests in these Owning Partnerships. In addition,
the Company was the managing agent for all of the 32 adult living
communities, one nursing home and one residential apartment
complex in the Company's portfolio. The Company has financed the
acquisition of adult living communities and other properties
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, nursing home and residential apartment complex.
F-14
<PAGE>
========================================
UNTIL , 1997 (25 DAYS AFTER
THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING 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 UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIP-
TIONS.
-------------------------------------
TABLE OF CONTENTS
PROSPECTUS SUMMARY . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . 11
USE OF PROCEEDS . . . . . . . . . . 24
DIVIDEND POLICY . . . . . . . . . . 24
CAPITALIZATION . . . . . . . . . . 26
DILUTION . . . . . . . . . . . . . 27
SELECTED CONSOLIDATED
FINANCIAL DATA . . . . . . . . 28
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . 30
BUSINESS . . . . . . . . . . . . . 44
MANAGEMENT . . . . . . . . . . . . 59
CERTAIN TRANSACTIONS . . . . . . . 63
PRINCIPAL AND SELLING
STOCKHOLDERS . . . . . . . . . 65
DESCRIPTION OF CAPITAL STOCK . . . 66
SHARES ELIGIBLE FOR FUTURE SALE . . 71
CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS . . . . . . 72
UNDERWRITING . . . . . . . . . . . 76
LEGAL MATTERS . . . . . . . . . . . 78
EXPERTS . . . . . . . . . . . . . . 78
AVAILABLE INFORMATION . . . . . . . 78
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS . . . . . F-1
------------------------------------
NO DEALER, SALESPERSON OR OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS 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 PRO-
SPECTUS, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS
IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
========================================
========================================
GRAND COURT
LIFESTYLES, INC.
1,300,000 Shares of
% Senior Convertible
Redeemable Preferred Stock
and
1,200,000 Shares
of
Common Stock
------------
PROSPECTUS
------------
NATIONAL SECURITIES
CORPORATION
, 1997
-----
========================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Offering
The following table sets forth the estimated expenses to be
incurred in connection with the issuance and distribution of the
Securities being registered. All expenses will be borne by the
Company, except that (i) the Selling Stockholders will pay a 10% pro
rata share of the non-accountable expense allowance and (ii) the
Representative will pay certain expenses of the Offering incurred
after April 7, 1997.
Amount
------
Securities and Exchange
Commission
registration fee . . . . $32,374.71
NASDAQ National Market
listing fee . . . . . . . . 50,000
Accounting fees and expenses 1,650,000*
Legal fees and expenses . . 1,100,000*
Printing and engraving 100,000*
expenses . . . . . . . . .
Non-accountable expense 537,500*
allowance . . . . . . . . .
Finders fees . . . . . . . 250,000
Blue Sky fees and expenses 21,000*
Transfer agent and registrar
fees and expenses .. . . . 3,000*
Miscellaneous . . . . . . . 13,625.29*
-------------
Total . . . . . . . . $3,757,500.00
=============
---------------------
* estimated
Item 14. Indemnification of Directors and Officers
Article IX of the Company's Restated Certificate of Incorporation
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 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."
II-1
<PAGE>
Article X of the Company's By-Laws 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 pro-
ceeding, 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.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 31, 1994, the Company issued Debentures
in three series, bonds in two series and notes in two series, with
interest rates ranging from 11% to 13.125%, and maturity dates from
1997 to 2004 in an aggregate principal amount of $45,333,002. 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%.
II-2
<PAGE>
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, 1994, there were 18 such limited partnership
offerings for an aggregate of $178,050,000. 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 15,000,000 shares of Common Stock to
Messrs. Luciani and Rodin in exchange for assets having an aggregate
value of $33,273,000. This offering was issued in reliance on
exemptions from the registration requirements under the 1933 Act under
Section 4(2) of such act.
In connection with the Offering contemplated by this
Registration Statement, as additional compensation to the several
Underwriters and selected dealers, the Company intends to issue
warrants to the Underwriters to purchase from the Company up to
120,000 shares of Common Stock and 130,000 shares of Convertible
Preferred Stock at a price equal to 165% of the per share price to the
public of the common Stock and the Convertible Preferred Stock,
respectively, exercisable over a period of four years commencing one
year after the effective date of this Registration Statement. These
warrants will be issued in reliance on exemptions from the
registration requirements under the 1933 Act under Section 4(2) of
such act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
*1.1 - Form of Underwriting Agreement.
*1.2 - Form of Registration Rights/Warrant Agreement
*1.3 - Form of Agreement Among Underwriters
*1.4 - Form of Selected Dealer Agreement
*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.
*2.1(c) - Third 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(d) - Fourth 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(e) - Fifth 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.
II-3
<PAGE>
2.1(f) - Sixth 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.
*4.1 - Form of certificate of designation, preferences and
rights of Convertible Preferred Stock.
*5(a) and.8 Opinion of Reid & Priest LLP.
*10.1 - 1996 Stock Option and Performance Award Plan.
*10.2(a) - Loan Agreements dated as of November 25, 1996, by and
between Leisure Centers LLC-1 and Bank United relating
to financing of the Corpus Christi, Texas property.
*10.2(b) - Guaranty Agreement, dated as of November 25, 1996,
between the Company and Bank United relating to
financing of the Corpus Christi, Texas property.
*10.2(c) - Loan Agreement, dated as of January 29, 1997, by and
between Leisure Centers LLC-1 and Bank United relating
to financing of the Temple, Texas property.
*10.2(d) - Guaranty Agreement, dated as of January 29, 1997,
between the Company and Bank United relating to the
financing of the Temple, Texas property.
*10.3 - Master Development Agreement dated September 18, 1996
between Capstone Capital Corp. and 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.
II-4
<PAGE>
*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.
*10.9(a) - First Amendment to Assumption Agreement dated as of
September 10, 1996 among Sterling National Bank &
Trust, the Company, Bernard M. Rodin and John Luciani.
*10.10(a) - Form of 13.125% Retirement Financing Notes - III, due
October 31, 2001.
*10.10(b) - Form of 13.125% Retirement Financing Notes - IV, due
March 31, 2002.
*10.11(a) - Bank Agreement dated as of September 6, 1996 between
the Bank of New York and the Company with respect to
13.125% Retirement Financing Notes - III.
*10.11(b) - Bank Agreement dated as of October 22, 1996 between the
Bank of New York and the Company with respect to
13.125% Retirement Financing Notes - IV.
*12 - Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividends of the Company.
21 - List of Subsidiaries of the Company.
*23.1 - Consent of Reid & Priest LLP (included in Exhibit 5(a)
and 8 hereto).
23.2 - Consent of DELOITTE & TOUCHE LLP.
*24 - Power of Attorney.
27.1 - Financial Data Schedule for the period ended
January 31, 1997.
---------------------
* Previously filed.
II-5
<PAGE>
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;
(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 volume of securities offered (if the
total dollar value of securities offered would not exceed
that which was registered) and any deviation from the
estimated maximum offering may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in 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; and
(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 such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(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) The undersigned registrant hereby undertakes to provide
to the Representative, at the closing specified in the
Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Representative 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-6
<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 Boca Raton, the State of Florida, on
May 15, 1997.
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 May 15, 1997
----------------------- Board of Directors
John Luciani and
Chief Executive
Officer (Principal
Executive
Officer)
/s/ Bernard M. Rodin * President and Chief May 15, 1997
----------------------- Operating Officer
Bernard M. Rodin and Director
(Principal
Executive Officer)
/s/ John W. Luciani, III* Executive Vice May 15, 1997
------------------------- President and
John W. Luciani, III Director
/s/ Paul Jawin Chief Financial May 15, 1997
----------------------- Officer (Principal
Paul Jawin Financial Officer
and Principal
Accounting Officer)
/s/ Walter Feldesman * Director May 15, 1997
-----------------------
Walter Feldesman
/s/ Leslie E. Goodman * Director May 15, 1997
-----------------------
Leslie E. Goodman
By: */s/ Paul Jawin
-------------------
Paul Jawin,
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
-------------
No. Description
--------- -------------------
2.1(f) - Sixth 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.
21 - List of Subsidiaries of the Company.
23.2 - Consent of DELOITTE & TOUCHE LLP.
27.1 - Financial Data Schedule for the period ended
January 31, 1997.
Exhibit 2.1(f)
SIXTH AMENDMENT TO CONSOLIDATION AGREEMENT
This Sixth Amendment ("Sixth Amendment") to the Consolidation
Agreement dated as of the 1st day of April, 1996 (the "Consolidation
Agreement") between Grand Court Lifestyles, Inc., a Delaware corporation
("Grand Court"), party of the first part, and John Luciani and Bernard M.
Rodin (the "Transferring Shareholders") and J&B Management Company, a New
Jersey partnership (the "Company"), parties of the second part, is made as
of the 1st day of April, 1996. Capitalization terms not defined herein
shall have the meanings ascribed to them in the Consolidation Agreement.
W I T N E S S E T H:
- - - - - - - - - -
Whereas, Grand Court, the Transferring Shareholders and the Company
entered into the Consolidation Agreement;
Whereas, Grand Court, the Transferring Shareholders and the Company
desire to amend Schedule 1.2 of the Agreement by this Sixth Amendment
relating to the transfer of interests in Grand Court Lifestyles Payroll
Corp. by the Transferring Shareholders to Grand Court;
Accordingly, the parties hereto agree as follows:
ARTICLE I
Stock and Interests Acquired by Buyer
Schedule 1.2 is hereby amended to include immediately after clause (i)
thereof new clause (j):
(j) interests in Grand Court Lifestyles Payroll Corp., a Delaware
corporation
ARTICLE II
Miscellaneous
Except as herein specifically amended, all of the terms, provisions
and conditions of the Consolidation Agreement shall continue to remain in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Sixth
Amendment to be duly executed as of the day and year first above written.
/s/ John Luciani /s/ Bernard M. Rodin
-------------------------- ------------------------------
John Luciani Bernard M. Rodin
J&B MANAGEMENT COMPANY
/s/ John Luciani /s/ Bernard M. Rodin
-------------------------- -----------------------------
By: John Luciani, Partner By: Bernard M. Rodin, Partner
GRAND COURT LIFESTYLES, INC.
/s/ John Luciani /s/ Bernard M. Rodin
--------------------------- ------------------------------
By: John Luciani, President By: Bernard M. Rodin, Vice-President
Exhibit 21
LIST OF SUBSIDIARIES
FOR
GRAND COURT LIFESTYLES, INC.
1. Grand Court Development Corp., a Delaware Corporation
2. Grand Court Facilities, Inc., a Delaware Corporation
3. Grand Court Facilities, Inc., II, a Delaware Corporation
4. Grand Court Facilities, Inc., III, a Delaware Corporation
5. Grand Court Facilities, Inc., IV, a Delaware Corporation
6. Grand Court Facilities, Inc., V, a Delaware Corporation
7. Grand Court Facilities, Inc., VI, a Delaware Corporation
8. Grand Court Facilities, Inc., VII, a Delaware Corporation
9. Grand Court Facilities, Inc., VIII, a Delaware Corporation
10. Grand Court Facilities, Inc., IX, a Delaware Corporation
11. Grand Court Facilities, Inc., X, a Delaware Corporation
12. Grand Court Facilities, Inc., XI, a Delaware Corporation
13. Grand Court Facilities, Inc., XII, a Delaware Corporation
14. Grand Court Facilities, Inc., XIII, a Delaware Corporation
15. Grand Court Facilities, Inc, XIV, a Delaware Corporation
16. Grand Court Facilities, Inc., XV, a Delaware Corporation
17. Grand Court Facilities, Inc., XVI, a Delaware Corporation
18. Grand Court Facilities, Inc., XVII, a Delaware Corporation
19. Grand Court Facilities, Inc., XVIII, a Delaware Corporation
20. Grand Court Facilities, Inc., XIX, a Delaware Corporation
21. Grand Court Facilities, Inc., XX, a Delaware Corporation
22. Grand Court Lifestyles Payroll Corp., a Delaware Corporation
23. J&B Financing, LLC, a Delaware Limited Liability Company
24. Leisure Centers, LLC-I, a Texas Limited Liability Company
25. Leisure Centers, LLC-II, a Texas Limited Liability Company
26. Leisure Centers, LLC-III, a Texas Limited Liability Company
27. Leisure Centers, LLC-IV, a Texas Limited Liability Company
28. Leisure Facilities, Inc., a Delaware Corporation
29. Leisure Facilities, Inc., II, a Delaware Corporation
30. Leisure Facilities, Inc., III, a Delaware Corporation
31. Leisure Facilities, Inc., IV, a Delaware Corporation
32. Leisure Facilities, Inc., V, a Delaware Corporation
33. Leisure Facilities, Inc., VI, a Delaware Corporation
34. Leisure Facilities, Inc., VII, a Delaware Corporation
35. Leisure Facilities, Inc., IX, a Delaware Corporation, doing
business in Texas under the fictitious name of Liberty
Place, Inc.
36. Leisure Facilities, Inc., X, a Delaware Corporation
37. Leisure Facilities, Inc., XII, a Delaware Corporation
38. Leisure Facilities, Inc. XV, a Delaware Corporation
39. T Lakes L.C., a Florida Limited Liability Company
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
Grand Court Lifestyles, Inc.
Boca Raton, Florida
We consent to the use in this Post-Effective Amendment No. 1 to the
Registration Statement (No. 333-05955) of Grand Court Lifestyles, Inc.
on Form S-1 of our report dated April 28, 1997, appearing in the
Prospectus, which is part of this Post-Effective Amendment No. 1 to
the Registration Statement and to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
May 15, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JAN-31-1997
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<RECEIVABLES> 232,040
<ALLOWANCES> 10,109
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<TOTAL-ASSETS> 261,193
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0
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<TOTAL-LIABILITY-AND-EQUITY> 261,193
<SALES> 36,965
<TOTAL-REVENUES> 66,115
<CGS> 31,470
<TOTAL-COSTS> 7,176
<OTHER-EXPENSES> 34,396
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<INTEREST-EXPENSE> 16,394
<INCOME-PRETAX> (23,321)
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