AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1997
REGISTRATION NO. 333-05955
==========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 5
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 industrial (I.R.S. employer
jurisdiction of classification code number) identification
incorporation or number)
organization)
------------------------------------------
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, (212) 801-9200
New York 10022
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 3,162,500 $10.00 $17,250,000 None
value per share shares(3)
--------------------------------------------------------------------------
Preferred Stock, $.0001 1,725,000 $10.00 $17,250,000 None
par value per share shares
--------------------------------------------------------------------------
Common Stock, $.01 par 275,000 $16.50 $2,475,000 None
value per share shares(4)(5)
--------------------------------------------------------------------------
Preferred Stock, $.0001 150,000 $16.50 $2,475,000 None
par value 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 1,437,500 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 125,000 shares of Common Stock issuable upon conversion of
the Convertible Preferred Stock issuable upon exercise of the
Representative's 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
Representative's Warrants.
(6) Represents shares of Convertible Preferred Stock issuable upon
exercise of Representative's 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 MARCH 10, 1997
1,500,000 SHARES OF % SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND
1,500,000 SHARES OF COMMON STOCK
GRAND COURT LIFESTYLES, INC.
This Prospectus relates to an offering (the "Offering") of (a)
1,500,000 shares of % Senior Convertible Redeemable Preferred Stock,
$.0001 par value, and $10.00 liquidation preference per share (the
"Convertible Preferred Stock") and (b) 1,500,000 shares of Common Stock,
$.01 par value per share ("Common Stock") of Grand Court Lifestyles, Inc.
(the "Company"), of which 1,200,000 shares are being sold by the Company
and 300,000 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 March , 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 March ,
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 April 30, 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
wtih respect to 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
has been approved for listing on the Nasdaq National Market under the
symbol "GCLI," subject to certain conditions. The Company has applied for
listing of the Convertible Preferred Stock on the Nasdaq National Market
under the symbol "GCLIP."
AN INVESTMENT IN THE SECURITIES INVOLVES SUBSTANTIAL RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 10 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 PROCEEDS TO
TO SELLING
PRICE TO UNDERWRITING COMPANY(2) STOCKHOLDERS
PUBLIC DISCOUNTS(1) (3) (2)(3)
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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 March , 1997.
----------------------------------------
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is March , 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
REGISTRAITON 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 National
Securities Corporation, the representative of the several Underwriters
(the "Representative"), in the form of (i) 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) warrants
to purchase from the Company up to 150,000 shares of Common Stock and
150,000 shares of Convertible Preferred Stock ("Representative's
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 (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 $2,915,000.
All expenses of the Offering will be paid by the Company, except that
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.
(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 225,000 additional shares of Common
Stock, of which up to 180,000 shares will be sold by the Company and
up to 45,000 shares will be sold by the Selling Stockholders, and up
to 225,000 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 WTIH 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 8.5%, the mid-point in the range for the dividend rate
of between 8% and 9%. Other than in the consolidated financial statements,
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 will occur on the date of this Prospectus.
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 4,646 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 offering 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, 1996 and the nine months ended October 31, 1996, the Company paid
approximately $917,000 and $4.0 million, respectively, with respect to
guaranteed return obligations, and paid approximately $1.6 million and $1.6
million, respectively, 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
-1-
<PAGE>
to utilize cash generated by the Company to meet its guaranteed return
obligations. 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. The aggregate amount of guaranteed return
obligations for each of the fiscal years 1996 through 2002 based on
existing management contracts is $12.4 million, $14.8 million, $13.7
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, 1996 with respect to fiscal 1996 and remaining scheduled capital
contributions (as adjusted to reflect certain property refinancings
that resulted in the return of capital to limited partners) with respect
to fiscal years 1997 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 amount of the prepayments received upon the closings of
the sales of limited partnership interests in Investing Partnerships, as a
percentage of total sales revenue and syndication fee income, averaged
63.9% in fiscal 1993, 64.6% in fiscal 1994, 52.6% in fiscal 1995 and 54.7%
for the nine months ended October 31, 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
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 October 31, 1996, the Company had approximately $23.8 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 10.51% 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
controlling interests in Owning Partnerships which own multi-family
properties. As of October 31, 1996, the recorded value, net of deferred
income, of multi-family notes was $106.5 million. All but $348,000 of the
$52.6 million of "Other Partnership Receivables" recorded on the Company's
Consolidated Balance Sheet as of October 31, 1996 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 Selling Stockholders and one
of their affiliates have assigned certain interests they owned personally
to the Investing Partnerships which own controlling interests in the
Protected Partnerships, which assigned interests provide additional
security for the multi-family notes issued to the Company by such Investing
Partnerships. The Company has recorded a loss for the nine months ended
October 31, 1996 in the amount of $18.4 million, representing the recorded
value, net of deferred income and net of any previously established
reserves, due to the impairment of these multi-family notes. As a result
of the transfers by the Selling Stockholders and their affiliate of these
assigned interests to the Investing Partnerships that issued such multi-
family
-2-
<PAGE>
notes, the Company recorded a contribution to capital in the amount
of $21.3 million and the recorded value of such multi-family notes remains
unchanged. The Company believes that it will collect these multi-family
notes due to the additional security provided by the assigned interests.
There are 17 remaining Owning Partnerships which own multi-family
properties that are in default of their mortgages. As of October 31, 1996,
the recorded value, net of deferred income, of the multi-family notes and
"Other Partnership Receivables" held by the Company in said properties was
$33.8 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 such other Owning Partnerships that own multi-family
properties that are in default on 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 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 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 4,646 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 to eight existing
communities over the next two years. The Company has recently acquired an
adult living community in Mesa, Arizona containing 166 apartment units and
has entered into contracts to acquire one adult living community in Winter
Haven, Florida containing 133 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 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. 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
-3-
<PAGE>
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. In addition,
there can be no assurance that the Company will not suffer delays or cost
overruns in instituting 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.
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
January 24, 1997 at its existing adult living communities of approximately
91%. In addition, the Company plans to use the common facility design of
its prototype and its "The Grand Court" trademarked name to promote
recognition of its properties nationally. The Company focuses exclusively
on "Private-pay" residents who pay for housing or related services out of
their own funds, rather than relying on the few states that have enacted
legislation which enables assisted-living facilities to receive Medicaid
funding similar to funding generally provided to skilled nursing
facilities. The Company believes this "Private-pay" focus will allow the
Company to increase rental revenues as demographic pressure increases
demand for adult living facilities and to avoid potential financial
difficulties it might encounter if it were dependent on Medicaid or other
reimbursement programs that may be scaled back as a result of health care
reform, budget deficit reduction or other pending or future state or
Federal government initiatives.
Grand Court Lifestyles, Inc. is a Delaware corporation formed in 1996
to consolidate substantially all of the assets of its predecessors, J&B
Management Company, Leisure Centers, Inc., and their affiliates. Unless
the context otherwise indicates, all references to the Company include
Grand Court Lifestyles Inc., its subsidiaries and predecessors. The
Company's principal executive offices are located at 2650 N. Military
Trail, Suite 350, Boca Raton, Florida 33431 and its telephone number is
(561) 997-0323.
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<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.}
-5-
<PAGE>
THE OFFERING
Securities Offered(1) 1,500,000 shares of Convertible
Preferred Stock and 1,500,000 shares of
Common Stock
Common Stock to be sold by
the Company(1) 1,200,000 shares
Common Stock to be sold by
Selling Stockholders(1) 300,000 shares
Convertible Preferred Stock to be
Sold by the Company(1) 1,500,000 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 16,200,000 shares of Common Stock;
1,500,000 shares of Convertible
Preferred Stock
Giving effect to full conversion
of the Convertible Preferred
Stock 17,450,000 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 April 30, 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 March
, 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 March , 2001, at the
cash redemption prices set forth herein,
plus
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<PAGE>
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 such
proceeds for working capital and general
corporate purposes and (ii) the balance
of approximately $19.1 million to
finance development of new adult living
communities.
_____________
(1) Excludes a maximum of 180,000 additional shares of Common Stock to be
sold by the Company, a maximum of 225,000 additional shares of
Convertible Preferred Stock to be sold by the Company and a maximum of
45,000 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".
-7-
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data and other data)
The summary consolidated financial data have been taken or derived
from, and should be read in conjunction with, the Company's consolidated
financial statements and the related notes thereto, and the capitalization
data included elsewhere in this Prospectus. The results of operations for
an interim period have been prepared on the same basis as the year end
financial statements and, in the opinion of management, contain all
adjustments, consisting of only normally recurring adjustments, necessary
for a fair presentation of the results of operations for such period. The
results of operations for an interim period may not give a true indication
of results for the full year. See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED JANUARY 31, (AS RESTATED)(6)
------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ----- -----
STATEMENT OF OPERATIONS
DATA:
Revenues:
Sales . . . . . . . . $17,200 $18,170 $21,807 $23,413 $32,804
Syndication Fee Income 5,888 6,484 7,654 5,587 8,603
Deferred income earned 253 792 6,668 3,518 9,140
Interest income . . . 25,584 13,209 13,315 9,503 12,689
Property management
fees from related
parties . . . . . . 499 560 3,899 4,360 4,379
Equity in
Earnings/Loss from
Partnership . . . . 16 129 206 276 356
- - - - 1,013
Other income . . . . . ------- ------- -------- ------- --------
49,440 39,344 53,549 46,657 68,984
------- ------- -------- ------- --------
Costs and expenses:
Cost of sales . . . . 15,972 14,411 26,876 21,514 27,406
Selling . . . . . . . 6,256 7,027 6,706 6,002 7,664
Interest . . . . . . . 14,021 11,874 10,991 13,610 15,808
General and
administrative . . . 5,836 5,617 5,226 6,450 7,871
Property Management
Expense . . . . . . . - - 45 238 604
Loss on Impairment of
Receivables . . . . . - - - - -
Officers'
Compensation(1) . . . 1,200 1,200 1,200 1,200 1,200
Depreciation and 412 975 1,433 2,290 2,620
amortization . . . . ------ ------- ------- ------- --------
43,697 41,104 52,477 51,304 63,173
------ ------- ------- ------- --------
Income (loss) before
provision for income
taxes . . . . . . . . 5,743 (1,760) 1,072 (4,647) 5,811
Provision for income - - - - -
taxes . . . . . . . . ------- ------ ------- ------- ---------
Net income (loss) 5,743 (1,760) 1,072 (4,647) 5,811
Pro-forma income tax 2,297 (704) 429 (1,859) 2,324
provisions (benefit)(2)
------- ------ ------- ------- ---------
Pro-forma net income $3,446 $(1,056) $ 643 $(2,788) $ 3,487
(loss)(2) . . . . . . ======= ======= ======= ======== =========
Pro-forma earnings
(loss) per common $ .23 $(.07) $ .04 $ (.19) $ .23
share(2) . . . . . . ======= ======= ======= ======== =========
Pro-forma weighted
average common shares 15,000 15,000 15,000 15,000 15,000
used . . . . . . . . ======= ======= ======= ======== ========
Ratio of earnings to
combined fixed charges
and preferred stock 1.40 - 1.09 - 1.32
dividends . . . . . ======= ======= ======= ======== ========
Deficiency in combined
fixed charges and
preferred stock - 1,760 - 4,647 -
dividends . . . . . ====== ======= ======= ======== ========
OTHER DATA:
Adult living
communities
operated (end of 9 14 18 24 28
period) . . . . . . ======= ======= ======= ======== ========
Number of units (end 1,639 2,336 2,834 3,683 4,164
of period) . . . . . ======= ======= ======= ======== ========
Average occupancy 83.3% 90.6% 90.4% 89.3% 94.7%
percentage (3) . . ======== ======= ======= ======== ========
NINE MONTHS ENDED
OCTOBER 31,
-------------------------
1995 1996
---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales . . . . . . . . . . . . . $22,986 $22,232
Syndication Fee Income . . . . 5,819 4,976
Deferred income earned . . . . 6,855 -
Interest income . . . . . . . . 9,137 11,043
Property management fees from
related parties . . . . . . 3,324 2,420
Equity in Earnings/Loss from
Partnership . . . . . . . . 269 250
943 -
Other income . . . . . . . . . ------ --------
49,333 40,921
------ --------
Costs and expenses:
Cost of sales . . . . . . . . . 19,844 17,493
Selling . . . . . . . . . . . . 5,413 4,603
Interest . . . . . . . . . . . 11,636 12,017
General and administrative . . 5,419 5,687
Property Management Expense . . 320 2,791
Loss on Impairment of
Receivables . . . . . . . . . - 18,442
Officers' Compensation(1) . . . 900 900
1,886 2,539
Depreciation and amortization . ------- --------
45,418 64,472
------- --------
Income (loss) before provision for
income taxes . . . . . . . . . 3,915 (23,551)
- -
Provision for income taxes . . . ------ --------
Net income (loss) 3,915 (23,551)
Pro-forma income tax provisions 1,566 (2,093)
(benefit)(2) . . . . . . . . . ------ --------
$ 2,349 $(21,458)
Pro-forma net income (loss)(2) . ======== ========
Pro-forma earnings (loss) per $ .16 $ (1.43)
common share(2) . . . . . . . . ======== ========
Pro-forma weighted average 15,000 15,000
common shares used . . . . . . ======== ========
Ratio of earnings to combined
fixed charges and preferred 1.29 -
stock dividends . . . . . . . . ======== ========
Deficiency in combined fixed
charges and preferred stock - 23,776
dividends . . . . . . . . . . . ======== ========
OTHER DATA:
Adult living communities 26 29(4)
operated (end of period) . . ======== ========
3,920 4,119(4)
Number of units (end of period) ======== ========
Average occupancy 94.9% 92.3%
percentage (3) . . . . . . . ======== ========
-8-
<PAGE>
AS OF JANUARY 31, (AS RESTATED)(6)
-----------------------------------------
1992 1993 1994 1995 1996
----- ----- ----- ----- ----
BALANCE SHEET
DATA:
Cash and cash
equivalents . . $3,477 $6,455 $9,335 $10,950 $17,961
Notes and
receivables-
net . . . . . 230,760 234,115 227,411 220,014 223,736
Total assets . 240,842 250,648 248,386 248,085 259,555
Total
liabilities . 191,234 203,990 211,647 217,879 225,238
Stockholders'
equity . . . 49,608 46,658 36,739 30,206 34,317
AS OF OCTOBER 31, 1996
------------------------
ACTUAL ADJUSTED(5)
------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents
$8,860 $30,985
Notes and receivables-net
224,377 224,377
Total assets . . . . . . 255,315 277,440
Total liabilities . . . . 224,010 224,010
Stockholders' equity . . 31,305 53,430
------------------------
(1) John Luciani and Bernard M. Rodin, the Chairman of the Board and
President, respectively, of the Company received dividends and
distributions from the Company's predecessors but did not receive
compensation. Officers' Compensation is based upon the aggregate
compensation currently received by such officers, $600,000 a year for
each such officer. Amounts received by such officers in excess of
such amount are treated as dividends for purposes of the Company's
financial statements. In the first nine months of 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) Three adult living communities containing 527 units in the aggregate
were acquired by the Company after
October 31, 1996.
(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."
(6) Subsequent to the issuance of the Company's fiscal 1995 Consolidated
Financial Statements, the Company discovered that a mathematical error
had occurred in the calculation of the Company's initial investment in
partnerships. As a result, the Company's Consolidated Financial
Statements have been restated from the amounts previously reported to
reflect the correction of this error.
-8-
<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 $23.6 million for the fiscal years ended January 31, 1993 and
1995 and the nine months ended October 31, 1996, 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 guaranty 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 October 31, 1996 the Company had approximately $137.9 million
principal amount of debt, excluding accrued interest of $900,000 ("Total
Debt"), at an average interest rate of 11.90% per annum. Of the principal
amount of Total Debt, $9.4 million becomes due in the fiscal year ending
January 31, 1997; $22.9 million becomes due in the fiscal year ending
January 31, 1998; $32.8 million becomes due in the fiscal year ending
January 31, 1999; $17.6 million becomes due in the fiscal year ending
January 31, 2000; $18.8 million becomes due in the fiscal year ending
January 31, 2001, and the balance of $36.4 million becomes due thereafter.
Of the Total Debt, $77.9 million principal amount were debentures
("Debenture Debt") issued in eleven separate series, secured by notes owed
to the Company by partnerships formed to invest in multi-family housing
(the "Multi-family Notes"), investor notes and limited partnership
interests arising from offerings arranged by the Company in connection with
acquisitions of multi-family housing (the "Purchase Note Collateral"). The
Debenture Debt has an average interest rate of 11.95% per annum and has
maturities ranging from 1996 through 2004. During the fiscal year ended
January 31, 1996 and the nine months ending October 31, 1996, total
interest expense with respect to Debenture Debt was approximately $8.7
million and $7.0 million, respectively, the Purchase Note Collateral
produced approximately $2.0 million and $2.1 million of interest and
related payments to the Company, respectively, which was approximately $6.7
million and $4.9 million less than the amount required to pay interest on
the Debenture Debt, respectively. The Company paid the shortfall from cash
generated by its operations. Debenture Debt in the aggregate principal
amount of approximately $8.0 million, $2.1 million, $19.5 million,
$10.3 million and $15.1 million will mature in the respective fiscal years
1996 through 2000. There can be no assurance that amounts received with
respect to the Purchase Note Collateral will be sufficient to pay the
Company's future debt service obligations with respect to the Debenture
Debt. 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.
-10-
<PAGE>
Of the Company's Total Debt, an additional $31.2 million principal
amount was unsecured, having an average interest rate of 13.24% 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 October 31, 1996, the Company had approximately
$23.8 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 10.51% 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 is in the process of issuing additional Unsecured
Debt in the amount of $15 million of which $7.7 million was issued as of
October 31, 1996 to refinance other indebtedness. Although the Company
currently does not anticipate incurring additional Debenture Debt or
Unsecured Debt, there can be no assurance that this will be the case. For
example, the Company may incur additional Debenture Debt or Unsecured Debt
as a means of refinancing its existing debt or for working capital
purposes. Neither the Company nor the Owning Partnerships have policies
limiting the amount or proportion of indebtedness incurred.
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, 1996 and at October 31, 1996,
the Company's debt for borrowed money to consolidated net worth ratio was
4.08 to 1 and 4.44 to 1, respectively. 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.
POTENTIAL INCREASES IN DEBT SERVICE OBLIGATIONS RELATING TO VARIABLE RATE
DEBT
The Investor Note Debt, which totaled $23.8 million in aggregate
principal amount at October 31, 1996, bears interest at variable rates
determined by reference to the prime rate of the lending banks. Each 1%
increase or decrease of the interest rate on such debt would result in an
increase or decrease in the annual debt service obligation of the Company
of approximately $238,000. 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, 1996 and the nine months ended October 31, 1996, the
Company paid approximately $917,000 and $4.0 million, respectively, with
respect to guaranteed return obligations, and paid approximately $1.6
million and $1.6 million, respectively, with respect to operating cash
deficiencies. The increase in the amount the Company paid with respect to
guaranteed return obligations in the nine month period ended October 31,
1996 resulted from an increase in the amount of capital contributions from
limited partners which were subject to
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<PAGE>
guaranteed return obligations and an increase in debt service payments due
to the refinancing of a number of its adult living communities, an
acceleration of the maintenance and repairs of various adult living
communities, including certain adult living communities which were not
refinanced, and the establishment of capital improvement reserves pursuant
to the terms of the newly refinanced loans, which reduced the cash flow and
incentive management fees these properties generate. The amount paid by
the Company with respect to its guaranteed return obligations for the
nine months ending October 31, 1996 was offset by an increase in interest
income received by the Company during the nine months ended October 31,
1996, which was also the result of such refinancings. The refinancings
resulted in the return of over $43 million of capital to limited partners,
which reduced the amount of capital upon which the Company is obligated to
make payments in respect of guaranteed returns. The refinancings (which
include the initial mortgage financing of certain communities that were
previously acquired without mortgage financing) also resulted in increased
debt service payments by the Owning Partnerships which own the refinanced
adult living communities. These debt service payments reduced the cash
flow available to pay the guaranteed return to limited partners during
the nine months ended October 31, 1996. The decrease in available cash
flow exceeded the reduction in the guaranteed return obligations for the
current year and, therefore, increased the amount required to be paid by
the Company with respect to such guaranteed return obligations. The
aggregate amount which the Company will be required to pay 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 1996 through 2002 based on existing management contracts is $12.4
million, $14.8 million, $13.7 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, 1996 with respect to
fiscal 1996 and remaining scheduled capital contributions (as adjusted to
reflect the refinancings) with respect to fiscal years 1997 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
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 amount of these prepayments received upon the closings
of the sales of limited partnership interests in Investing Partnerships, as
a percentage of total sales revenue and syndication fee income, averaged
63.9% in fiscal 1993, 64.6% in fiscal 1994, 52.6% in fiscal 1995 and 54.7%
for the nine months ended October 31, 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 or guaranty
agreements and of applicable federal and state securities and blue sky laws
and regulations.
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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."
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 October
31, 1996, the aggregate principal amount of the mortgage debt of the Owning
Partnerships was approximately $148.2 million and the aggregate annual debt
service obligations, excluding any balloon amounts payable at maturity, was
approximately $13.6 million. Most of this debt contains provisions which
limit the ability of the respective Owning Partnerships to further encumber
the property. Through January 31, 2001, approximately $125.3 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. 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 ("Purchase Notes") from Investing
Partnerships which were formed to acquire controlling interests in Owning
Partnerships which own adult living properties ("Adult Living Notes") and
Purchase Notes from Investing Partnerships which were formed to acquire
controlling interests in Owning Partnerships which own multi-family
properties ("Multi-Family Notes"). As of October 31, 1996, the recorded
value, net of deferred income, of Multi-Family Notes was $106.5 million.
All but approximately $348,000 of the $52.6 million of "Other Partnership
Receivables" recorded on the Company's Consolidated Balance Sheet as of
October 31, 1996 relate to Multi-Family Notes. (See Note 4 to Consolidated
Financial Statements.) The Company holds 169 Multi-Family Notes which are
secured by controlling interests in 126 multi-family properties (the
"Multi-Family Properties"). 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
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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 Multi-Family Properties are in default on their
respective mortgages. The Owning Partnerships that own these properties
have been negotiating with the respective mortgage lenders and, in some
cases, have obtained workout agreements pursuant to which the lenders
generally agree during the term of the agreement not to take any action
regarding the mortgage default and to accept reduced debt service payments
for a period of time, 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"). As of October 31, 1996,
the recorded value, net of deferred income, of the Multi-Family Notes and
"Other Partnership Receivables" relating to the Protected Partnerships was
$21.3 million.
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. 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.
The Company has recorded a loss of $18.4 million to reflect the
impairment of the Multi-Family Notes, for which the Assigned Interests
provide additional security, and the related "Other Partnership
Receivables." As a result of the transfers by the Selling Stockholders and
their affiliate of the Assigned Interests to the Investing Partnerships
which issued such Multi-Family Notes, the Company has recorded a
contribution to capital of $21.3 million and the recorded value of such
Multi-Family Notes and "Other Partnership Receivables" is unchanged. Due
to a re-evaluation by one of the Protected Partnerships of the value of its
real property and of the likelihood of successfully confirming a plan of
reorganization, said Protected Partnership has converted its bankruptcy
proceeding to a Chapter 7 liquidation proceeding. The Company, therefore,
does not anticipate a successful reorganization of such property, but
expects that this Multi-Family Note and the other Multi-Family Notes
relating to the Protected Partnerships will be collected due to the
additional collateral provided by the Assigned Interests.
There are 17 remaining Owning Partnerships which own Multi-Family
Properties that are in default of their mortgages. As of October 31, 1996,
the recorded value, net of deferred income, of the Multi-Family Notes and
"Other Partnership Receivables" relating to these 17 properties was $33.8
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 the 17 Owning Partnerships that own Multi-Family Properties
that are in default on their mortgages will file Chapter 11 Petitions or
take similar actions seeking protection from their creditors.
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.
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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. 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
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".
LIABILITIES ARISING FROM GENERAL PARTNER STATUS
The Company is a general partner of all but one of the Owning
Partnerships and the general partner of 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 six 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, the
Company's business, operating results and financial condition could be
adversely affected. See "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 such Owning
Partnerships and such period has not expired with respect to any such
Investing Partnerships.
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 notes,
aggregating $106.5 million, net of deferred income, at October 31, 1996
that were secured by the limited partnership interests in such
partnerships. These individuals have provided personal guarantees in
certain circumstances to obtain mortgage financing for certain adult living
communities operated by the Company and for certain of the Company's
Investor Note Debt, and the obligations 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
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
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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 service of
its principal executive officers. The loss of the services of one or more
of them could have a material adverse effect on the Company's operating
results and financial condition. Certain of the Company's officers or
entities controlled by them are general partners of partnerships that own
or invest in real property and they may be required to devote time to such
partnerships. The Company also depends on its ability to attract and
retain management personnel who will be responsible for the day-to-day
operations of each of its adult living communities. If the Company is
unable to hire qualified management to operate such communities, the
Company's business, operating results and financial condition could be
adversely affected. See "- Conflicts of Interest" and "Management."
COMPETITION
The long-term care industry is highly competitive, and the Company
believes that the assisted-living segment, in particular, will become even
more competitive in the future. The Company will be competing with
numerous other companies providing similar long-term care alternatives such
as home healthcare agencies, community-based service programs, adult living
communities and convalescent centers. The Company expects that, as the
provision of assisted-living services receives increased attention and the
number of states providing 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 occupancyand depressed cashflows andoperating results. See
"Business - Competition."
STAFFING AND LABOR COSTS
The Company competes with other providers of independentand assisted-
living services with respect to attracting and retaining qualified
personnel. The Company also is dependent upon the available labor pool of
employees. A shortage of trained or other personnel may require the
Company to enhance its wage and benefits package in order to compete. No
assurance can be given that the Company's labor costs will not increase, or
that if they do increase, they can be matched by corresponding increases in
rental or management revenue. Any significant failure by the Company to
attract and retain qualified employees, to control its labor costs or to
match increases in its labor expenses with corresponding increases in
revenues could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business - Employees."
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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 independentor
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 90.74% of the Company's Common Stock (approximately 84.2%
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
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,
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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."
LIMITED UNDERWRITING HISTORY
The Representative has participated in only 17 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."
-19-
<PAGE>
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF MARKET PRICE OF SECURITIES
Prior to the Offering, there have been no public markets for
Securities and there can be no assurance that active trading markets will
develop or, if developed, be sustained after the Offering. The Common
Stock has been approved for quotation on the NASDAQ National Market,
subject to certain conditions. After completion of the Offering, the
market 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 Representative's 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."
INADEQUATE DIVIDEND COVERAGE
The annual dividend requirement on the Convertible Preferred Stock is
$1,275,000 ($1,466,250 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 by virtue of
such dividend or distribution. See -"Recent Net Losses and Anticipated
Operating Losses", "Substantial Debt Obligations of the Company", "Dividend
Policy" and "Description of Capital Stock - Convertible Preferred Stock."
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 October 31, 1996. 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."
-20-
<PAGE>
POSSIBLE ISSUANCE OF ADDITIONAL PREFERRED STOCK SENIOR TO THE CONVERTIBLE
PREFERRED STOCK
In addition to the Convertible Preferred Stock, the Company will have
approximately 13,125,000 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."
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF CONVERTIBLE PREFERRED STOCK
Commencing March , 2000 [the third anniversary of the date of the
Prospectus] and extending through March , 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 March , 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 13,125,000 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."
-21-
<PAGE>
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 $8.03 per share, excluding
exercise of the Over-allotment Option. Additional dilution may occur upon
exercise of the Representative's 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 16,200,000 shares of Common Stock outstanding (excluding the Over-
allotment Option and the exercise of the Representative's 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. In addition, the Representative holds the
Representative's Warrants which entitle it to purchase up to 150,000 shares
of the Company's Common Stock and 150,000 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
Representative's 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
Representative's 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 Representative's Warrants), after
deducting estimated underwriting discounts and offering expenses payable by
the Company, are estimated to be approximately $22.1 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 $19.1 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 will use approximately $19.1 million
of its net proceeds of the Offering plus funds generated by its operations
to fund the 20% to 25% of development costs not provided by construction
loans. See "Risk Factors - Discretionary Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Business - Strategy".
Pending the uses outlined above, funds will be placed into short term
investments such as governmental obligations, bank certificates of deposit,
banker's acceptances, repurchase agreements, short term debt obligations,
money market funds, and interest bearing accounts. The Company will not
receive any proceeds from the sale of any shares by the Selling
Stockholders.
-22-
<PAGE>
DIVIDEND POLICY
The Company does not anticipate paying dividends on its Common Stock
subsequent to October 31, 1996. 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 proposed and 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
October 31, 1996 was approximately $53 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 by virtue of
such dividend or distribution. During fiscal 1994, fiscal 1995 and the
nine months ended October 31, 1996, the Company and its predecessors paid
dividends and other distributions of $1,886,000, $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."
-23-
<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization
of the Company at October 31, 1996, 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 Representative's 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 OCTOBER 31, 1996
-------------------------
Actual As Adjusted
--------- -----------
(IN THOUSANDS)
---------------
Bank Debt . . . . . . . . . . . . $33,008 $33,008
Other debt, principally debentures
105,840 105,840
Stockholders' equity:
Preferred Stock, $.0001 par
value; 15,000,000 shares
authorized; none issued and
outstanding; 1,500,000 shares
issued and outstanding as
adjusted . . . . . . . . . . . - .15
Common Stock, $.01 par value;
40,000,000 shares authorized;
15,000,000 shares issued and
outstanding; 16,200,000 shares
issued and outstanding as
adjusted(1) . . . . . . . . . . 150 162
Accumulated deficit . . . . . . (22,698) (22,698)
Additional paid-in capital (1) 53,853 75,965.85
------------ ----------
31,305 53,430
Total stockholders' equity -------- -------
$170,153 $192,278
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 October
31, 1996 was approximately $21,958,000, or $1.46 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 $31,305,000
less intangible assets of $9,347,000). 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 October 31, 1996 would have been $31,840,000 or $1.97 per share,
representing an immediate increase in pro forma net tangible book value
of $.51 per share to existing shareholders and an immediate dilution of
$8.03 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
October 31, 1996 . . . . . . . . . . . . . . . 1.46
Increase per share attributable to new investors .51
-----
Pro forma net tangible book value per share
after offering . . . . . . . . . . . . . . . . . 1.97
-----
Net tangible book value dilution per share to new
investors . . . . . . . . . . . . . . . . . . . . . $8.03
------
In the event the Over-allotment Option is exercised in full, the net
tangible book value at October 31, 1996 would have been approximately
$33,472,000 and the dilution of net tangible book value per share to new
investors would have been approximately $7.96.
The following tables summarize, on a pro forma basis at October 31,
1996, the difference between the number of shares purchased from the
Company, total consideration paid and the average price paid per share by
existing stockholders (based upon Total Stockholders' Equity at October 31,
1996) and new investors after giving effect to the Offering:
SHARES PURCHASED TOTAL CONSIDERATION PAID
---------------- -----------------------
NUMBER PERCENT AMOUNT PERCENT
------ ------- ------ -------
SELLING 14,700,000 90.74 $31,305,000 67.6
STOCKHOLDERS(1) .
New investors(1) 1,500,000 9.26 15,000,000 32.4
----------- ---- ------------ ----
Total . . . 16,200,000 100 $46,305,000(2) 100
=========== ==== ============= ====
AVERAGE PRICE
PER SHARE
-----------
SELLING STOCKHOLDERS(1) . . . $2.13
New investors(1) . . . . . . $10.00
Total . . . . . . . . .
(1) Upon completion of the Offering (excluding the Over-allotment Option),
the Selling Stockholders will own 14,700,000 shares of Common Stock,
and the new investors will own 1,500,000 shares of Common Stock,
representing 100% of the outstanding shares of Common Stock.
(2) Does not include $15,000,000 paid by new investors for 1,500,000
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 2,750,000 shares of
Common Stock or 15.8% 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. The results of operations for an interim period have been prepared
on the same basis as the year end financial statements and, in the opinion
of management, contain all adjustments, consisting of only normally
recurring adjustments, necessary for a fair presentation of the results of
operations for such period. The results of operations for an interim
period may not give a true indication of results for the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEARS ENDED JANUARY 31, (AS RESTATED)(5)
-------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS
DATA:
Revenues:
Sales . . . . . . . . $17,200 $18,170 $21,807 $23,413 $32,804
Syndication Fee Income
5,888 6,484 7,654 5,587 8,603
Deferred income earned
253 792 6,668 3,518 9,140
Interest income . . . 25,584 13,209 13,315 9,503 12,689
Property management
fees from related
parties . . . . . . 499 560 3,899 4,360 4,379
Equity in Earnings/Loss
from Partnerships . . 16 129 206 276 356
- - - - 1,013
Other income . . . . ------ ------- ------- -------- -------
49,440 39,344 53,549 46,657 68,984
------- ------- ------- -------- -------
Costs and expenses:
Cost of sales . . . . 15,972 14,411 26,876 21,514 27,406
Selling . . . . . . . 6,256 7,027 6,706 6,002 7,664
Interest . . . . . . 14,021 11,874 10,991 13,610 15,808
General and
administrative . . . 5,836 5,617 5,226 6,450 7,871
Property Management
Expense . . . . . . - - 45 238 604
Loss on Impairment of
Receivables . . . . - - - - -
Officers'
Compensation(1) . . 1,200 1,200 1,200 1,200 1,200
Depreciation and 412 975 1,433 2,290 2,620
amortization . . . . ------ ------- -------- -------- --------
43,697 41,104 52,477 51,304 63,173
------ ------- -------- -------- --------
Income (loss) before
provision for income
taxes . . . . . . . . 5,743 (1,760) 1,072 (4,647) 5,811
Provision for income - - - - -
taxes . . . . . . . . ------- ------- ------- -------- --------
Net income (loss) 5,743 (1,760) 1,072 (4,647) 5,811
Pro-forma income tax 2,297 (704)
provisions (benefit)(2)
------- ------- 429 (1,859) 2,324
Pro-forma net income $3,446 $(1,056) $643 $(2,788) $3,487
(loss)(2) . . . . . . ======= ======= ====== ======== ========
Pro-forma earnings
(loss) per common $.23 $(.07) $.04 $(.19) $.23
share(2) . . . . . . ======= ======= ====== ======== ========
Pro-forma weighted
average common shares 15,000 15,000 15,000 15,000 15,000
used . . . . . . . . ======= ======= ====== ======== ========
Ratio of earnings to
fixed charges and
preferred stock 1.40 - 1.09 - 1.32
dividends . . . . . . ======= ====== ====== ======== ========
Deficiency in combined
fixed charges and
preferred stock - 1,760 - 4,647 -
dividends . . . . . . ======= ====== ====== ======== ========
Other Data:
Adult living communities
operated (end of 9 14 18 24 28
period) . . . . . . . . ====== ====== ======= ======= ========
Number of units (end of 1,639 2,336 2,834 3,683 4,164
period) . . . . . . . ====== ====== ======= ======= ========
Average occupancy 83.3% 90.6% 90.4% 89.3% 94.7%
percentage (3) . . ====== ====== ======= ======= ========
NINE MONTHS ENDED
OCTOBER 31,
----------------------------------
1995 1996
----- -----
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales . . . . . . . . . . . . . . $22,986 $22,232
Syndication Fee Income . . . . . 5,819 4,976
Deferred income earned . . . . . 6,855 -
Interest income . . . . . . . . . 9,137 11,043
Property management fees from
related parties . . . . . . . . . . 3,324 2,420
Equity in Earnings/Loss from
Partnerships . . . . . . . . . . 269 250
943 -
Other income . . . . . . . . . . ------- --------
49,333 40,921
------- --------
Costs and expenses:
Cost of sales . . . . . . . . . . 19,844 17,493
Selling . . . . . . . . . . . . . 5,413 4,603
Interest . . . . . . . . . . . . 11,636 12,017
General and administrative . . . 5,419 5,687
Property Management Expense . . . 320 2,791
Loss on Impairment of
Receivables . . . . . . . . . . - 18,442
Officers' Compensation(1) . . . . 900 900
1,886 2,539
Depreciation and amortization . . ------- -------
45,418 64,472
------- -------
Income (loss) before provision
for income taxes . . . . . . . . 3,915 (23,551)
- -
Provision for income taxes . . . . ------- -------
Net income (loss) 3,915 (23,551)
Pro-forma income tax 1,566 (2,093)
provisions (benefit)(2) . . . . . ------- --------
$2,349 $(21,458)
Pro-forma net income (loss)(2) . . ======= ========
Pro-forma earnings (loss) per $.16 $(1.43)
common share(2) . . . . . . . . . ======= =======
Pro-forma weighted average 15,000 15,000
common shares used . . . . . . . ======= =======
Ratio of earnings to fixed charges 1.29 -
and preferred stock dividends . . ======= =======
Deficiency in combined fixed
charges and preferred stock - 23,776
dividends . . . . . . . . . . . . ======= =======
Other Data:
Adult living communities 26 29(4)
operated (end of period) . . . ======= =======
Number of units (end of 3,920 4,119(4)
period) . . . . . . . . . . . . ======= =======
Average occupancy 94.9% 92.3%
percentage (3) . . . . . . . . ======== ======
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AS OF JANUARY 31, (AS RESTATED)(5)
1992 1993 1994 1995
----- ----- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents . . . $3,477 $6,455 $9,335 $10,950
Notes and receivables-net . . .230,760 234,115 227,411 220,014
Total assets . . . . . . . . .240,842 250,648 248,386 248,085
Total liabilities . . . . . . .191,234 203,990 211,647 217,879
Stockholders' equity . . . . . 49,608 46,658 36,739 30,206
AS OF
OCTOBER 31,
-----------
1996 1996
---- ----
BALANCE SHEET DATA:
Cash and cash equivalents . . $17,961 $8,860
Notes and receivables-net . . 223,736 224,377
Total assets . . . . . . . . 259,555 255,315
Total liabilities . . . . . . 225,238 224,010
Stockholders' equity . . . . 34,317 31,305
----------------------
(1) John Luciani and Bernard M. Rodin, the Chairman of the Board and
President, respectively, of the Company received dividends and
distributions from the Company's predecessors but did not receive
compensation. Officers' Compensation is based upon the aggregate
compensation currently received by such officers, $600,000 a year for
each such officer. Amounts received by such officers in excess of
such amounts are treated as dividends for purposes of the Company's
financial statements. In the first nine months of 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) Three adult living communities containing 527 units in the aggregate
were acquired by the Company after October 31, 1996.
(5) Subsequent to the issuance of the Company's fiscal 1995 Consolidated
Financial Statements, the Company discovered that a mathematical error
had occurred in the calculation of the Company's initial investment in
partnerships. As a result, the Company's Consolidated Financial
Statements have been restated from the amounts previously reported to
reflect the correction of this error.
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<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 4,646 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 166 apartment units and has entered
into contracts to acquire one adult living community in Winter Haven,
Florida containing 133 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 six 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, mortgage financing and long-term leases or
similar arrangements to finance the development, construction and initial
operating costs of these new adult living communities.
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<PAGE>
The Company derives its revenues from sales of interests in adult
living real estate limited partnerships, recognition of deferred income
with respect to such partnerships, interest on notes received by the
Company from such partnerships as part of the purchase price for the sale
of interests, and property management fees received by the Company:
o 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.
o Syndication Fee Income. The Company earns syndication fee income equal
to the expenses of the syndication which include commissions.
o 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.
o Interest Income. The Company has note receivables from Investing
Partnerships which were formed to acquire interests in Owning Partnerships
which own adult living communities. Such notes generally have interest
rates ranging from 11% to 13.875% per annum and are due in installments
over five years from the date the Investing
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<PAGE>
Partnership acquired its interest in the Owning Partnership. The notes
represent senior indebtedness of the related limited partnership and are
collateralized by Investing Partnership's interest in the Owning
Partnership that owns the related adult living community. These
properties are generally encumbered by mortgages. The mortgages
generally bear interest at rates ranging from 8% to 9.5% per annum.
The mortgages are generally collateralized by a mortgage lien on the
related adult living communities. Principal and interest payments on each
note are also collateralized by the investor notes payable to the
Investing Partnership to which the limited partners are admitted.
The Company also has note receivables from Investing Partnerships
which were formed to acquire controlling interests in multi-family
properties. The notes have maturity dates ranging from ten to fifteen
years from the date the partnership interests were sold. Fifty-one of the
169 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 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 note also are collateralized by the investor
notes.
o Management fees. Property management fees earned for services provided
to related parties are recognized as revenue when related services have
been performed.
o Equity in Earnings/Loss 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.
o Existing Defaults and Bankruptcies of Owning Partnerships. As described
in "Liquidity and Capital Resources", a number of the Owning Partnerships
that own Multi-Family Properties are in default on their mortgages and nine
of them have filed, or are expected soon to file, 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. 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 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
o Revenues
Revenues for the three months ended October 31, 1996 were $12.6
million compared to $13.9 million for the three months ended October 31,
1995, a decrease of $1.3 million or 9.4%. Revenues for the nine months
ended October 31, 1996 were $40.9 million compared to $49.3 million for the
nine months ended October 31, 1995, a decrease of $8.4 million or 17.0%.
Revenues for the fiscal year ended January 31, 1996 ("Fiscal 1995") were
$69.0 million compared to $46.7 million for the year ending January 31,
1995 ("Fiscal 1994"), representing an increase of $22.3 million or 47.8%.
Revenues for Fiscal 1994 were $46.7 million compared to $53.5 million for
the year ended January 31, 1994 ("Fiscal 1993"), representing a decrease of
$6.8 million or 12.7%.
Sales for the three months ended October 31, 1996 were $6.9 million
compared to $7.1 million for the three months ended October 31, 1995, a
decrease of $200,000 or 2.8%. The decrease is attributable to slightly
less favorable terms when arranging for the sale of partnership interests
relating to 90.5% of one adult living community
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<PAGE>
and 17% of a second adult living community in the three months ended
October 31, 1996 as compared to the terms when arranging for the sale of
partnership interests relating to one adult living community in the three
months ended October 31, 1995. Sales for the nine months ended
October 31, 1996 were $22.2 million compared to $23.0 million for the
nine months ended October 31, 1995, a decrease of $800,000 or 3.5%.
This decrease is attributable to slightly less favorable terms on the
sale of partnership interests relating to 3 adult living communities in
the nine months ended October 31, 1996 as compared to the terms on the
sale of partnership interests relating to 4 adult living communities in
the nine months ended October 31, 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 in Fiscal 1994. Sales for Fiscal 1994 were
$23.4 million compared to $21.8 million for Fiscal 1993, representing a
decrease of $1.6 million or 7.4%. The increase is attributable to more
favorable terms when arranging for the sale of partnership interests
relating to four adult living communities in Fiscal 1994 as compared to
the terms when arranging for the sale of partnership interests relating
to four adult living communities in Fiscal 1993.
Syndication fee income for the three months ended October 31, 1996 was
$1.5 million compared to $1.7 million for the three months ended October
31, 1995, a decrease of $200,000 or 11.8%. The decrease is attributable to
a slightly lower commission rate for the sale or partnership interests
relating to 90.5% of one adult living community and 17% of a second adult
living community during the three months ended October 31, 1996 as compared
to the commission rate for the sale of partnership interests in one adult
living community during the three months ended October 31, 1995.
Syndication fee income for the nine months ended October 31, 1996 was $5.0
million as compared to $5.8 million for the nine months ended October 31,
1995, a decrease of $800,000, or 13.8%. The decrease is attributable to a
lower commission rate for the sale of partnership interests relating to
three adult living communities and 90.5% of a fourth adult living community
during the nine months ended October 31, 1996 as compared to the commission
rate for the sale of partnership interests relating to four adult living
communities during the nine months ended October 31, 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
interests 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. Syndication fee
income was $5.6 million in Fiscal 1994 as compared to $7.7 million in
Fiscal 1993, a decrease of $2.1 million, or 27.2%. The decrease is
attributable to a lower commission rate for the sale of partnership
interests relating to four adult living communities in Fiscal 1994 as
compared to the commission rate for the sale of partnership interests
relating to four adult living communities in Fiscal 1993.
There was no deferred income earned in the three months ended October
31, 1996 compared to $2.3 million for the three months ended October 31,
1995, a decrease of $2.3 million or 100.0%. There was no deferred income
earned in the nine months ended October 31, 1996 compared to $6.9 million
for the nine months ended October 31, 1995, a decrease of $6.9 million or
100.0%. In that the Company's estimate of cash flows from its adult living
communities did not increase during the three months ended October 31, 1996
and the nine months ended October 31, 1996, the Company earned no deferred
income in these periods. In February and 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 in the
nine months ended October 31, 1996. Deferred income earned increased to
$9.1 million in Fiscal 1995 from $3.5 million in Fiscal 1994, representing
an increase of $5.6 million or 160%. The increase in the recognition of
deferred income earned is primarily as a result of increased cash flows
from adult living communities and the refinancing of a number of adult
living communities in March 1996, as described above. Deferred income
earned in Fiscal 1994 was $3.5 million compared to $6.7 million for Fiscal
1993, representing a decrease of $3.2 million or 47.8%. This decrease is
principally due to the high amount of deferred income earned in Fiscal 1993
because of a significant increase in the cash flow of a number of adult
living communities in that year as compared to
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<PAGE>
previous years, thus allowing for the realization of a substantial amount
of deferred income in Fiscal 1993. While cash flow from adult living
communities continued to increase in Fiscal 1994, it did not increase at
the same rate as in Fiscal 1993, resulting in the realization of less
deferred income in Fiscal 1994 than in Fiscal 1993.
Interest income for the three months ended October 31, 1996 was $3.2
million compared to $2.1 million for the three months ended October 31,
1995, an increase of $1.1 million or 52.4%. This increase was due to the
increase in the three months ended October 31, 1996 in the cash flow
generated by various multi-family properties (and, in particular, the
proceeds from the refinancing of one multi-family property) which the
Company receives as interest income on the related Purchase Notes, as
compared to such cash flow generated in the three months ended October 31,
1995. This increase was partially offset by a reduction of interest income
due to the prepayment of mortgages held by the Company and a reduction in
scheduled interest payments resulting from the refinancings of a number of
adult living communities, as discussed below. Interest income for the nine
months ended October 31, 1996 was $11.0 million compared to $9.1 million
for the nine months ended October 31, 1995, an increase of $1.9 million or
20.9%. The refinancing of a number of adult living communities in February
and March 1996 resulted in the return of over $43.0 million of capital to
limited partners, thereby accelerating the receipt of scheduled interest
payments received by the Company in the three months ending April 30,
1996. This accelerated receipt of scheduled interest payments in the
three months ended April 30, 1996 caused interest income for the nine
months ended October 31, 1996 to be greater than interest income for
the nine months ended October 31, 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 the
nine months ended October 31, 1996 of the cash flow generated by various
multi-family properties, which the Company receives as interest income,
as compared to such cash flows generated in the nine months ended
October 31, 1995. Interest income for Fiscal 1995 was $12.7 million
compared to $9.5 million for Fiscal 1994, representing an increase of
$3.2 million or 33.7%. Such increase reflects the increased aggregate
interest received on notes from limited partnerships as a result of an
increase in the aggregate principal amount of such notes. The increase
in aggregate principal amount reflects an increase in the number of
existing adult living communities operated by the Company and in the
number of offerings in connection with acquisitions of adult living
communities to six in Fiscal 1995, compared to four in Fiscal 1994. The
increase in interest income in Fiscal 1995 also reflects an interest
payment realized in connection with a mortgage debt restructuring for a
Multi-Family Property. Interest income for Fiscal 1994 was $9.5 million
compared to $13.3 million for Fiscal 1993, representing a decrease of $3.8
million or 28.6%. This decrease was primarily attributable to the
continuing decline in the amounts receivable and collected of investor
notes relating to offerings in connection with acquisitions of Multi-Family
Properties (which decline reflects the Company's discontinuance of multi-
family property acquisitions and offerings after 1986), which investor note
collections were applied as interest payments under their respective
limited partnership notes payable to the Company. 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 for the three months
ended October 31, 1996 were $1.0 million compared to $600,000 for the three
months ended October 31, 1995, an increase of $400,000 or 66.7%. The
increase is primarily attributable to increased incentive management fees
generated by an adult living community the Company acquired from an
existing Owning Partnership. Property management fees from related parties
for the nine months ended October 31, 1996 were $2.4 million compared to
$3.3 million for the nine months ended October 31, 1995, a decrease of
$900,000 or 27.3%. This decrease is primarily due to (i) an acceleration
of the maintenance and repairs to various adult living communities, which
reduced cash flow and the incentive management fees the properties
generated, (ii) the increased debt service on various adult living
communities due to the refinancing of such properties (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 reduction of the Company's
guaranteed return obligation due to said refinancing, and (iii) 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
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<PAGE>
from Fiscal 1994 to Fiscal 1995. Property management fees from related
parties increased to $4.4 million in Fiscal 1994 compared to $3.9 million
in Fiscal 1993, representing an increase of $500,000 or 12.8%. The
increase is attributable to additional properties under management
during the period.
There was no change in equity in earnings/loss from partnerships
during the three and nine months ended October 31, 1996 as compared to the
three and nine months ended October 31, 1995. Equity in earnings/loss 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. Equity in earnings/loss from partnerships
was $300,000 in Fiscal 1994 as compared to $200,000 in Fiscal 1993,
representing an increase of $100,000 or 50%. The increase is attributable
to additional properties in which the Company retains a general partnership
interest.
There was no other income for the three months ended October 31, 1996
or the three months ended October 31, 1995. There was no other income for
the nine months ended October 31, 1996 as compared to $1.0 million for the
nine months ended October 31, 1995, a decrease of $1.0 million or 100.0%.
The decreases are due to the non-recurring nature of the other income
recognized in the three months and nine months ended October 31, 1995,
which resulted from the restructuring and reduction of a development fee
obligation of the Company. Other income increased to $1.0 million in
Fiscal 1995 from no other income earned in Fiscal 1994, representing an
increase of $1.0 million. The increase is due to the restructuring and
reduction of said development fee obligation of the Company. There was no
other income in Fiscal 1994 or Fiscal 1993.
o Cost of Sales
Cost of sales, which include the cash portion of the purchase price
for properties plus related transaction costs, expenses and any payments by
the Company in respect of operating cash deficiencies of Owning
Partnerships and any deferred income liabilities that are established
during the applicable period, for the three months ended October 31, 1996
were $8.2 million compared to $5.0 million for the three months ended
October 31, 1995, an increase of $3.2 million or 64.0%. The increase is
primarily due to the establishment in the three months ended October 31,
1996 of a deferred income liability relating to the acquisitions occurring
in said period and in the first three months of Fiscal 1996, which
increased the cost of sales, as compared to the three months ended October
31, 1995, where no such liability was established. Cost of sales as a
percentage of sales and syndication fee income increased from 56.6% for the
three months ended October 31, 1995 to 97.6% for the three months ended
October 31, 1996. The increase can be attributed to the establishment in
the three months ended October 31, 1996 of a deferred income liability
relating to the acquisitions occurring in said period and in the first
three months of Fiscal 1996, which increased the cost of sales, as compared
to the three months ended October 31, 1995, where no such liability was
established. Cost of sales for the nine months ended October 31, 1996 were
$17.5 million compared to $19.8 million for the nine months ended October
31, 1995, a decrease of $2.3 million or 11.6%. The decrease is primarily
due to the establishment in the nine months ended October 31, 1995 of
greater deferred income liabilities relating to the acquisitions occurring
in said period, which increased the cost of sales, as compared to the nine
months ended October 31, 1996, where lesser deferred income liabilities
were established, and is also due to the Company's ability to acquire
properties on more favorable terms and to obtain more favorable mortgage
financings for its acquisitions (i.e. higher loan-to-value ratios and
preferred interest rates). Cost of sales as a percentage of sales and
syndication fee income decreased from 68.8% for the nine months ended
October 31, 1995 to 64.3% for the nine months ended October 31, 1996. The
decrease is primarily due to the establishment in the nine months ended
October 31, 1995 of greater deferred income liabilities referred to above.
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 million
as compared to the acquisition of four properties in Fiscal 1994 with
combined purchase prices of $22.3 million. The increase in the aggregate
purchase price of properties acquired was partially offset by an increased
use of mortgage financing for acquisitions in Fiscal 1995 from levels of
mortgage financing for Fiscal 1994, which reduced cash expenditures by the
Company for such acquisitions. Cost of sales as a 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
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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.
Cost of sales for Fiscal 1994 were $21.5 million compared to $26.9
million for Fiscal 1993, a decrease of $5.4 million or 20.1%. This
decrease was due primarily to the use of mortgage financing for property
acquisitions in Fiscal 1994, which reduced cash expenditures by the
Company for property acquisitions from such expenditures for Fiscal 1993
where no such mortgage financing was used. Cost of sales as a percentage
of sales and syndication fee income decreased from 91.2% in Fiscal 1993
to 74.1% in Fiscal 1994. This decrease is principally due to the use of
mortgage financing for property acquisitions in Fiscal 1994, which reduced
cash expenditures by the Company for property acquisitions from such
expenditures for Fiscal 1993, in which mortgage financing was not used.
Several factors, including the collapse of the real estate market in
the late 1980's and early 1990's, which resulted in a number of distressed
property sales and limited competition from other prospective purchasers,
allowed the Company to acquire existing adult living communities at such
time on relatively favorable terms. Mortgage financing, however, was
generally either not available or available only on relatively unattractive
terms during this period, which made acquisitions more difficult because
they either required large outlays of cash or the use of mortgage financing
on relatively unfavorable terms. During the last several years, several
factors have contributed towards a trend to less favorable terms for
acquisitions of adult living communities, including a recovery in the
market for adult living communities and increased competition from other
prospective purchasers of adult living communities. The Company, however,
has been able to obtain mortgage financing on increasingly favorable terms
(i.e. the Company has obtained mortgages for a greater percentage of the
purchase price and at preferred rates). These factors, combined with an
overall reduction of interest rates, have partially offset the factors that
have led to more unfavorable acquisition terms. A significant change in
these or other factors (including, in particular, a significant rise in
interest rates) could prevent the Company from acquiring communities on
terms favorable enough to offset the start-up losses of newly-developed
communities as well as the Company's debt service obligations, guaranty
obligations, operating cash deficiencies and the Company's selling, general
and administrative expenses. Although the Company has been able to acquire
adult living communities on more favorable terms in the nine months ended
October 31, 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.
o Selling Expenses
Selling expenses for the three months ended October 31, 1996 were $1.1
million compared to $1.6 million for the three months ended October 31,
1995, a decrease of $500,000 or 31.3%. The decrease is attributable to
lower commissions and related selling costs in connection with the sale of
limited partnership interests in connection with 90.5% of one adult living
community and 17% of another adult living community in the three months
ended October 31, 1996 compared to the sale of limited partnership
interests in connection with one adult living community in the three months
ended October 31, 1995. Selling expenses for the nine months ended October
31, 1996 were $4.6 million compared to $5.4 million for the nine months
ended October 31, 1995, a decrease of $800,000 or 14.8%. The decrease was
attributable to the lower sales volume, and the resulting lower commissions
and related selling costs in connection with, limited partnership interests
in partnerships that acquired 3 adult living communities and 90.5% of a
fourth in the nine months ended October 31, 1996 compared to limited
partnership interests in partnerships that acquired 4 adult living
communities in the nine months ended October 31, 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 for $41.4 million compared to the
sale of limited partnership interests in partnerships that acquired four
adult living communities in Fiscal 1994 for $29.0 million. Selling expenses
for Fiscal 1994 were $6.0 million compared to $6.7 million in Fiscal 1993,
representing
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a decrease of $700,000 or 10.4%. This decrease is due primarily to
reductions in the rate of commissions paid for assistance in the sale of
limited partnership interests.
o Interest Expense
Interest expense for the three months ending October 31, 1996 was $4.2
million compared to $3.7 million for the three months ended October 31,
1995, an increase of $500,000 or 13.5%. Interest expense for the nine
months ended October 31, 1996 was $12.0 million as compared to $11.6
million for the nine months ended October 31, 1995 an increase of $400,000
or 3.4%. The increases 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
communities were direct obligations of the Company and the corresponding
interest payments were included in the Company's interest expense. These
mortgages are now direct obligations of the Owning Partnerships that own
these properties and the corresponding interest payments are no longer
included in interest expense. Interest expense for Fiscal 1995 was $15.8
million compared to $13.6 million for Fiscal 1994, representing an increase
of $2.2 million or 16.2%. Interest Expense included interest payments on
Debenture Debt which had an average interest rate of 11.95% per annum and
was secured by the Purchase Note Collateral. During Fiscal 1995, total
interest expense with respect to Debenture Debt was approximately $8.7
million 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. Interest expense for Fiscal 1994 was $13.6 million compared to $11.0
million for Fiscal 1993, an increase of $2.6 million or 23.6%. The
increases can be attributed to increases in debt during the periods and was
somewhat offset by reductions in interest rates during the periods. See
"Liquidity and Capital Resources."
o General and Administrative Expenses
General and administrative expenses were $2.0 million for the three
months ended October 31, 1996 as compared to $2.1 million for the three
months ended October 31, 1995, a decrease of $100,000 or 4.8%. The
decrease is due to the capitalization of expenses relating to the
implementation of the Company's development program, which became
significant in the current fiscal year, as partially offset by increases in
professional fees and salary costs associated with the new development
program. General and administrative expenses were $5.7 million for the
nine months ended October 31, 1996 as compared to $5.4 million for the nine
months ended October 31, 1995, an increase of $300,000 or 5.6%. The
increase reflects additional professional fees and additional salary costs
incurred in instituting the Company's development program and in managing
and financing the Company's portfolio of adult living communities and other
properties, which increased by two in the nine months ended October 31,
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 portfolio of properties, which
increased by six in Fiscal 1995, and also reflects increases in various
office expenses. General and administrative expenses were $6.5 million in
Fiscal 1994 compared to $5.2 million in Fiscal 1993, an increase of $1.3
million or 25.0%. The increase reflects increased professional fees and
salary costs incurred in managing and financing the Company's portfolio of
properties which increased by six in fiscal 1994 and the reimbursement to
various properties for certain expenses as stipulated in the HUD settlement
discussed under "Legal Proceedings" below.
o Property Management Expense
Property Management expense for the three months ended October 31,
1996 was $900,000 compared to $100,000 for the three months ended October
31, 1995, an increase of $800,000 or 800%. Property management expense for
the nine months ended October 31, 1996 was $2.8 million as compared to
$300,000 for the nine months ended October 31, 1995, an increase of $2.5
million or 833%. These increases are primarily due to an acceleration of
the Company's program of improvements and repairs at the Company's adult
living communities, including a number of adult living communities that
were refinanced, which reduced the cash flow generated by these
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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. Property management expense for Fiscal 1994 was
$200,000 as compared to $45,000 property management expense for Fiscal
1993, an increase of $155,000 or 344.4%. 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.
o Loss On Impairment Of Receivables
For the three-month and nine-month periods ended October 31, 1996, the
Company realized a loss on impairment of receivables of $1.6 million and
$18.4 million, respectively as compared to no such loss for the
corresponding periods in 1995. 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 recorded value of
such Multi-Family Notes and "Other Partnership Receivables" is unchanged
and the Company recorded a contribution to capital of $21.3 million. See -
"Liquidity and Capital Resources."
o Officers' Compensation
Officers' Compensation was $300,000 for the three months ended October
31, 1996 and for the three months ended October 31, 1995. Officers'
Compensation was $900,000 for the nine months ended October 31, 1996 and
the nine months ended October 31, 1995. Officers' Compensation was $1.2
million for Fiscal 1995, Fiscal 1994 and Fiscal 1993.
o Depreciation and Amortization
Depreciation and amortization for the three months ended October 31,
1996 was $800,000 compared to $400,000 for the three months ended October
31, 1995, an increase of $400,000 or 100%. The increase is primarily due
to the prepayment of debt which resulted in the acceleration of the
unamortized portion of these related costs. Depreciation and amortization
for the nine months ended October 31, 1996 was $2.5 million as compared to
$1.9 million for the nine months ended October 31, 1995, an increase of
$600,000 or 31.6%. The increase primarily is attributable to the
prepayment of debt which resulted in the acceleration of the unamortized
portion of these related costs and also to the issuance of additional
Debenture Debt and Unsecured Debt in Fiscal 1995 which had its full
amortization impact in the nine months ended October 31, 1996.
Depreciation and amortization for Fiscal 1995 was $2.6 million compared to
$2.3 million for Fiscal 1994. Depreciation and amortization consists of
amortization of deferred debt expense incurred in connection with debt
issuance. Depreciation and amortization for Fiscal 1994 was $2.3 million
compared to $1.4 million in Fiscal 1993. The increase can be attributable
to the issuance of additional Debenture Debt in Fiscal 1993 which had its
full amortization impact in Fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed operations through cash flow
generated by operations, by arranging for the sale of partnership interests
and through borrowings consisting of Investor Note Debt, Unsecured Debt,
Mortgage Debt and Debenture Debt. The Company's principal liquidity
requirements are for payment of operating expenses, costs associated with
development of new adult living communities, debt service obligations,
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.
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The Company's cash and cash equivalents were $18.0 million at January
31, 1996, $11.0 million at January 31, 1995 and $9.3 million at January
31, 1994. The increase in cash and cash equivalents at January 31, 1996
reflects, among other things, (i) net income of $5.8 million for Fiscal
1995, compared to a loss of $4.6 million for Fiscal 1994, (ii) increases in
loans and accrued interest payable by $52.0 million, and (iii) amortization
and depreciation for Fiscal 1995 of $2.6 million, offset in part by, among
other things, (i) a decrease in loans payable by $39.3 million, (ii)
distributions of $1.7 million and (iii) payments of other notes payable of
$1.6 million. The increase in cash and equivalents at January 31, 1995
reflects, among other things, (i) increases in loans and accrued interest
payable by $44.0 million and (ii) amortization and depreciation of $2.3
million offset, in part, by (i) a loss of $4.6 million for Fiscal 1994,
(ii) a decrease in loans payable by $31.3 million, (iii) distributions of
$1.9 million and (iv) payments of notes payable of $2.6 million.
Cash flows used by operating activities for the nine months ended
October 31, 1996 were $200,000 and were comprised of: (i) net loss of
$23.6 million plus (ii) adjustments for non-cash items of $21.0 million
plus (iii) the net change in operating assets and liabilities of $2.4
million. The adjustments for non-cash items is comprised of depreciation
and amortization of $3.0 million and loss on impairment of receivables of
$18.0 million. Cash flows used by operating activities for the nine months
ended October 31, 1995 were $8.4 million and were comprised of: (i) net
income of $3.9 million less (ii) adjustments for non-cash items of $5.0
million less (iii) the net change in operating assets and liabilities of
$7.3 million. The adjustments for non-cash items is comprised of
depreciation and amortization of $1.9 million offset by deferred income
earned of $6.9 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. Cash flows provided by operating activities for Fiscal 1993 were
$6.7 million and were comprised of: (i) net income of $1.1 million less
(ii) adjustments for non-cash items of $5.2 million plus (iii) the net
change in operating assets and liabilities of $10.8 million. The
adjustments for non-cash items is comprised of depreciation and
amortization of $1.4 million offset for deferred income earned of
$6.7 million.
Net cash used by investing activities for the nine months ended
October 31, 1996 of $36,000 was comprised of the increase in investments
for the period offset by a decrease in investments due to the distribution
of refinancing proceeds due to the Company's portion of general partner
interests in adult living communities. Net cash used by investing
activities for the nine months ended October 31, 1995 of $260,000 was
comprised of the increase in investments. 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
investing activities for Fiscal 1993 of $294,000 was comprised of the
increase in investments.
Net cash used by financing activities for the nine months ended
October 31, 1996 of $8.9 million was comprised of: (i) debt repayments of
$39.5 million less proceeds from the issuance of new debt of $38.2 million
less (ii) payments of notes payable of $100,000 less (iii) dividends paid
of $800,000 less (iv) the increase in other assets of $6.7 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 the nine months ended October 31, 1995 of $7.2
million was comprised of: (i) debt repayments of $30.6 million less
proceeds from the issuance of new debt of $43.0 million less (ii) payments
of notes payable of $1.1 million, less (iii) dividends paid of $1.4 million
less (iv) the increase in other assets of $2.7 million due to the
capitalization of costs associated with the purchase of an adult living
community that was not yet sold and the capitalization of costs relating to
the issuance of new debt as 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)
debt repayments of $39.3 million less proceeds from the issuance of new
debt of $52.0 million less (ii) payments of notes payable of $1.6 million
less (iii)
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dividends paid of $1.7 million and less (iv) the increase in
other assets of $2.8 million due to the capitalization of loan costs
primarily in connection with Debenture Debt. Net cash provided by
financing activities for Fiscal 1994 of $1.1 million was comprised of: (i)
debt repayments of $31.3 million less proceeds from the issuance of new
debt of $44.0 million less (ii) payments of notes payable of $2.6 million
less (iii) dividends paid of $1.9 million less (iv) the increase in other
assets of $7.1 million due to the capitalization of loan costs primarily in
connection with Debenture Debt. Net cash used by financing activities for
Fiscal 1993 of $3.5 million was comprised of (i) debt repayments of $21.6
million less proceeds from the issuance of new debt of $34.4 million less
(ii) payments of notes payable of $2.6 million less (iii) dividends paid of
$11.0 million less (iv) the increase in other assets of $2.7 million due to
the capitalization of loan costs primarily in connection with Debenture
Debt.
At January 31, 1996, the Company had total indebtedness, excluding
accrued interest, of $139.2 million, consisting of $78.3 million of
Debenture Debt, $18.9 million of Unsecured Debt, $12.0 million of Mortgage
Debt and $30.0 million of Investor Note Debt. As of October 31, 1996, the
Company has reduced outstanding Investor Note Debt from $30.0 million to
$23.8 million, increased Unsecured Debt from $18.9 million to $31.2
million, and decreased Mortgage Debt from $12 million to $5.0 million.
Since that date, Debenture Debt decreased from $78.3 million to $77.9
million. As a result, total indebtedness, decreased from $139.2 million to
$137.9 million and the Company had cash and cash equivalents at October 31,
1996 of $8.9 million. Contributing to this debt repayment was the
refinancing in February and March 1996 of certain adult living communities
the Company manages resulting in the return of over $43 million of capital
to limited partners and the reduction of both Investor Note Debt and
Mortgage Debt.
Of the principal amount of total indebtedness at January 31, 1996,
$37.2 million becomes due in the fiscal year ending January 31, 1997; $12.9
million becomes due in the fiscal year ending January 31, 1998; $29.7
million becomes due in the fiscal year ending January 31, 1999; $15.4
million becomes due in the fiscal year ending January 31, 2000; $17.4
million becomes due in the fiscal year ending January 31, 2001, and the
balance of $26.6 million becomes due thereafter. Of the amount maturing in
the fiscal year ending January 31, 1997, $6.8 million is Investor Note Debt
which the Company repaid through the collection of investor notes. The
balance, approximately $30.4 million, included $9.9 million of Debenture
Debt, $5.2 million of Mortgage Debt and $15.3 million of Unsecured Debt.
During Fiscal 1996, the Company repaid approximately $1.9 million of
Debenture Debt and repaid $14.3 million of Unsecured Debt. The Company
also repaid the entire $5.2 million of Mortgage Debt due by January 31,
1997 by refinancing said debt, which refinanced debt became obligations of
the partnerships that own the properties and ceased being obligations of
the Company. The Company anticipates that the balance of $8.0 million of
Debenture Debt and $1.0 million of Unsecured Debt that matures during the
current fiscal year, together with interest on outstanding debt, will be
repaid from the Company s existing cash and cash equivalents, which
amounted to $8.9 million on October 31, 1996, along with the proceeds of
new Unsecured Debt the Company intends to issue, cash flow that will be
generated by property operations and by arranging for the sale of
partnership interests to finance the acquisition of additional existing
adult living communities. However, competition to acquire such communities
has intensified and there can be no assurance that the Company will be able
to acquire such communities on terms favorable enough to offset start-up
costs of newly developed communities and the cash requirements of the
Company's existing operations and debt service.
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, 1996 and at October 31, 1996,
the Company's debt for borrowed money to consolidated net worth ratio was
4.08 to 1 and 4.44 to 1, respectively. 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.
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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 the nine months
ended October 31, 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 $6.2 million,
respectively, for application to the Company's guaranteed return
obligations. During such periods, the Company funded $1.6 million and $1.6
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, which
attempts have thus far been unsuccessful. These conversions account for
69.7% and 65.1%, respectively, of the operating deficiency funding by the
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 these
periods than the amounts the properties distributed to the Company for
application to such guaranteed return obligations and the Company funded
approximately $917,000 and $4.0 million, respectively, to meet such
obligations. The increase in the amount the Company paid with respect to
guaranteed return obligations in the nine month period ended October 31,
1996 primarily resulted from an increase in the amount of capital
contributions from limited partners which were subject to guaranteed return
obligations and the refinancing of a number of its adult living communities
(some of which received mortgage financing for the first time, as they were
previously acquired without mortgage financing). The amount paid by the
Company with respect to its guaranteed return obligations for the nine
months ended October 31, 1996 was offset by an increase in interest income
received by the Company during the nine months ended October 31, 1996,
which was also the result of such refinancings. The refinancings resulted
in the return of over $43 million of capital to limited partners, which
reduced the amount of capital upon which the Company is obligated to
guarantee a return. The refinancings also resulted in increased debt
service payments by the Owning Partnerships which own the refinanced adult
living communities and the establishment of capital improvement reserves
for the refinanced properties. These debt service payments and capital
improvement reserves reduced the cash flow available to pay the guaranteed
returns to limited partners during the nine months ended October 31, 1996.
In addition, the Company accelerated its program of maintenance and repairs
of its adult living communities, including certain adult living communities
which were not refinanced, which also decreased the cash flow generated by
these properties. The decrease in available cash flow exceeded the
reduction in the Company's guaranteed returned obligations for the current
year and, therefore, increased the amount required to be paid by the
Company with respect to such guaranteed return obligations. 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 1996 through 2002 based on existing
management contracts will increase to $14.8 million in Fiscal 1997, then
decrease to $13.7 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, 1996 with respect to Fiscal 1996 and
remaining scheduled capital contributions (as reduced by the refinancings)
with respect to fiscal years 1997 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
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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 cash generated by the Company to make management contract payments
which are distributed by the Owning Partnerships to the Investing
Partnerships to pay limited partners in such partnerships their guaranteed
return. The 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 amount of these prepayments received upon the closings
of the sales of limited partnership interests in Investing Partnerships, as
a percentage of total sales revenue and syndication fee income, averaged
63.9% in Fiscal 1993, 64.6% in Fiscal 1994, 52.6% in Fiscal 1995 and 54.7%
for the nine months ended October 31, 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 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 October 31, 1996, the recorded value, net of deferred income, of
Multi-Family Notes was $106.5 million. All but approximately $348,000 of
the $52.6 million of "Other Partnership Receivables" recorded on the
Company's Consolidated Financial Statements as of October 31, 1996 relate
to Multi-Family Notes. (See Note 4 to Consolidated Financial Statements.)
The Company holds 169 Multi-Family Notes which are secured by controlling
interests in 126 Multi-Family Properties.
Twenty-seven of the Multi-Family Properties are in default on their
respective mortgages. The Owning Partnerships that own these properties
have been negotiating with the respective mortgage holders and, in some
cases, have obtained workout agreements pursuant to which the lenders
generally agree during the term of the agreement not to take any action
regarding the mortgage default and to accept reduced debt service payments
for a period of time, with the goal of increasing property cash flow to
enable the property to fully service its mortgage. 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"). As of October 31, 1996,
the recorded value, net of deferred income, of the Multi-Family Notes and
"Other Partnership Receivables" relating to the Protected Partnerships was
$21.3 million.
The Selling Stockholders and one of their affiliates have assigned
certain interests they own personally in various partnerships that own
Multi-Family properties (the "Assigned Interests") to 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.
The Company has recorded a loss of $18.4 million to reflect the
impairment of the Multi-Family Notes for which the Assigned Interests
provide additional security and the related "Other Partnership
Receivables." The Multi-Family Notes relating to the Protected
Partnerships were first deemed impaired when the mortgages on their
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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 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 in view of the
state of facts at such time. In that the Selling Stockholders transferred
the Assigned Interests in July 1996, the one Protected Partnership that did
not file a Chapter 11 Petition had decided in July 1996 not to resist
foreclosure, and the nine Protected Partnerships that filed Chapter 11
Petitions filed said petitions in August 1996 (or by August 1996 expected
to do so in the future), the Company reflected both the related $21.3
million capital contribution and the $18.4 million loss in the nine months
ended October 31, 1996 and the recorded value of the related Multi-Family
Notes and "Other Partnership Receivables" is unchanged. Due to a re-
evaluation by one of the Protected Partnerships of the value of its real
property and of the likelihood of successfully confirming a plan of
reorganization, said Protected Partnership has converted its bankruptcy
proceeding to a Chapter 7 liquidation proceeding. The Company, therefore,
does not anticipate a successful reorganization of such property, but
expects that this Multi-Family Note and the other Multi-Family Notes
relating to the Protected Partnerships will be collected due to the
additional collateral provided by the Assigned Interests.
There are 17 remaining Owning Partnerships that own Multi-Family
Properties that are in default of their mortgages. As of October 31, 1996,
the recorded value, net of deferred income, of the Multi-Family Notes and
"Other Partnership Receivables" relating to these 17 properties was $33.8
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 the 17 Owning Partnerships that own Multi-Family Properties
that are in default on their mortgages will file Chapter 11 Petitions or
take similar actions seeking protection from their creditors.
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. Any such future mortgage defaults could, and any such future
filings of Chapter 11 petitions or the
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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.
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 166 units and has entered into contracts to acquire one adult
living community in Winter Haven, Florida containing 133 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
$29.7 million. The Company has financed and intends to finance
approximately $21.7 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 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 development plan and to repay debt.
The Company s present Investor Note Debt lenders do not have sufficient
lending capacity to meet all of the Company s future requirements.
However, the Company currently is negotiating with several new Investor
Note Debt lenders which the Company believes will have sufficient lending
capacity to meet all of the Company s foreseeable Investor Note Debt
borrowing requirements.
The Company also has implemented a new development plan pursuant to
which it currently intends to commence construction on between 18 and 24
new adult living communities during the next two years. The Company will
utilize the proceeds of this offering plus mortgage financing to construct,
own and operate new communities. The Company'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. 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
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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
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 will use its net proceeds of the Offering (above
the approximately $3 million to be used for working capital and general
corporate purposes) plus funds generated by its operations to fund the 20%
to 25% of development costs not provided by construction loans.
The annual dividend requirement on the Convertible Preferred Stock is
$1,275,000 ($1,466,250 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. See "Description of Capital Stock - 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 by virtue of such dividend or
distribution.
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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 4,646 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. The facilities operated by the
Company had an average occupancy rate of approximately 91% at January 24,
1997. 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 six adult living communities. The Company also holds
options on 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
partially with cash raised from the cash down payment
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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 1995 and the nine months
ended October 31, 1996, the Company paid approximately $917,000 and $4.0
million, respectively, with respect to guaranteed return obligations, and
paid approximately $1.6 million and $1.6 million, respectively with respect
to operating cash deficiencies. The increase in the amount the Company
paid with respect to guaranteed return obligations in the nine month period
ended October 31, 1996 primarily results from an increase in the amount of
capital contributions from limited partners which were subject to
guaranteed return obligations and the refinancing of a number of its adult
living communities (some of which received mortgage financing for the first
time as they were previously acquired without mortgage financing). The
amount paid by the Company with respect to its guaranteed return
obligations for the nine months ending October 31, 1996 was offset and
exceeded by an increase in interest income received by the Company during
the nine months ended October 31, 1996, which was also the result of such
refinancings. The refinancings resulted in the return of over $43 million
of capital to limited partners, which reduced the amount of capital upon
which the Company is obligated to make payments which are distributed to
limited partners in respect of guaranteed returns. The refinancings also
resulted in increased debt service payments by the Owning Partnerships
which own the refinanced adult living communities and the establishment of
capital improvement reserves for the refinanced properties. These debt
service payments and capital improvement reserves reduced the cash flow
available to pay the guaranteed return to limited partners during the nine
months ended October 31, 1996. In addition, the Company accelerated its
program of maintenance and repairs of its adult living communities,
including certain adult living communities which were not refinanced, which
also decreased the cash flow generated by these properties. The decrease
in available cash flow exceeded the reduction in the guaranteed return
obligations for the current year and, therefore, increased the amount
required to be paid by the Company with respect to such guaranteed return
obligations. The aggregate amount which the Company will be required to
pay under the management contracts with respect to guaranteed return
obligations 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 meet guaranteed return 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 the
new development plan, to meet other liquidity and capital resource
commitments and for dividends. The Company will attempt to structure future
offerings to minimize the likelihood that it will be required to utilize
the cash it generates to pay guaranteed returns and operating cash
deficiencies, but there can be no assurance that this will be the case.
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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
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
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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
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.
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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
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:
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MEDIAN NET WORTH
1988 1991
---- ----
45-54 57,466 58,250
55-64 80,032 83,041
65+ 73,471 88,192
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
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 91% occupancy
rate at January 24, 1997 at its existing communities.
The Company will continue to acquire existing communities and intends
to finance these acquisitions, in part, by arranging for the sale of
partnership interests in such communities. The Company believes that its
continuing acquisition and financing of adult living communities will
provide additional cash flow to help the Company pursue its development
program. 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,
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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 are also
realized in that more apartment units are being produced for each community
that is developed.
Common areas will include recreation areas, dining rooms, a kitchen,
administrative offices, an arts and crafts room, a multi-purpose room,
laundry rooms for each floor, a beauty salon/barber shop, a library reading
area, card rooms, a billiards room, a health center to monitor residents'
medical needs and covered and assigned parking. The Company believes that
the common areas and amenities offered by 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
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 construction mortgage financing for
up to $7 million and $7.3 million, respectively, from Bank United.
Construction has commenced on development sites in San Angelo, Wichita
Falls, El Paso and Abilene, Texas, under
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the Company's $39 million development agreement with Capstone. The
Company also has obtained options to acquire three additional sites
in Amarillo, Round Rock, 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 additional new communities in the next two years. The Company
also anticipates developing adult living communities in one or more of
the following states: Kentucky, Tennessee, 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" trademarked name to promote national brand-name
recognition. The Company has recently adopted the trademarked name.
Historically, adult living communities have generally been independently
owned and operated and there has been little national brand-name
recognition. The Company believes that national recognition will be
increasingly important in the adult living business. The Company
intends to continuously use its trademarked name in its business
activities, and the life of this trademark will extend for the
duration of its use. The Company considers this trademark to be a
valuable intangible intellectual property asset.
SERVICES
It is important to identify the specific tastes and needs of the
residents of an adult living community, which can vary from region to
region and from one age group to the next. Residents who are 70 years old
have different needs than those who are 85. The Company has retained a
gerontologist to insure that programs and activities are suitable for all
of the residents in a community and that they are adjusted as these
residents "age in place". Both independent and assisted-living services
will be offered at all of the Company's newly, developed communities.
BASIC SERVICE AND CARE PACKAGE. The Company provides four levels of
service at its adult-living communities:
Level I is Independent Living which includes three meals per day,
weekly housekeeping, activities program, 24-hour security and
transportation for shopping and medical appointments.
Level II or Catered Living offers all of the amenities of Level I in
addition to all utilities, personal laundry and daily housekeeping.
Level III is Assisted Living, which offers three meals per day, daily
housekeeping, 24-hour security, all utilities, medication management,
activities and nurse's aides to assist the residents in daily bathing and
dressing.
Level IV is especially designed to meet the needs of our assisted
living residents who require increased assistance with the activities of
daily living. We are able to accommodate residents with walkers or
wheelchairs,
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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
4,646 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 %
YEAR AT
NUMBER OF ACQUIRED JANUARY 24,
COMMUNITY (1) STATE UNITS (2) 1997
------------- ------ -------- --------- -----------
The Grand Court Arizona 166 1997 96%(3)
Mesa
The Grand Court Arizona 136 1991 98%
Phoenix
The Grand Court Florida 184 1989 95%
Fort Myers
The Grand Court Florida 126 1996 76%
Lakeland
The Grand Court Florida 170 1992 91%
Lake Worth
The Grand Court Florida 189 1995 66%
North Miami
The Grand Court Florida 60 1993 99%
Pensacola
The Grand Court I Florida 72 1994 88%
Pompano Beach(4)
The Grand Court II Florida 42 1994 67%
Pompano Beach(4)
The Grand Court Florida 94 1995 95%
Tavares
The Grand Court Florida 164 1997 99%
Tampa
The Grand Court Illinois 76 1993 100%
Belleville
The Grand Court II Kansas 127 1994 99%
Kansas City
The Grand Court Kansas 275 1990 99%
Overland Park
The Grand Court Michigan 164 1993 100%
Farmington Hills
The Grand Court Michigan 114 1994 99%
Novi
The Grand Court I Missouri 173 1989 96%
Kansas City
The Grand Court Missouri 217 1989 81%
III Kansas City(5)
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NUMBER OF YEAR OCCUPANCY % AT
COMMUNITY(1) STATE UNITS ACQUIRED JANUARY 24, 1997
---------------- --------- -------- --------- -----------------
600 E. 8th St. Missouri 237(6) 1990 72%
The Grand Court Nevada 152 1991 97%
Las Vegas
The Grand Court Ohio 120 1994 93%
Columbus
The Grand Court Ohio 185 1994 100%
Dayton
The Grand Court Ohio 73 1992 88%
Findlay
The Grand Court Ohio 77 1992 86%
Springfield
The Grand Court I Tennessee 143(7) 1995 90%
Chattanooga
The Grand Court II Tennessee 146 1995 100%
Chattanooga
The Grand Court Tennessee 197 1992 92%
Memphis
The Grand Court Tennessee 197 1996 58%
Morristown
The Grand Court Texas 180 1992 92%
Bryan
The Grand Court Texas 132 1990 95%
Longview
The Grand Court Texas 139 1991 97%
Lubbock
The Grand Court I Texas 198 1993 96%
San Antonio
The Grand Court II Texas 57(8) 1995 93%
San Antonio
The Grand Court Texas 60 1996 72%
Weatherford
The Grand Court Virginia 98 1995 100%
Bristol
----------------------
(1) In certain cases, more than one Investing Partnership owns an interest
in one Owning Partnership. There are therefore, more Investing
Partnerships than there are Owning Partnership. One of the Owning
Partnerships owns two adult living communities 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 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) The occupancy rate of The Grand Court Mesa is as of January 30, 1997.
(4) These are adjacent properties and are counted as one adult living
community.
(5) A portion of the units at The Grand Court III Kansas City are rented,
from time to time, as residential apartment units.
(6) 600 E. 8th St. is a 237-unit residential apartment complex.
(7) Grand Court I Chattanooga's unit count includes a 70-bed nursing wing.
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(8) Grand Court II San Antonio is a 57-bed licensed nursing facility.
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.
REGIONAL. The Company has eight regional administrators: one
responsible for six Florida communities and the one residential apartment
complex property operated by the Company, one responsible for two
communities in Tennessee, two in Arizona and one in Nevada, one responsible
for five communities in Texas and the one nursing home operated by the
Company, one responsible for three communities in Missouri, two communities
in Kansas, two communities in Michigan and one community in Illinois, one
responsible for four communities in Ohio and one in Tennessee, and one
responsible for one community in Florida, one in Tennessee and one in
Virginia. The Company also has a regional administrator who oversees its
food division. In addition, one regional administrator and various other
Company personnel oversee the third-party managing agents that operate
multi-family properties in which the equity interests are pledged to the
Company to secure notes owed to it. Each regional administrator is
reported to by the manager of those communities he oversees.
COMMUNITY. The management team at each community consists of an
administrator, who has overall responsibility for the operation of the
community, an activity director, a marketing director and, at certain
larger communities, one or two assistant administrators. Each community
which offers assisted-living services has a staff responsible for the
assisted-living care giving services. This staff consists of a lead
resident aide, a medication room aide, certified nurse aides and trained
aides, and, in those states which so require, registered nurses. At least
one staff member is on duty 24 hours per day to respond to the emergency or
scheduled 24-hour assisted-living services available to the residents. Each
community has a kitchen staff, a housekeeping staff and a maintenance
staff. The average community currently operated by the Company has 40 to 50
full-time employees depending on the size of the community and the extent
of services provided in that community.
The Company places emphasis on diet and nutrition, as well as
preparing attractively presented healthy meals which can be enjoyed by the
residents. The Company's in-house food service program is led by a regional
administrator who reviews all menus and recipes for each community. The
menus and recipes are reviewed and changed based on consultation with the
food director and input from the residents. The Company provides special
meals for residents who require special diets.
EMPLOYEES. The Company emphasizes maximizing each employee's
potential through support and training. The Company's training program is
conducted on three levels. Approximately six times per year, corporate
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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 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
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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 4,646 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 must also
comply with the requirements of the Americans With Disabilities Act and are
subject to various local building codes and other ordinances, including
fire safety codes. While the Company relies almost exclusively on private
pay residents, the Company operates a nursing home 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%
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.
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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.
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. 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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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
Name Age Position
---- ---- --------
John Luciani(1) 64 Chairman of the Board and Chief
Executive Officer
Bernard M. 66 Chief Operating Officer, President
Rodin(2) and Director
John W. Luciani 44 Executive Vice President and
III Director
Paul Jawin 41 Chief Financial Officer
Dorian Luciani 41 Senior Vice President Acquisition
and Construction
Deborah Luciani 39 Vice President New Business
Development and Acquisitions
Edward J. Glatz 54 Vice President Construction
Catherine V. 31 Vice President and Treasurer
Merlino
Keith Marlowe 34 Secretary
Walter 78 Director
Feldesman(1)(2)
Leslie E. 53 Director
Goodman(1)(2)
-------------------------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
JOHN LUCIANI, Chief Executive Officer and Chairman of the Board of
Directors, founded the earliest predecessor of the Company in 1969 and has
been engaged in a number of business activities and investments since 1952.
Commencing in 1960, he entered into the real estate development and
construction business, concentrating initially on the development,
construction and sale of residential high-rise apartment buildings and
single-family homes and subsequently on the acquisition and development of
multi-family rental housing complexes. Since 1986, he has concentrated on
the acquisition, development and financing of adult living communities for
the elderly. Mr. Luciani founded the earliest predecessor of the Company
with Bernard M. Rodin in 1969. Mr. Luciani was a general partner of two
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 two
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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<PAGE>
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., a
real estate software company, 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.
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<PAGE>
DIRECTOR COMPENSATION
The Company will pay each Director who is not an employee of the
Company $1,000 per Board meeting attended and $500 per Committee meeting
attended. All Directors are reimbursed by the Company for their out-of-
pocket expenses incurred in connection with attendance at meetings of, and
other activities related to service on, the Board of Directors or any Board
Committee.
AUDIT COMMITTEE
The Board of Directors established an Audit Committee in June 1996.
The Audit Committee is currently composed of Messrs. Rodin, Feldesman and
Goodman. The Audit Committee's duties include reviewing internal financial
information, monitoring cash flow, budget variances and credit
arrangements, reviewing the audit program of the Company, reviewing with
the Company's independent accountants the results of all audits upon their
completion, annually selecting and recommending independent accountants,
overseeing the quarterly unaudited reporting process and taking such other
action as may be necessary to assure the adequacy and integrity of all
financial information distributed by the Company.
COMPENSATION COMMITTEE
The Board of Directors established a Compensation Committee in June
1996. The Compensation Committee is currently composed of Messrs. John
Luciani, Feldesman and Goodman. The Compensation Committee recommends
compensation levels of senior management and works with senior management
on benefit and compensation programs for Company employees.
EXECUTIVE COMPENSATION
The following table shows, as to the Chief Executive Officer and each
of the four other most highly compensated executive officers information
concerning compensation accrued for services to the Company in all
capacities during the fiscal years ended January 31, 1996 and 1997,
respectively.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------
OTHER
ANNUAL
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
----------------------------- ----- ------ ------ ------------
John Luciani, Chairman of the
Board and Chief Executive fiscal
Officer(1) . . . . . . . . . 1995 - - -
fiscal
1996 $500,000 - -
Bernard M. Rodin, Chief
Operating Officer, President fiscal
and Director(1) . . . . . . . 1995 - - -
fiscal
1996 $500,000 - -
John W. Luciani, III,
Executive Vice President and fiscal
Director . . . . . . . . . . 1995 $315,000 - -
fiscal
1996 $350,000 - -
NAMES AND PRINCIPAL POSITION YEAR ALL OTHER COMPENSATION ($)
------------------------------ ---- ---------------------------
John Luciani, Chairman fiscal
of the Board and Chief 1995 $1,450,000
Executive Officer(1)
fiscal
1996 $ 497,000
Bernard M. Rodin, Chief fiscal
Operating Officer, Presidnent 1995 $1,450,000
and Director(1)
fiscal
1996 $ 497,000
John W. Luciani, III, Executive fiscal
President and Director 1995 -
fiscal
1996 -
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<PAGE>
ANNUAL COMPENSATION
--------------------------------
OTHER
ANNUAL
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
----------------------------- ----- ------ ------ ------------
Dorian Luciani, Senior Vice fiscal
President . . . . . . . . . . 1995 $315,000 - -
fiscal
1996 $350,000 - -
Paul Jawin, Chief Financial fiscal
Officer . . . . . . . . . . . 1995 $289,050 - -
fiscal
1996 $325,000 - -
ALL
OTHER
COMPENSATION
NAME AND PRINCIPAL POSITION ($)
--------------------------- --------------
-
Dorian Luciani, Senior Vice President . . . . . . -
-
Paul Jawin, Chief Financial Officer . . . . . . . -
---------------
(1) Messrs. Luciani and Rodin received dividends and distributions from
the Company's predecessors but did not receive salaries. As of April
1, 1996 a salary for each of Messrs. Luciani and Rodin was established
at the rate of $600,000 per year. In the first nine months of 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 to an eligible
employee owning more than 10% of the outstanding Common Stock or stock of
any subsidiary or
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<PAGE>
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 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
four 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 $5,495,500,
$943,000, $850,000 and $397,000 in Fiscal 1993, 1994 and 1995 and the nine
months ended October 31, 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 notes, aggregating $106.5 million, net of
deferred income, as of October 31, 1996, that are secured by the limited
partnership interests in such partnerships. 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 Messrs. Luciani and Rodin is approximately $38.5
million and $38.5 million, respectively. In addition, Messrs. Luciani and
Rodin and certain employees will devote a portion of their time to
overseeing the third-party managers of multi-family properties and one
adult living community in which Messrs. Luciani and Rodin have financial
interests but the Company does not.
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<PAGE>
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. As a result of the
transfers by the Selling Stockholders and their affiliate of the Assigned
Interests to the Investing Partnerships which issued certain Multi-Family
Notes, the recorded value of such Multi-Family Notes and "Other Partnership
Receivables" is unchanged and the Company has recorded a contribution to
capital of $21.3 million. Each of the Selling Stockholders was a general
partner of two of the Protected Partnerships, but withdrew as a general
partner prior to such partnerships' filings of the respective Chapter 11
Petitions.
During Fiscal 1995 and the nine months ended October 31, 1996, the
Company paid to Francine Rodin, the wife of Bernard M. Rodin, the Company's
Chief Operating Officer, President and a Director, $121,876 and $118,000,
respectively, as fees for introducing to the Company broker/dealers that
have assisted the Company in the sale of limited partnership interests in
Investing Partnerships. Mrs. Rodin will receive a fee with respect to any
future sales of such limited partnership interests and other securities
offered by the Company, excluding shares of Securities offered hereby, by
such broker/dealers. During Fiscal 1995 and the nine months ended
October 31, 1996, Francine Rodin received consulting fees of $51,510 and
$49,435, respectively, in connection with coordinating the Company's travel
arrangements and marketing efforts. Mrs. Rodin is now an employee of the
Company and performs similar services.
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 $6,271,802 is currently outstanding.
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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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of October 31,
1996, 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% 150,000 7,350,000 45.37%
Bernard M. Rodin 7,500,000 50% 150,000 7,350,000 45.37%
All directors and
officers as a
group . . . . . 15,000,000 100% 300,000 14,700,000 90.74%
------------------
(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 22,500 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 89.5% 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 84.2% 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 82.3% 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 Representative's Warrants), there will be outstanding: (a) 16,200,000
shares of Common Stock, consisting of (i) 14,700,000 shares currently owned
by the Selling Stockholders and not offered hereby; (ii) 1,200,000 shares
to be sold by the Company hereby; (iii) the 300,000 shares to be sold by
the Selling Stockholders hereby and (b) 1,500,000 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 1,875,000 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 $.85 per share per annum, payable quarterly on the last
business day of January, April, July and October of each year, commencing
April 30, 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 October
31, 1996, the Company had available surplus of approximately $31 million
(or approximately $53 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 by virtue of such dividend or distribution.
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 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
Representative's 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
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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 March , 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 March , 2001 [four
years after the date of this Prospectus] at the redemption prices set forth
below, plus accumulated and unpaid dividends:
REDEMPTION
PRICE
PER SHARE
DATE OF REDEMPTION ----------
March , 2001 to March , 2002 . . . . . . . . . $
March , 2002 to March , 2003 . . . . . . . . .
March , 2003 to March , 2004 . . . . . . . . .
March , 2004 and thereafter . . . . . . . . . . .
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 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
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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 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
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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 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
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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 Representative's 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
16,200,000 shares of Common Stock. Of these shares, 1,500,000 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 14,700,000 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 under the Securities Act or unless an exemption
from registration, such as the exemption provided by Rule 144 under the
Securities Act, is available.
In general, under Rule 144, as currently in effect, any person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned Restricted Shares for at least a two-year period (as
computed under Rule 144) is entitled to sell within any three-month period
a number of such shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock (approximately 162,200 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 three-year period
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(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 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 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, the
Representative holds the Representative's Warrants which entitle it to
purchase up to approximately 275,000 shares of the Company's Common Stock
(including approximately 125,000 shares of Common Stock to be acquired upon
conversion of the 150,000 shares of Convertible Preferred Stock which may
be acquired upon exercise of the Representative's Warrants). The
Representative's 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
Representative's Warrants and/or the underlying Common Stock for sale in
the public market. The issuance of Common Stock pursuant to the exercise
of the Representative's 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.
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
October 31, 1996. The Company cannot accurately determine whether such
deficit will exist 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 accumulated earnings and profits, if any, on
January 31, 1997 and its future earnings and profits.
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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.
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
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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.
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.
-74-
<PAGE>
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 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:
-75-
<PAGE>
Number of
Shares
Number of of Convertible
Underwriters Shares of Common Stock Preferred Stock
----------- ---------------------- ---------------
National Securities
Corporation . . . .
-------- ----------
Total . . . . . . . . . . . . . . 1,500,000 1,500,000
========= =========
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.
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 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 180,000 shares of Common Stock and up to 225,000 shares of
Convertible Preferred Stock and to purchase from the Selling Stockholders
up to an additional 45,000 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 and certain restricted transfers to and by the
estate of the Selling Stockholders are permitted. An appropriate legend
shall be marked on the face of certificates representing all such
securities.
-76-
<PAGE>
In connection with this Offering, the Company has agreed to sell to
the Representative, at a price of $.0001 per warrant, the Representative's
Warrants to purchase from the Company up to 150,000 shares of Common Stock
and up to 150,000 shares of Convertible Preferred Stock. The
Representative's 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's 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 Representative's 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
Representative's Warrants upon the occurrence of certain events. The
Representative's 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 17 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 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."
-77-
<PAGE>
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 and financial statement schedule
of the Company as of January 31, 1995 and 1996 and for each of the three
years in the period ended January 31, 1996, included in this Prospectus and
Registration Statement have been audited by Deloitte & Touche LLP,
independent accountants, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
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.
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.
-78-
<PAGE>
GRAND COURT LIFESTYLES, INC. and SUBSIDIARIES
__________
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 1995 and 1996
(as restated) and October 31, 1996 F-3
Consolidated Statements of Operations for the Years ended
January 31, 1994, 1995 and 1996 (as restated), the Three
Months ended October 31, 1995 and 1996 and the Nine Months ended
October 31, 1995 and 1996 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended January 31, 1994, 1995 and 1996
(as restated) and the Nine Months ended October 31, 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended January 31, 1994, 1995 and 1996 (as restated)
and the Nine Months ended October 31, 1996 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Grand Court Lifestyles, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Grand Court
Lifestyles, Inc. and subsidiaries as of January 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31,
1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Grand
Court Lifestyles, Inc. and subsidiaries as of January 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the
three years in the period ended January 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 13, the accompanying consolidated financial statements
have been restated.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
April 26, 1996, except for Notes 12c
and 13, as to which the date is February 3, 1997.
F-2
<PAGE>
GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share data)
--------------------------------------------------------------------------
JANUARY 31, OCTOBER 31,
------------- --------------
(AS RESTATED) (UNAUDITED)
1995 1996 1996
----- ----- -----
ASSETS
Cash and cash equivalents $10,950 $17,961 $8,860
Notes and receivables net 220,014 223,736 224,377
Investments in
partnerships . . . . . . 2,040 2,607 2,643
15,081 15,251 19,435
Other assets net . . . . ------- -------- --------
$248,085 $259,555 $255,315
Total assets . . . . . . ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Loans and accrued interest
payable . . . . . . . . . $127,355 $140,094 $138,848
Notes and commissions
payable . . . . . . . . . 3,569 1,684 2,134
Other liabilities . . . . 2,000 4,018 4,364
84,955 79,442 78,664
Deferred income . . . . . -------- -------- -------
217,879 225,238 224,010
Total liabilities . . . .
Commitments and
contingencies
Stockholders' equity
Common Stock, $.10 par
value -
authorized, 10,000
shares;
issued and outstanding,
9,224 shares . . . . . . 1 1 1
Paid-in capital . . . . . 30,205 34,316 54,002
- - (22,698)
Accumulated deficit . . . ------- ------- --------
30,206 34,317 31,305
TOTAL STOCKHOLDERS' EQUITY
------- ------- --------
Total liabilities and $248,085 $259,555 $255,315
stockholders' equity . . ========= ======== ========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
GRAND COURT LIFESTYLES, INC. SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
--------------------------------------------------------------------------
YEARS ENDED THREE MONTHS ENDED
JANUARY 31, OCTOBER 31,
---------------------------- -------------------
(AS RESTATED) (unaudited)
1994 1995 1996 1995 1996
--------- -------- ------- ------- ---------
Revenues:
Sales . . . . . . . . $21,807 $23,413 $32,804 $7,080 $6,861
Syndication Fee Income 7,564 5,587 8,603 1,734 1,511
Deferred income earned 6,668 3,518 9,140 2,285 -
Interest income . . . 13,315 9,503 12,689 2,107 3,157
Property management
fees from related
parties . . . . . . . 3,899 4,360 4,379 614 975
Equity in
Earnings/Loss from
Partnerships . . . . 206 276 356 89 136
- - 1,013 18 -
Other income . . . . -------- -------- -------- ------ -------
53,549 46,657 68,984 13,927 12,640
-------- --------- -------- ------ -------
Cost and Expenses:
Cost of sales . . . . 26,876 21,514 27,406 4,989 8,170
Selling . . . . . . . 6,706 6,002 7,664 1,559 1,114
Interest . . . . . . . 10,991 13,610 15,808 3,745 4,215
General and
administrative . . . 5,226 6,450 7,871 2,077 1,998
Property Management
Expense . . . . . . . 45 238 604 76 881
Loss on Impairment of
Receivables . . . . . - - - - 1,589
Officers' Compensation 1,200 1,200 1,200 300 300
Depreciation and 1,433 2,290 2,620 395 809
amortization . . . . ------- -------- -------- ------ ------
52,477 51,304 63,173 13,141 19,076
------- -------- -------- ------ ------
Income (loss) before
provision (benefit)
for income taxes . . . 1,072 (4,647) 5,811 786 (6,436)
Provision (benefit) - - - - -
for income taxes . . . ------- ----------------- ------ -------
Net income (loss) . . . 1,072 (4,647) 5,811 786 (6,436)
Pro forma income tax 429 (1,859) 2,324 315 -
provision (benefit) . ------- -------- ------- ------ ------
Pro forma $643 $(2,788) $3,487 $471 $(6,436)
net income (loss) . . ======= ======== ====== ====== =======
Pro forma earnings
(loss) per common $.04 $(.19) $.23 $.03 $(.43)
share . . . . . . . . ======= ======== ====== ====== =======
Pro forma weighted
average common shares 15,000 15,000 15,000 15,000 15,000
used . . . . . . . . . ======= ======= ======= ====== ======
NINE MONTHS ENDED
OCTOBER 31,
---------------------------
(UNAUDITED)
1995 1996
---- ----
Revenues:
Sales . . . . . . . . . . . . . . . $22,986 $22,232
Syndication Fee Income . . . . . . 5,819 4,976
Deferred income earned . . . . . . 6,855 -
Interest income . . . . . . . . . . 9,137 11,043
Property management fees from
related parties . . . . . . . . . 3,324 2,420
Equity in Earnings/Loss
from Partnerships . . . . . . . . 269 250
943 -
Other income . . . . . . . . . . . ------ -------
49,333 40,921
------ -------
Cost and Expenses:
Cost of sales . . . . . . . . . . . 19,844 17,493
Selling . . . . . . . . . . . . . . 5,413 4,603
Interest . . . . . . . . . . . . . 11,636 12,017
General and administrative . . . . 5,419 5,687
Property Management
Expense . . . . . . . . . . . . . 320 2,791
Loss on Impairment of
Receivables . . . . . . . . . . . - 18,442
Officers' Compensation . . . . . . 900 900
Depreciation and 1,886 2,539
amortization . . . . . . . . . . ------ -------
45,418 64,472
------ -------
Income (loss) before
provision (benefit)
for income taxes . . . . . . . . . 3,915 (23,551)
Provision (benefit) - -
for income taxes . . . . . . . . . ------ --------
Net income (loss) . . . . . . . . . . 3,915 (23,551)
Pro forma income tax 1,566 (2,093)
provision (benefit) . . . . . . . . ------ --------
Pro forma $2,349 $(21,458)
net income (loss) . . . . . . . . . ====== ========
Pro forma earnings (loss) $.16 $(1.43)
per common share . . . . . . . . . ====== ========
Pro forma weighted average 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, 1994, 1995 AND 1996 (AS RESTATED) AND NINE MONTHS
ENDED OCTOBER 31, 1996
(In Thousands)
--------------------------------------------------------------------------
Stockholders' equity, January 31, 1994 . 36,739
Net loss . . . . . . . . . . . . . . . (4,647)
Dividends . . . . . . . . . . . . . . . (1,886)
-------
Stockholders' equity, January 31, 1995 . 30,206
Net income . . . . . . . . . . . . . . 5,811
Dividends . . . . . . . . . . . . . . . (1,700)
-------
Stockholders' equity, January 31, 1996 . 34,317
Net loss (unaudited) . . . . . . . . . (23,551)
Capital Contribution (unaudited) . . . 21,333
Dividends (unaudited) . . . . . . . . . (794)
------
Stockholders' equity, October 31, 1996 $31,305
(unaudited) . . . . . . . . . . . . . . . =======
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
--------------------------------------------------------------------------
YEARS ENDED JANUARY 31,
---------------------------------
(AS RESTATED)
1994 1995 1996
----- ----- ----
Cash flows from operating activities:
Net income (loss) . . . . . . . . . $1,072 $(4,647) $5,811
------- ------- ------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization and depreciation . . 1,433 2,290 2,620
Loss on impairment of receivables - - -
Deferred income earned . . . . . (6,668) (3,518) (9,140)
Adjustment for changes in assets and
liabilities:
Accrued interest income on notes
receivable and receipt of notes
receivable . . . . . . . . . . . . (1,241) 174 (2,560)
(Increase) decrease in notes and
receivables . . . . . . . . . . . 7,945 7,223 (1,162)
Increase (decrease) in commissions
payable . . . . . . . . . . . . . . 1,011 (501) (244)
Increase (decrease) in other
liabilities . . . . . . . . . . . . (1,278) (506) 2,018
Increase (decrease) in deferred 4,401 632 3,627
income . . . . . . . . . . . . . . ------ ------ -------
5,603 5,794 (4,841)
------ ------ -------
Net cash provided (used) by operating 6,675 1,147 970
activities . . . . . . . . . . . . ------ ------ -------
Cash flows from investing activities:
(Increase) decrease in investments . (294) (591) (567)
------ ------ -------
Net cash provided (used) by investing (294) (591) (567)
activities . . . . . . . . . . . . ------ ------ -------
Cash flows used in financing
activities:
Decrease in loans payable . . . . . (21,629) (31,311) (39,326)
Increase in loans and accrued
interest payable . . . . . . . . . 34,429 44,014 52,065
(Increase) decrease in other assets (2,701) (7,180) (2,790)
Payments of notes payable . . . . . (2,609) (2,578) (1,641)
(Dividends) Contributions . . . . . (10,991) (1,886) (1,700)
------- ------- -------
Net cash provided (used) in
financing activities . . . . . . . (3,501) 1,059 6,608
------- ------- -------
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . 2,880 1,615 7,011
Cash and cash equivalents, beginning
of period . . . . . . . . . . . . . 6,455 9,335 10,950
------ ------- -------
Cash and cash equivalents, end of
period . . . . . . . . . . . . . . $9,335 $10,950 $17,961
====== ======= =======
Supplemental information:
Interest paid . . . . . . . . . . . $10,710 $12,914 $16,922
======= ======= =======
Non cash capital contribution . . . - - -
======= ======= =======
NINE MONTHS ENDED OCTOBER 31,
(UNAUDITED)
1995 1996
-------------- --------------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . $3,915 $(23,551)
------- --------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization and depreciation . . . 1,886 2,539
Loss on impairment of receivables . - 18,442
Deferred income earned . . . . . . (6,855) -
Adjustment for changes in assets and
liabilities:
Accrued interest income on notes
receivable and receipt of notes
receivable . . . . . . . . . . . . (597) 118
(Increase) decrease in notes and
receivables . . . . . . . . . . . (9,353) 2,132
Increase (decrease) in commissions
payable . . . . . . . . . . . . . (387) 574
Increase (decrease) in other
liabilities . . . . . . . . . . . 348 346
Increase (decrease) in deferred 2,627 (778)
income . . . . . . . . . . . . . . ------- -------
(12,331) 23,373
------- -------
Net cash provided (used) by (8,416) (178)
operating activities . . . . . . . ------- -------
Cash flows from investing activities:
(Increase) decrease in investments . (260) (36)
------- -------
Net cash provided (used) by (260) (36)
investing activities . . . . . . ------- -------
Cash flows used in financing activities:
Decrease in loans payable . . . . . . (30,611) (39,450)
Increase in loans and accrued interest
payable . . . . . . . . . . . . . . . 42,993 38,204
(Increase) decrease in other assets . (2,727) (6,723)
Payments of notes payable . . . . . . (1,094) (124)
(Dividends) Contributions . . . . . . (1,352) (794)
-------- --------
Net cash provided (used) in 7,209 (8,887)
financing activities . . . . . . . -------- --------
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . (1,467) (9,101)
Cash and cash equivalents, beginning of 10,950 17,961
period . . . . . . . . . . . . . . . . -------- -------
Cash and cash equivalents, end of period
$9,483 $8,860
======== =======
Supplemental information:
Interest paid . . . . . . . . . . . . $11,193 $11,587
======= =======
Non cash capital contribution . . . . - $21,333
======= =======
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1994, 1995 AND 1996, THREE MONTHS ENDED OCTOBER 31,
1996 AND THE NINE MONTHS ENDED OCTOBER 31, 1996
(Information pertaining to the period October 31, 1996 is unaudited)
(In Thousands)
---------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
Grand Court Lifestyles, Inc. (the "Company") was formed pursuant to
the merger of various Sub-chapter S corporations which were wholly-
owned by the Selling Stockholders and the transfer of certain assets
by and assumption of certain liabilities of (i) a partnership that was
wholly-owned by the Selling Stockholders and (ii) the Selling
Stockholders individually. In exchange for the transfer of such
stock, assets and liabilities, the Selling Stockholders received
shares of the Company's common stock. These transactions are
collectively called the "reorganization". All of the assets and
liabilities 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, a fully
integrated provider of adult living accommodations and services,
acquires, finances, develops and manages adult living communities. As
a result of the Company's financing activities, limited partnerships
("Investing Partnerships") are formed whereby the Company retains a 1%
to 1.5% general partnership interest.
LINE OF BUSINESS The Company's revenues have been and are expected to
continue to be primarily derived from sales of partnership interests
in partnerships it organizes to finance the acquisition of existing
adult living communities. Investing Partnerships generally own a
98.5% to 99% interest in partnerships that own adult living
communities ("Owning Partnerships"). The Company also arranges for
the mortgage financing of the adult living communities and is involved
in the development and management of adult living communities.
Another source of income is interest income on notes receivable.
The adult living communities and multi-family properties are located
throughout the United States. The Company as of January 31, 1996
manages approximately 28 adult living communities.
UNAUDITED INTERIM FINANCIAL STATEMENTS The Consolidated Financial
Statements as of October 31, 1996 and for the three and nine months
ended October 31, 1995 and 1996 includes, in the opinion of
management, all adjustments consisting only of normal recurring
adjustments necessary for a fair presentation of the financial
position and results of operations for these periods. The results for
interim period ended October 31, 1996 are not necessarily indicative
of the results that maybe expected for the entire year.
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
F-7
<PAGE>
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. 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 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 projects are recognized immediately upon sale.
ALLOWANCE ON NOTES RECEIVABLE In the event that the facts and
circumstances indicate that the collectibility of a note may be
impaired, an evaluation of recoverability is performed. If an
evaluation is performed, the Company compares the recorded value of
the note to the value of the underlying property less any encumbrances
to determine if a write-down is required for impairment. Interest
income on multi-family notes is recognized on the cash basis.
ACCOUNTING ESTIMATES The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make significant estimates and assumptions that affect
the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
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 FINANCING AND DEBT EXPENSE Costs incurred in connection with
obtaining long-term financing have been capitalized and are amortized
over the term of the financing.
DEFERRED PROJECT COSTS Costs incurred in connection with the
construction and development of adult living communities the Company
intends to build. Such costs include the capitalization of interest
during the construction period.
INVESTMENTS The Company accounts for its interest in limited
partnerships under the equity method of accounting. The Company uses
this method because as the general partner it can exercise significant
influence over the operating and financial policies of such
partnerships. Under this method the Company records its share of
income and loss of the entity as well as any distributions or
contributions as an increase or decrease to the investment account.
The carrying amount of the investments in limited partnerships differs
from the Company's underlying equity interest based upon its stated
ownership percentages. Such differences are attributable to the
disproportionate amount of money and notes invested in the entities by
the Company for its equity interest as compared to the other
investors. This difference is being amortized over the estimated life
of the underlying partnership.
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 Seller Stockholders who were the sole
shareholders and partners of those entities.
F-8
<PAGE>
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 107, "Disclosure about
Fair Value of Financial Instruments." The Company is unable to
determine the fair value of its notes and receivables as such
instruments do not have a ready market. Other financial instruments
are believed to be stated at approximately their fair value.
4. NOTES AND RECEIVABLES
Notes and other receivables are from related parties and consist of
the following:
JANUARY 31, OCTOBER 31,
------------ ----------
1995 1996 1996
----- ----- ------
Notes receivable - multi-family
(a)(f) $178,706 $174,025 $174,154
Notes and accrued interest
receivable - adult living (b) . - 3,228 4,222
Other partnership receivables
(c)(f) . . . . . . . . . . . . . 46,984 52,295 52,634
Mortgages (d) . . . . . . . . . . 7,324 7,188 -
- - 3,476
Accrued interest receivable . . . ------- ------ ------
233,014 236,736 234,486
Less allowance for uncollectible 13,000 13,000 10,109
receivables (e) . . . . . . . . . -------- -------- --------
$220,014 $223,736 $224,377
======== ========= =========
At January 31, 1995 and 1996 and October 31, 1996 the carrying value
of impaired notes receivable, net of deferred income, were approximately
$48,900, $48,900 and $33,800, respectively. Interest income on impaired
notes is recognized on the cash basis. Such income recognized was $2,329,
$2,272 and $1,688 for the years ended January 31, 1995 and 1996 and the
nine months ended October 31, 1996, 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. Fifty-
one of the 169 notes (approximately $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 $7,621, $6,764 and $5,586 for the years ended
January 31, 1995 and 1996 and the nine months ended October 31,
1996, 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 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 cash flows distributed by the
related multi-family properties and the proceeds in the event of
a sale or refinancing.
F-9
<PAGE>
(d) The mortgages bear interest at rates ranging from 8% to 9%. The
mortgages are generally collateralized by a mortgage lien on the
related adult living communities. As of October 31, 1996 all
mortgage receivables were paid in full.
(e) Allowance of Uncollectible Receivables:
Balance at Charged to Deductions Balance at
Beginning Costs and to Allowance End of
of Period Expenses ------------ Period
--------- ----------- ----------
YEAR ENDED
JANUARY 31, 1995
Reserve on Notes
Receivable $13,000,000 - - $13,000,000
YEAR ENDED
JANUARY 31, 1996
Reserve on Notes
Receivable $13,000,000 - - $13,000,000
NINE MONTHS ENDED
OCTOBER 31, 1996
(UNAUDITED)
Reserve on Notes
Receivable 13,000,000 18,442,000 $21,333,000 $10,109,000
The Company has recorded a loss of $18.4 million to reflect the
impairment of certain multi-family notes receivable. 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 in view of the state of facts at such time. In that
the Selling Stockholders transferred the Assigned Interests in
July 1996, the one Protected Partnership that did not file a
Chapter 11 Petition had decided in July 1996 not to resist
foreclosure, and the nine Protected Partnerships that filed
Chapter 11 Petitions filed said petitions in August 1996 (or by
August 1996 expected to do so in the future), the Company
reflected both the related $21.3 million capital contribution and
the $18.4 million loss in the nine months ended October 31, 1996.
(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.
F-10
<PAGE>
5. OTHER ASSETS
Other assets are comprised as follows:
JANUARY 31, OCTOBER 31,
-------------- ----------
1995 1996 1996
------ ------ ------
Deferred loan costs (a) . . . 6,910 7,994 7,326
Investment in Caton (b) . . . 1,854 1,854 1,782
Unsold subscription units (c) - 595 408
Investment held for resale (d) 4,396 - -
Deferred registration costs - 833 2,021
(e) . . . . . . . . . . . . .
Deferred project costs (f) . - - 5,653
Other assets . . . . . . . . 1,921 3,975 2,245
------ ------ ------
15,081 15,251 19,435
====== ====== ======
(a) Financing costs of $2,410, $3,578 and $1,724 were capitalized during
the years ended January 31, 1995, 1996 and the period ended October
31, 1996 respectively. These costs are being amortized using the
straight-line method over periods ranging from one to ten years.
(b) The Company has approximately a 50% equity interest in Caton
Associates, a partnership which owns a mortgage loan collateralized by
interests in a cooperative apartment building. The Company's equity
interest in this partnership totaled $466 at January 31, 1995, 1996
and October 31, 1996. Additionally, the Company owns certain
cooperative apartments in such building recorded at $1,388 at
January 31, 1995, 1996 and $1,316 at October 31, 1996.
(c) The Company has capitalized $595 and $408 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 October 31, 1996
respectively. Upon completion of these transactions such costs will
be charged to cost of sales.
(d) The Company capitalized as an investment held for resale costs
associated with the financing of the acquisition of adult living
communities. The costs associated with the financing accrued during
the fiscal year ending January 31, 1996 at which time the investment
was charged to cost of sales.
(e) The Company has capitalized costs relating to 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.
(f) The Company has capitalized costs which include interest associated
with its construction and development of properties it intends to
build. If a project is discontinued, any deferred project costs are
expensed.
F-11
<PAGE>
6. LOANS AND ACCRUED INTEREST PAYABLE
Loans payable consists of the following:
JANUARY 31, OCTOBER 31,
---------------------- -------------
1995 1996 1996
----- ---- ----
Banks (including mortgages) $39,261 $41,361 $33,008
(a) (b) (c) . . . . . . . .
Other, principally 88,094 98,733 105,840
debentures (d) . . . . . . ------- -------- --------
$127,355 $140,094 $138,848
======== ======== ========
(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
October 31, 1996 was 8.5% and 8.25% respectively.
(b) In addition to the aforementioned bank loans, the Company had three
additional loans from banks. Each of the loans were collateralized by
an assignment of the first mortgage loans payable to the Company. Two
of the loans bore interest at rates varying from 8% to 9% per annum
and were scheduled to come due on various dates through 1996. In
March 1996, the partnerships that own these properties refinanced two
of these mortgages, which eliminated them as obligations of the
Company. The third loan bore interest at the rate of 9.5% per annum
and was scheduled to mature on March 31, 1997. The remaining loan has
been paid in full as of October 31, 1996.
(c) 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 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
1996 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
-----------
1997 . . . . . . . . . . . . $37,170
1998 . . . . . . . . . . . . 12,887
1999 . . . . . . . . . . . . 29,660
2000 . . . . . . . . . . . . 15,426
2001 . . . . . . . . . . . . 17,428
Thereafter . . . . . . . . . 26,628
-------
139,199
Accrued interest . . . . . . 895
------
$140,094
========
F-12
<PAGE>
7. OTHER LIABILITIES
a. Other liabilities include advances and certain expenses. These
amounts do not bear interest and have no specific repayment date.
b. Unearned income of $963 and $720 was recorded for the amount of
unsubscribed partnership interests in adult living communities
financed during the year ended January 31, 1996 and the period
ended October 31, 1996, respectively. Upon full subscription
these amounts will be recognized as income.
8. DEFERRED INCOME
Deferred income is comprised of:
JANUARY 31, OCTOBER 31,
-------------- ------------
1995 1996 1996
----- ----- ----
Multi-family . . . . . . . $69,280 $68,447 $67,689
Adult living(a) . . . . . . 15,675 10,995 10,975
------- ------- -------
$84,955 $79,442 $78,664
======== ======== ========
a. The aggregate amount of guaranteed return obligations for each of
the fiscal years 1996 through 2002 based on existing management
contracts is $12.4 million, $14.8 million, $13.7 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, 1996 with respect to fiscal 1996 and remaining
scheduled capital contributions (as adjusted to reflect the
refinancings) with respect to fiscal years 1997 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 recorded a valuation allowance of $2,760, because it was
uncertain that such deferred tax assets in excess of deferred tax
liabilities would be realizable in future years.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amount used for income taxes
purposes. The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
Deferred tax assets: January 31,
1996
-----------
Notes and receivables . . . . $8,920
Accrued expenses and other 1,257
liabilities . . . . . . . . . . -------
Total gross deferred tax 10,177
assets . . . . . . . . . . . .
Less valuation allowance . . 2,760
-------
Deferred tax assets net of 7,417
valuation allowance . . . . . . -------
Deferred tax liabilities:
Deferred income . . . . . . . 4,560
Other assets . . . . . . . . 2,492
Investment in partnerships . 365
-------
Total gross deferred tax 7,417
liabilities . . . . . . . . . . -------
Net deferred tax assets $ -
(liabilities) . . . . . . . . . =======
F-13
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
The Company rents office space under a lease expiring February 1997.
Annual base rent under such lease is approximately $178. The Company
entered into a ten year lease for additional office space, commencing
September 1, 1991. The annual base rent is approximately $113 and
will increase 5% each year for ten years.
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. Aggregate fees for such services for the years
ended January 31, 1994, 1995 and 1996 and the nine month period ended
October 31, 1996 totaled $4,105, $4,636 and $4,735 and $2,670,
respectively. Also included in property management fees is the
Company's share of equity income from partnerships of $206, $276 and
$356 and $250 for the years ended January 31, 1994, 1995 and 1996, and
the nine month period ended October 31, 1996.
In addition, the Company has amounts due from unconsolidated
affiliates of $413, $248 and $348 as of January 31, 1995 and 1996 and
October 31, 1996, 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, 1994, 1995 and
1996 and the nine month period ending October 31, 1996 of $553, $731,
$1,600 and $1,600, 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
$106,464, net of deferred income, at October 31, 1996 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.
As of October 31, 1996, the Company was the managing general partner
for 28 of the 29 Owning Partnerships which owned the 29 adult living
communities, one nursing home and one residential apartment complex
which the Company operates. The Company also is the general partner
for 23 of the 34 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 Company's 29 adult
living communities, one nursing home and one residential apartment
complex. 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>
12. SUBSEQUENT EVENTS
a. Refinancings
In February and March of 1996, the Company arranged for the
refinancing of a number of its adult living communities (some of which
received mortgage financing for the first time as they were previously
acquired without mortgage financing). Substantially all of the
refinancing proceeds from the mortgages over and above the transaction
costs and the existing mortgage, if any, were distributed to the
investors as a return of capital based upon the investor's ownership
percentage in the respective limited partnership. The resultant
return of capital to the investors was approximately $43,717. As the
Company has guaranteed the investors a return based on their capital
contribution the return of a portion of the investors capital
contributions has reduced the Company's obligation under the
guarantee. This reduction, however, is offset and exceeded by the
decrease in available cash flow in the current year to fund the
guarantee, and therefore, increased the amount required to be paid by
the Company with respect to such guarantee return obligation.
Accordingly, the deferred income which reflects the Company's
guaranteed obligation has been increased at January 31, 1996 as the
negotiations for the mortgage commitments started as early as the
fourth quarter of Fiscal 1995 and were substantially agreed to by
January 31, 1996.
As a result of this refinancing the Company reflected a reduction in
assets of $6,000, a reduction in debt of $8,900 and additional
interest income of $2,900 during the nine month period ended October
31, 1996.
b. Development Agreement
The Company has entered into an agreement, dated September 18, 1996,
with Capstone Capital Corporation ("Capstone") to provide up to
$39,000 for the development of up to four new adult living communities
that will be operated by the Company pursuant to long-term leases with
Capstone. The Company also closed two construction mortgage financing
loans with Bank United for up to $7.0 million and up to $7.3 million
to construct adult living communities in Corpus Christi, Texas and
Temple, Texas, respectively.
c. Capitalization
The Board of Directors and the stockholders will approve, to be
effective on the date of this Prospectus of the Company's Common
Stock, (i) the filing of a Restated Certificate of Incorporation that
would provide for, among other things, the authorization of 40,000,000
shares of Common Stock and 15,000,000 shares of Preferred Stock and an
approximate 1,626.19-for-1 stock split of the issued and
outstanding Common Stock and (ii) a Stock Option Plan reserving for
issuance up to 2,500,000 shares of Common Stock pursuant to stock
options and other stock awards. The following sets forth the
pro forma effect of the stock split.
JANUARY 31 OCTOBER 31
1995 1996 ---------
--------------------- 1996
----
Preferred Stock, $.0001 - - -
par value; 15,000,000
shares authorized; none
issued and outstanding
Common Stock, $.01 par 150 150 150
value; authorized,
40,000,000 shares;
issued and outstanding,
15,000,000 shares
Paid-in capital 30,056 34,167 53,853
Accumulated deficit - - (22,698)
F-15
<PAGE>
13. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's fiscal 1995
consolidated financial statements, the Company discovered that a
mathematical error had occurred in the calculation of the
Company's initial investment in partnerships. As a result, the
Company's consolidated financial statements have been restated
from the amounts previously reported to reflect the correction of
this error. Such restatement had the following effects for the
period shown.
January 31
-----------------------------------
Prior
to 1994 1994 1995 1996
-------- ----- ----- -----
(Increase) Decrease
Cost of Sales (686) (328) (265) (294)
Increase (Decrease)
Equity Income
in Partnership 216 (19) 120 69
Net effect on income
(loss) before
provision (benefit)
for income taxes (470) (347) (145) (225)
F-16
<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 SUBSCRIPTIONS.
-----------------------
TABLE OF CONTENTS
Prospectus Summary . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . 10
Use of Proceeds . . . . . . . . . . . 22
Dividend Policy . . . . . . . . . . . 23
Capitalization . . . . . . . . . . . 24
Dilution . . . . . . . . . . . . . . 25
Selected Consolidated
Financial Data . . . . . . . . . 26
Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . 28
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 . . . . . . . . . . . . 75
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 REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION AND REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE SELLING
STOCKHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED,
OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. UNDER NO CIRCUMSTANCES SHALL THE
DELIVERY OF THIS PROSPECTUS, OR ANY SALE MADE
PURSUANT TO THIS PROSPECTUS, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
OF THIS PROSPECTUS.
====================================================
=======================================================
GRAND COURT
LIFESTYLES, INC.
1,500,000 SHARES OF
% SENIOR CONVERTIBLE
REDEEMABLE PREFERRED STOCK
AND
1,500,000 SHARES
OF
COMMON STOCK
---------------
PROSPECTUS
---------------
NATIONAL SECURITIES
CORPORATION
MARCH , 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
the Selling Stockholders will pay a 10% pro rata share of the non-
accountable expense allowance.
AMOUNT
-----------------
Securities and Exchange
Commission $32,374.71
registration fee . . . .
NASDAQ National Market 50,000
listing fee . . . . . . . .
Accounting fees and expenses
1,300,000*
Legal fees and expenses . . 500,000*
Printing and engraving 100,000*
expenses . . . . . . . . .
Non-accountable expense 645,000*
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 . . . . . . . . $2,915,000
==========
-------------------
* 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 proceeding, if they had no
reasonable cause to believe their conduct was unlawful. A director or
officer may also be indemnified against expenses incurred in connection
with a suit by or in the right of the corporation if such director or
officer acted in good faith and in a manner reasonably believed to be in or
not opposed to the best interests of the corporation, except that no
indemnification may be made without court approval if such person was
adjudged liable to the corporation.
Item 15. Recent Sales of Unregistered Securities
Since January 31, 1993, the Company issued Debentures in six
series, bonds in two series and notes in two series, with interest rates
ranging from 11% to 13.125%, and maturity dates from 1996 to 2004 in an
aggregate principal amount of $61,192,277. 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, 1993, there were 21 such limited
partnership offerings for an aggregate of $208,900,000. 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 Sections 3(b) and 4(2)
of such act.
In connection with the Offering contemplated by this Registration
Statement, as additional compensation to National Securities Corporation as
Representative of the several Underwriters, the Company intends to issue
warrants to the Representative to purchase from the Company up to 150,000
shares of Common Stock and 150,000 shares of Convertible Preferred Stock
("Representative's 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 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>
*2.2(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.
*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.
II-4
<PAGE>
*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 - Amended Financial Data Schedule for the period
ended October 31, 1996.
27.2 - Amended Financial Data Schedule for the period
ended January 31, 1996.
_______________
* Previously filed.
** To be filed by amendment.
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 Fort Lee, the State of New Jersey, on March 10, 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 March 10, 1997
------------------ Board
John Luciani of Directors and
Chief Executive
Officer (Principal
Executive
Officer)
/s/ Bernard M.Rodin * President and March 10, 1997
------------------ Chief Operating
Bernard M. Rodin Officer and
Director
(Principal
Executive Officer)
/s/ John W. Luciani, III * Executive Vice March 10, 1997
-------------------------- President and
John W. Luciani, III Director
/s/ Paul Jawin Chief Financial March 10, 1997
----------------------- Officer (Principal
Paul Jawin Financial Officer
and Principal
Accounting
Officer)
/s/ Walter Feldesman * Director March 10, 1997
------------------------
Walter Feldesman
/s/ Leslie E. Goodman * Director March 10, 1997
-------------------------
Leslie E. Goodman
By: */s/ Paul Jawin
--------------------------
Paul Jawin,
Attorney-in-Fact
II-7
EXHIBIT INDEX
--------------
EXHIBIT
NUMBER DESCRIPTION
------- --------------------------------------
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.
*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.
*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 - Amended Financial Data Schedule for the period
ended October 31, 1996.
27.2 - Amended Financial Data Schedule for the period
ended January 31, 1996.
_______________
* Previously filed.
** To be filed by amendment.
Exhibit 1.1
1,500,000 SHARES OF COMMON STOCK
1,500,000 SHARES OF % SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK
--
GRAND COURT LIFESTYLES, INC.
UNDERWRITING AGREEMENT
----------------------
New York, New York
March , 1997
---
National Securities Corporation
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154-11001
as Representative of the several Underwriters listed on Schedule B hereto
Ladies and Gentlemen:
Grand Court Lifestyles, Inc., a corporation organized under the laws
of the State of Delaware (the "Company") proposes to issue, and the persons
named in Schedule A (the "Selling Stockholders") propose to sell, to the
underwriters named in Schedule B (collectively, the "Underwriters", which
term shall also include any underwriter substituted as hereinafter provided
in Section 13 hereof), and confirm their agreement with the Underwriters
with respect to the sale by the Company and the Selling Stockholders and
the purchase by the Underwriters of an aggregate of one million five
hundred thousand (1,500,000) common shares ("Shares") of the Company,
par value $.01 per share ("Common Stock"), with one million two hundred
thousand (1,200,000) of the Shares being issued and sold to the
Underwriters by the Company and three hundred thousand (300,000) of the
Shares being sold to the Underwriters by the Selling Stockholders in
accordance with Schedule A, and one million five hundred thousand
(1,500,000) shares of % Senior Convertible Preferred Stock
--
("Preferred Shares") of the Company, par value $.0001 per share, and $10.00
liquidation preference per share ("Preferred Stock"). Such Shares and
Preferred Shares are hereinafter referred to collectively as the "Firm
Securities." Upon your request, as provided in Section 3(b) of this
Agreement, the Company shall also issue and sell to the Underwriters up to
an additional one hundred eighty thousand (180,000) shares of Common
Stock and two hundred twenty-five thousand (225,000) shares of Preferred
Stock and the Selling Stockholders shall also sell to the Underwriters up
to an additional forty five thousand (45,000) shares of Common Stock for
the purpose of covering over-allotments, if any, all in accordance with
Schedule A. Such additional shares of Common Stock and Preferred Stock
are hereinafter referred to collectively as the "Option Securities."
The Company also proposes to issue and sell to National Securities
Corporation, as the Representative of the several Underwriters (the
"Representative"), warrants (the "Representative's Warrants") pursuant
to the Representative's Warrant Agreement dated as of March ___, 1997,
between the Company and the Representative (the "Representative's
Warrant Agreement"), for the purchase of an additional one hundred fifty
thousand (150,000) shares of Common Stock and one hundred fifty thousand
(150,000) shares of Preferred Stock. The shares of Common Stock and
Preferred Stock issuable upon exercise of the Representative's Warrants,
and the shares of Common Stock issuable upon conversion of the Preferred
Stock acquired upon exercise of the Representative's Warrants, are
hereinafter referred to collectively as the "Representative's Securities."
The aggregate one million seven hundred twenty-five thousand (1,725,000)
shares of Common Stock (including Common Stock constituting Option
Securities) and one million seven hundred twenty-five thousand (1,725,000)
shares of Preferred Stock (including Preferred Stock constituting Option
Securities) will be separately tradeable upon issuance. The Firm
Securities, the Option Securities, the Representative's Warrants, and the
Representative's Securities are hereinafter collectively referred to as
the "Securities" and are more fully described in the Registration
Statement and the Prospectus referred to below. The Company confirms the
agreements made by it with the Underwriters with respect to the Securities
and related matters as follows:
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Underwriters as of the date
hereof, and as of the Closing Date (as hereinafter defined) and the
Option Closing Date (as hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement,
and an amendment or amendments thereto, on Form S-1 (No. 333-
05955), including each related preliminary prospectus included
therein prior to the time such registration statement becomes
effective ("Preliminary Prospectus"), for the registration of the
Firm Securities and the Option Securities under the Securities
Act of 1933, as amended (the "Act"), which registration statement
and amendment or amendments have been prepared by the Company in
conformity with the requirements of the Act, and the Rules and
Regulations (as defined below) of the Commission under the Act.
The Company will not file any other amendment thereto to which
the Representative shall have reasonably objected in writing
after having been furnished with a copy thereof. Except as the
context may otherwise require, such registration statement, as
amended, on file with the Commission at the time the registration
statement becomes effective (including the prospectus, financial
statements, schedules, exhibits and all other documents filed as
a part thereof or incorporated therein (including, but not
limited to those documents or information incorporated by
reference therein) and all information deemed to be a part
thereof as of such time pursuant to paragraph (b) of Rule 430(A)
of the Regulations), is hereinafter called the "Registration
Statement," and the form of prospectus in the form first filed
with the Commission pursuant to Rule 424(b) of the Regulations,
is hereinafter called the "Prospectus." For purposes hereof,
"Rules and Regulations" mean the rules and regulations adopted by
the Commission under either the Act or the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any
Preliminary Prospectus, the Registration Statement or Prospectus
or any part of any thereof and no proceedings for a stop order
suspending the effectiveness of the Registration Statement or any
of the Company's securities have been instituted or are pending
or, to the Company's knowledge, are threatened. Each of the
Preliminary Prospectus, the Registration Statement and Prospectus
at the time of filing thereof conformed with the requirements of
the Act and the Rules and Regulations, and none of the
Preliminary Prospectus, the Registration Statement or Prospectus
at the time of filing thereof contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein and necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading, except that this representation and warranty does not
apply to (i) statements made in reliance upon and in conformity
with written information furnished to the Company with respect to
the Underwriters by or on behalf of the Underwriters expressly
for use in such Preliminary Prospectus, Registration Statement or
Prospectus, or (ii) statements made in any Preliminary Prospectus
which were revised and/or corrected in any subsequent Preliminary
Prospectus or the Registration Statement or Prospectus, and which
subsequent Preliminary Prospectus or Prospectus was recirculated
to all recipients of the Preliminary Prospectus which had been
revised in accordance with the Rules and Regulations.
(c) When the Registration Statement [WAS DECLARED/BECOMES] effective
and at all times subsequent thereto up to the Closing Date and
the Option Closing Date, if any, and during such longer period as
the Prospectus may be required to be delivered in connection with
sales by the Underwriters or a dealer, the Registration Statement
and the Prospectus, as amended or supplemented as required, will
contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations, and will
conform in all material respects to the requirements of the Act
and the Rules and Regulations; neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, will
contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under
which the statements where made or omitted, not misleading;
provided, however, that this representation and warranty does not
-----------------
apply to statements made or statements omitted in reliance upon
and in conformity with information furnished to the Company in
writing by or on behalf of the Underwriters expressly for use in
the Preliminary Prospectus, Registration Statement or Prospectus
or any amendment thereof or supplement thereto.
(d) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation. The Company's
subsidiaries are sometimes hereafter individually referred to as
a "Subsidiary" and collectively referred to as the
"Subsidiaries," and when reference is made to a Subsidiary it
also includes any general partnership, limited partnership or
limited liability company whose financial statements have been
consolidated with those of the Company in the consolidated
financial statements of the Company that are included in each
Preliminary Prospectus, the Registration Statement or the
Prospectus. Except as set forth in the Prospectus, the Company
does not own or control, directly or indirectly, any corporation,
partnership, trust, joint venture or other business entity other
than the subsidiaries listed in Exhibit 21 of the Registration
Statement. Each of the Company and any Subsidiary is duly
qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or
leasing of any properties or the character of its operations
require such qualification or licensing, except where the failure
to be so qualified or licensed would not have a material and
adverse effect on the condition, financial or otherwise, or the
earnings, position, business affairs, operations, properties, or
results of operations of the Company and the Subsidiaries, taken
as a whole (the "Business"). Each of the Company and any
Subsidiary has all requisite power and authority (corporate and
other), and has obtained any and all necessary authorizations,
approvals, orders, licenses, certificates, franchises and permits
of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties
and conduct its business as described in the Prospectus, except
where the failure to have such authorizations, approvals, orders,
licenses, certificates, franchises or permits would not have a
material and adverse effect on the Business; each of the Company
and any Subsidiary is and has been doing business in compliance
with all such authorizations, approvals, orders, licenses,
certificates, franchises and permits and all federal, state,
local and foreign laws, rules and regulations; and neither the
Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise,
or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially and
adversely affect the Business; the disclosures in the
Registration Statement concerning the effects of federal, state,
local, and foreign laws, rules and regulations on each of the
Company's and any Subsidiary's businesses as currently conducted
and as contemplated are correct in all material respects and do
not omit to state a material fact necessary to make the
statements contained therein not misleading in light of the
circumstances in which they were made.
(e) At the dates as of which such information is set forth in the
Prospectus, and after giving effect to the stock split described
in the Prospectus, the Company had a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, under
the headings "Capitalization" and "Description of Capital Stock"
and will have the adjusted capitalization set forth therein on
the Closing Date and on the Option Closing Date, if any, based
upon the assumptions set forth therein, and neither the Company
nor any Subsidiary is a party to or bound by any instrument,
agreement or other arrangement providing for it to issue any
capital stock, rights, warrants, options or other securities,
except for this Agreement, the Representative's Warrant Agreement
and as described in the Prospectus. The Securities and all other
securities issued or issuable by the Company conform or, when
issued and paid for, will conform, in all material respects to
all statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding shares
of capital stock of the Company and all Subsidiaries have been
duly authorized and validly issued and are fully paid and
non-assessable and the holders thereof have no rights of
rescission with respect thereto, and are not subject to personal
liability by reason of being such holders; and none of such
securities was issued in violation of the preemptive rights of
any holders of any security of the Company or similar contractual
rights granted by the Company or any Subsidiary. The Firm
Securities, the Representative's Warrant and the Option
Securities are not and will not be subject to any preemptive or
other similar rights of any stockholder, have been duly
authorized and, when issued, paid for and delivered in accordance
with the terms hereof, will be validly issued, fully paid and
nonassessable and will conform in all material respects to the
description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such
holders; all corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly
and validly taken; and the certificates representing the
Securities will be in due and proper form.
(f) The consolidated financial statements of the Company and each
Subsidiary together with the related notes and schedules thereto,
included in the Registration Statement and the Prospectus fairly
present the consolidated financial position, income, changes in
cash flow, changes in stockholders' equity and the results of
operations of the Company and each Subsidiary at the respective
dates and for the respective periods to which they apply and such
financial statements have been prepared in conformity with the
Rules and Regulations and with generally accepted accounting
principles ("GAAP") consistently applied throughout the periods
involved. Except as disclosed in the Registration Statement and
the Prospectus, there has been no material adverse change or
development involving a material prospective change in the
Business, whether or not arising in the ordinary course of
business, since the date of the financial statements included in
the Registration Statement and the Prospectus and the outstanding
debt, the property, both tangible and intangible, and the
businesses of each of the Company and any Subsidiary taken as a
whole conform in all material respects to the descriptions
thereof contained in the Registration Statement and the
Prospectus. Financial information (including, without
limitation, any pro forma financial information) set forth in the
Prospectus under the headings "Summary Financial Data," "Selected
Consolidated Financial Data," "Capitalization," and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," fairly present, on the basis stated in the
Prospectus, the information set forth therein, and have been
derived from or compiled on a basis consistent with that of the
audited consolidated financial statements included in the
Prospectus, and have been prepared in accordance with the
applicable requirements of Regulation S-X promulgated under the
Securities and Exchange Act of 1934, as amended (the "Exchange
Act"), and otherwise in accordance with the Rules and
Regulations.
(g) Each of the Company and any of its predecessors in interest (i)
has filed with the appropriate federal, state and local
governmental agencies, and all foreign countries and political
subdivisions thereof, all tax returns which are required to be
filed through the date hereof or has received extensions thereof;
(ii) has paid all federal, state, local, and foreign taxes shown
on such returns and all assessments received by it, to the extent
that the same are material and have become due, except where the
failure to so file or so pay could not have a material adverse
effect on the Business, including, but not limited to,
withholding taxes and amounts payable under Chapters 21 through
24 of the Internal Revenue Code of 1986 (the "Code"), and has
furnished all information returns it is required to furnish
pursuant to the Code; (iii) has established adequate reserves for
such taxes which are not due and payable; and (iv) does not have
any material tax deficiency or claims outstanding, proposed or
assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance
by the Company of the Securities, (ii) the purchase by the
Underwriters of the Firm Securities and the Option Securities, if
any, from the Company and the purchase by the Representative of
the Representative's Warrants from the Company, (iii) the
consummation by the Company of any of their obligations under
this Agreement, or (iv) resales of the Firm Securities and Option
Securities in connection with the distribution contemplated
hereby.
(i) Except for the absence of policies which are disclosed in the
Prospectus, the Company and each of the Subsidiaries maintain
insurance by insurers of recognized financial responsibility of
the types and in the amounts as the Company and each of the
Subsidiaries believe is prudent and adequate for the business in
which it is engaged and customary in the industry in which the
Company and the Subsidiaries operate, including, but not limited
to, insurance covering property liability, and insurance covering
real and personal property owned or leased against theft, damage,
destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and
effect. The Company and each of the Subsidiaries, has delivered
to the Underwriters' Counsel satisfactory summaries of these
insurance policies. The Company has no reason to believe that it
and the Subsidiaries will not be able to renew existing insurance
coverage with respect to the Company and the Subsidiaries as and
when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its and the
Subsidiaries' businesses, in either case, at a cost that would
not have a material adverse effect on the Business. None of the
Company and any Subsidiary has failed to file any material
claims, has material disputes with its insurance company
regarding any claims submitted under its insurance policies, and
has not complied in all material respects with all material
provisions contained in its insurance policies where the failure
to do so could reasonably be expected to have a material adverse
effect on the Business.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental
or similar matters), domestic or foreign, pending or threatened
against (or circumstances that may give rise to the same), or
involving the properties or business of, the Company or any
Subsidiary which (i) questions the validity of the capital stock
of the Company, this Agreement, the Representative's Warrant
Agreement, or of any action taken or to be taken by the Company
or any Selling Stockholder pursuant to or in connection with this
Agreement or the Representative's Warrant Agreement, (ii) is
required to be disclosed in the Registration Statement which is
not so disclosed (and such proceedings as are summarized in the
Registration Statement are accurately summarized in all material
respects), or (iii) could reasonably be expected to materially
and adversely affect the Business.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, to enter into
this Agreement and the Representative's Warrant Agreement and to
consummate the transactions provided for in such agreements, as
applicable; and this Agreement and the Representative's Warrant
Agreement have each been duly and properly authorized, executed
and delivered by the Company as applicable. Each of this
Agreement and the Representative's Warrant Agreement constitutes
a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms (except as the
enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law), and none of the
Company's issue and sale of the Securities, or the execution or
delivery of this Agreement or the Representative's Warrant
Agreement by the Company, the performance hereunder and
thereunder by the Company, the consummation of the transactions
contemplated herein and therein by the Company, or the conduct of
the Company's business as described in the Registration
Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under,
or result in the creation or imposition of any lien of any kind
whatsoever upon, any property or assets (tangible or intangible)
of the Company or any Subsidiary pursuant to the terms of (i) the
certificate of incorporation or by-laws or the memorandum or
articles of association, as applicable, of the Company or any
Subsidiary, (ii) any license, contract, indenture, mortgage, deed
of trust, voting trust agreement, stockholders agreement, note,
loan or credit agreement or any other agreement or instrument to
which the Company or any Subsidiary is a party or by which any of
them is or may be bound or to which any of their properties or
assets (tangible or intangible) is or may be subject, or (iii)
any statute, judgment, decree, order, rule or regulation
applicable to the Company or any Subsidiary of any arbitrator,
court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those
having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or any
Subsidiary or any of their respective activities or properties,
which could reasonably be expected to materially and adversely
affect the Business in each of the above instances.
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other
body, domestic or foreign, is required for the issuance and sale
of the Securities pursuant to the Prospectus and the Registration
Statement, the performance of this Agreement and the
Representative's Warrant Agreement and the transactions
contemplated hereby and thereby, including without limitation,
any waiver of any preemptive, first refusal or other rights that
any entity or person may have for the issue and/or sale of any of
the Securities, except such as have been or may be obtained under
the Act or may be required under state securities or blue sky
laws (collectively, "Blue Sky") in connection with the
Underwriters' purchase and distribution of the Firm Securities
and the Option Securities, if any, and the Representative's
purchase of the Representative's Warrants to be sold by the
Company hereunder.
(m) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as
exhibits to the Registration Statement to which the Company, any
Subsidiary, or any Selling Stockholder is a party or by which any
of them may be bound or to which any of their assets, properties
or businesses may be subject, have been duly and validly
authorized, executed and delivered by the Company, any
Subsidiary, or the Selling Stockholders and constitute the legal,
valid and binding agreements of the Company or any Subsidiary or
any Selling Stockholder, as the case may be, enforceable against
the Company or any Subsidiary, as the case may be, in accordance
with their respective terms (except as the enforceability thereof
may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or
equitable, and except as rights to indemnity or contribution may
be limited by applicable law). The descriptions in the
Registration Statement of such agreements, contracts and other
documents are accurate in all material respects and fairly
present the information required to be shown with respect thereto
by Form S-1, and there are no contracts or other documents which
are required by the Act or the Rules and Regulations to be
described in the Registration Statement or filed as exhibits to
the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are complete and
correct copies of the documents of which they purport to be
copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as
may otherwise be indicated or contemplated herein or therein,
neither the Company nor any Subsidiary has (i) issued any
securities or incurred any liability or obligation, direct or
contingent, for borrowed money except in the ordinary course of
business, (ii) entered into any transaction other than in the
ordinary course of business consistent with past practice, or
(iii) declared or paid any dividend with respect to its capital
stock, and there has not been any change in the capital stock
(other than upon the sale of the Firm Securities), or any
material change in the debt (long or short term) or liabilities,
or any material adverse change in the Business.
(o) Except as disclosed in the Prospectus, no default exists in the
due performance and observance of any term, covenant or condition
of any material license, contract, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders' agreement, partnership agreement, note,
loan or credit agreement, purchase order, or any other material
agreement or instrument evidencing an obligation for borrowed
money, or any other material agreement or instrument to which the
Company or any Subsidiary is a party or by which the Company or
any Subsidiary may be bound or to which the property or assets
(tangible or intangible) of the Company or any Subsidiary is
subject or affected, except for such defaults, if any, which
individually and in the aggregate would not have a material
adverse effect on the Business.
(p) Each of the Company and the Subsidiaries has generally enjoyed a
satisfactory employer-employee relationship with its employees
and is in material compliance with all federal, state, local, and
foreign laws and regulations respecting employment and employment
practices, terms and conditions of employment and wages and
hours. To the Company's knowledge, there are no pending
investigations involving the Company or any Subsidiary, by the
U.S. Department of Labor, or any other foreign or domestic
governmental agency responsible for the enforcement of such
federal, state, local, or foreign laws and regulations. To the
Company's knowledge, there is no unfair labor practice charge or
complaint against the Company or any Subsidiary pending before
the National Labor Relations Board or any strike, picketing,
boycott, dispute, slowdown or stoppage pending or threatened
against or involving the Company or any Subsidiary, or any
predecessor entity. No representation question exists respecting
the employees of the Company or any Subsidiary, and no collective
bargaining agreement or modification thereof is currently being
negotiated by the Company or any Subsidiary. No grievance or
arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company or any
Subsidiary. No labor dispute with the employees of the Company
or, any Subsidiary exists, or, to its knowledge, is imminent.
(q) Except for the Grand Court Lifestyles, Inc. Employee Benefit
Plan, neither the Company nor any Subsidiary maintains, sponsors
or contributes to any program or arrangement that is an "employee
pension benefit plan," an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2),
3(1) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") (the foregoing are
collectively, "ERISA Plans"). Neither the Company nor any
Subsidiary maintains or contributes, now or at any time
previously, to a defined benefit plan, as defined in Section
3(35) of ERISA. No ERISA Plan (or any trust created thereunder),
if any, has engaged in a "prohibited transaction" within the
meaning of Section 406 of ERISA or Section 4975 of the Code,
which could subject the Company or any Subsidiary to any tax
penalty on prohibited transactions and which has not adequately
been corrected. Each ERISA Plan, if any, is in compliance with
all material reporting, disclosure and other requirements of the
Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal
Revenue Services with respect to each ERISA Plan which is
intended to comply with Code Section 401(a), stating that such
ERISA Plan and the attendant trust are qualified thereunder.
Neither the Company nor any Subsidiary has ever completely or
partially withdrawn from a "multiemployer plan."
(r) None of the Company, any Subsidiary, nor any of their respective
employees, directors, stockholders, partners, or affiliates
(within the meaning of the Rules and Regulations) has taken or
will take, directly or indirectly, any action designed to or
which has constituted or which might be expected to cause or
result in, under the Exchange Act, or otherwise, unlawful
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities or
otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, trademarks, service marks, trade names and copyrights,
and applications with respect thereto, and licenses and rights to
the foregoing presently owned or held by the Company and any
Subsidiary, are in dispute so far as known by the Company or, are
in any conflict with the right of any other person or entity. To
the Company's knowledge, each of the Company and any Subsidiary
(i) owns or has the right to use, free and clear of all Liens of
any kind whatsoever, all patents, trademarks, service marks,
trade names and copyrights, technology and licenses and rights
with respect to the foregoing, used in the conduct of its
business as now conducted or proposed to be conducted without
infringing upon or otherwise acting adversely to the right or
claimed right of any person, corporation or other entity under or
with respect to any of the foregoing and (ii) except as set forth
in the Prospectus, is not obligated or under any liability
whatsoever to make any payment by way of royalties, fees or
otherwise to any owner or licensee of, or other claimant to, any
patent, trademark, service mark, trade name, copyright, know-how,
technology or other intangible asset, with respect to the use
thereof or in connection with the conduct of its business or
otherwise, except for such obligations or liabilities, if any,
which individually and in the aggregate would not have a material
adverse effect on the Business.
(t) Each of the Company and the Subsidiaries has good and marketable
title to, or valid and enforceable leasehold estates in, all
items of real and personal property stated in the Prospectus to
be owned or leased by it free and clear of all liens, of any kind
whatsoever, other than those referred to in the Prospectus and
liens for taxes not yet due and payable, except for such liens
the existence of which does not materially affect the value of
the Company and the Subsidiaries real and personal property,
taken as a whole.
(u) Deloitte & Touche LLP, whose report is filed with the Commission
as a part of the Registration Statement, are independent
certified public accountants as required by the Act and the Rules
and Regulations.
(v) [Intentionally Left Blank.]
(w) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the
nature of a finder's, consulting or origination fee with respect
to the sale of the Securities hereunder or any other
arrangements, agreements, understandings, payments or issuance
with respect to the Company, any Subsidiary or any of their
respective officers, directors, stockholders, partners, employees
or affiliates that may affect the Underwriter's compensation, as
determined by the National Association of Securities Dealers,
Inc. ("NASD"), other than as described in the Prospectus.
(x) The Firm Securities and the Option Securities have been approved
for inclusion and quotation on the Nasdaq National Market
("Nasdaq-NMS").
(y) Neither the Company nor any Subsidiary, nor any of their
respective officers, employees, agents or any other person acting
on behalf of the Company or any Subsidiary has, directly or
indirectly, given or agreed to give any money, gift or similar
benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee
or agent, governmental agency (domestic or foreign) or
instrumentality of any government (domestic or foreign) or any
political party or candidate for office (domestic or foreign) or
other person who was, is, or may be in a position to help or
hinder the business of the Company or any Subsidiary (or assist
the Company or any Subsidiary in connection with any actual or
proposed transaction) which might subject the Company or any
Subsidiary, or any other such person to any damage or penalty in
any civil, criminal or governmental litigation or proceeding
(domestic or foreign). The Company's and each Subsidiary's
internal accounting controls are sufficient to cause the Company
and each Subsidiary to comply with the Foreign Corrupt Practices
Act of 1977, as amended.
(z) Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company or any Subsidiary, or any
"affiliate" or "associate" (as these terms are defined in Rule
405 promulgated under the Rules and Regulations) of any of the
foregoing persons or entities has or has had, either directly or
indirectly (i) an interest in any person or entity which (A)
furnishes or sells services or products which are furnished or
sold or are proposed to be furnished or sold by the Company or
any Subsidiary, or (B) purchases from or sells or furnishes to
the Company or any Subsidiary any goods or services, or (ii) a
beneficial interest in any contract or agreement to which the
Company or any Subsidiary is a party or by which it may be bound
or affected. Except as set forth in the Prospectus, there are no
existing agreements, arrangements, understandings or
transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company or
any Subsidiary, and any officer, director, all holders of five
percent (5%) or more of the Common Stock of the Company or of the
capital stock or interests of or in any Subsidiary, or any
partner, affiliate or associate of any of the foregoing persons
or entities which are required to be disclosed in the Prospectus.
(aa) Any certificate signed by any officer of the Company or any
officer of any Subsidiary, and delivered to the Underwriters or
to the Underwriters' Counsel (as defined herein) shall be deemed
a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(bb) Each of the minute books of the Company and each Subsidiary has
been made available to the Underwriters and contains a complete
summary of all meetings and actions of the directors and
stockholders of the Company and each Subsidiary, respectively,
since the time of its respective incorporation, and reflects all
transactions referred to in such minutes accurately and fairly in
all material respects.
(cc) Except and to the extent described in the Prospectus, no holders
of any securities of the Company or any Subsidiary or of any
options, warrants or other convertible or exchangeable securities
of the Company or any Subsidiary have the right to include any
securities issued by the Company or any Subsidiary in the
Registration Statement or any registration statement to be filed
by the Company or to require the Company to file a registration
statement under the Act and no person or entity holds any anti-
dilution rights with respect to any securities of the Company or
any Subsidiary.
(dd) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida,
Chapter 92-198, An Act Relating to Disclosure of Doing Business
-----------------------------------------------
with Cuba, and the Company further agrees that if it or any
---------
affiliate commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the
date of the Registration Statement becomes or has become
effective with the Commission or with the Florida Department of
Banking and Finance (the "Department"), whichever date is later,
or if the information reported or incorporated by reference in
the Prospectus, if any, concerning the Company's, or any
affiliate's, business with Cuba or with any person or affiliate
located in Cuba changes in any material way, the Company will
provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
(ee) The Company is not now, and immediately after the sale of the
Firm Securities, the Option Securities, if any, and the
Representative's Warrants hereunder, and the application of the
proceeds from such sale as described under the caption "Use of
Proceeds" in the Prospectus, will not be an "investment company"
or a company "controlled by" an "investment company" within the
meaning of such terms under the Investment Company Act of 1940,
as amended, and the rules and regulations of the Commission
thereunder.
(ff) The Company, and each Subsidiary, and each facility that is
managed by the Company or any Subsidiary, is in compliance with
all federal, state, local or foreign rules, laws, regulations,
ordinances, codes, administrative orders and common law, and has
all necessary licenses and permits, relating to pollution or
protection of human health or wildlife, the release or threatened
release, the use, distribution, manufacture, processing, storage,
treatment and disposal of toxic substances, toxic wastes,
chemicals, pollutants, contaminants, wastes, medical wastes,
hazardous wastes, hazardous substances, petroleum or petroleum
products and protection of health or the environment (including
without limitation, ambient air, surface water, groundwater,
landsurface or subsurface strata), other than such lack of
compliance or the absence of such licenses and permits the effect
of which does not and would not in the future have a material
adverse effect on the Business (collectively, "Environmental
Laws").
(gg) The Company will not, and will not permit any of its future
subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including, but not
limited to, the sale, purchase, exchange, lease, transfer or
other disposition of any properties, assets or services to, or
the purchase of any property, assets or services from, or the
entry into any contact, agreement, undertaking, loan, advance or
guarantee) with, or for the benefit of, an Affiliate (an
"Affiliate Transaction"), or extend, renew, waive or otherwise
modify the terms of any Affiliate Transaction entered into prior
to the date of issuance of the Securities unless (i) such
Affiliate Transaction is between or among the Company and its
wholly-owned subsidiaries, or (ii) the terms of such Affiliate
Transaction are fair and reasonable; provided, however,
notwithstanding anything to the contrary contained herein, the
Company may issue securities pursuant to the exercise of
outstanding options and warrants on the terms in effect and
described in the Prospectus relating to the Securities. All
Affiliate Transactions approved in good faith by the Board of
Directors of the Company and a minimum of two disinterested and
independent outside directors thereof, with such approval
evidenced by a Board Resolution, which refers to the criteria set
forth in this Section 1(gg), shall be deemed to meet the
criterion set forth in (i) or (ii) above. "Affiliate" is defined
in accordance with Rule 405 promulgated under the Rules and
Regulations.
2. Representations and Warranties of the Selling Stockholders. The
----------------------------------------------------------
Selling Stockholders, severally and not jointly, represent and warrant to,
and agree with, each of the Underwriters as of the date hereof, and as of
the Closing Date and each Option Closing Date, if any, as follows:
(i) Such Selling Stockholder has full legal right, power and
authority to enter into this Agreement, the Power of Attorney with
-----
and , or either of them, as attorney-in-fact (the "Attorney-in-Fact")
-----
in the form heretofore furnished to you (the "Power of Attorney") and the
Custody Agreement with First United Bank as custodian (the "Custodian") in
the form heretofore furnished to you (the "Custody Agreement"). Each
Selling Stockholder has full legal right, power and authority to deliver
and sell the Firm Securities and the Option Securities to be sold by such
Selling Stockholder under this Agreement, and to consummate the
transactions provided for in this Agreement, the Power of Attorney and the
Custody Agreement; and this Agreement, the Power of Attorney and the
Custody Agreement have each been duly and properly authorized, executed and
delivered by such Selling Stockholder. Each of this Agreement, the Power
of Attorney and the Custody Agreement constitutes a legal, valid and
binding agreement of such Selling Stockholder enforceable against such
Selling Stockholder in accordance with its terms (except as the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to
or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as
rights to indemnity or contribution may be limited by applicable law).
None of such Selling Stockholder's delivery and sale of the firm Securities
or Option Securities, execution or delivery of this Agreement, the Power of
Attorney or the Custody Agreement, its performance hereunder and
thereunder, or its consummation of the transactions contemplated herein and
therein, conflicts with or will conflict with or results or will result in
any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation
or imposition of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever
upon, any property or assets (tangible or intangible) of such Selling
Stockholder pursuant to the terms of any license, contract, indenture,
mortgage, deed of trust, lease, voting trust agreement, stockholders
agreement, note, loan or credit agreement or any other agreement or
instrument to which the Selling Stockholder is a party or by which the
Selling Stockholder is or may be bound or to which either of its properties
or assets (tangible or intangible) is or may be subject, or any statute,
judgement, decree, order, rule or regulation applicable to any Selling
Stockholder or any arbitrator, court, regulatory body or administrative
agency or other governmental agency or body (including, without limitation,
those having jurisdiction over any matter), domestic or foreign, having
jurisdiction over the Selling Stockholder or any of his activities or
properties, which could reasonably be expected to materially and adversely
affect the Business in each of the above instances. The Attorney-in-Fact,
acting alone, is authorized to execute and deliver this Agreement and the
Custody Agreement and the certificates referred to in Section 8(j) hereof
----
on behalf of such Selling Stockholder, to authorize the delivery of the
Firm Securities or Option Securities to be sold by such Selling Stockholder
under this Agreement and to duly endorse (in blank or otherwise) the
certificate or certificates representing such Firm Securities or Option
Securities or a stock power or powers with respect thereto, to accept
payment therefor, and otherwise to act on behalf of such Selling
Stockholder in connection with this Agreement and the Custody Agreement.
(ii) No consent, approval, authorization or order of, and no filing
with, any court regulatory body, government agency or other body, domestic
or foreign, is required for the delivery and sale of the Firm Securities or
Option Securities to be sold by such Selling Stockholder under this
Agreement pursuant to the Prospectus and the Registration Statement, for
the performance of this Agreement, the Power of Attorney and the Custody
Agreement and for the transactions contemplated hereby and thereby,
including without limitation, any waiver of any preemptive, first refusal
or other rights that any entity or person may have for the delivery and
sale of any of the Firm Securities or Option Securities to be sold by such
Selling Stockholder under this Agreement, except such as have been or may
be obtained under the Act or may be required under state securities or Blue
Sky laws in connection with the Underwriters' purchase and distribution of
the Firm Securities and the Option Securities to be sold by such Selling
Stockholder under this Agreement.
(iii) At the date hereof such Selling Stockholder has, and at the
time of delivery of the Firm Securities or Option Securities to be sold by
the Selling Stockholder to the several Underwriters, such Selling
Stockholder will have full right, power and authority to sell, assign,
transfer and deliver the Firm Securities or Option Securities to be sold by
such Selling Stockholder hereunder. At the date hereof such Selling
Stockholder is, and at the time of delivery of the Firm Securities or
Option Securities to be sold by such Selling Stockholder, such Selling
Stockholder will be, the lawful owner of and has and will have, good and
marketable title to such Firm Securities or Option Securities free and
clear of any liens, charges, pledges, equities, encumbrances, security
interests, claims, community property rights, restrictions on transfer or
other defects in title. Upon delivery of and payment for the Firm
Securities or Option Securities to be sold by such Selling Stockholder
hereunder, good and marketable title to such Firm Securities or Option
Securities will pass to the Underwriters, free and clear of any liens,
charges, pledges, equities, encumbrances, security interests, claims,
community property rights, restrictions on transfer or other defects in
title. Except as described in the Registration Statement and the
Prospectus or created hereby, there are no outstanding options, warrants,
rights, or other agreements or arrangements requiring such Selling
Stockholder at any time to transfer any Common Stock to be sold hereunder
by such Selling Stockholder. The Firm Securities and Option Securities, to
be sold by such Selling Stockholder under this Agreement, are not and will
not be subject to any preemptive or other similar rights of such
stockholder.
(iv) At the time when the Registration Statement becomes or became
effective, and at all times subsequent thereto up to and including the
Closing Date and the Option Closing Date, the Registration Statement and
any amendments thereto will not contain any untrue statement of a material
fact regarding such Selling Stockholder or omit to state a material fact
regarding such Selling Stockholder required to be stated therein or
necessary in order to make the statements therein regarding such Selling
Stockholder not misleading, and the Prospectus (and any supplements
thereto) will not contain any untrue statement of a material fact regarding
such Selling Stockholder or omit to state a material fact regarding such
Selling Stockholder required to be stated therein or necessary in order to
make the statements therein regarding such Selling Stockholder, in light of
the circumstances under which they were made, not misleading, and such
Selling Stockholder is unaware of any material misstatement in or omission
from the Registration Statement or the Prospectus or of any material
adverse information regarding such Selling Stockholder and his security
holdings which is not set forth in the Registration Statement and the
Prospectus.
(v) Such Selling Stockholder or any of his affiliates (within the
meaning of the Rules and Regulations) has not taken or will not take,
directly or indirectly, any action designed to or which has constituted or
which might be expected to cause or result in, under the Exchange Act, or
otherwise, unlawful stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities
or otherwise.
(vi) There is not pending or, to such Selling Stockholder's knowledge,
threatened against such Selling Stockholder any action, suit or proceeding
which (A) questions the validity of this Agreement, the Power of Attorney,
the Custody Agreement or of any action taken or to be taken by such Selling
Stockholder pursuant to or in connection with this Agreement, the Power of
Attorney, or the Custody Agreement or (B) is required to be disclosed in
the Registration Statement which is not so disclosed, and such actions,
suits or proceedings as are summarized in the Registration Statement, if
any, are accurately summarized.
(vii) Upon executing this Agreement, certificates in negotiable
form for the Firm Securities and Option Securities to be sold by such
Selling Stockholder under this Agreement on the Closing Date, or Option
Closing Date if requested by the Underwriters pursuant to Section 3(b)
hereof, together with a stock power or powers duly endorsed in blank by
such Selling Stockholder, will have been placed in custody with the
Custodian for the purpose of effecting delivery hereunder and thereunder.
(viii) Such Selling Stockholder has no registration rights or other
similar rights with respect to any securities of the Company; and such
Selling Stockholders does not have any right of first refusal or other
similar right to purchase any securities of the Company upon the issuance
or sale thereof by the Company or upon the sale thereof by any other
stockholder of the Company.
(ix) Such Selling Stockholder has not since the effective date of the
Registration Statement (i) sold, bid for, purchased, attempted to induce
any person to purchase, or paid anyone any compensation for soliciting
purchases of Common Stock, or (ii) paid or agreed to pay to any person any
compensation for soliciting another to purchase any securities of the
Company (except for the sale of the Firm Securities and Option Securities
to the Underwriters under this Agreement and except as otherwise permitted
by law).
(x) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the sale by such
Selling Stockholder of the Firm Securities and Option Securities, (ii) the
purchase by the Underwriters of the Firm Securities and Option Securities
from such Selling Stockholder, (iii) the consummation by such Selling
Stockholder of any of his obligations under this Agreement, or (iv) resales
of the Firm Securities and Option Securities sold by such Selling
Stockholder in connection with the distribution contemplated hereby.
(xi) Any certificate signed by or on behalf of such Selling
Stockholder and delivered to the Underwriters shall be deemed a
representation and warranty by such Selling Stockholder to the Underwriters
as to the matters covered thereby.
3. Purchase, Sale and Delivery of the Securities and Representative's
------------------------------------------------------------------
Warrants.
--------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and
conditions herein set forth, the Company and the Selling
Stockholders, severally and not jointly, agree to issue and sell
to the respective Underwriters, and each of the Underwriters
agrees to purchase the Firm Securities (subject to such
adjustment as the Representative may determine to avoid
fractional shares, plus any additional numbers of Firm Securities
which such Underwriter may become obligated to purchase pursuant
to the provisions of Section 13 hereof) which bears the same
proportion to the number of Firm Securities to be sold by the
Company or by that Selling Stockholder, as the case may be, as
the number of Firm Securities set forth opposite the name of such
Underwriters on Schedule B bears to the total number of Firm
Securities to be sold by the Company and such Selling
Stockholder, in each case on a firm commitment basis no later
than three (3) business days after the Effective Date of the
Registration Statement, at a price of $ per share of Common
------
Stock and $ per share of Preferred Stock [in each case 92.5%
----
of the initial public offering price].
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the
Selling Stockholders hereby grant an option to the several
Underwriters to purchase, and the Underwriters shall have the
right to purchase, severally and not jointly pro rata from the
Company and the Selling Stockholders, all or any part of the
Option Securities at a price of $ per share of Common Stock
------
and $ per share of Preferred Stock [in each case 92.5% of
----
the initial public offering price]. The option granted hereby
will expire forty-five (45) days after (i) the date the
Registration Statement becomes effective, if the Company has
elected not to rely on Rule 430A under the Rules and Regulations,
or (ii) the date of this Agreement if the Company has elected to
rely upon Rule 430A under the Rules and Regulations, and may be
exercised in whole or in part from time to time only for the
purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Firm
Securities upon notice by the Representative to the Company and
the Selling Stockholders setting forth the number of Option
Securities as to which the several Underwriters are then
exercising the option and the time and date of payment and
delivery for any such Option Securities. Any such time and date
of delivery (an "Option Closing Date") shall be determined by the
Representative, but shall not be later than five (5) full
business days after the exercise of said option, nor in any event
prior to the Closing Date, as hereinafter defined, unless
otherwise agreed upon by the Representative and the Company.
Nothing herein contained shall obligate the Underwriters to make
any over-allotments. No Option Securities shall be delivered
unless the Firm Securities shall be simultaneously delivered or
shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of the
Representative at 1001 Fourth Avenue, Suite 2200, Seattle,
Washington 98154, or at such other place as shall be agreed upon
by the Representative and the Company. Such delivery and payment
shall be made at 10:00 a.m. (New York City time) on March ,
---
1997 or at such other time and date as shall be agreed upon by
the Representative and the Company, but not less than three (3)
nor more than four (4) full business days after the effective
date of the Registration Statement (such time and date of payment
and delivery being herein called "Closing Date"). In addition,
in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for,
and delivery of certificates for, such Option Securities shall be
made at the above mentioned office of the Representative or at
such other place as shall be agreed upon by the Representative
and the Company on each Option Closing Date as specified in the
notice from the Representative to the Company. Delivery of the
certificates for the Firm Securities and the Option Securities,
if any, shall be made to the Representative against payment by
the Underwriters of the purchase price for the Firm Securities
and the Option Securities, if any, to the order of the Company
and the Selling Stockholders, as applicable, by New York Clearing
House funds, subject in each case to such adjustments as the
Representative in its discretion shall make to eliminate any
sales or purchases of fractional shares. Certificates for the
Firm Securities and the Option Securities, if any, shall be in
definitive, fully registered form, shall bear no restrictive
legends and shall be in such denominations and registered in such
names as the Underwriters may request in writing at least two (2)
business days prior to the Closing Date or the relevant Option
Closing Date, as the case may be. The certificates for the Firm
Securities and the Option Securities, if any, shall be made
available to the Representative at such office or such other
place as the Representative may designate for inspection,
checking and packaging no later than 9:30 a.m. on the last
business day prior to the Closing Date or the relevant Option
Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative, the Representative's Warrants at a purchase price
of $.0001 per warrant, which warrants shall entitle the holder(s)
thereof to purchase an aggregate of 150,000 shares of Common
Stock and 150,000 shares of Preferred Stock. The
Representative's Warrants shall be exercisable for a period of
four (4) years commencing one (1) year from the effective date of
the Registration Statement at an exercise price of $ per
-----
share of Common Stock and $ per share of Preferred Stock [in
----
each case one hundred sixty-five percent (165%) of the public
offering price of the Firm Securities]. The Representative's
Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit 1.2 to the
Registration Statement. Payment for the Representative's
Warrants shall be made on the Closing Date.
4. Public Offering of the Shares.
-----------------------------
As soon after the Registration Statement becomes effective as the
Representative deems advisable, the Underwriters shall make a public
offering of the Firm Securities at the price and upon the other terms
set forth in the Prospectus. The Underwriters may from time to time
increase or decrease the public offering price and increase or
decrease concessions and discounts to dealers after distribution of
the Firm Securities has been completed to such extent as the
Representative, in its sole discretion deems advisable and as
permitted by the Act and the Rules and Regulations. The Underwriters
may enter into one or more agreements as the Representative, in its
sole discretion deems advisable, with one or more broker-dealers who
shall act as dealers in connection with such public offering.
5. Covenants and Agreements of the Company. The Company covenants and
---------------------------------------
agrees with the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before
or after the effective date of the Registration Statement, file
any amendment to the Registration Statement or supplement to the
Prospectus or file any document under the Act or Exchange Act
before termination of the offering of the Firm Securities and
Option Securities by the Underwriters of which the Underwriters
shall not previously have been advised and furnished with a copy,
or to which the Underwriters shall have reasonably objected or
which is not in compliance with the Act, the Exchange Act or the
Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative and confirm the notice
in writing (i) when the Registration Statement, as amended,
becomes effective, if the provisions of Rule 430A promulgated
under the Act will be relied upon, when the Prospectus has been
filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes
effective, (ii) of the issuance by the Commission of any stop
order or of the initiation, or the threatening, of any
proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the
Preliminary Prospectus or the Prospectus, or any amendment or
supplement thereto, or the institution of proceedings for that
purpose, (iii) of the issuance by the Commission, or by any state
securities commission of any proceedings for the suspension of
the qualification of any of the Securities for offering or sale
in any jurisdiction or of the initiation, or the threatening, of
any proceeding for that purpose, (iv) of the receipt of any
comments from the Commission, and (v) of any request by the
Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional
information. If the Commission, or any state securities
commission authority shall enter a stop order or suspend such
qualification at any time, the Company will use its best efforts
to obtain promptly the lifting of such order or suspension.
(c) The Company shall file the Prospectus (in form and substance
reasonably satisfactory to the Underwriter) or transmit the
Prospectus by a means reasonably calculated to result in filing
with the Commission pursuant to Rule 424(b).
(d) The Company will give the Representative notice of its intention
to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or
supplement to the Prospectus (including any revised prospectus
which the Company proposes for use by the Underwriters in
connection with the offering of the Firm Securities and Option
Securities which differs from the corresponding prospectus on
file at the Commission at the time the Registration Statement
becomes effective, whether or not such revised prospectus is
required to be filed pursuant to Rule 424(b) of the Rules and
Regulations), and will furnish the Representative with copies of
any such amendment or supplement a reasonable amount of time
prior to such proposed filing or use, as the case may be, and
will not file any such prospectus to which the Representative or
Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel
("Underwriters' Counsel") shall reasonably object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration
Statement becomes effective, to qualify the Firm Securities and
Option Securities for offering and sale under the securities laws
of such jurisdictions as the Representative may reasonably
designate to permit the continuance of sales and dealings therein
for as long as may be necessary to complete the distribution, and
shall make such applications, file such documents and furnish
such information as may be required for such purpose; provided,
--------
however, the Company shall not be required to qualify as a
-------
foreign corporation or file a general or limited consent to
service of process in any such jurisdiction. In each
jurisdiction where such qualification shall be effected, the
Company will, unless the Representative agrees that such action
is not at the time necessary or advisable, use all reasonable
efforts to file and make such statements or reports at such times
as are or may reasonably be required by the laws of such
jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to
comply with all requirements imposed upon it by the Act and the
Exchange Act, as now and hereafter amended and by the Rules and
Regulations, as from time to time in force, so far as necessary
to permit the continuance of sales of or dealings in the Firm
Securities and Option Securities in accordance with the
provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating
to the Firm Securities and Option Securities or the
Representative's Securities is required to be delivered under the
Act, any event shall have occurred as a result of which, in the
opinion of counsel for the Company or Underwriters' Counsel, the
Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend
the Prospectus to comply with the Act, the Company will notify
the Representative promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance
with Section 10 of the Act, each such amendment or supplement to
be satisfactory to Underwriter's Counsel and the Company will
furnish to the Underwriters copies of such amendment or
supplement as soon as available and in such quantities as the
Representative may request.
(g) As soon as practicable, but in any event not later than forty-
five (45) days after the end of the 12-month period beginning on
the day after the end of the fiscal quarter of the Company during
which the effective date of the Registration Statement occurs
(ninety (90) days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company
shall make generally available to its security holders, in the
manner specified in Rule 158(b) of the Rules and Regulations, and
to the Representative, an earnings statement which will be in the
detail required by, and will otherwise comply with, the
provisions of Section 11 (a) of the Act and Rule 158(a) of the
Rules and Regulations, which statement need not be audited unless
required by the Act, covering a period of at least twelve (12)
consecutive months after the effective date of the Registration
Statement.
(h) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable,
annual reports (including financial statements audited by
independent public accountants) and unaudited quarterly reports
of earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly reports to its
stockholders, consolidated statements of income of the
Company and its consolidated subsidiaries for each quarter
in the form furnished to the Company's stockholders;
(ii) concurrently with furnishing such annual reports to its
stockholders, a consolidated balance sheet of the Company
and its consolidated subsidiaries as at the end of the
preceding fiscal year, together with statements of
consolidated operations, stockholders equity, and cash flows
of the Company and its consolidated subsidiaries for such
fiscal year, accompanied by a copy of the certificate
thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all other
reports (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the
Commission, the NASD or any securities exchange;
(v) every press release and every material news item or article
of interest to the financial community in respect of the
Company or its affairs which was released or prepared by or
on behalf of the Company; and
(vi) any additional information of a public nature concerning the
Company or its businesses which the Representative may
request.
During such five-year period, if the Company continues to have
active subsidiaries, the foregoing financial statements will be
on a consolidated basis to the extent that the accounts of the
Company and its subsidiaries are consolidated and will be
accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(i) The Company will maintain a transfer agent (the "Transfer Agent")
and, if necessary under the jurisdiction of incorporation of the
Company, a Registrar (which may be the same entity as the
Transfer Agent) for its Common Stock and Preferred Stock, each of
which shall be satisfactory to the Representative.
(j) The Company will furnish or cause to be furnished to the
Representative without charge, at such place as the
Representative may designate, copies of each Preliminary
Prospectus, the Registration Statement and any pre-effective or
post-effective amendments thereto (two of which copies will be
manually signed and will include all financial statements and
exhibits), the Prospectus, and all amendments and supplements
thereto, including any prospectus prepared after the effective
date of the Registration Statement, in each case as soon as
available and in such quantities as the Representative may
reasonably request.
(k) Concurrently with the execution and delivery hereof, the Company
shall provide to the Underwriters, legally binding and
enforceable agreements, in form and substance satisfactory to the
Representative ("Lock-up Agreements") pursuant to which each of
the Selling Stockholders agrees that he will not, other than as
set forth in the Prospectus, directly or indirectly, offer to
sell, sell, make a short sale (including without limitation short
against the box), grant any option for the sale of, assign,
transfer, pledge, hypothecate or otherwise encumber or dispose of
any shares of Common Stock or securities convertible into,
exercisable or exchangeable for or evidencing any right to
purchase or subscribe for any shares of Common Stock (either
pursuant to Rule 144 of the Rules and Regulations or otherwise),
dispose of any beneficial interest therein, enter into any swap
or other agreement that transfers in whole or in part any of the
economic consequences or ownership of the shares of Common Stock,
whether any such transactions were to be settled by delivery of
Common Stock, other securities, cash or otherwise, for a period
of not less than thirteen (13) months following the effective
date of the Registration Statement without the prior written
consent of the Representative; provided, that the foregoing
--------
restriction shall not prohibit (a) the issuance of shares of
Common Stock or options to purchase shares of Common Stock in
connection with the Company's Stock Option and Performance Award
Plan, or (b) transfers to the estate or by the estate of the
Selling Stockholders, so long as any such transferees agree to be
bound by the restrictions set forth herein. The Company will
cause the Transfer Agent, as defined below, to mark an
appropriate legend on the face of stock certificates representing
all of such securities and to place "stop transfer"" orders on
the Company's stock ledgers.
(l) Each of the Company and its Subsidiaries will use its best
efforts to cause the Company and the Subsidiaries' respective
officers, directors, stockholders, and their respective
affiliates (within the meaning of the Rules and Regulations) not
to take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in,
unlawful stabilization or manipulation of the price of any
securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Firm Securities and the Option Securities, if any, in the manner,
and subject to the conditions, set forth under "Use of Proceeds"
in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the
Company or any Subsidiary or any affiliate of either, except in
accordance with the disclosures contained in the Prospectus.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a
Form SR as may be required pursuant to Rule 463 of the
Regulations) from time to time, under the Act, the Exchange Act,
and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act, and the
Rules and Regulations.
(o) The Company shall furnish to the Representative as early as
practicable prior to each of the Closing Date and Option Closing
Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim
financial statements of the Company which have been read by the
Company's independent public accountants as stated in their
letters to be furnished pursuant to Section 8(n) hereof.
------------
(p) The Company shall use its best efforts to cause the Common Stock
and the Preferred Stock to be listed on Nasdaq/NMS and for a
period of five (5) years from the date hereof use its best
efforts to maintain the Nasdaq-NMS listing of the Common Stock
and the Preferred Stock, to the extent outstanding.
(q) At the request of the Representative, for a period of five (5)
years from the Closing Date, the Company shall furnish to the
Representative at the Company's sole expense (i) monthly
consolidated transfer sheets relating to the Common Stock, (ii)
the list of holders of all of the Company's Common Stock,
Preferred Stock and any securities for which the Common Stock and
Preferred Stock are redeemable, convertible or exchangeable, on a
monthly basis, and (iii) a Blue Sky "Trading Survey" for
secondary sales of the Company's securities prepared by counsel
to the Company, to the extent that the Company's securities are
not eligible for solicited and unsolicited secondary sales in all
fifty (50) states of the United States and the District of
Columbia.
(r) As soon as practicable (i) but in no event more than ten (10)
business days before the effective date of the Registration
Statement, file a Form 8-A with the Commission providing for the
registration under the Exchange Act of the Common Stock and the
Preferred Stock, and (ii) but in no event more than thirty (30)
days from the effective date of the Registration Statement, take
all necessary and appropriate actions to be included in Standard
and Poors Corporation Descriptions and Moodys OTC Manual and to
continue such inclusion for a period of not less than seven (7)
years, only to the extent that the Common Stock and the Preferred
Stock are not included for trading on Nasdaq/NMS.
(s) The Company hereby agrees that it will not, without the prior
written consent of the Representative, for a period of thirteen
(13) months from the effective date of the Registration
Statement, adopt, propose to adopt or otherwise permit to exist
any employee, officer, director, consultant or compensation plan
or arrangement permitting (i) the grant, issue, sale or entry
into any agreement to grant, issue or sell any option, warrant or
other contract right to acquire any Common Stock or Preferred
Stock (x) at an exercise price that is less than the greater of
the public offering price of the Firm Securities set forth herein
and the fair market value on the date of grant or sale or (y) to
any of its executive officers or directors or to any holder of
five percent (5%) or more of the shares of Common Stock;
provided, however that this prohibition shall not apply to the
issuance of shares of Common Stock registered under the Act
pursuant to the Registration Statement, or pursuant to the
Company's 1996 Stock Option and Performance Award Plan; or (ii)
the maximum number of shares of Common Stock or other securities
of the Company purchasable at any time pursuant to options or
warrants issued by the Company to exceed two million five hundred
thousand (2,500,000) shares (subject to reasonable, customary
anti-dilution adjustments) reserved for issuance under the
Company's Stock Option and Performance Award Plan; or (iii) the
payment for such securities with any form of consideration other
than cash, or (iv) the existence of stock appreciation rights,
phantom options or similar arrangements.
(t) Until the completion of the distribution of the Firm Securities
and the Option Securities under the terms hereof, the Company
shall not, without the prior written consent of the
Representative or Underwriters' Counsel, issue, directly or
indirectly any press release or other communication or hold any
press conference with respect to the Company or its activities or
the offering contemplated hereby, other than trade releases
issued in the ordinary course of the Company's business with
respect to the Company's operations.
(u) For a period equal to the lesser of (i) seven (7) years from the
date hereof, and (ii) the sale to the public of the
Representative's Securities, the Company will not take any action
or actions which may prevent or disqualify the Company's use of
Form S-1 (or other appropriate form) for the registration under
the Act of the Representative's Securities.
6. Certain Covenants of the Selling Stockholders. Each of Selling
---------------------------------------------
Stockholders covenants and agrees, severally and not jointly, with each of
the Underwriters as follows:
(i) Such Selling Stockholder will not, directly or indirectly,
without the prior written consent of the Company and the
Representative, offer, offer to sell, sell, grant an option for the
sale or purchase of, assign, transfer, pledge, hypothecate or
otherwise encumber or dispose of any shares of Common Stock or any
securities convertible into, exchangeable or exercisable for, or
evidencing any right to purchase or subscribe for, any shares of
Common Stock (either pursuant to Rule 144 of the Rules and Regulations
or otherwise) or dispose of any beneficial interest therein for a
period of thirteen (13) months after the date hereof, except pursuant
to this Agreement or transfers to the estate or by the estate of such
Selling Stockholder, so long as such transferees agree to be bound by
the restrictions set forth herein, and such Selling Stockholder and
any of his affiliates (within the meaning of the Rules and
Regulations) will not take, directly or indirectly, any action
designated to, or which might in the future reasonably be expected to
cause or result in, unlawful stabilization or manipulation of the
price of any securities of the Company.
(ii) Such Selling Stockholder consents to the use of the
Prospectus and any amendment or supplement thereto by the Underwriters
and all dealers to whom the Securities may be sold, both in connection
with the offering or sale of the Securities and for such period of
time thereafter as the Prospectus is required by law to be delivered
in connection therewith.
(iii) Such Selling Stockholder will review the Prospectus and
will comply with all agreements and satisfy all conditions on its part
to be complied with or satisfied pursuant to this Agreement, the
Custody Agreement and the Power of Attorney at or prior to the Closing
Date and any Option Closing Date.
7. Payment of Expenses
-------------------
(a) The Company hereby agrees to pay on each of the Closing Date and
the Option Closing Date (to the extent not previously paid) all
expenses and fees (other than fees of Underwriters' Counsel,
except as provided in (iv) below) incident to the performance of
the obligations of the Company and the Selling Stockholders under
this Agreement and the Representative's Warrant Agreement,
including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company; (ii) all costs and
expenses incurred in connection with the preparation,
duplication, printing (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage
with respect thereto) of the Registration Statement, and the
Prospectus and any amendments and supplements thereto and the
printing, mailing (including the payment of postage with respect
thereto) and delivery of this Agreement, the Representative's
Warrant Agreement, selected dealer agreements (if any) and
related documents, including the cost of all copies thereof and
of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the
Underwriters and such dealers as the Representative may request,
in quantities as herein above stated; (iii) the printing,
engraving, issuance and delivery of the certificates representing
the Securities; (iv) the qualification of the Securities under
state or foreign securities or "Blue Sky" laws, if legally
required, and the costs of printing and mailing the "Preliminary
Blue Sky Memorandum" and the "Supplemental Blue Sky Memorandum,"
if any, and disbursements and fees of counsel in connection
therewith, (v) advertising costs and expenses, including but not
limited to costs and expenses incurred by the Company and the
Representative in connection with the "road show," information
meetings and presentations, bound volumes and prospectus
memorabilia and "tombstone" advertisement expenses, (vi) costs
and expenses in connection with due diligence investigations,
including but not limited to the fees of any independent counsel,
expert or consultant retained, (vii) fees and expenses of the
transfer agent, registrar and custodian and all issue and
transfer taxes, if any, (viii) the fees payable to the Commission
and the NASD, and (ix) the fees and expenses incurred in
connection with the listing of the Securities on Nasdaq-NMS and
any other exchange.
(b) If this Agreement is terminated by the Underwriter in accordance
with the provisions of Section 8, Section 12 (a) or Section 13,
---------------------------------------
the Company shall reimburse and indemnify the Underwriter for all
of its actual out-of-pocket expenses on an accountable basis,
including the reasonable fees and disbursements of Underwriters'
Counsel, less any amounts already paid pursuant to Section 7(c)
------------
hereof, up to a maximum of $75,000.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 7, it will pay
---------
to the Representative on the Closing Date by certified or bank
cashiers check or, at the election of the Representative, by
deduction from the proceeds of the offering contemplated herein a
non-accountable expense allowance equal to 2.15% of the gross
proceeds received by the Company from the sale of the Firm
Securities, $50,000 of which has been paid to date. In the event
the Underwriters elect to exercise the over-allotment option
described in Section 3(b) hereof, the Company agrees to pay to
------------
the Representative on the Option Closing Date (by certified or
bank cashiers check or, at the Representative's election, by
deduction from the proceeds of the offering) a non-accountable
expense allowance equal to 2.15% of the gross proceeds received
by the Company from the sale of the Option Securities.
8. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
Underwriters hereunder shall be subject to the continuing accuracy of
the representations and warranties of the Company and the Selling
Stockholders herein as of the date hereof and as of the Closing Date
and Option Closing Date, if any, as if they had been or have made on
and as of the Closing Date or Option Closing Date, as the case may be;
the accuracy on and as of the Closing Date or Option Closing Date, if
any, of the statements of officers of the Company (where applicable)
made pursuant to the provisions hereof; and the performance by the
Company and the Selling Stockholders on and as of the Closing Date and
Option Closing Date, if any, of its covenants and obligations
hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 noon, New York time, on the date of this Agreement or
such later date and time as shall be consented to in writing by
the Representative, and, at the Closing Date and Option Closing
Date, if any, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings
for that purpose shall have been instituted or shall be pending
or contemplated by the Commission and any request on the part of
the Commission for additional information shall have been
complied with to the reasonable satisfaction of Underwriter's
Counsel. If the Company has elected to rely upon Rule 430A of
the Rules and Regulations, the price of the Common Stock and
Preferred Stock to be sold hereunder and any price related
information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted
to the Commission for filing pursuant to Rule 424(b) of the Rules
and Regulations within the prescribed time period and, prior to
the Closing Date, the Company shall have provided evidence
satisfactory to the Representative of such timely filing, or a
post-effective amendment providing such information shall have
been promptly filed and declared effective in accordance with the
requirements of Rule 430A of the Rules and Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an
untrue statement of fact which, in the Underwriter's reasonable
opinion, is material, or omits to state a fact which, in the
Representative's reasonable opinion, is material and is required
to be stated therein or is necessary to make the statements
therein not misleading, or that the Prospectus, or any supplement
thereto, contains an untrue statement of fact which, in the
Representative's reasonable opinion, is material, or omits to
state a fact which, in the Representative's reasonable opinion,
is material and is required to be stated therein or is necessary
to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(c) On or prior to each of the Closing Date and Option Closing Date,
if any, the Representative shall have received from Underwriters'
Counsel, such opinion or opinions with respect to the
organization of the Company, the validity of the Securities, the
Registration Statement, the Prospectus and other related matters
as the Representative may request, and Underwriters' Counsel
shall have received from the Company such papers and information
as they request to enable them to pass upon such matters.
(d) At the Closing Date, the Underwriters shall have received the
favorable opinion of Reid & Priest, LLP, New York, New York,
special counsel to the Company, dated the Closing Date, addressed
to the Underwriters and in form and substance satisfactory to the
Representative and Underwriters' Counsel to the effect that:
(i) the Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the
State of Delaware. Each subsidiary of the Company listed in
Exhibit 21 to the Registration Statement (the
"Subsidiaries") has been duly incorporated or formed and is
existing and in good standing under the laws of the
jurisdiction of its incorporation or organization. The
Company and the Subsidiaries are duly qualified and in good
standing as a foreign corporation in each jurisdiction in
which the character or location of its assets or properties
(owned, leased or licensed) or the nature of its business
makes such qualification necessary except for such
jurisdictions where the failure to so qualify would not have
a material adverse effect on the assets or properties,
business, results of operations or financial condition of
the Company or its subsidiaries, taken as a consolidated
whole. To our knowledge, the Company has no subsidiaries
other than those identified in the Registration Statement,
and the Company does not control, directly or indirectly,
any corporation, partnership, joint venture, association or
other business organization which is material to the
Business other than as described in the Registration
Statement and the Prospectus. The Company and the
Subsidiaries have all requisite corporate power and
authority to own, lease and license its assets and
properties and conduct its businesses as now being conducted
and as described in the Registration Statement and the
Prospectus; and the Company has all such corporate power and
authority, and such authorizations, approvals, consents,
orders, licenses, certificates and permits as may be
necessary to enter into, deliver and perform this Agreement
and the Representative's Warrant Agreement, and to issue and
sell the Securities (except as may be required under the
Securities Act and state and foreign Blue Sky laws) under
the terms hereof and thereof and to consummate the
transactions provided for herein and therein;
(ii) Prior to the issuance of Securities in accordance with this
Agreement, the Company had an authorized and outstanding
capital stock as set forth under the caption
"Capitalization" in the Registration Statement and the
Prospectus. All of the outstanding shares of Common Stock
have been duly and validly issued and are fully paid and
nonassessable and, to such counsel's knowledge, none of them
was issued in violation of any preemptive or other similar
right (except for any such right emanating from the
Company's Certificate of Incorporation or By-laws, for which
no knowledge criteria applies). The Securities, when issued
(in the case of the Securities to be sold by the Company)
and sold pursuant to this Agreement and the Representative's
Warrant Agreement, will be duly and validly issued, fully
paid and nonassessable, and, to such counsel's knowledge,
none of them will be issued in violation of any preemptive
or other similar right (except for any such right emanating
from the Company's Certificate of Incorporation or By-laws,
for which no knowledge criteria applies). Except as
disclosed in the Registration Statement and the Prospectus,
to such counsel's knowledge, there is no outstanding option,
warrant or other right calling for the issuance of, and no
commitment, plan or arrangement to issue, any share of
Preferred Stock or Common Stock of the Company or any
security convertible into, or exercisable or exchangeable
for, such Preferred Stock or Common Stock. The Securities
conform in all material respects to all statements in
relation thereto contained in the Registration Statement and
the Prospectus. The Representative's Warrants constitute
valid and binding obligations of the Company to issue and
sell, upon exercise thereof and payment therefor, the number
and type of securities of the Company called for thereby;
(iii) To such counsel's knowledge, no holders of securities of
the Company have rights to the registration of such
securities under the Registration Statement, other than the
Selling Stockholders as identified in the Registration
Statement and the Prospectus;
(iv) this Agreement and the Representative's Warrant Agreement
have been duly and validly executed and delivered by the
Company and, assuming due authorization, execution and
delivery by the other parties thereto, constitute and will
constitute the legal, valid and binding obligation of the
Company enforceable against the Company in accordance with
its terms, except (A) as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other
similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles and (B) to the
extent that rights to indemnity or contribution under this
Agreement may be limited by Federal and state securities
laws or the public policy underlying such laws.
(v) No transfer tax or duty is payable (on the assumption that
the laws of New York are applicable to such transactions) by
or on behalf of the Underwriters in connection with (A) the
issuance by the Company of the Securities, (B) the purchase
by the Underwriters of the Securities from the Company, (C)
the consummation by the Company of any of its obligations
under this Agreement, or (D) resales of the Securities in
connection with the distribution contemplated hereby;
(vi) to such counsel's knowledge, each of the Company and the
Subsidiaries is not in violation of any term or provision of
its charter or by-laws;
(vii) neither the execution, delivery and performance of
this Agreement or the Representative's Warrant
Agreement by the Company nor the consummation of any
of the transactions contemplated hereby and thereby
(including, without limitation, the issuance and sale
by the Company of the Securities) will give rise to a
right to terminate or accelerate the due date of any
payment due under, or conflict with or result in the
breach of any term or provision of, or constitute a
default (or an event which with notice or lapse of
time or both would constitute a default) under, or
require any consent or waiver under, or result in the
execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the
Company and its subsidiaries pursuant to the terms of,
(i) to such counsel's knowledge, any indenture,
mortgage, deed of trust or other agreement or
instrument to which the Company or any Subsidiary is a
party or by which it or any of its properties or
businesses is bound, (ii) any term or provision of its
charter or by-laws or (iii) any statute, rule or
regulation or, to such counsel's knowledge, any
franchise, license, permit, judgment, decree or order,
in any such case where termination, acceleration,
conflict, breach, default, event of default, lien,
charge, encumbrance, whether or not asserted or
imposed, would have a material adverse effect on the
assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a consolidated
whole;
(viii) except as disclosed in the Registration Statement and
the Prospectus, to such counsel's knowledge, there are
no pending or threatened actions, suits or proceedings
(governmental or otherwise) against or affecting the
Company, any of the Subsidiaries or any of their
respective properties that, if determined adversely to
the Company or any of the Subsidiaries, could
individually or in the aggregate have a material
adverse effect on the financial condition or business,
properties, net worth or results of operations of the
Company and the Subsidiaries taken as a consolidated
whole, or would materially and adversely affect the
ability of the Company or any of the Subsidiaries to
perform their respective obligations under this
Agreement, or which are otherwise required to be
disclosed in the Prospectus under the Rules and
Regulations;
(ix) the Registration Statement has become effective under the
Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made
in the manner and within the time period required by Rule
424(b); to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement
has been issued, no proceedings for that purpose have been
instituted or threatened and the Registration Statement and
the Prospectus (other than the financial statements and
other financial and statistical information contained
therein as to which such counsel need express no opinion)
comply as to form in all material respects with the
applicable requirements of the Act and the respective rules
thereunder;
(x) the Company is not a Passive Foreign Investment Company
("PFIC") within the meaning of Section 1296 of the United
States Internal Revenue Code of 1986, as amended;
(xi) the statements in the prospectus under "Business -
Partnership Offerings"; "Certain Transactions"; "Description
of Capital Stock"; "Shares Eligible For Future Sale"; and
"Certain Federal Income Tax Considerations" insofar as such
statements constitute a summary of documents referred to
therein or matters of law, are, in all material respects,
accurate summaries of the material provisions thereof and
accurately present the information required with respect to
such documents and matters. To such counsel's knowledge, all
contracts and other documents required to be filed as
exhibits to, or described in, the Registration Statement
have been so filed with the Commission or are described as
required in the Registration Statement, as the case may be.
To the extent deemed advisable by such counsel, they may rely as to
matters of fact on certificates of responsible officers of the Company and
public officials. Copies of such certificates shall be furnished to the
Representative and counsel for the Underwriters.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representative and representatives of the
independent certified public accountants of the Company, at which
conferences the contents of the Registration Statement and the Prospectus
and related matters were discussed and, although such counsel is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and the Prospectus (except as specified in the foregoing
opinion), on the basis of the foregoing no facts have come to the attention
of such counsel which have caused such counsel to believe that the
Registration Statement at the time it became effective and at each Closing
Date contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus as of its date
and at each Closing Date contained any untrue statement of a material fact
or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood that such counsel need not
express any belief with respect to the financial statements and schedules
and other financial or statistical data included in the Registration
Statement or the Prospectus).
(e) At the Closing Date, the Underwriters shall have received
the favorable opinion of Reid & Priest LLP, in its capacity
as special counsel for the Selling Stockholders, dated the
Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the
effect that:
(i) This Agreement, the Power of Attorney with Paul Jawin and
John W. Luciani, III, or either of them, as attorney-in-fact (the
"Power of Attorney") and the Custody Agreement with First Union Bank
as custodian (the "Custody Agreement") have been duly and validly
executed and delivered by the Selling Stockholder and constitute and
will constitute the legal, valid and binding obligation of each of the
Selling Stockholders, enforceable against each of the Selling
Stockholders in accordance with its terms, except (i) as the
enforceability hereof and thereof may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles,
(ii) to the extent that rights to indemnity or contribution under this
Agreement may be limited by federal and state securities laws or the
public policy underlying such laws and (iii) no opinion is expressed
as to the enforceability of the Power of Attorney and Custody
Agreement in the event of the death of a Selling Stockholder prior to
his sale of the Firm Securities or Option Securities hereunder. To
such counsel's knowledge, none of any Selling Stockholder's delivery
and sale of the Firm Securities or Option Securities, execution or
delivery of this Agreement, the Power of Attorney or the Custody
Agreement, his performance hereunder or thereunder, or his
consummation of the transactions contemplated herein and therein,
conflicts with or results in any material breach or violation of any
of the terms or provisions of, or constitutes a material default
under, or results in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or
assets (tangible or intangible) of any Selling Stockholder pursuant to
the terms of (i) any license, contract, indenture, mortgage, deed of
trust, lease, voting trust agreement, stockholders agreement, note,
loan or credit agreement or any other agreement or instrument of which
such counsel has knowledge and to which any Selling Stockholder is a
party or by which any Selling Stockholder is bound, or (ii) any
statute, rule or regulation, or, to such counsel's knowledge, any
decree, judgement or order, of any arbitrator, court, regulatory body
or administrative agency or other governmental agency or body having
jurisdiction over any Selling Stockholder or any of his activities or
properties (including, without limitation, those having jurisdiction
over environmental or similar matters), domestic or foreign, which is
applicable to any Selling Stockholder, and in each case where such
conflict, breach, violation or default would have a material adverse
effect on such Selling Stockholder.
(ii) To such counsel's knowledge, no consent, approval,
authorization or order of any Federal or state court or governmental
agency or body is required for the performance of this Agreement by
either Selling Stockholder or the sale by either Selling Stockholder
of the Common Stock to be sold by him hereunder, except such as have
been obtained under the Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of such shares by the several Underwriters (as to which
such counsel need express no opinion) and such as may be required
under the rules of the National Association of Securities Dealers,
Inc. with respect to the underwriting arrangements reflected in this
Agreement (as to which such counsel need express no opinion).
(iii) Except as disclosed in the Registration Statement and
the Prospectus, to such counsel's knowledge, there are no pending or
threatened actions, suits or proceedings against or affecting either
Selling Stockholder, or any of his properties that, if determined
adversely to the Selling Stockholder, would materially and adversely
affect the ability of such Selling Stockholder to perform his
obligations under this Agreement, the Power of Attorney and the
Custody Agreement, or which are otherwise required to be disclosed in
the Prospectus under the Rules and Regulations.
(iv) No transfer tax, stamp duty or other similar tax is payable
(on the assumption that the laws of the State of New York are
applicable) by or on behalf of the Underwriters in connection with (i)
the sale by the Selling Stockholders of the Firm Securities or Option
Securities, (ii) the purchase by the Underwriters of the Firm
Securities or Option Securities from the Selling Stockholders, (iii)
the consummation by the Selling Stockholders of any of their
obligations under this Agreement, or (iv) resales of the Firm
Securities or Option Securities in connection with the distribution
contemplated hereby.
(v) Each of the Underwriters has received good and valid title
to the Firm Securities and Option Securities being sold by the Selling
Stockholder hereunder, free and clear of any adverse claims; provided
that the Underwriters are purchasing such Firm Securities and Option
Securities in good faith and without notice of any adverse claims;
To the extent deemed advisable by such counsel, they may rely as to
matters of fact on certificates of responsible officers of the Company, the
Selling Stockholder and public officials. Copies of such certificates shall
be furnished to the Representative and counsel for the Underwriters.
Such counsel may assume that each Selling Stockholder has the
necessary legal capacity to execute, deliver and perform the Agreement, the
Power of Attorney and the Custody Agreement executed by him in connection
with the transactions contemplated by the Agreement.
(f) At the Option Closing Date, if any, the Representatives shall
have received the favorable opinion of Company Counsel, as both
special counsel to the Company and special counsel to the Selling
Stockholders dated the Option Closing Date, addressed to the
Underwriters and in form and substance satisfactory to the
Representative and Underwriters' Counsel confirming as of the
Option Closing Date the statements made by Company Counsel in its
opinion delivered on the Closing Date as counsel to the Company
and counsel to the Selling Stockholders.
(g) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished
such documents, certificates and opinions as they may reasonably
require for the purpose of enabling them to review or pass upon
the matters referred to in subsection (c) of this Section 8, or
-
in order to evidence the accuracy, completeness or satisfaction
of any of the representations, warranties or conditions of the
Company and each Subsidiary, or herein contained.
(h) Prior to each of the Closing Date and the Option Closing Date, if
any (i) there shall have been no material adverse change or
development involving a prospective material change in the
condition, financial or otherwise, prospects, stockholders equity
or the business activities of the Company, whether or not in the
ordinary course of business, from the latest dates as of which
such condition is set forth in the Registration Statement and
Prospectus; (ii) except as disclosed in the Registration
Statement, there shall have been no transaction, not in the
ordinary course of business, entered into by the Company or any
Subsidiary, from the latest date as of which the financial
condition of the Company and any Subsidiary is set forth in the
Registration Statement and Prospectus which is materially adverse
to the Company or any Subsidiary; (iii) neither the Company nor
any Subsidiary, shall be in default under any provision of any
instrument relating to any outstanding indebtedness which default
has not been waived; (iv) except as disclosed in the Registration
Statement, neither the Company nor any Subsidiary shall have
issued any securities (other than the Securities) or declared or
paid any dividend or made any distribution in respect of its
capital stock of any class and there has not been any change in
the capital stock or any material change in the debt (long or
short term) or liabilities or obligations of the Company or any
Subsidiary (contingent or otherwise); (v) no material amount of
the assets of the Company or any Subsidiary shall have been
pledged or mortgaged, except as set forth in or contemplated by
the Registration Statement and Prospectus; (vi) no action, suit
or proceeding, at law or in equity, shall have been pending or
threatened (or circumstances giving rise to same) against the
Company or any Subsidiary or any of the Selling Stockholders, or
affecting any of their respective properties or businesses before
or by any Court or federal, state or foreign commission, board or
other administrative agency wherein an unfavorable decision,
ruling or finding may materially, adversely affect the Business,
or the Selling Stockholders' abilities to continue to function in
connection with the business operations of the Company or any
Subsidiary, except as set forth in the Registration Statement and
Prospectus; and (vii) no stop order shall have been issued under
the Act and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission.
(i) At each of the Closing Date and Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company
signed by the principal executive officer and by the chief
financial or chief accounting officer of the Company, dated the
Closing Date or Option Closing Date, as the case may be, to the
effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and
that:
(i) The representations and warranties of the Company and each
Subsidiary in this Agreement are true and correct as if made
on and as of the Closing Date or the Option Closing Date, as
the case may be, and the Company has complied with all
agreements and covenants and satisfied all conditions
contained in this Agreement on its part to be performed or
satisfied at or prior to the Closing Date or Option Closing
Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued,
and no proceedings for that purpose have been instituted or
are pending or, to the best of each of such persons
knowledge after due inquiry, are contemplated or threatened
under the Act;
(iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto,
contain all statements and information required to be
included therein, and the Registration Statement, or
any amendment or supplement thereto, does not include
any untrue statement of a material fact or omits to
state any material fact required to be stated therein
or necessary to make the statements therein not
misleading and neither the Preliminary Prospectus, the
Prospectus, or any supplement thereto included any
untrue statement of a material fact or omitted to
state any material fact required to be stated therein
or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus,
and except as described in or contemplated by the
Registration Statement and Prospectus, (a) neither the
Company nor any Subsidiary has incurred up to and including
the Closing Date or the Option Closing Date, as the case may
be, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent;
(b) neither the Company nor any Subsidiary has paid or
declared any dividends or other distributions on its capital
stock; (c) neither the Company nor any Subsidiary has
entered into any transactions not in the ordinary course of
business; (d) there has not been any change in the capital
stock or material increase in long-term debt or any material
increase in the short-term borrowings (other than any
increase in the short-term borrowings in the ordinary course
of business) of the Company or any Subsidiary; (e) neither
the Company nor any Subsidiary has sustained any loss or
damage to its property or assets, whether or not insured;
(f) there is no litigation which is pending or threatened
(or circumstances giving rise to same) against the Company
or any Subsidiary or any affiliated party of any of the
foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth; and
(g) there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been set
forth.
References to the Registration Statement and the Prospectus in
this subsection (g) are to such documents as amended and
supplemented at the date of such certificate.
(j) The Selling Stockholders shall have furnished to the Underwriter
such other documents and certificates as to the accuracy and
completeness of any statement in the Registration Statement or
the Prospectus as of the time of purchase and the additional time
of purchase, as the case may be, as the Representative and
Underwriters' counsel may reasonably request. Specifically, at
each of the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received a certificate from each of
the Selling Stockholders (which may be signed by the Attorney-in-
Fact), dated the Closing Date, and the Option Closing Date, if
any, to the effect that such Selling Stockholder has carefully
examined the Registration Statement, the Prospectus and this
Agreement, and that:
(A) The representations and warranties of such Selling
Stockholder in this Agreement are true and correct, as if made at
and as of the Closing Date or the Option Closing Date, as the
case may be, and such Selling Stockholder has complied with all
agreements and covenants and satisfied all conditions contained
in this Agreement to be performed or satisfied by such Selling
Stockholder at or prior to the Closing Date or the Option Closing
Date, as the case may be; and
(B) The Registration Statement and Prospectus and, if any,
each amendment and each supplement thereto, contain all
statements and information required to be included therein
regarding such Selling Stockholder, and none of the Registration
Statement, the Prospectus nor any amendment or supplement thereto
includes any untrue statement of a material fact regarding such
Selling Stockholder or omits to state any material fact regarding
such Selling Stockholder required to be stated therein or
necessary to make the statements therein regarding such Selling
Stockholder not misleading, and neither the Preliminary
Prospectus or any supplement thereto included any untrue
statement of a material fact regarding such Selling Stockholder
or omitted to state a material fact regarding such Selling
Stockholder required to be stated therein or necessary in order
to make the statements therein regarding such Selling
Stockholder, in light of the circumstances under which they were
made, not misleading.
References to the Registration Statement and the Prospectus in
this subsection (j) are to such documents as amended and supplemented
at the date of such certificate.
(k) The Company and the Selling Stockholders shall have performed
such of their respective obligations under this Agreement as are
to be performed by the terms hereof at or before the time of
purchase and at or before the additional time of purchase, as the
case may be.
(l) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriters, as described in the
Registration Statement.
(m) At the time this Agreement is executed, the Representative shall
have received a letter, dated the date hereof, addressed to the
Underwriters in form and substance satisfactory (including the
non-material nature of the changes or decreases, if any, referred
to in clause (iii) below) in all respects to the Representative
and Underwriters' Counsel from Deloitte & Touche LLP:
(i) confirming that they are independent certified public
accountants with respect to the Company and each Subsidiary
within the meaning of the Act and the applicable Rules and
Regulations;
(ii) stating that it is their opinion that the consolidated
financial statements and supporting schedules of the Company
and each Subsidiary included in the Registration Statement
comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules
and Regulations thereunder and that the Underwriter may rely
upon the opinion of Deloitte & Touch LLP, with respect to
the financial statements and supporting schedules included
in the Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited
interim consolidated financial statements of the
Company and each Subsidiary (with an indication of the
date of the latest available unaudited interim
financial statements), a reading of the latest
available minutes of the stockholders and board of
directors and the various committees of the boards of
directors of the Company and the Subsidiaries,
consultations with officers and other employees of the
Company and the Subsidiaries responsible for financial
and accounting matters and other specified procedures
and inquiries, nothing has come to their attention
which would lead them to believe that (A) the pro
forma financial information contained in the
Registration Statement and Prospectus, if any, does
not comply as to form in all material respects with
the applicable accounting requirements of the Act and
the Rules and Regulations or is not fairly presented
in conformity with generally accepted accounting
principles applied on a basis consistent with that of
the audited consolidated financial statements of the
Company or the unaudited pro forma financial
information included in the Registration Statement, if
any, (B) the unaudited financial statements and
supporting schedules of the Company and the
Subsidiaries included in the Registration Statement do
not comply as to form in all material respects with
the applicable accounting requirements of the Act and
the Rules and Regulations or are not fairly presented
in conformity with generally accepted accounting
principles applied on a basis substantially consistent
with that of the audited consolidated financial
statements of the Company and the Subsidiary included
in the Registration Statement, or (C) at a specified
date not more than five (5) days prior to the
effective date of the Registration Statement, there
has been any change in the capital stock or long-term
debt of the Company and the Subsidiaries, or any
decrease in the stockholders' equity or net current
assets or net assets of the Company and the
Subsidiaries as compared with amounts shown in the
balance sheet included in the Registration Statement,
other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or
decrease, setting forth the amount of such change or
decrease, and (D) during the period from October 31,
1996 to a specified date not more than five (5) days
prior to the effective date of the Registration
Statement, there was any decrease in net revenues, net
revenues, net earnings or increase in net earnings per
common share of the Company and the Subsidiaries, in
each case as compared with the corresponding period
beginning October 31, 1996 other than as set forth in
or contemplated by the Registration Statement, or, if
there was any such decrease, setting forth the amount
of such decrease;
(iv) setting forth at a date not later than five (5) days prior
to the date of the Registration Statement, the amount of
liabilities of the Company and the Subsidiaries (including a
break-down of commercial paper and notes payable to banks);
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the
Company and the Subsidiaries set forth in the Prospectus in
each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from
the general accounting records, including work sheets, of
the Company and the Subsidiaries and excluding any questions
requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings,
inquiries and other appropriate procedures (which procedures
do not constitute an examination in accordance with
generally accepted auditing standards in the United States),
set forth in the letter and found them to be in agreement;
(vi) stating that they have not during the immediately preceding
five (5) year period brought to the attention of any of the
Company's or any Subsidiary's management any "weakness", as
defined in Statement of Auditing Standard No. 60
"Communication of Internal Control Structure Related Matters
Noted in an Audit," in any of the Company's or any
Subsidiary's internal controls;
(vii) stating that they have in addition carried out certain
specified procedures, not constituting an audit, with
respect to certain pro forma financial information
which is included in the Registration Statement and
the Prospectus, if any, and that nothing has come to
their attention as a result of such procedures that
caused them to believe such unaudited pro forma
financial information, if any, does not comply in form
in all respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments, if any, have not been
properly applied to the historical amounts in the
compilation of that information; and
(viii) statements as to such other matters incident to the
transaction contemplated hereby as the Representative
may request.
(n) At the Closing Date and the Option Closing Date, if any, the
Representative shall have received from Deloitte & Touche LLP, a
letter, dated as of the Closing Date or the Option Closing Date,
as the case may be, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection
(l) of this Section, except that the specified date referred to
shall be a date not more than five days prior to Closing Date or
the Option Closing Date, as the case may be, and, if the Company
has elected to rely on Rule 430A of the Rules and Regulations, to
the further effect that they have carried out procedures as
specified in clause (v) of subsection (l) of this Section with
respect to certain amounts, percentages and financial information
as specified by the Underwriter and deemed to be a part of the
Registration Statement pursuant to Rule 430A(b) and have found
such amounts, percentages and financial information to be in
agreement with the records specified in such clause (v).
(o) On each of the Closing Date and the Option Closing Date, if any,
there shall have been duly tendered to the Representative for the
Underwriters' account, the appropriate number of Securities.
(p) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative pursuant to
subsection (e) of Section 5 hereof shall have been issued on
----------------
either the Closing Date or the Option Closing Date, if any, and
no proceedings for that purpose shall have been instituted or
shall be contemplated.
(q) On or before the Closing Date, the Company shall have executed
and delivered to the Representative (i) the Representative's
Warrant Agreement substantially in the form filed as Exhibit 1.2
-----------
to the Registration Statement in final form and substance
satisfactory to the Representative, and (ii) the Representative's
Warrants in such denominations and to such designees as shall
have been provided to the Company.
(r) On or before the Closing Date, the Common Stock and Preferred
Stock shall have been duly approved for inclusion and quotation
on Nasdaq-NMS, subject to official notice of issuance.
(s) On or before the Closing Date, there shall have been delivered to
the Representative all of the duly executed Lock-up Agreements,
in form and substance satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option
Closing Date, as the case may be, is not so fulfilled, the
Underwriters may terminate this Agreement or, if the Underwriters so
elects, they may waive any such conditions which have not been
fulfilled or extend the time for their fulfillment by written action
of the Representative on behalf of the several Underwriters.
9. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the
Underwriters (for purposes of this Section 9, "Underwriter" shall
---------
include the officers, directors, stockholders, partners,
employees, agents, including specifically each person who may be
substituted for an Underwriter as provided in Section 13 hereof),
and each person, if any, who controls the Underwriter (a
"controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and
all losses, claims, damages, expenses or liabilities, joint or
several (and actions in respect thereof), whatsoever (including
but not limited to any and all reasonable expenses whatsoever
incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever), as
such are incurred, to which the Underwriter or such controlling
person may become subject under the Act, the Exchange Act or any
other statute or at common law or otherwise or under the laws of
foreign countries, arising out of or based (A) upon any untrue
statement or alleged untrue statement of a material fact
contained (i) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and
supplemented); (ii) in any post effective amendment or amendments
or any new registration statement and prospectus in which is
included securities of the Company issued or issuable upon
exercise of the Securities; or (iii) in any application or other
document or written communication (in this Section 9 collectively
called "application") executed by the Company or based upon
written information furnished by the Company or any Selling
Stockholder in any jurisdiction in order to qualify the
Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, Nasdaq-NMS
or any other securities exchange; (B) the omission or alleged
omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not
misleading (in the case of the Prospectus, in the light of the
circumstances under which made), or (C) any breach of any
representation, warranty or covenant or agreement of the Company
or any Selling Stockholder contained herein or in any certificate
by or on behalf of the Company or any of its officers or the
Selling Stockholders delivered pursuant hereto, unless, in the
case of clause (A) or (B) such statement or omission (i) was made
in reliance upon and in conformity with written information
furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary
Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any application,
as the case may be, or (ii) if a copy of the Preliminary
Prospectus or Prospectus in which such untrue statement or
alleged untrue statement or omission or alleged omission was
corrected had not been sent, distributed or property recirculated
by the Underwriters within the time required by the Act and the
Rules and Regulations and such failure directly resulted in the
otherwise indemnifiable losses, claims, damages, or expenses of
the Underwriters (as defined herein) and each controlling person
thereof.
The indemnity agreement in this subsection (a) shall be in
addition to any liability which the Company or the Selling
Stockholders may have at common law or otherwise.
(b) Each Selling Shareholder, severally and not jointly, agrees to
indemnify and hold harmless the Underwriters (as defined in this
Section 9(a) above) and each controlling person within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, from and against any and all losses, claims, damages,
expenses or liabilities, joint or several (and actions in respect
thereof), whatsoever (including but not limited to any and all
reasonable expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever), as such are incurred, to
which the Underwriter or such controlling person may become
subject under the Act, the Exchange Act or any other statute or
at common law or otherwise or under the laws of foreign
countries, arising out of or based (A) upon any untrue statement
or alleged untrue statement of a material fact contained (i) in
any Preliminary Prospectus, the Registration Statement or the
Prospectus (as from time to time amended and supplemented); (ii)
in any post effective amendment or amendments or any new
registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the
Securities; or (iii) in any application or other document or
written communication (in this Section 9 collectively called
"application") based upon written information furnished by such
Selling Stockholder in any jurisdiction in order to qualify the
Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, Nasdaq-NMS
or any other securities exchange; or (B) any breach of any
representation, warranty or covenant or agreement of such Selling
Stockholder contained herein or in any certificate by or on
behalf of such Selling Stockholders delivered pursuant hereto,
unless, in the case of clause (A) such statement or omission was
made (i) in reliance upon and in conformity with written
information furnished to such Selling Stockholder with respect to
any Underwriter by or on behalf of such Underwriter expressly for
use in any Preliminary Prospectus, the Registration Statement or
Prospectus, or any amendment thereof or supplement thereto, or in
any application, as the case may be or (ii) if a copy of the
Preliminary Prospectus or Prospectus in which such untrue
statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent, given, distributed or
properly recirculated by the Underwriters within the time
required by the Act and the Rules and Regulations and such
failure directly resulted in the otherwise indemnifiable losses,
claims, damages, or expenses of the Underwriters as defined
herein) and each controlling person thereof.
The indemnity agreement in this subsection (b) shall be in
addition to any liability which the Company may have at common
law or otherwise.
(c) The Underwriters agree severally, but not jointly, to indemnify
and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each
other person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act,
and the Selling Stockholders, to the same extent as the foregoing
indemnity from the Company and the Selling Stockholders to the
Underwriters but only with respect to statements or omissions, if
any, made in any Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in
strict conformity with, written information furnished to the
Company with respect to any Underwriter by such Underwriter
expressly for use in such Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application. Each of the
Company and each of the Selling Stockholders acknowledges that
the statements with respect to the public offering of the
Securities set forth under the heading "Underwriting," the Risk
Factor entitled "Limited Underwriting History" and the
stabilization and passive market making legends in the
Prospectus have been furnished by the Underwriters expressly
for use therein and constitute the only information furnished
in writing by or on behalf of the Underwriters for inclusion
in the Prospectus.
The indemnity agreement in this subsection (c) shall be in
addition to any liability which each Underwriter may have at
common law or otherwise.
(d) Promptly after receipt by an indemnified party under this Section
-------
9 of notice of the commencement of any action, suit or
--
proceeding, such indemnified party shall, if a claim in respect
thereof is to be made against one or more indemnifying parties
under this Section 9, notify each party against whom
indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party shall
not relieve it from any liability which it may have under this
Section 9 except to the extent that it has been prejudiced in any
---------
material respect by such failure or from any liability which it
may have otherwise). In case any such action is brought against
any indemnified party, and it notifies an indemnifying party or
parties of the commencement thereof, the indemnifying party or
parties will be entitled to participate therein, and to the
extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice
from such indemnified party, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties
shall have the right to employ its or their own counsel in any
such case but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing
by the indemnifying party in connection with the defense of such
action at the expense of such indemnifying party, (ii) the
indemnifying party shall not have employed counsel reasonably
satisfactory to such indemnified party to have charge of the
defense of such action within a reasonable period of time after
notice of commencement of the action, or (iii) such indemnified
party or parties shall have been advised in a written opinion by
counsel to the indemnified party that a conflict of interest
exists between the indemnifying party and the indemnified
parties, making representation of such parties by the same
counsel inappropriate (in which case the indemnifying parties
shall not have the right to direct the defense of such action on
behalf of the indemnified party or parties), in any of which
events the reasonable fees and expenses of additional counsel
shall be borne by the indemnifying parties. Anything in this
Section 9 to the contrary notwithstanding, an indemnifying party
---------
shall not be liable for any settlement of any claim or action
effected without its written consent; provided, however, that
-------- -------
such consent was not unreasonably withheld or delayed. An
indemnifying party will not, without the prior written consent of
the indemnified parties, settle, compromise or consent to the
entry of any judgement with respect to any pending or threatened
claim, action, suit, investigation, inquiry, proceeding or
litigation in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties
are actual or potential parties to such claim, action, suit,
investigation, inquiry, proceeding or litigation), unless such
settlement, compromise or consent (i) includes an unconditional
release of each indemnified party from all liability arising out
of such claim, action, suit, investigation, inquiry, proceeding
or litigation and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act by or on
behalf of any indemnified party.
(e) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes a claim for
indemnification pursuant to this Section 9, but it is judicially
---------
determined (by the entry of a final judgment or decree by a court
of competent jurisdiction and the expiration of time to appeal or
the denial of the last right of appeal) that such indemnification
may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 9 provide for
---------
indemnification in such case, or (ii) contribution under the Act
may be required on the part of any indemnified party, then each
indemnifying party shall contribute to the amount paid as a
result of such losses, claims, damages, expenses or liabilities
(or actions in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of
the contributing parties, on the one hand, and the party to be
indemnified on the other hand, from the offering of the
Securities or (B) if the allocation provided by clause (A) above
is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to
in clause (i) above, but also the relative fault of each of the
contributing parties, on the one hand, and the party to be
indemnified on the other hand, in connection with the statements
or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable
considerations. In any case where the Company and/or any Selling
Stockholder is the contributing party and the Underwriters are
the indemnified party, the relative benefits received by the
Company and/or any Selling Stockholder on the one hand, and the
Underwriters on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the
Securities (before deducting expenses other than underwriting
discounts and commissions) bears to the total underwriting
discounts and non-accountable expense allowance and any amounts
realized from the sale of Representative Securities received by
-------------- ----------
the Underwriters hereunder, in each case as set forth in the
table on the cover page of the Prospectus. Relative fault shall
be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Stockholders, or
by the Underwriters, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages,
expenses or liabilities (or actions in respect thereof) referred
to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified
any such action or claim. Notwithstanding the provisions of this
subsection (d), the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount
applicable to the Firm Securities and Options Securities
purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f)
of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For
purposes of this Section 9, (i) each person, if any, who controls
---------
the Company within the meaning of the Act, each officer of the
Company who has signed the Registration Statement, and each
director of the Company shall have the same rights to
contribution as the Company and (ii) each person, if any, who
controls an Underwriter within the meaning of the Act shall have
the same rights to contribution as such Underwriter, subject in
each case to this subsection (d). Any party entitled to
contribution will, promptly after receipt of notice of claim of
any action, suit or proceeding against such party in respect to
which a claim for contribution may be made against another party
or parties under this subsection (d), notify such party or
parties from whom contribution may be sought, but the omission so
to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation
it or they may have hereunder or otherwise than under this
subsection (d), or to the extent that such party or parties were
not adversely affected by such omission. The contribution
agreement set forth above shall be in addition to any liabilities
which any indemnifying party may have at common law or otherwise.
10. Representations and Agreements to Survive Delivery. All
--------------------------------------------------
representations, warranties and agreements contained in this Agreement
or contained in certificates of officers of the Company or of the
Selling Stockholders submitted pursuant hereto, shall be deemed to be
representations, warranties and agreements at the Closing Date and the
Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and of the Selling
Stockholders, and the indemnity agreements contained in Section 9
---------
hereof, shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Underwriter, the
Company, any Selling Stockholder, or any controlling person of any
Underwriter or the Company, and shall survive termination of this
Agreement or the issuance and delivery of the Securities to the
Underwriters and the Representative, as the case may be.
11. Effective Date. This Agreement shall become effective at 10:00 a.m.,
--------------
New York City time, on the next full business day following the date
------------------------------------------------
hereof, or at such earlier time after the Registration Statement
------
becomes effective as the Representative, in its discretion, shall
release the Firm Securities and Option Securities for the sale to the
public; provided, however, that the provisions of Sections 7, 9 and 12
-------- ------- --------
of this Agreement shall at all times be effective. For purposes of
this Section 11, the Firm Securities and the Option Securities to be
----------
purchased hereunder shall be deemed to have been so released upon the
earlier of dispatch by the Representative of telegrams to securities
dealers releasing such securities for offering or the release by the
Representative for publication of the first newspaper advertisement
which is subsequently published relating to the Firm Securities and
the Option Securities.
12. Termination.
-----------
(a) Subject to subsection (b) of this Section 12, the Representative shall
-------
have the right to terminate this Agreement between the date of this
Agreement and the Closing Date or the Option Closing Date, as the case
may be, (i) if any domestic or international event or act or
occurrence has materially disrupted, or in the Underwriter's opinion
will in the immediate future materially disrupt the financial markets;
or (ii) if any material adverse change in the financial markets shall
have occurred; or (iii) if trading generally shall have been suspended
or materially limited on or by the New York Stock Exchange, the
American Stock Exchange, the National Association of Securities
Dealers Automated Quotation System, the NASD, the Commission or any
other government authority having jurisdiction over such matters; or
(iv) if trading of any of the securities of the Company shall have
been suspended, or any of the securities of the Company shall have
been delisted, on any exchange or in any over-the-counter market; or
(v) if the United States shall have become involved in a war or major
hostilities, or if there shall have been an escalation in an existing
war or major hostilities or a national emergency shall have been
declared in the United States; or (vi) if a banking moratorium has
been declared by any state or by federal authority; or (vii) if the
Company shall have sustained a loss material to the Company by fire,
flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act which, whether or not such loss shall have
been insured, will, in the Representative's opinion, make it
inadvisable to proceed with the offering, sale and/or delivery of the
Firm Securities and the Option Securities; or (viii) if there shall
have been (a) such a material adverse change in the Business, or (b)
such material adverse change in the general market, political or
economic conditions, in the United States or elsewhere, which, in each
case, in the Representative's judgment, would make it inadvisable to
proceed with the offering, sale and/or delivery of the Firm Securities
and the Option Securities; or (ix) if either of Messrs. Bernard M.
Rodin or John Luciani no longer serves the Company in his present
capacity.
(b) If this Agreement is terminated by the Representative in accordance
with the provisions of Section 12(a), the Company shall promptly
-------
reimburse and indemnify the Representative for all of its actual
out-of-pocket expenses (on an accountable basis), including the
reasonable fees and disbursements of counsel for the Underwriter (less
amounts previously paid pursuant to Section 7(c) above), up to a
------------
maximum of $75,000. Notwithstanding any contrary provision contained
-------
in this Agreement, if this Agreement shall not be carried out within
the time specified herein, or any extension thereof granted by the
Representative, by reason of any failure on the part of the Company or
any Selling Stockholder to perform any undertaking or satisfy any
condition of this Agreement by it to be performed or satisfied
(including, without limitation, pursuant to Section 8 or Section 13)
--------- ----------
then, the Company shall promptly reimburse and indemnify the
Representative for all of its actual out-of-pocket expenses (on an
accountable basis), including the reasonable fees and disbursements of
Underwriters counsel (less amounts previously paid pursuant to Section
-------
7(c) above), up to a maximum of $75,000. In addition, the Company
---
shall remain liable for all Blue Sky counsel fees and disbursements,
expenses and filing fees. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination
of this Agreement (including, without limitation, pursuant to Sections
--------
8, 12, and 13 hereof), and whether or not this Agreement is otherwise
carried out, the provisions of Section 7 and Section 9 shall not be in
------- -------
any way affected by such election or termination or failure to carry
out the terms of this Agreement hereof.
13. Substitution of the Underwriters; Default by the Company.
--------------------------------------------------------
(a) If one or more of the Underwriters shall fail (otherwise
than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8, Section 12 or Section 13
------- ------- -------
hereof) to purchase the Securities which it or they are obligated to
purchase on such date under this Agreement (the "Defaulted
Securities"), the Representative shall have the right, within twenty-
four (24) hours thereafter, to make arrangement for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon the terms herein set forth; if, however,
the Representative shall not have completed such arrangements within
such 24-hour period, then:
(i) if the number of Defaulted Securities does not exceed
10% of the total number of Firm Securities to be purchased on
such date, the non-defaulting Underwriters shall be obligated to
purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of
the total number of Firm Securities, this Agreement shall
terminate without liability on the part of any non-defaulting
Underwriters (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the
Underwriters may at the Representative's option, by notice from
the Representative to the Company and the Selling Stockholders,
terminate the Underwriters' obligation to purchase Option
Securities from the Company and/or the Selling Stockholders, as
the case may be, on such date).
No action taken pursuant to this Section 13 shall relieve any
-------
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date or the Option Closing Date, as the case may be,
for a period not exceeding seven (7) days in order to effect any required
changes in the Registration Statement or Prospectus or in any other
documents or arrangements.
(b) If either the Company or any Selling Stockholder shall fail
at the Closing Date or any Option Closing Date, as applicable, to sell
and deliver the number of Securities which it or he is obligated to
sell hereunder on such date, then this Agreement shall terminate (or,
if such default shall occur with respect to any Option Securities to
be purchased on an Option Closing Date, the Underwriters may, at the
Representative's option, by notice from the Representative to the
Company and the Selling Stockholders, terminate the Underwriters'
obligation to purchase Option Securities from the Company and/or the
Selling Stockholders, as the case may be, on such date) without any
liability on the part of any non-defaulting party other than pursuant
to Section 7, Section 9 and Section 12 hereof. No action taken
pursuant to this Section 13 shall relieve the Company and/or the
Selling Stockholders from liability, if any, in respect of such
default.
14. Notices. All notices and communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any
standard form of telecommunication. Notices to the Underwriter at
National Securities Corporation, 1001 Fourth Avenue, Suite 2200,
Seattle Washington 98154, Attention: Steven A. Rothstein, Chairman,
with a copy to Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
153 East 53rd Street, New York, New York 10022, Attention: Stephen A.
Weiss, Esq. Notices to the Company and to the Selling Stockholders
shall be directed to the Company, and to the Selling Stockholders in
care of the Company, at 2650 N. Military Trail, Suite 350, Boca Raton,
FL 33431, Attention: John Luciani, III, Executive Vice President,
with a copy to Reid & Priest, LLP, 40 West 57th Street, New York, New
York 10019, Attention: John T. Hood, Esq.
15. Parties. This Agreement shall inure solely to the benefit of and
-------
shall be binding upon, the Underwriter, the Company, the Selling
Stockholders and the controlling persons, directors and officers
referred to in Section 9 hereof, and their respective successors,
-------
legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any
provisions herein contained. No purchaser of Securities from the
Underwriter shall be deemed to be a successor by reason merely of such
purchase.
16. Construction. This Agreement shall be governed by and construed and
------------
enforced in accordance with the laws of the State of New York without
giving effect to its choice of law or conflict of laws principles.
17. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all
of which taken together shall be deemed to be one and the same
instrument.
18. Entire Agreement: Amendments. This Agreement and the Representative's
----------------------------
Warrant Agreement constitute the entire agreement of the parties
hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in a writing, signed
by the Underwriter, the Company and the Selling Stockholders.
<PAGE>
If the foregoing correctly sets forth the understanding among the
Underwriter, the Company and the Selling Stockholders, please so indicate
in the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement among the Underwriter, the Company and the
Selling Stockholders, severally.
Very truly yours,
GRAND COURT LIFESTYLES, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
THE SELLING STOCKHOLDERS
NAMED IN SCHEDULE A HERETO
----------------------------------------
Bernard M. Rodin
----------------------------------------
John Luciani
CONFIRMED AND ACCEPTED AS OF
THE DATE FIRST ABOVE WRITTEN:
----------------------------
NATIONAL SECURITIES CORPORATION
For itself and as Representative of the several Underwriters named in
Schedule B hereto.
By:
-----------------------------
Name: Steven A. Rothstein
Title: Chairman
<PAGE>
SCHEDULE A
NUMBER OF
NAME FIRM SECURITIES
---- ---------------
Bernard M. Rodin 150,000 Shares of
-----------------
Common Stock
-------------
John Luciani 150,000 Shares of
-----------------
Common Stock
------------
TOTAL . . . . . . . . . . . . . . . . . 300,000 Shares of
Common Stock
=================
NUMBER OF
NAME OPTION SECURITIES
---- -----------------
Bernard M. Rodin 22,500 Shares of
---------------
Common Stock
------------
John Luciani 22,500 Shares of
----------------
Common Stock
------------
TOTAL . . . . . . . . . . . . . . . . . 45,000 Shares of
Common Stock
=================
<PAGE>
SCHEDULE B
NUMBER OF
NAME FIRM SECURITIES
---- ---------------
Common Stock Preferred
National Securities ------------ ---------
Corporation Stock
-----
TOTAL . . . . . . . . . 1,500,000 Shares 1,500,000 Shares
================ ==================
<PAGE>
SCHEDULE C
STOCKHOLDERS WHO HAVE EXECUTED LOCK-UP AGREEMENTS
Exhibit 1.2
--------------------------------------------------------------------------
GRAND COURT LIFESTYLES, INC.
AND
NATIONAL SECURITIES CORPORATION
---------------
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of March _, 1997
--------------------------------------------------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of __________, 1997
between GRAND COURT LIFESTYLES, INC., a Delaware corporation (the
"Company"), and NATIONAL SECURITIES CORPORATION (hereinafter referred to
variously as the "Holder" or the "Representative").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company proposes to issue to the Representative (and/or
its designees) warrants ("Warrants") to purchase up to an aggregate 150,000
shares of _____% Senior Convertible Redeemable Preferred Stock, $.0001 par
value, of the Company (the "Convertible Preferred Stock"), 150,000 shares
of Common Stock, $.01 par value (the "Common Stock"), of the Company, or
any combination of such securities at the exercise prices set forth herein;
and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof among
the Company, John Luciani, Bernard Rodin and the several Underwriters
listed therein to act as the Representative in connection with the
Company's proposed public offering of 1,500,000 shares of Convertible
Preferred Stock and 1,500,000 shares of Common Stock at an initial public
offering price of $10.00 per share of Convertible Preferred Stock and
$10.00 per share of Common Stock (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and
as part of the Representative's compensation in connection with, the
Representative acting as the Representative pursuant to the Underwriting
Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate thirty dollars ($30.00),
the agreements herein set forth and other good and valuable consideration,
hereby acknowledged, the parties hereto agree as follows:
1. Grant. Subject to the issuance and sale of the Common Stock
-----
and Convertible Preferred Stock in accordance with the Underwriting
Agreement on the Closing Date, the Representative (and/or its designees) is
hereby granted the right to purchase, at any time from __________, 1998
[one year from the effective date of the Registration Statement], until
5:30 P.M., New York time, on __________, 2002 [five years from the
effective date of the Registration Statement], at which time the Warrants
expire (the "Expiration Date"), up to an aggregate of (a) 150,000 shares of
Convertible Preferred Stock (the "Preferred Shares") at an initial exercise
price (subject to adjustment as provided in Section 8 hereof) of $16.50 per
-------
share of Convertible Preferred Stock [165% of the initial public offering
price per share of Convertible Preferred Stock], or in the event the
Convertible Preferred Stock has been redeemed by the Company or converted
into shares of Common Stock in accordance with the terms of the Convertible
Preferred Stock, up to 125,000 shares (subject to adjustment as provided in
Section 8 hereof) of Common Stock (the "Conversion Shares") at an initial
-------
exercise price (subject to adjustment as provided in Section 8 hereof) of
-------
$19.80 per share of Common Stock [165% of the initial public offering price
per share of Convertible Preferred Stock divided by the Conversion Rate, as
defined in and calculated pursuant to that certain Certificate of
Designation, Preferences and Rights of % Series A Senior Convertible
Redeemable Preferred Stock of Grand Court Lifestyles, Inc. (the
"Certificate of Designation"), dated as of __________, 1997 and filed with
the Secretary of State of the State of Delaware] and (b) 150,000 shares of
Common Stock (the "Common Shares") at an initial exercise price (subject to
adjustment as provided in Section 8 hereof) of $16.50 per share of Common
-------
Stock [165% of the initial public offering price per share of Common
Stock], or any combination of such Preferred Shares, Conversion Shares
and/or Common Shares at such exercise prices set forth herein, all subject
to the terms and conditions of this Agreement.
It is expressly understood that this Agreement entitles the
Representative to purchase Warrants in the aggregate amount of ten percent
(10%) of the number of securities offered to the public (excluding the over
allotment option) on an as converted basis (subject to adjustment as
provided in Section 8 hereof). Therefore, in the case of the Warrants to
-------
purchase shares of Convertible Preferred Stock, each share of Convertible
Preferred Stock purchased hereunder will reduce the number of Preferred
Shares purchasable by the Representative by one (subject to adjustment as
provided in Section 8 hereof). Similarly, each Conversion Share purchased
-------
hereunder will reduce the number of Preferred Shares purchasable by the
Representative by 1.2 shares of Convertible Preferred Stock and will reduce
the number of Conversion Shares purchasable by the Representative by one
(subject to adjustment as provided in Section 8 hereof). Except as set
-------
forth herein, the shares of Convertible Preferred Stock and shares of
Common Stock issuable upon exercise of the Warrants are in all respects
identical to the shares of Convertible Preferred Stock and shares of Common
Stock being purchased by the Underwriters for resale to the public pursuant
to the terms and provisions of the Underwriting Agreement. The Preferred
Shares, the Conversion Shares and the Common Shares issuable upon
redemption or conversion of the Preferred Shares or exercise of the
Warrants are sometimes hereinafter referred to collectively as the
"Securities."
2. Warrant Certificates. The warrant certificates (the "Warrant
--------------------
Certificates") delivered and to be delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A, attached hereto and made a
part hereof, with such appropriate insertions, omissions, substitutions,
and other variations as required or permitted by this Agreement.
3. Exercise of Warrant.
-------------------
Section 3.1 Method of Exercise. The Warrants initially are
------------------
exercisable at an aggregate initial exercise price (subject to adjustment
as provided in Section 8 hereof) per Preferred Share, Conversion Share and
-------
Common Share set forth in Section 6 hereof payable by certified or official
-------
bank check in New York Clearing House funds, subject to adjustment as
provided in Section 8 hereof. The registered holder of a Warrant
-------
Certificate ("Holder" or "Holders") shall be entitled to receive a
certificate or certificates for the Warrant Securities upon: (a) surrender
of a Warrant Certificate with the annexed Form of Election to Purchase duly
executed, (b) with payment of the Exercise Price (as hereinafter defined)
for the Preferred Shares, Conversion Shares and/or Common Shares purchased
at the Company's principal executive offices in Boca Raton, Florida
(presently located at 2650 N. Military Trail, Suite 350, Boca Raton,
Florida); and (c) delivery to the Company of a duly executed agreement
signed by the person(s) designated in the Form of Election to Purchase to
the effect that such person(s) agree(s) to be bound by all the terms and
conditions of this Warrant, including without limitation the provisions of
Section 7 and 8. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder thereof, in whole
or in part (but not as to fractional shares of the Preferred Shares,
Conversion Shares and Common Shares underlying the Warrants). In the event
the Company redeems all of the shares of Convertible Preferred Stock (other
than the Preferred Shares underlying the Warrants), then the Warrants may
only be exercised if such exercise is accompanied by the simultaneous
conversion of the Preferred Shares, underlying the Warrants being so
exercised. Warrants may be exercised to purchase all or part of the
Preferred Shares, Conversion Shares and/or Common Shares purchasable
thereunder. In the case of the purchase of less than all the Securities
purchasable under any Warrant Certificate, the Company shall cancel said
Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the
Securities purchasable thereunder.
Section 3.2 Exercise by Surrender of Warrant. In addition to
--------------------------------
the method of payment set forth in Section 3.1 and in lieu of any cash
-------
payment required thereunder, the Holder(s) of the Warrants shall have the
right at any time and from time to time to exercise the Warrants in full or
in part by surrendering the Warrant Certificate in the manner specified in
Section 3.1 in exchange for the number of shares of Common Stock equal to
-------
the quotient derived from dividing the numerator (x) an amount equal to the
difference between (A) the sum of (1) the number of Preferred Shares as to
which the Warrants are being exercised multiplied by the per Preferred
Share Market Price, (2) the number of Conversion Shares as to which the
Warrants are being exercised multiplied by the per Conversion Share Market
Price and (3) the number of Common Shares as to which the Warrants are
being exercised multiplied by the per Common Share Market Price, and (B)
the sum of the number of Warrants which are being exercised multiplied by
the Exercise Price as then in effect, by the denominator (y) the per share
Market Price of the Common Stock. Solely for the purposes of this
paragraph, Market Price shall be calculated either (i) on the date on which
the form of election attached hereto is sent to the Company pursuant to
Section 14 hereof ("Notice Date") or (ii) as the average of the Market
-------
Prices for each of the five trading days preceding the Notice Date,
whichever of (i) or (ii) is greater.
Section 3.3 Definition of Market Price. As used herein, the
--------------------------
phrase "Market Price" at any date shall be deemed to be (i) when referring
to the Preferred Shares, the last reported sale price, or, in case no such
reported sale takes place on such day, the average of the last reported
sale prices for the last three (3) trading days, in either case as
officially reported by the Nasdaq National Market ("NNM") or the principal
securities exchange on which the Convertible Preferred Stock is listed or
admitted to trading, or, if the Convertible Preferred Stock is not listed
or admitted to trading on NNM or any national securities exchange or
otherwise quoted by the National Association of Securities Dealers
Automated Quotation System ("Nasdaq"), the average closing bid price as
furnished by the National Association of Securities Dealers, Inc. ("NASD")
through Nasdaq or similar organization if Nasdaq is no longer reporting
such information, or if the Convertible Preferred Stock is not quoted on
Nasdaq, as determined in good faith (using customary valuation methods) by
resolution of the members of the Board of Directors of the Company, based
on the best information available to it; or (ii) when referring to the
Conversion Shares or the Common Shares, the last reported sale price, or,
in case no such reported sale takes place on such day, the average of the
last reported sale prices for the last three (3) trading days, in either
case as officially reported by NNM or the principal securities exchange on
which the Common Stock is listed or admitted to trading, or, if the Common
Stock is not listed or admitted to trading on NNM or any national
securities exchange or otherwise quoted by Nasdaq, the average closing bid
price as furnished by the NASD through Nasdaq or similar organization if
Nasdaq is no longer reporting such information, or if the Common Stock is
not quoted on Nasdaq, as determined in good faith (using customary
valuation methods) by resolution of the members of the Board of Directors
of the Company, based on the best information available to it.
4. Issuance of Certificates. Upon the exercise of the Warrants,
------------------------
the issuance of certificates for the Securities and/or other securities,
properties or rights underlying such Warrants and, upon the redemption or
conversion of the Preferred Shares, the issuance of certificates for shares
of Common Stock and/or other securities, properties or rights underlying
such Preferred Shares, as the case may be, shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the
Holder thereof including, without limitation, any transfer tax, stamp, duty
or other similar tax, which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Sections
--------
5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall
not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any such certificates in
a name other than that of the Holder, and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
The Warrant Certificates and the certificates representing the
Securities underlying the Warrants and the shares of Common Stock
underlying the Preferred Shares (and/or other securities, properties or
rights issuable upon the redemption or conversion of the Preferred Shares
or the exercise of the Warrants) shall be executed on behalf of the Company
by the manual or facsimile signature of the then Chairman or Vice Chairman
of the Board of Directors or President or Vice President of the Company.
Warrant Certificates shall be dated the date of execution by the Company
upon initial issuance, division, exchange, substitution or transfer or in
lieu of mutilated, lost, stolen or destroyed Warrant Certificates.
Certificates representing the Securities (and/or other securities,
properties or rights issuable upon the redemption or conversion of the
Preferred Shares or exercise of the Warrants) shall be dated as of the
Notice Date (regardless of when executed or delivered) and dividend bearing
securities so issued shall accrue dividends from the Notice Date.
5. Restriction On Transfer of Warrants. (a) The Holder of a
-----------------------------------
Warrant Certificate, by its acceptance thereof, represents, warrants,
covenants and agrees that the Warrants are being acquired as an investment
and not with a view to the distribution thereof; that the Warrants may not
be sold, transferred, assigned, hypothecated or otherwise disposed of, in
whole or in part, for a period of one (1) year from the date hereof, except
to officers of the Representative, subject to compliance with applicable
Federal and state securities laws and Interpretations of the Board of
Governors of the National Associates of Securities Dealers, Inc.
(b) Between one year from the date hereof and the Expiration
Date inclusive, this Warrant shall be freely transferable, in whole or in
part, subject to the other terms and conditions hereof and to compliance
with applicable federal and state securities laws.
(c) Any transfer of this Warrant permitted by this Section 5
shall be effected by: (i) surrender of this Warrant for cancellation (with
the annexed Form of Assignment duly executed) at the office or agency of
the Company referred to in Section 3; (ii) delivery of a certificate
(signed, if the Holder is a corporation or partnership, by an authorized
officer or partner thereof), stating that each transferee designated in the
assignment form is a permitted transferee under this Section 5; and (iii)
delivery of an opinion of counsel stating that the proposed transfer may be
made without registration or qualification under applicable Federal or
state securities laws. This Warrant shall be deemed to have been
transferred, in whole or in part to the extent specified, immediately prior
to the close of business on the date provisions of this Section 5(c) are
satisfied, and the transferee(s) designated in the assignment form shall
become the holder(s) of record at that time and date. The Company shall
issue, in the name(s) of the designated transferee(s) (including the Holder
if this Warrant has been transferred in part) a new Warrant or Warrants of
like tenor and representing, in the aggregate, rights to purchase the same
number of shares of Convertible Preferred and Common Stock (or such other
securities) as are then purchasable under this Warrant. Such new Warrant
or Warrants shall be delivered to the record holder(s) thereof within a
reasonable time, not exceeding ten business days, after the rights
represented by this Warrant shall have been so transferred. As used herein
(unless the context otherwise requires), the term "Holder" shall include
each such transferee, and the term "Warrant" shall include each such
transferred Warrant.
6. Exercise Price.
--------------
Section 6.1 Initial and Adjusted Exercise Price. Except as
-----------------------------------
otherwise provided in Section 8 hereof, the initial exercise price of each
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Warrant shall be $_____ [165% of the initial public offering price] per
share of Convertible Preferred Stock, $____ [165% of the initial public
offering price per share of Convertible Preferred Stock divided by the
Conversion Rate, as defined in and calculated pursuant to the Certificate
of Designations] per Conversion Share and $_____ [165% of the initial
public offering price] per share of Common Stock. The adjusted exercise
price shall be the price which shall result from time to time from any and
all adjustments of the initial exercise price in accordance with the
provisions of Section 8 hereof. Any transfer of a Warrant shall constitute
-------
an automatic transfer and assignment of the registration rights set forth
in Section 7 hereof with respect to the Securities or other securities,
-------
properties or rights underlying the Warrants.
Section 6.2 Exercise Price. The term "Exercise Price" herein
--------------
shall mean the initial exercise price or the adjusted exercise price,
depending upon the context or unless otherwise specified.
7. Registration Rights.
-------------------
Section 7.1 Registration Under the Securities Act of 1933.
---------------------------------------------
The Securities issuable upon exercise of the Warrants and the shares of
Common Stock issuable upon redemption or conversion of the Preferred Shares
(collectively, the "Warrant Securities") have been registered under the
Securities Act of 1933, as amended (the "Act"), pursuant to the Company's
Registration Statement on Form S-1 (Registration No. 333-05955) (the
"Registration Statement"). All of the representations and warranties of the
Company contained in the Underwriting Agreement relating to the
Registration Statement, the Preliminary Prospectus and Prospectus (as such
terms are defined in the Underwriting Agreement) and made as of the dates
provided therein, are incorporated by reference herein. The Company agrees
and covenants promptly to file post-effective amendments to such
Registration Statement as may be necessary in order to maintain its
effectiveness and otherwise to take such action as may be necessary to
maintain the effectiveness of the Registration Statement as long as any
Warrants are outstanding. In the event that, for any reason whatsoever, the
Company shall fail to maintain the effectiveness of the Registration
Statement, the certificates representing the Warrant Securities shall bear
the following legend:
The securities represented by this certificate
have been acquired for investment and have not
been registered under the Securities Act of 1933,
as amended ("Act"). Such securities may not be
offered or sold except pursuant to (i) an
effective registration statement under the Act,
(ii) to the extent applicable, Rule 144 under the
Act (or any similar rule under such Act relating
to the disposition of securities), or (iii) an
opinion of counsel, if such opinion shall be
reasonably satisfactory to counsel to the issuer,
that an exemption from registration under such Act
is available.
For purposes of Section 7.2, 7.3 and 7.4 hereof, the Warrant Securities
shall also include any of the other securities issuable upon redemption or
conversion of the Preferred Shares or exercise of the Warrants.
Section 7.2 Piggyback Registration.
----------------------
(a) If, at any time commencing one year after the date hereof
and expiring six (6) years thereafter, the Company proposes to register any
of its securities under the Act (other than pursuant to Form S-4, Form S-8
or a comparable registration statement) it will give written notice by
registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to the Holders of the Warrants and/or the Warrant
Securities of its intention to do so. If the Holders of the Warrants and/or
Warrant Securities notify the Company within twenty (20) business days
after receipt of any such notice of its or their desire to include any such
securities in such proposed registration statement, the Company shall
afford such Holders of the Warrants and/or Warrant Securities the
opportunity to have any such Warrant Securities registered under such
registration statement (a "Piggyback Registration"); provided, however,
-------- -------
that the Holders of the Warrants and/or Warrant Securities shall furnish
the Company with appropriate information in connection therewith as the
Company may request in writing.
(b) In the event that the managing underwriter for said offering
advises the Company in writing that in its opinion the number of securities
requested to be included in such registration exceeds the number which can
be sold in such offering without causing a diminution in the offering price
or otherwise adversely affecting the offering, the Company will include in
such registration (a) first the securities the Company proposes to sell,
(b) second, the securities held by the entities, if any, that made a demand
for registration, (c) third, the Warrant Securities requested to be
included in such registration statement pursuant to Section 7.2 which, in
the opinion of such underwriter, can be sold, pro rata among all proposed
selling shareholders; provided, that in the event that any Warrant
--------
Securities requested to be included in such registration statement are not
so included pursuant to the provisions of this Section 7.2(b), the Company
will include such Warrant Securities in a subsequent registration statement
that is filed by the Company with the Securities and Exchange Commission no
more than one hundred eighty (180) days following the effective date of the
registration statement in which such Warrant Securities were not included,
and the Company shall maintain the effectiveness of that subsequent
registration statement for a period of no less than nine (9) months from
its effective date.
(c) Notwithstanding the provisions of this Section 7.2, the
-------
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7.2 (irrespective of whether a written
-------
request for inclusion of any such securities shall have been made) to elect
not to file any such proposed registration statement or to withdraw the
same after the filing but prior to the effective date thereof, and the
Holder of Warrants and/or Warrant Securities may elect in writing, not
later than five (5) business days prior to the effectiveness of the
registration statement so filed not to have such Holder's Warrant
Securities so included in connection with such registration.
Section 7.3 Demand Registration.
-------------------
(a) At any time commencing one (1) year, after the date hereof
and expiring four (4) years thereafter, the Holders of the Warrants and/or
Warrant Securities representing a "Majority" (as hereinafter defined) of
such securities (assuming the exercise of all of the Warrants) shall have
the right (which right is in addition to the registration rights under
Section 7.2 hereof), exercisable by written notice to the Company, to have
-------
the Company prepare and file with the Securities and Exchange Commission
(the "Commission"), on one occasion only, a registration statement and such
other documents, including a prospectus, as may be necessary in the opinion
of both counsel for the Company and counsel for the Holders, in order to
comply with the provisions of the Act, so as to permit a public offering
and sale by such Holders, and any other Holders of the Warrants and/or
Warrant Securities who notify the Company within twenty (20) days after the
Company mails notice of such request pursuant to Section 7.3(b) hereof
-------
(collectively, the "Requesting Holders"), of their respective Warrant
Securities for the earlier of (i) nine (9) consecutive months or (ii) until
the sale of all the Warrant Securities requested to be registered by the
Requesting Holders; provided, however, the Company shall be entitled to
-------- -------
defer such registration for a period of up to 90 days if and to the extent
that its Board of Directors shall determine in good faith that such
registration would interfere with a pending corporate transaction.
(b) The Company covenants and agrees to give written notice of
any registration request under this Section 7.3 by any Holder or Holders
-------
representing a Majority of the Warrants and/or Warrant Securities to all
other registered Holders of the Warrants and the Warrant Securities within
ten (10) days from the date of the receipt of any such registration
request.
(c) In addition to the registration rights under Section 7.2 and
-------
subsection (a) of this Section 7.3, at any time commencing one (1) year
-------
after the date hereof and expiring four (4) years thereafter, any Holder of
Warrants and/or Warrant Securities representing twenty five percent (25%)
of such securities (see Section 7.4(m) below) shall have the right,
exercisable by written request to the Company, to have the Company prepare
and file with the Commission, on one occasion only, a registration
statement so as to permit a public offering and sale for such period of
time ending at the earlier of (i) nine (9) consecutive months from the
effective date of an applicable registration statement, or, (ii) until the
sale of all Warrant Securities requested to be registered; provided,
--------
however, that the provisions of Section 7.4(b) hereof shall not apply to
------- -------
any such registration request and registration and all costs incident
thereto shall be at the expense of the Holder or Holders making such
request; and provided, further that the Company shall be entitled to defer
-------- -------
such registration for a period of up to ninety (90) days if and to the
extent that its Board of Directors shall determine in good faith that such
registration would interfere with a pending corporate transaction.
(d) Notwithstanding anything to the contrary contained herein,
if the Company shall not have filed a registration statement for the
Warrant Securities within the time period specified in Section 7.4(a)
-------
hereof pursuant to the written notice specified in Section 7.3(a) of a
-------
Majority of the Holders of the Warrants and/or Warrant Securities, the
Company may, at its option, upon the written notice of election of a
Majority of the Holders of the Warrants and/or Warrant Securities
requesting such registration, repurchase (i) any and all Warrant Securities
of such Holders at the higher of the Market Price per Preferred Share,
Conversion Share and Common Share, as the case may be, on (x) the date of
the notice sent pursuant to Section 7.3(a) or (y) the expiration of the
-------
period specified in Section 7.4(a) and (ii) any and all Warrants of such
-------
Holders at such Market Price less the Exercise Price of such Warrant. Such
repurchase shall be in immediately available funds and shall close within
two (2) days after the later of (i) the expiration of the period specified
in Section 7.4(a) or (ii) the delivery of the written notice of election
-------
specified in this Section 7.4(d).
-------
Section 7.4 Covenants of the Company and each Holder With
---------------------------------------------
Respect to Registration. In connection with any registration under Sections
----------------------- --------
7.2 or 7.3 hereof, and except as otherwise provided in this Agreement, the
Company and each Holder covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within sixty (60) days of receipt of any demand
therefor, shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each
Holder desiring to sell Warrant Securities such number of prospectuses as
shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses
of Holder(s)' counsel and any underwriting or selling commissions), fees
and expenses in connection with all registration statements filed pursuant
to Sections 7.2 and 7.3(a) hereof including, without limitation, the
--------
Company's legal and accounting fees, printing expenses, blue sky fees, and
expenses, if any. The Holder(s) whose Warrant Securities are the subject of
such registration statement will pay all costs, fees and expenses
(including those of the Company) in connection with any registration
statement filed pursuant to Section 7.3(c).
-------
(c) The Company will use its best efforts to take all necessary
action which may be required in qualifying or registering the Warrant
Securities included in a registration statement for offering and sale under
the securities or blue sky laws of such states as reasonably are requested
by the Holder(s), provided that the Company shall not be obligated to
execute or file any general consent to service of process or to qualify as
a foreign corporation to do business under the laws of any such
jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each
person, if any, who controls such Holders within the meaning of Section 15
-------
of the Act or Section 20(a) of the Securities Exchange Act of 1934, as
-------
amended ("Exchange Act"), against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them
may become subject under the Act, the Exchange Act or otherwise, arising
from such registration statement; provided, however that the Company shall
not be liable in any such case to the extent such loss, claim, damage,
expense or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, in reliance upon and in conformity with information
furnished by Holder(s) of the Warrant Securities to be sold pursuant to
such registration statement for use in the preparation thereof.
(e) The Holder(s) of the Warrant Securities to be sold pursuant
to a registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, its owners and directors
and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against all
------- -------
loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any
claim whatsoever) to which they may become subject under the Act, the
Exchange Act or otherwise, to the extent such loss, claim, damage, expense
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission made in such registration statement, in
reliance upon and in conformity with information furnished by the Holder(s)
of the Warrant Securities to be sold pursuant to such registration
statement for use in the preparation thereof.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial
filing of any registration statement or the effectiveness thereof.
(g) Notwithstanding the foregoing, if the Warrant Securities are
to be distributed by means of an underwritten public offering, to the
extent that the provisions on indemnification contained in the underwriting
agreement entered into in connection with such underwriter are in conflict
with the provisions of Sections 7.4(d) and 7.4(e), the provisions of such
underwriting agreement shall be controlling, provided that the Holder is a
party to such underwriting agreement.
(h) The Company shall not permit the inclusion of any securities
other than the Warrant Securities to be included in any registration
statement filed pursuant to Section 7.3 hereof, or permit any other
-------
registration statement (other than pursuant to Form S-4, Form S-8 or a
comparable registration statement) to be or remain effective during the one
hundred eighty (180) day period following the effectiveness of a
registration statement filed pursuant to Section 7.3 hereof, without the
-------
prior written consent of the Holders of the Warrants and Warrant Securities
representing a Majority of such securities, which consent shall not be
unreasonably withheld.
(i) The Company shall furnish to each Holder participating in
the offering and to each underwriter, if any, a signed counterpart,
addressed to such Holder or underwriter, of (i) an opinion of counsel to
the Company, dated the effective date of such registration statement (and,
if such registration includes an underwritten public offering, an opinion
dated the date of the closing under the underwriting agreement), and (ii) a
"cold comfort" letter dated the effective date of such registration
statement (and, if such registration includes an underwritten public
offering, a letter dated the date of the closing under the underwriting
agreement) signed by the independent public accountants who have issued a
report on the Company's financial statements included in such registration
statement, in each case covering substantially the same matters with
respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(j) The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11 (a) of the Act and covering a period of
-------
at least 12 consecutive months beginning after the effective date of the
registration statement.
(k) The Company shall deliver promptly to each Holder
participating in the Offering requesting the correspondence and memoranda
described below and to the managing underwriters, copies of all
correspondence between the Commission and the Company, its counsel or
auditors and all memoranda relating to discussions with the Commission or
its staff with respect to the registration statement and permit each Holder
and underwriter to do such investigation, upon reasonable advance notice,
with respect to information contained in or omitted from the registration
statement as it deems reasonably necessary to comply with applicable
securities laws or rules of the NASD. Such investigation shall include
access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to
such reasonable extent and at such reasonable times and as often as any
such Holder or underwriter shall reasonably request.
(l) The Company shall enter into an underwriting agreement with
the managing underwriters selected for such underwriting by Holders holding
a Majority of the Warrant Securities requested to be included in such
underwriting, the identity of which managing underwriter shall be consented
to by the Company, and which consent cannot be unreasonably withheld;
provided that the Representative shall be entitled to serve as such
--------
managing underwriter if the Holders holding a Majority of the Warrant
Securities elect that the Representative do so. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such
managing underwriter(s), and shall contain such representations, warranties
and covenants by the Company and such other terms as are customarily
contained in agreements of that type used by the managing underwriter(s).
The Holders shall be parties to any underwriting agreement relating to an
underwritten sale of their Warrant Securities and may, at their option,
require that any or all of the representations, warranties and covenants of
the Company to or for the benefit of such underwriter(s) shall also be made
to and for the benefit of such Holders. Such Holders shall not be required
to make any representations or warranties to or agreements with the Company
or the underwriter(s) except as they may relate to such Holders and their
intended methods of distribution.
(m) For purposes of this Agreement, a specified "percentage" of
the Warrants or Warrant Securities shall mean (i) that number of the
Warrants which equals the specified percentage of the then outstanding
Warrants, or (ii) such number of the Warrant Securities, following assumed
conversion of all convertible securities included within the Warrant
Securities, as would entitle the Holders to ownership of the specified
percentage of the Common Stock (x) to be acquired upon full exercise of the
Warrants and (y) be acquired upon conversion of all convertible securities
which may be acquired upon full exercise of the Warrants, other than
Warrants or Warrant Securities that are held by the Company, an affiliate,
officer, creditor, employee or agent thereof or any of their respective
affiliates, members of their family, persons acting as nominees or in
conjunction therewith or that have been resold to the public pursuant to a
registration statement filed with the Commission under the Act.
8. Obligation of Holders . It shall be a condition precedent
---------------------
to the obligations of the Company to take any action pursuant to Section 7
hereof that each of the selling Holders shall:
(a) Furnish to the Company such information regarding
themselves, the Warrant Securities held by them, the intended method of
sale or other disposition of such securities, the identity of and
compensation to be paid to any underwriters proposed to be employed in
connection with such sale or other disposition, and such other information
as may reasonably be required to effect the registration of their Warrant
Securities.
(b) Notify the Company, at any time when a prospectus relating
to the Warrant Securities covered by a registration statement is required
to be delivered under the Act, of the happening of any event with respect
to such selling Holder as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to be stated
therein or necessary to make the statement therein not misleading in the
light of the circumstances then existing.
9. Adjustments to Exercise Price and Number of Securities.
------------------------------------------------------
Section 9.1 Subdivision and Combination. In case the Company
---------------------------
shall at any time subdivide or combine the outstanding shares of
Convertible Preferred Stock or Common Stock, the Exercise Price shall
forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
Section 9.2 Stock Dividends and Distributions. In case the
---------------------------------
Company shall pay a dividend in, or make a distribution of, shares of
Convertible Preferred Stock, Common Stock or of the Company's capital stock
convertible into Common Stock, the Exercise Price shall forthwith be
proportionately decreased. An adjustment made pursuant to this Section 8.2
-------
shall be made as of the record date for the subject stock dividend or
distribution.
Section 9.3 Adjustment in Number of Securities. Upon each
----------------------------------
adjustment of the Exercise Price pursuant to the provisions of this Section
-------
8, the number of Warrant Securities issuable upon the exercise at the
adjusted exercise price of each Warrant shall be adjusted to the nearest
full amount by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Securities
issuable upon exercise of the Warrants immediately prior to such adjustment
and dividing the product so obtained by the adjusted Exercise Price.
Section 9.4 Definition of Common Stock and Convertible
------------------------------------------
Preferred Stock. (a) For the purpose of this Agreement, the term "Common
---------------
Stock" shall mean (i) the class of stock designated as Common Stock in the
Certificate of Incorporation of the Company as may be amended as of the
date hereof, or (ii) any other class of stock resulting from successive
changes or reclassification of such Common Stock consisting solely of
changes in par value, or from par value to no par value, or from no par
value to par value. In the event that the Company shall after the date
hereof issue securities with greater or superior voting rights than the
shares of Common Stock outstanding as of the date hereof, the Holder, at
its option, may receive upon exercise of any Warrant either the Warrant
Securities or a like number of such securities with greater or superior
voting rights.
(b) For the purpose of this Agreement, the term "Convertible
Preferred Stock" shall mean the Convertible Preferred Stock purchased by
the Underwriters for resale to the public in the Public Offering pursuant
to the terms of the Underwriting Agreement, as such Convertible Preferred
Stock is more particularly described in the Certificate of Designation, as
the same may be amended from time to time. The Preferred Shares issuable
upon exercise of the Warrants shall be identical to the Convertible
Preferred Stock described in the Certificate of Designation. In the event
of any change after the date hereof in the Conversion Rate (as defined in
and calculated pursuant to the Certificate of Designation) or, the time
period for conversion of, or the number or class of securities issuable
upon conversion of, the Convertible Preferred Stock, the Holder of any
Warrant shall receive upon exercise thereof Preferred Shares with a
conversion ratio (and an effective conversion price) equal to the
Conversion Rate (and an effective Conversion Price) then in effect for,
convertible for such number and class of securities as would be issuable
upon the conversion of, and convertible for such period of time as, shares
of Convertible Preferred Stock issued and outstanding on the date hereof
after giving effect to such change. In addition, in the event that the
Company grants to the holders of Convertible Preferred Stock upon the
conversion thereof any benefits or inducements not set forth in the
Certificate of Designation, the Holder shall be entitled to receive such
benefit or inducement upon the exercise by such Holder of any Warrant(s) to
purchase Preferred Shares or Conversion Shares.
Section 9.5 Merger or Consolidation. In case of any
-----------------------
consolidation of the Company with, or merger of the Company with, or merger
of the Company into, another corporation (other than a consolidation or
merger which does not result in any reclassification or change of the
outstanding Common Stock or Convertible Preferred Stock or other securities
issuable upon exercise of the Warrants or redemption or conversion of the
Convertible Preferred Stock), or in the case of any sale or conveyance to
another person, corporation or other entity of the property of the Company
as an entirety or substantially as an entirety, then, as a condition of
such consolidation, merger, sale or conveyance, the Company or such
successor or purchasing entity, as the case may be, shall execute and
deliver to the Holder a supplemental warrant agreement providing that the
holder of each Warrant then outstanding or to be outstanding shall have the
right thereafter (until the expiration of such Warrant) to receive, upon
exercise of such Warrant, the kind and amount of shares of stock and other
securities and property receivable upon such consolidation or merger, by a
holder of the number of securities of the Company for which such Warrant
might have been exercised immediately prior to such consolidation, merger,
sale or transfer. Such supplemental warrant agreement shall provide for
adjustments which shall be identical to the adjustments provided in Section
-------
8. The above provision of this subsection shall similarly apply to
successive consolidations, mergers, sales or conveyances.
Section 9.6 No Adjustment of Exercise Price in Certain Cases.
------------------------------------------------
No adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Warrants or the Warrant
Securities issuable upon the exercise of the Warrants;
(b) Upon the issuance or sale of Common Stock or Convertible
Preferred Stock (or any other security convertible exercisable, or
exchangeable into shares of Common Stock or Convertible Preferred Stock)
upon the direct or indirect conversion, exercise, or exchange of any
options, rights, warrants, or other securities or indebtedness of the
Company outstanding as of the date of this Agreement or granted pursuant to
any stock option plan of the Company; provided, that, in the case of all
--------
such stock option plans, 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, exercise or exchange of
all securities convertible, exercisable or exchangeable for Common Stock,
including the Convertible Preferred Stock then outstanding; or
(c) If the amount of said adjustment shall be less than ten
cents (10 cents) per Warrant Security, provided, however, that in such
case any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together
with the next subsequent adjustment which, together with any adjustment
so carried forward, shall amount to at least ten cents (10 cents) per
Warrant Security.
Section 9.7 Form of Warrant After Adjustments. The form of
---------------------------------
the Warrant Certificates need not be changed because of any adjustments in
the Exercise Price or number of Warrant Securities, and warrant
certificates theretofore or thereafter issued may continue to express the
same Exercise Price and number of Warrant Securities as are stated in the
respective Warrant Certificates, as initially issued.
10. Exchange and Replacement of Warrant Certificates. Each
------------------------------------------------
Warrant Certificate is exchangeable without expense, upon the surrender
thereof by the registered Holder at the principal executive office of the
Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of Warrant
Securities in such denominations as shall be designated by the Holder
thereof at the time of such surrender. The Company may require such Holder
to pay only those expenses which represent a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with any such
exchange.
Upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Warrants, if mutilated, the Company will make and
deliver a new Warrant Certificate of like tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not
-----------------------------------
be required to issue certificates representing fractions of shares of
Convertible Preferred Stock or shares of Common Stock upon the exercise of
the Warrants, nor shall it be required to issue scrip or pay cash in lieu
of fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Convertible Preferred Stock or shares of
Common Stock or other securities, properties or rights.
12. Reservation and Listing of Securities. The Company shall at
-------------------------------------
all times reserve and keep available out of its authorized shares of
Convertible Preferred Stock and Common Stock, solely for the purpose of
issuance upon the exercise of the Warrants, such number of shares of
Convertible Preferred Stock and Common Stock or other securities,
properties or rights as shall be issuable upon the exercise, conversion or
redemption thereof. The Company covenants and agrees that, upon exercise of
the Warrants and payment of the Exercise Price therefor, all shares of
Convertible Preferred Stock, shares of Common Stock and other securities
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any stockholder.
The Company further covenants and agrees that upon redemption or conversion
of the Preferred Shares, and payment of the respective Exercise Price
therefor, all shares of Common Stock and other securities issuable upon
such exercise, redemption or conversion, as the case may be, shall be duly
and validly issued, fully paid, non-assessable and not subject to the
preemptive rights of any stockholder. As long as the Warrants shall be
outstanding, the Company shall use its best efforts to cause all shares of
Convertible Preferred Stock and Common Stock issuable upon the exercise of
the Warrants and all shares of Common Stock issuable upon conversion or
redemption of the Preferred Shares to be listed (subject to official notice
of issuance) on all securities exchanges on which the Convertible Preferred
Stock and/or Common Stock issued to the public in connection herewith may
then be listed and/or quoted on Nasdaq.
13. Notices to Warrant Holders. Nothing contained in this
--------------------------
Agreement shall be construed as conferring upon the Holders the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter,
or as having any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Warrants and their
exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings or
capital surplus (in accordance with applicable law), as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all
or substantially all of its property, assets and business as an entirety
shall be proposed;
then, in any one or more of said events, the Company shall give written
notice of such event at least twenty one (21) days prior to the date fixed
as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled
to vote on such proposed dissolution, liquidation, winding up or sale. Such
notice shall specify such record date or the date of closing the transfer
books, as the case may be. Failure to give such notice or any defect
therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend, or the issuance of
any convertible or exchangeable securities, or subscription rights, options
or warrants, or any proposed dissolution, liquidation, winding up or sale.
14. [Intentionally Left Blank]
15. Notices.
-------
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made
and sent when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to the registered Holder of the Warrants, to the address
of such Holder as shown on the books of the Company;
(b) If to the Company, to the address set forth in Section 3
-------
hereof or to such other address as the Company may designate by notice to
the Holders; or
(c) If to the Representative, to National Securities
Corporation, 1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154,
Attention: General Counsel.
16. Supplements and Amendments. The Company and the
--------------------------
Representative may from time to time supplement or amend this Agreement in
a writing signed by both parties without the approval of any Holders of
Warrant Certificates (other than the Representative) in order to cure any
ambiguity, to correct or supplement any provision contained herein which
may be defective or inconsistent with any provisions herein, or to make any
other provisions in regard to matters or questions arising hereunder which
the Company and the Representative may deem necessary or desirable and
which the Company and the Representative deem shall not adversely affect
the interests of the Holders of Warrant Certificates.
17. Successors. All the covenants and provisions of this
----------
Agreement shall be binding upon and inure to the benefit of the Company,
the Representative, the Holders and their respective successors and assigns
hereunder.
18. Termination. This Agreement shall terminate at the close of
-----------
business on __________, 2004. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination
-------
until the close of business on __________, 2010.
19. Governing Law: Submission to Jurisdiction. This Agreement
-----------------------------------------
and each Warrant Certificate issued hereunder shall be deemed to be a
contract made under the laws of the State of New York and for all purposes
shall be construed in accordance with the laws of said State without giving
effect to the rules of said State governing the conflicts of laws.
The Company, the Representative and the Holders hereby agree that
any action, proceeding or claim against it arising out of, or relating in
any way to, this Agreement shall be brought and enforced in the courts of
the State of New York or of the United States of America for the Southern
District of New York, and irrevocably submits to such jurisdiction, which
jurisdiction shall be exclusive. The Company, the Representative and the
Holders hereby irrevocably waive any objection to such exclusive
jurisdiction or inconvenient forum. Any such process or summons to be
served upon any of the Company, the Representative and the Holders (at the
option of the party bringing such action, proceeding or claim) may be
served by transmitting a copy thereof, by registered or certified mail,
return receipt requested, postage prepaid, addressed to it at the address
set forth in Section 14 hereof. Such mailing shall be deemed personal
-------
service and shall be legal and binding upon the party so served in any
action, proceeding or claim. The Company, the Representative and the
Holders agree that the prevailing party(ies) in any such action or
proceeding shall be entitled to recover from the other party(ies) all of
its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.
20. Entire Agreement: Modification. This Agreement (including
------------------------------
the Underwriting Agreement to the extent portions thereof are referred to
herein) contains the entire understanding between the parties hereto with
respect to the subject matter hereof and may not be modified or amended
except by a writing duly signed by the party against whom enforcement of
the modification or amendment is sought.
21. Severability. If any provision of this Agreement shall be
------------
held to be invalid or unenforceable by a court of competent jurisdiction,
such invalidity or unenforceability shall not affect any other provision of
this Agreement.
22. Captions. The caption headings of the Sections of this
--------
Agreement are for convenience of reference only and are not intended, nor
should they be construed as, a part of this Agreement and shall be given no
substantive effect.
23. Benefits of this Agreement. Nothing in this Agreement shall
--------------------------
be construed to give to any person or corporation other than the Company
and the Representative and any other registered Holder(s) of the Warrant
Certificates or Warrant Securities any legal or equitable right, remedy or
claim under this Agreement; and this Agreement shall be for the sole
benefit of the Company and the Representative and any other registered
Holders of Warrant Certificates or Warrant Securities.
24. Counterparts. This Agreement may be executed in any number
------------
of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and such counterparts shall together constitute
but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed, as of the day and year first above written.
GRAND COURT LIFESTYLES, INC.
By: ________________________________________
Name:
Title:
NATIONAL SECURITIES CORPORATION
By: ________________________________________
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY
SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR
(iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, MARCH __, 2002
No. W- Warrants to Purchase
_____ Shares of Convertible Preferred Stock and/or
_____ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that __________, or registered
assigns, is the registered holder of __________ Warrants to purchase
initially, at any time from __________, 1998 [one year from the effective
date of the Registration Statement] until 5:30 p.m. New York time on
__________, 2002 [five years from the effective date of the Registration
Statement] ("Expiration Date"), up to _________ fully-paid and
non-assessable shares of __% Senior Convertible Redeemable Preferred Stock,
$.0001 par value ("Convertible Preferred Stock"), of GRAND COURT
LIFESTYLES, INC., a Delaware corporation (the "Company") (or in accordance
with the Warrant Agreement (as hereinafter defined), such number of shares
of Common Stock, other securities and/or property of the Company into which
a share of Convertible Preferred Stock may be converted or redeemed
(collectively, "Conversion Shares")) and/or __________ fully-paid and
non-assessable shares of common stock, $.01 par value ("Common Stock"), of
the Company at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $ [165% of the initial public offering
price] per share of Convertible Preferred Stock, $ per Conversion Share
[165% of the initial public offering price per share of Convertible
Preferred Stock divided by the Conversion Rate, as defined in and
calculated pursuant to the Certificate of Designation], and $__________
[165% of the initial public offering price] per share of Common Stock upon
surrender of this Warrant Certificate and payment of the Exercise Price at
an office or agency of the Company. Payment of the Exercise Price shall be
made by certified or official bank check in New York Clearing House funds
payable to the order of the Company or by surrender of this Warrant
Certificate.
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a
duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a
part of this instrument and is hereby referred to for a description of the
rights, limitation of rights, obligations, duties and immunities thereunder
of the Company and the holders (the words "holders" or "holder" meaning the
registered holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the
Company's securities issuable thereupon may, subject to certain conditions,
be adjusted. In such event, the Company will, at the request of the holder,
issue a new Warrant Certificate evidencing the adjustment in the Exercise
Price and the number and/or type of securities issuable upon the exercise
of the Warrants; provided, however, that the failure of the Company to
issue such new Warrant Certificates shall not in any way change, alter, or
otherwise impair the rights of the holder as set forth in the Warrant
Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax
or other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by
this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as
the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the
purpose of any exercise hereof, and of any distribution to the holder(s)
hereof, and for all other purposes, and the Company shall not be affected
by any notice to the contrary.
All terms used in this Warrant Certificate which are defined in
the Warrant Agreement shall have the meanings assigned to them in the
Warrant Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of______________, 1997
GRAND COURT LIFESTYLES, INC.
By: _________________________
Name:
Title:
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] __________ shares of Convertible Preferred Stock;
[ ] __________ shares of Common Stock;
and herewith tenders in payment for such securities a certified or official
bank check payable in New York Clearing House funds to the order of Grand
Court Lifestyles, Inc. in the amount of $__________, all in accordance with
the terms of Section 3.1 of the Representative's Warrant Agreement dated as
-------
of __________, 1997 between Grand Court Lifestyles, Inc. and National
Securities Corporation. The undersigned requests that a certificate for
such securities be registered in the name of __________ whose address is
_____________ and that such Certificate be delivered to _______________
whose address is _______________.
Dated: Signature ___________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
_____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase shares of Common
Stock, and herewith tenders in payment for such securities __________
Warrants in respect of Common Shares, _____ Warrants in respect of
Conversion Shares and ______ Warrants in respect of Convertible Preferred
Shares all in accordance with the terms of Section 3.2 of the
-------
Representative's Warrant Agreement dated as of , 1997 between Grand Court
Lifestyles, Inc. and National Securities Corporation. The undersigned
requests that a certificate for such securities be registered in the name
of __________ whose address is __________ and that such Certificate be
delivered to ____________________ whose address is ____________________.
Dated: Signature ___________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
_____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________ hereby sells, assigns and
transfers unto
___________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint __________
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated: Signature ___________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
_____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Exhibit 1.3
1,500,000 SHARES OF COMMON STOCK
1,500,000 SHARES OF PREFERRED STOCK
GRAND COURT LIFESTYLES, INC.
AGREEMENT AMONG UNDERWRITERS
----------------------------
February __, 1997
NATIONAL SECURITIES CORPORATION
As Representatives of the
several Underwritten named
in Schedule A to Exhibit A
annexed hereto
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
Dear Sirs:
We understand that Grand Court Lifestyles, Inc., a Delaware
corporation (the "Company"), desires to enter into an agreement,
substantially in the form of Exhibit A hereto (the "Underwriting
Agreement"), with you and the other prospective Underwriters
named in Schedule A to the Underwriting Agreement for the sale by
the Company of an aggregate of 1,200,000 shares (the "Shares") of
common stock, $.01 par value (the "Common Stock"), of the
Company, the sale by certain Selling Stockholders (as defined in
the Underwriting Agreement) of 300,000 shares of Common Stock
(the "Stockholder Shares"), and the sale by the Company of
1,500,000 shares of __ % Senior Convertible Redeemable Preferred
Stock (the "Preferred Shares"), $.0001 par value (the "Preferred
Stock"), of the Company. The Shares, Stockholder Shares, and
Preferred Shares shall be referred to collectively as the "Firm
Securities." In addition, the Company has agreed to grant to the
Underwriters an option to purchase up to an additional 180,000
shares of Common Stock and 225,000 shares of the Preferred Stock
and the Selling Stockholders have agreed to grant to the
Underwriters an option to purchase an additional 45,000 shares of
Common Stock (the "Option Shares"), for the purpose of covering
over-allotments, if any, in connection with the sale of the Firm
Securities. The Option Shares are hereinafter referred to as the
"Option Securities." The Firm Securities and any Option
Securities purchased pursuant to the Underwriting Agreement are
herein called the "Securities."
We understand that changes may be made in those who are to
be Underwriters and in the respective number of Securities to be
purchased by them, but that the number of Securities to be
purchased by us as set forth in said Schedule A will not be
changed without our consent except as provided herein or in the
Underwriting Agreement. The parties on whose behalf you execute
the Underwriting Agreement are herein called the "Underwriters."
We desire to confirm the agreement among you, the
undersigned and the other Underwriters with respect to the
purchase of the Securities by the Underwriters, severally and not
jointly, from the Company. The aggregate number of Securities
which any Underwriter will be obligated to purchase pursuant to
the terms of the Underwriting Agreement is herein called the
"Underwriting Obligation" of that Underwriter.
1. Authority and Compensation of the Representative. We
------------------------------------------------
hereby authorize you, as our representative (the
"Representative") and on our behalf, (a) to enter into an
agreement with the Company, in substantially the form attached
hereto as Exhibit A, but with such changes therein as in your
judgment will not be materially adverse to the Underwriters,
providing for the purchase by us, severally and not jointly, from
the Company, at the purchase price per share determined as set
forth in said Exhibit A, of the number of Firm Securities set
forth opposite our name in Schedule A to said Exhibit A, and our
proportionate share of the Option Shares which you determine to
be purchased, (b) to exercise all the authority and discretion
vested in the Underwriting and in you by the provisions of the
Underwriting Agreement, (c) to take all such action as you in
your discretion may deem necessary or advisable in order to carry
out the provisions of the Underwriting Agreement and of this
Agreement, and the sale and distribution of the Securities, and
(d) to determine all matters relating to the public advertisement
of the Securities.
As our share of the compensation for your services
hereunder, we will pay to you, and we authorize you to charge to
our account on the Closing Date and on the Option Closing Date
referred to in the Underwriting Agreement, $__ per Share in
respect of the aggregate number of Firm Securities and Option
Securities, respectively, which we shall agree to purchase
pursuant to the Underwriting Agreement.
It is understood that you shall receive from the Company, as
the representative and designee of the several Underwriters,
warrants (the "Representative's Warrants") to purchase an
additional 150,000 shares of Common Stock, exercisable at not
less than 165% of the Initial Public Offering Price, as defined
hereunder. As the representative and designee of the several
Underwriters, you shall retain one hundred percent (100%) of such
Representative's Warrants.
2. Public Offering of Securities. The sale of the
-----------------------------
Securities to the public is to be made, as herein provided, as
soon after the Registration Statement relating to the Securities
becomes effective as you deem advisable. The purchase price to be
paid by the Underwriters for the Securities and the initial
public offering price are to be determined by agreement between
you and the Company. The Securities shall be first offered to the
public at the initial public offering price as so determined (the
"Initial Public Offering Price"). You will advise us by fax,
graphic scanning, telegraph or telephone when the Securities
shall be released for offering, when the Registration Statement
relating to the Securities shall become effective and the price
at which the Securities are initially to be offered. We agree not
to sell any of the Securities until you have released them for
that purpose. We authorize you, after the initial public
offering, to change the public offering price, the concession and
the reallowance if, in your sole discretion, such action becomes
desirable by reason of changes in general market conditions or
otherwise. As used herein, the terms "Registration Statement",
"Preliminary Prospectus" and "Prospectus" shall have the meanings
ascribed thereto in the Underwriting Agreement. The public
offering price at the time in effect is herein called the
"Offering Price". After notice from you that the Securities are
released for public sale, we will offer to the public in
conformity with the provisions hereof and with the terms of
offering set forth in the Prospectus such Securities as you
advise us are not reserved. Unless otherwise permitted, we will
not sell any of the Securities to any account over which we have
discretionary authority.
3. Offering to Selected Dealers and Retail Sales. We
---------------------------------------------
authorize you to reserve for offering and sale, and on our behalf
to sell, to retail purchasers (such sales being herein called
"Retail Sales") and to dealers selected by you (such dealers,
among whom any Underwriter may be included, being herein called
"Selected Dealers") all or any part of our Securities as you, in
your sole discretion, shall determine. Such sales, if any, shall
be made (a) in the case of Retail Sales, at the Offering Price,
and (b) in the case of sales to Selected Dealers, at the Offering
Price less such concession or concessions as you, in your sole
discretion, shall determine. Except for such sales as are
designated by a purchaser to be for the account of a particular
Underwriter or Selected Dealer, any sales to Selected Dealers
made for our account shall be as nearly as practicable in the
ratio that the Securities reserved for our account for offering
to Selected Dealers bears to the aggregate of all Securities of
all Underwriters so reserved.
You agree to notify us promptly on the date of the public
offering as to the number of Securities, if any, which we may
retain for direct sale by us. Prior to the termination of the
provisions referred to in Section 12 hereof, you may reserve for
----------
offering and sale as hereinbefore provided any Securities
theretofore retained by us remaining unsold and we may, with your
consent, retain any Securities therefore reserved by you
remaining unsold.
We agree that, from time to time prior to the termination of
the provisions referred to in Section 12 hereof, we shall furnish
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to you such information as you may request in order to determine
the number of Securities purchased by us under the Underwriting
Agreement which then remain unsold, and we shall upon your
request sell to you for the account of any Underwriter as many of
such unsold Securities as you may designate at the Offering
Price, less all or any part of the concession to Selected Dealers
as you, in your sole discretion, shall determine. The provisions
of Section 4 hereof shall not be applicable in respect of any
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such sale.
We authorize you to determine the form and manner of any
communications or agreements with Selected Dealers. In the event
that there shall be any agreements with Selected Dealers, you are
authorized to act as manager thereunder and we agree, in such
event, to be governed by the terms and conditions of such
agreements. The form of Selected Dealer Agreement attached
hereto as Exhibit B is satisfactory to us.
It is understood that any Selected Dealer to whom an offer
may be made as hereinbefore provided shall be actually engaged in
the investment banking or securities business and shall be either
(i) a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") or (ii) a dealer with its
principal place of business located outside the United States,
its territories and its possessions and not registered as a
broker or dealer under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), who agrees not to make any sales within
the United States, its territories or its possessions or to
persons who are nationals thereof or residents therein. Each
Selected Dealer shall agree to comply with the provisions of
Section 24 of Article III of the Rules of Fair Practice of the
NASD, and each foreign Selected Dealer who is not a member of the
NASD also shall agree to comply with the NASD's interpretation
with respect to free-riding and withholding, to comply, as though
it were a member of the NASD, with the provisions of Sections 8
and 36 of Article III of such Rules of Fair Practice, and to
comply with Section 25 of Article III thereof as that Section
applies to a non-member foreign dealer. The several Underwriters
may allow, and the Selected Dealers, if any, may re-allow, such
concession or concessions as you may determine from time to time
on sales of Securities to any qualified dealer, all subject to
the Rules of Fair Practice of the NASD.
You hereby represent and warrant that neither you nor any of
your affiliates (as such term is defined in Rule 405 promulgated
under the Securities Act of 1933, as amended (the "1933 Act"))
have received compensation of any nature from the Company
pursuant to any agreement, arrangement or understanding with the
Company or otherwise during the twelve (12) month period prior to
and including the date hereof and neither you nor any such
affiliate will enter into any agreement, arrangement or
understanding with the Company for or otherwise receive
compensation of any nature from the Company during the twelve
(12) month period following the date hereof.
You, and any of the several Underwriters with your prior
consent, may make purchases or sales of the Securities from or to
any of the other Underwriters, at the Offering Price less all or
any part of the gross spread, and from or to any of the Selected
Dealers at the Offering Price less all or any part of the
concession to Selected Dealers.
Upon your request, we will advise you of the identity of any
dealer to whom we allow such a discount and any Underwriter or
Selected Dealer from whom we receive such a discount.
4. Repurchases in the Open Market. In recognition of the
------------------------------
importance of distributing the Securities to bona fide investors,
we agree to repurchase on demand any Securities sold by us
(otherwise than through you) which shall be contracted for or
purchased in the open market you on behalf of any Underwriter or
Underwriters, at a price equal to the cost of such purchase plus
commissions and taxes on redelivery. Any Securities delivered on
such repurchase need not be the identical Securities originally
sold by us. In lieu of delivery of such Securities to us, you may
sell such Securities in any manner for our account and charge us
with the amount of any loss or expense or credit us with the
amount of any profit, less any expense, resulting from such sale,
or charge our account with an amount not in excess of the
concession to Selected Dealers.
5. Stabilization and Over-Allotment. In order to
--------------------------------
facilitate the sale of the Securities, we authorize you on our
behalf and for our account, during the term of this Agreement, in
your discretion, and without obligating you to do so, to buy and
sell Securities and any other securities of the Company in the
open market or otherwise for either long or short account, on
such terms and at such prices as you may determine and, in
arranging for sales to Selected Dealers and others, to over-allot
and cover such over-allotments, provided that at no time shall
the net commitment of any Underwriter under authority of this
Section 5, either for long or short account, exceed an amount
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equivalent to 15% of the maximum number of Securities to be
purchased by such Underwriter under the Underwriting Agreement.
During or after the term of this Agreement you may cover any
short position incurred under the preceding sentence by purchase
of Option Securities from the Company, pursuant to the option
contained in Section 3 the Underwriting Agreement or otherwise.
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All purchases, sales and over-allotments under authority of this
Section shall be for the accounts of each of the several
Underwriters as nearly as practicable in proportion to their
respective Underwriting Obligations. We agree to take up at cost
on demand any Securities so purchased for our account and to
deliver on demand any Securities so sold or over-allotted for our
account. We also authorize you to deliver our Securities and any
other Securities purchased by you for our account pursuant to
this Section 5, against sales made by you for our account
-------
pursuant to any provisions of this Agreement. Notwithstanding the
foregoing limitations, in the event of default by one or more
Underwriters in respect of their obligations under this Section,
-------
each non-defaulting Underwriter shall assume its proportionate
share of the obligations of such defaulting Underwriter without
relieving such defaulting Underwriter of its liability hereunder.
In the event that you effect any stabilizing purchases
pursuant to this Section 5, you will notify each Underwriter
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promptly of the date and time when the first stabilizing purchase
is effected and the date and time when stabilizing is terminated.
Each Underwriter agrees that if it effects any stabilizing
purchases, it will, not later than three business days following
the day on which any such stabilizing purchase is effected,
notify you of the price, date and time at which any such
stabilizing purchase was effected and will promptly notify you of
the date and time when stabilizing was terminated by such
Underwriter. Each Underwriter authorizes you to file the
Securities and Exchange Commission (the "Commission") all
notices, records and reports which may be required as a result of
any transactions made pursuant to this Section 5.
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We agree to advise you, from time to time upon your request
during the term of this Agreement, of the number of Securities
retained by us or purchased by us from other Underwriters and
Selected Dealers remaining unsold, and will, upon your request,
release to you for the accounts of one or more of the several
Underwriters, such number of Securities as you may designate at
such price, not less than the net price to Selected Dealers nor
more than the Initial Public Offering Price, as you may
determine.
If, pursuant to the provisions of the first paragraph of
this Section 5 and prior to the termination of this Agreement (or
-------
such earlier date as you may have determined on notice to the
Underwriters), you purchase or contract to purchase any
Securities which were retained by or released to us for direct
sale, which Securities were theretofore not effectively placed
for investment by us, we authorize you in your discretion either
to charge our account with an amount equal to the concession to
Selected Dealers with respect thereto or to require us to
repurchase such Securities at a price equal to the total cost of
such purchase, including commissions, if any, and transfer tax on
the redelivery. Securities delivered on such repurchase need not
be the identical Securities originally purchased by and delivered
to us.
Upon the termination of this Agreement, you are authorized
in your discretion, in lieu of delivering to the several
Underwriters any Securities then held for their respective
accounts pursuant to this Section 5, to sell such Securities for
-------
the accounts of each of the Underwriters at such price or prices
as you may determine and debit or credit our account for the loss
or profit resulting from such sale.
6. Authority to Borrow. We authorize you to advance your
-------------------
own funds for our account (charging current interest rates) and
to arrange loans for our account or the account of the
Underwriters, as you may deem necessary or advisable for the
purchase, carrying, sale and distribution of the Securities or
otherwise for the purpose of carrying out this Agreement. You may
execute and deliver any notes or other instruments in connection
therewith and may hold or pledge as security therefor all or any
part of our Securities and Securities purchased hereunder for our
account. Any lender is hereby authorized to accept your
instructions in all matters relating to such loans. Any part of
our Securities and Securities so held by you may be delivered to
us for carrying purposes and, if so delivered, will be
redelivered to you upon demand. The obligations of the
Underwriters under loans arranged under this Section 6 shall be
-------
several in proportion to their respective Underwriting
Obligations. Any lender is authorized to accept your instructions
as to the disposition of the proceeds of any such loans.
7. Allocation of Expenses and Liability. We authorize you
------------------------------------
to charge our account with and we agree to pay (a) all transfer
taxes on sales made by you for our account, except as herein
otherwise provided, and (b) our proportionate share (based on our
Underwriting Obligation) of all other expenses incurred by you in
connection with the purchase, carrying, sale and distribution of
the Securities and all other expenses arising under the terms of
the Underwriting Agreement or this Agreement. Your determination
of all such expenses and your allocation thereof shall be final
and conclusive. You may at any time make partial distributions of
credit balances or call for payment of debit balances. Funds for
our account at any time in your hands may be held in your general
funds without accountability for interest. As soon as practicable
after the termination of this Agreement, the net credit or debit
balance in our account, after proper charge and credit for all
interim payments and receipts, shall be paid to or paid by us,
provided that you may establish such reserves as you, in your
sole discretion, shall deem advisable to cover possible
additional expenses chargeable to the several Underwriters.
Notwithstanding any settlement, we will remain liable for any
taxes on transfers for our account and for our proportionate
share (based on our Underwriting Obligation) of all expenses and
liabilities that may be incurred by or for the accounts of the
Underwriters.
8. Liability for Future Claims. Neither any statement by
---------------------------
you of any credit or debit balance in our account nor any
reservation from distribution to cover possible additional
expenses relating to the Securities shall constitute any
representation by you as to the existence or non-existence of
possible unforeseen expenses or liabilities of or charges against
the several Underwriters. Notwithstanding the distribution of any
net credit balance to us or the termination of this Agreement or
both, we shall be and remain liable for, and will pay on demand,
(a) our proportionate share (based on our Underwriting
Obligation) of all expenses and liabilities which may be incurred
by or for the accounts of the Underwriters, or any of them, based
on the claim the Underwriters constitute an association,
unincorporated business, partnership or any separate entity, and
(b) any transfer taxes paid after such settlement on account of
any sale or transfer for our account.
9. Open Market Transactions. We represent and agree that
------------------------
we will not make bids or offers, or make or induce purchases or
sales for our own account or the accounts of customers, in the
open market or otherwise, either before or after the purchase of
the Securities and for either long or short account, of any
Securities or any security of the same class or series, or any
right to purchase any such security except (i) as provided in
this Agreement, the Underwriting Agreement and the Selected
Dealer Agreements or otherwise approved by you, (ii) in brokerage
transactions not involving solicitation of the customer's order
and (iii) in connection with option and option-related
transactions that are consistent with the "no-action" position of
the Commission under the 1934 Act. We further agree that we will
not lend, either before or after the purchase of the Securities,
to any customer, Underwriter, Selected Dealer or to any other
securities broker or dealer any Securities. Prior to the
completion (as defined in Rule 10b-6 under the 1934 Act) of our
participation in the distribution, we will otherwise comply with
Rule 10b-6.
10. Delivery and Payment. Upon your request, we shall
--------------------
deliver to you payment for the Securities to be purchased by us
under the Underwriting Agreement in an amount equal to the
Initial Public Offering Price for such Securities less the
concession to Selected Dealers. Such payment shall be made in
such form and at such time and place as may be specified in such
request, and we authorize you to make payment for such Securities
against delivery thereof for our account hereunder. If we are a
member of or clear through a member of The Depository Trust
Company ("DTC"), you may, in your discretion, deliver our
Securities through the facilities of DTC.
You shall remit to us, as promptly as practicable, the
amounts received by you from Selected Dealers and retail
purchasers as payment in respect of Securities sold by you for
our account pursuant to Section 3 hereof for which payment has
-------
been received. Securities purchased by us under the Underwriting
Agreement and not reserved or sold by you for our account
pursuant to Section 3 hereof shall be delivered to us as promptly
-------
as practicable after receipt by you. Any Securities purchased by
us and so reserved which remain unsold at any time prior to the
settlement of accounts hereunder may, in your discretion, and
shall, upon your request, be delivered to us, but, until
termination of the Selected Dealer Agreements pursuant to their
terms, such delivery shall be for carrying purposes only. In case
any Securities reserved for sale in Retail Sales or to Selected
Dealers shall not be purchased and paid for in due course as
contemplated hereby, we agree (a) to accept delivery when
tendered by you of any Securities so reserved for our account and
not so purchased and paid for, and (b) in case we shall have yet
received payment from you in respect of any such Securities, to
reimburse you on demand for the full amount which you shall have
paid us in respect of such Securities.
In the event of our failure to tender payment for Securities
as provided in the Underwriting Agreement, you shall have the
right under the provisions thereof to arrange for other persons,
who may include you and any other Underwriter, to purchase such
Securities which we had agreed to purchase, but without relieving
us from liability for our default.
11. Blue Sky. Prior to the initial offering by the
--------
Underwriters, you will inform us as to the states and other
jurisdictions under the respective securities or blue sky laws of
which it is believed that the Securities have been qualified for
sale or are exempt from such qualification, but you do not assume
any responsibility or obligation as to the accuracy of such
information or as to the right of any Underwriter or dealer to
offer or sell the Securities in any state or other jurisdiction.
You agree to file or cause to be filed, on behalf of the
Underwriters, a Further State Notice in respect of the Securities
pursuant to Article 23-A of the General Business Law of the State
of New York, if necessary. If we prepare to offer Securities
outside of the United States, its territories or possessions, we
will take, at our expense, all such action, if any, as may be
necessary to comply with the laws of each foreign jurisdiction in
which we propose to offer the Securities.
12. Termination. The provisions set forth in Section 2,
----------- -------
the second paragraph and the first sentence of the third
paragraph of Section 3, Section 4, the first sentence of Section
------- ------- -------
5 and Section 9 hereof will terminate at the close of business on
-------
the 45th calendar day after the effective date of the
Registration Statement, unless extended or sooner terminated as
hereinafter provided. You may extend such provisions, or any of
them, for a period not to exceed 45 additional calendar days by
notice to us to such effect. You may terminate any of such
provisions at any time by notice to us, and you may terminate all
such provisions at any time by notice to us to the effect that
the offering provisions of this Agreement are terminated.
13. Acknowledgment of Receipt of Registration Statement,
----------------------------------------------------
etc.
---
We hereby confirm that we have examined the Registration
Statement relating to the Securities as heretofore filed by the
Company with the Commission and each amendment thereto, if any,
filed through the date hereof, including any documents filed
under the 1934 Act through the date hereof and incorporated by
reference into the Prospectus, that we are willing to be named as
an underwriter therein and to accept the responsibilities of an
underwriter thereunder, and that we are willing to proceed as
therein contemplated. We confirm that we have authorized you to
advise the Company on our behalf (a) as to the statements to be
included in any Preliminary Prospectus and in the Prospectus
under the heading "Underwriting" insofar as they relate to us,
and (b) that there is no other information about us required to
be stated in the Registration Statement or Prospectus. We
understand that the aforementioned documents are subject to
further change and that we will be supplied with copies of any
further amendments or supplements to the Registration Statement,
of any document filed under the 1934 Act after the effective date
of the Registration Statement and before termination of the
offering of the Securities by the Underwriters if such document
is deemed to be incorporated by reference into the Prospectus and
of any amended or supplemented Prospectus promptly, if and when
received by you, but the making of such changes, amendments and
supplements shall not release us or affect our obligations
hereunder or under the Underwriting Agreement.
14. (a) Indemnification. We agree to indemnify and hold
---------------
harmless each other Underwriter and any person who controls any
such Underwriter within the meaning of Section 15 of the 1933
Act, to the extent that, and upon the terms on which, we agree to
indemnify and hold harmless the Company and other specified
persons as set forth in the Underwriting Agreement. Our indemnity
agreement contained in this Section 14 shall remain in full force
-------
and effect regardless of any investigation made by or on behalf
of such other Underwriter or controlling person and shall survive
the delivery of and payment for the Securities and the
termination of this Agreement and the similar agreements entered
into with the other Underwriters.
(b) Claims Against Underwriters. Each Underwriter
---------------------------
(including you) will pay, upon your request, as contribution, its
proportionate share, based upon its Underwriting Obligation, of
any loss, claim, damage or liability, joint or several, paid or
incurred by any Underwriter (including you) to any person other
than an Underwriter, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact
contained in the Registration Statement, the Prospectus, any
amendment or supplement thereto or any Preliminary Prospectus or
any other selling or advertising material approved by you for use
by the Underwriters in connection with the sale of the
Securities, or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein not misleading (other than an untrue
statement or alleged untrue statement or omission or alleged
omission made in conformity with written information furnished to
the Company through you by or on behalf of an Underwriter
expressly for use therein) or relating to any transaction
contemplated by this Agreement; and will pay such proportionate
share of any legal or other expense reasonably incurred by you or
with your consent in connection with investigating or defending
against any such loss, claim, damage or liability, or any action
in respect thereof. In determining the amount of our obligation
under this paragraph, appropriate adjustment may be made by you
to reflect any amounts received by any one or more Underwriters
in respect of such claim from the Company pursuant to Section 9
-------
of the Underwriting Agreement or otherwise. There shall be
credited against any amount paid or payable by us pursuant to
this paragraph any loss, claim, damage, liability or expense
which is incurred by us as a result of any such claim asserted
against us, and if such loss, claim, damage, liability or expense
is incurred by us subsequent to any payment by us pursuant to
this paragraph, appropriate provision shall be made to effect
such credit, by refund or otherwise. If any such claim is
asserted, you may take such action in connection therewith as you
deem necessary or desirable, including retention of counsel for
the Underwriters, and in your discretion separate counsel for any
particular Underwriter or group of Underwriters, and the fees and
disbursements of any counsel so retained by you shall be included
in the amounts payable pursuant to this paragraph. In determining
amounts payable pursuant to this paragraph, any loss, claim,
damage, liability or expense incurred by any person who controls
any Underwriter within the meaning of Section 15 of the 1933 Act
which has been incurred by reason of such control relationship
shall be deemed to have been incurred by such Underwriter. Any
Underwriter may elect to retain, at its own expense, separate
counsel. You may settle or consent to the settlement of any such
claim on advice of counsel retained by you. A claim against or
liability incurred by a person who controls an Underwriter shall
be deemed to have been made against or incurred by such
Underwriter. Whenever you receive notice of the assertion of any
claim to which the provisions of this paragraph would be
applicable, you will give prompt notice thereof to each
Underwriter. If any Underwriter or Underwriters defaults in its
or their obligation to make any payments under this paragraph,
each nondefaulting Underwriter shall be obligated to pay its
proportionate share of all defaulted payments, based upon the
proportion such non-defaulting Underwriter's Underwriting
Obligation be as to the Underwriting Obligations of all
non-defaulting Underwriters. Nothing herein shall relieve a
defaulting Underwriter from liability for its default.
15. Default by Underwriters. Default by any Underwriter in
-----------------------
respect of its obligations under the Underwriting Agreement shall
not release us from any of our obligations or in any way affect
the liability of such defaulting Underwriter to the other
Underwriters for damages resulting from such default. In the
event of such default by one or more Underwriters, you are
authorized to increase, pro rata with the other non-defaulting
Underwriters, the amount of Securities which we shall be
obligated to purchase from the Company; provided, however, that
the aggregate amount of all such increases for all non-defaulting
Underwriters shall not exceed 10% of the Securities and, if the
aggregate amount of the Securities not taken up by such
defaulting Underwriters exceeds such 10%, you are further
authorized, but shall not be obligated to arrange for the
purchase by other persons, who may include you and other non-
defaulting Underwriters, of all or a portion of the Securities
not taken up by such Underwriters. In the event any such
increases or arrangements are made, the respective amounts of the
Securities to be purchased by the non-defaulting Underwriters and
by any such other person or persons shall be taken as the basis
for the Underwriters' obligations under this Agreement, but this
shall not in any way affect the liability of any defaulting
Underwriter to the other Underwriters for damages resulting from
such default.
In the event of default by one or more Underwriters in
respect of their obligations under this Agreement to take up and
pay for any Securities purchased, or to deliver any such
Securities sold or over-allotted by you for the respective
accounts of the Underwriters or to bear their proportion of
expenses or liability pursuant to the Agreement, and to the
extent that arrangements shall not have been made by you for
other persons to assume the obligations of such defaulting
Underwriter or Underwriters, each non-defaulting Underwriter
agrees to assume proportionate share of the aforesaid obligations
of each such defaulting Underwriter without relieving any such
defaulting Underwriter of its liability therefor.
16. Capital Requirements. We confirm that the incurrence by
--------------------
us of our obligations under this Agreement and under the
Underwriting Agreement will not place us in violation of the net
capital requirements of Rule 15c3-1 under the 1934 Act or of any
applicable rules relating to capital requirements of any
securities exchange to which we are subject.
17. Undertaking to Mail Prospectuses. As contemplated by
--------------------------------
Rule l5c2-8 under the 1934 Act, you agree to mail a copy of the
Prospectus mentioned in the Underwriting Agreement to any person
making a written request therefor during the period referred to
in said Rule, the mailing to be made to the address given in the
request. We confirm that we have delivered all Preliminary
Prospectuses and revised Preliminary Prospectuses, if any,
required to be delivered under the provisions of Rule 15c2-8 and
agree to deliver all Prospectus required to be delivered
thereunder. We acknowledge that the copies of the Preliminary
Prospectus furnished to us have been distributed to dealers who
have been notified of the foregoing requirements pertaining to
the delivery of Preliminary Prospectuses and Prospectus. You have
heretofore delivered to us such number of copies of Preliminary
Prospectuses as have been reasonably requested by us, receipt of
which is hereby acknowledged, and will deliver such number of
copies of Prospectuses as will be reasonably requested by us.
18. General Position of the Representative. Your authority
--------------------------------------
shall include the taking of such action as you may deem advisable
in respect of all matters pertaining to any and all offers and
sales of the Securities, including the right to make any
modifications which you consider necessary or desirable in the
arrangements with Selected Dealers or others. You shall be under
no liability for or in respect of the value of the Securities or
the validity or the form thereof, the Registration Statement, the
Prospectus or agreements or other instruments executed by the
Company or others; or for or in respect of the delivery of the
Securities; or for the performance by the Company or others of
any agreement on its or their part; nor shall you as the
Representative or otherwise be liable under any of the provisions
hereof or for any matters connected herewith, except for want of
good faith, and except for any liability arising under the Act;
and only obligations expressly assumed by you as the
Representative herein shall be implied from this Agreement. In
representing the Underwriters hereunder, you shall act as the
Representative of each of them respectively. Nothing herein
contained shall constitute the several Underwriters partners with
you or with each other, or render any Underwriter liable for the
commitments of any other Underwriter, except as otherwise
provided in Section 15 hereof and in Section 13 of the
------- -------
Underwriting Agreement. If the Underwriters shall be deemed to
constitute a partnership for Federal income tax purposes, it is
the intent of each Underwriter to be excluded from the
application of Subchapter K, Chapter 1, Subtitle A, of the
Internal Revenue Code of 1986, as amended. Each Underwriter
elects to be so excluded and agrees not to take any position
inconsistent with such election. Each Underwriter authorizes you,
in your discretion, to execute and file on behalf of the
Underwriters such evidence of election as may be required by the
Internal Revenue Service. The commitments and liabilities of each
of the several Underwriters are several in accordance with their
respective Underwriting Obligations and are not joint.
19. Miscellaneous. Any notice hereunder from you to us or
-------------
from us to you shall be deemed to have been duly given if sent by
registered mail, telegram or teletype, to us at our address as
set forth in our Underwriter's Questionnaire previously delivered
to you, or to you National Securities Corporation, West 505
Riverside Avenue, Suite 604, Spokane, Washington 99201,
Attention: Syndicate Department.
We understand that you are a member in good standing of the
NASD. We hereby confirm that we are actually engaged in the
investment banking or securities business and are either (i) a
member in good standing of the NASD or (ii) a dealer with its
principal place of business located outside the United States,
its territories and its possessions and not registered as a
broker or dealer under the 1934 Act who agrees not to make any
sales within the United States, its territories or its
possessions or to persons who are nationals thereof or residents
therein (except that we may participate in sales to Selected
Dealers and others under Section 3 of this Agreement). We hereby
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agree to comply with the provisions of Section 24 of Article III
the Rules of Fair Practice of the NASD, and, if we are a foreign
dealer and not a member the NASD, we also hereby agree to comply
with the NASD's interpretation with respect to free-riding and
withholding and to comply, as though we were a member of the
NASD, with the provisions of Sections 8 and 36 of Article III of
such Rules of Fair Practice, and to comply with Section 25 of
Article III thereof as that Section applies to a non-member
foreign dealer. In connection with sales and offers to sell
Securities made by us outside the United States, its territories
and possessions (i) we will either furnish to each person to whom
any such sale or offer is made a copy of the then current
Preliminary Prospectus or the Prospectus, as the case may be, or
inform such person that such Preliminary Prospectus or Prospectus
will be available upon request, and (ii) we will furnish to each
person to whom any such sale or offer is made such prospectus,
advertisement or other offering document containing information
relating to the Securities or the Company as may be required
under the law of the jurisdiction in which such sale or offer is
made. Any prospectus, advertisement or other offering document
furnished by us to any person in accordance with the preceding
sentence and any such additional offering material as we may
furnish to any person (x) shall comply in all respects with the
law of the jurisdiction in which it is so furnished, (y) shall be
prepared and so furnished at our sole risk and expense and (z)
shall not contain information relating to the Securities or the
Company which is inconsistent in any respect with the information
contained in the then current Preliminary Prospectus or in the
Prospectus, as the case may be.
This instrument may be signed by or on behalf of the
Underwriters in one or more counterparts each of which shall
constitute an original and all of which together shall constitute
one and the same agreement among all the Underwriters and shall
become effective at such time as all the Underwriters shall have
signed or have had signed on their behalf such counterparts and
you shall have confirmed all such counterparts. You may confirm
such counterparts by facsimile signature.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO THE CHOICE OF LAW OR CONFLICTS OF LAWS PRINCIPLES
THEREOF.
Please confirm that the foregoing correctly states the
understanding between us by signing and returning to us a
counterpart hereof.
Very truly yours,
--------------------------------
Name: Steven A. Rothstein
As Attorney-in-Fact for each of the
several Underwriters named in
Schedule A to the Underwriting
Agreement.
Confirmed as of the date
first above written:
NATIONAL SECURITIES CORPORATION
As Representative of
the several Underwriters
By:
------------------------------
Name: Steven A. Rothstein
Title: Chairman
Exhibit 1.4
GRAND COURT LIFESTYLES, INC
1,500,000 SHARES OF STOCK (1)
1,500,000 SHARES OF PREFERRED STOCK (2)
SELECTED DEALER AGREEMENT
-------------------------
Ladies and Gentlemen:
1. Registration under the Securities Act of 1933, as
amended (the "Act"), of 1,500,000 shares of common stock, $.01
par value ("Common Stock") and 1,500,000 shares of __% Senior
Convertible Redeemable Preferred Stock, $.0001 par value
("Preferred Stock") of Grand Court Lifestyles, Inc., a Delaware
corporation (the "Company"), as more fully described in the final
prospectus enclosed herewith (the "Prospectus"), has become
effective. We are offering certain of the shares of Common Stock
and Preferred Stock for purchase by a selected group on the terms
and conditions stated herein.
Authorized $10.00 per share of Common Stock.
Public $10.00 per share of Preferred Stock.
Offering Price:
Dealers' Not to exceed $_____ per share of Common Stock
Selling and $____ per share of Preferred Stock payable
Concession: upon termination of the Selected Dealer
Agreement, except as provided below. We reserve
the right not to pay such concession on any of
the shares of Common Stock or Preferred Stock
purchased by any of the Selected Dealers from
us and repurchased by us at or below the price
stated above prior to such termination.
Delivery and Delivery of the shares of Common Stock and
Payment: Preferred Stock shall be made on or about
___________, 1997 or such later date as we may
advise, at the office of National Securities
Corporation, 1001 Fourth Avenue, Suite 2200,
Seattle, Washington 98154, or at such other
----------------
1 Plus the Over-Allotment Option available to the Underwriters
to purchase up to an additional 225,000 shares of Common
Stock, subject to certain terms and conditions as described
in the Underwriting Agreement.
2 Plus the Over-Allotment Option available to the Underwriters
to purchase up to an additional 225,000 shares of Preferred
Stock, subject to certain terms and conditions as described
in the Underwriting Agreement.
<PAGE>
place as we shall specify on not less than one
day's notice to you. Payment for the shares of
Common Stock and Preferred Stock is to be made,
against delivery, at the full authorized public
offering price stated above, or, if we shall so
advise you, at the public offering price less
the dealers' selling concession stated above,
by a certified or official bank check payable
to the order of National Securities
Corporation, in New York Clearing House Funds.
Termination: This Agreement shall terminate at the close of
business on the 45th day following the
effective date of the Registration Statement
(of which the enclosed Prospectus forms a
part), unless extended at our discretion for a
period or periods not to exceed in the 45
additional days. We may terminate this
Agreement, whether or not extended, at any time
without notice.
2. Except as otherwise expressly provided in this
Agreement, members of the Selected Dealers may immediately offer
the shares of Common Stock and Preferred Stock for sale and take
orders therefor only at the public offering price, subject to
confirmation and allotment by us. We, in turn, are prepared to
receive orders subject to confirmation and allotment by us. We
reserve the right to reject any order in whole or in part or to
allot less than the number of shares of Common Stock and
Preferred Stock applied for. Orders transmitted by telephone must
be promptly confirmed by letter or telegram.
3. You, by becoming a member of the Selected Dealers,
agree (a) to take up and pay for the number of shares of Common
Stock and Preferred Stock allotted and confirmed to you, (b) not
to use any of the shares of Common Stock or Preferred Stock to
reduce or cover any short position you may have, (c) upon our
request, to advise us of the number of shares of Common Stock and
Preferred Stock purchased from us as manager of the Selected
Dealers remaining unsold by you and to resell to us any or all of
such unsold shares of Common Stock and Preferred Stock at the
public offering price stated above, less all or such part of the
concession allowed you as we may determine, and (d) to make
available a copy of the Prospectus to all persons who on your
behalf will solicit orders for the shares of Common Stock and
Preferred Stock prior to the making of such solicitations by such
persons. You are not authorized to give any information or to
make any representations other than those contained in the
Prospectus or any supplements or amendments thereto.
4. As contemplated by Rule l5c2-8 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), we agree
to mail a copy of the Prospectus to any person making a written
request therefor during the period referred to in the rules and
regulations adopted under the Exchange Act, the mailing to be
made to the address given in the request. You confirm that you
have delivered all preliminary prospectuses and revised
preliminary prospectus, if any, required to be delivered under
the provisions of Rule 15c2-8 and agree to deliver all copies of
the Prospectus required to be delivered thereunder. We have
heretofore delivered to you such preliminary prospectuses as have
been required by you, receipt of which is hereby acknowledged,
and will deliver such further prospectuses as may be requested by
you.
5. You agree that until termination of this Agreement you
will not make purchases or sales of the shares of Common Stock or
Preferred Stock except (a) pursuant to this Agreement, (b)
pursuant to authorization received from us, or (c) in the
ordinary course of business as broker or agent for a customer
pursuant to any unsolicited order.
6. Additional copies of the Prospectus and any supplements
or amendments thereto shall be supplied in reasonable quantity
upon request.
7. The shares of Common Stock and Preferred Stock are
offered by us for delivery when, as and if sold to, and accepted
by, us and subject to the terms herein and in the Prospectus or
any supplements or amendments thereto, to our right to vary the
concessions and terms of offering after their release for public
sale, to approval of counsel as to legal matters and to
withdrawal, cancellation or modification of the offer without
notice.
8. Upon written application to us, you shall be informed
as to the jurisdictions under the securities or blue sky laws of
which we believe the shares of Common Stock and Preferred Stock
are eligible for sale, but we assume no responsibility as to such
eligibility or the right of any member of the Selected Dealers to
sell any of the shares of Common Stock and Preferred Stock in any
jurisdiction. We have caused to be filed a Further State Notice
relating to such of the shares of Common Stock and Preferred
Stock to be offered to the public in New York in the form
required by, and pursuant to, the provisions of Article 23A of
the General Business Law of the State of New York. Upon the
completion of the public offering contemplated herein, each
member of the Selected Dealers agrees to promptly furnish to us,
upon our request, territorial distribution reports setting forth
each jurisdiction in which sales of the shares of Common Stock
and Preferred Stock were made by such member, the number of
shares of Common Stock and Preferred Stock sold in such
jurisdiction, and any further information as we may request, in
order to permit us to file on a timely basis any report which we
as underwriter of the offering or manager of the Selected Dealers
may be required to file pursuant to the securities or blue sky
laws of any jurisdiction.
9. You, by becoming a member of the Selected Dealers
represent that you are (a) a member in good standing of the NASD,
or (b) a foreign dealer, who is not eligible for membership in
said NASD and has agreed not to sell the shares of Common Stock
and Preferred Stock (i) to purchasers in, or to persons who are
nationals of, the United States of America, and (ii) except in
compliance with (A) the Interpretation with Respect to Free-
Riding and Withholding of said NASD as to sales outside the
United States and (B) Sections 8, 24, 25 (applicable to a
non-member broker/dealer in a foreign country) and 36 of said
NASD's Rules of Fair Practice. In addition, if you are a member
of the NASD you confirm that you will not reallow any commissions
to any non-member broker/dealers, including foreign
broker/dealers registered pursuant to the Exchange Act.
10. You, by becoming a member of the Selected Dealers
represent that (a) neither you nor any of your directors,
officers, partners or "persons associated with" you (as defined
in the By-Laws of the NASD) nor, to your knowledge, any "related
person" (defined by the NASD to include counsel, financial
consultants and advisors, finders, members of the selling or
distribution groups, and any other persons associated with or
related to any of the foregoing) or any other broker-dealer, (i)
within the last 18 months have purchased in private transactions,
or intends before, at or within six months after the commencement
of the public offering of the shares of Common Stock and
Preferred Stock to purchase in private transactions, any
securities of the Company or any parent, predecessor, or
subsidiary thereof, (ii) within the last 12 months had any
dealings with any of the Company or the parent, predecessor,
subsidiary or controlling shareholder thereof or (iii) have,
except as contemplated by this agreement, any agreement,
arrangement. or understanding to receive compensation in
connection with (as defined by the NASD) the distribution of the
shares of Common Stock and Preferred Stock.
11. Nothing herein shall constitute any members of the
Selected Dealers partners with us or with each other, but you
agree, notwithstanding any prior settlement of accounts or
termination of this Agreement, to bear your proper proportion of
any tax or other liability based upon the claim that the Selected
Dealers constitute a partnership, association, unincorporated
business or other separate entity and a like share of any
expenses of resisting any such claim.
12. We shall be the underwriter of the offering and manager
of the Selected Dealers and shall have full authority to take
such action as we may deem advisable in respect of all matters
pertaining to the offering or the Selected Dealers or any members
of them. Except as expressly stated herein, or as may arise under
the Act, we shall be under no liability to any member of the
Selected Dealers as such for, or in respect of, (i) the validity
or value of the shares of Common Stock and Preferred Stock, (ii)
the form of, or the statements contained in, the Prospectus, the
Registration Statement of which the Prospectus forms a part, any
supplements or amendments to the Prospectus or such Registration
Statement, any preliminary prospectus, any instruments executed
by, or obtained or any supplemental sales data or other letters
from, the Company, or others, (iii) the form or validity of the
Underwriting Agreement, or this Agreement, (iv) the eligibility
of any of the shares of Common Stock and Preferred Stock for sale
under the laws of any jurisdiction, (v) the delivery of the
shares of Common Stock and Preferred Stock, (vi) the performance
by the Company or others of any agreement on its or their part,
(vii) or any matter in connection with any of the foregoing,
except our own want of good faith.
13. If for federal income tax purposes the Selected
Dealers, among themselves or with the underwriters, should be
deemed to constitute a partnership, then we elect to be excluded
from the application of Subchapter K, Chapter 1, Subtitle A of
the Internal Revenue Code of 1986, as amended, and we agree not
to take any position inconsistent with such selection. We
authorize you, in your discretion, to execute and file on our
behalf such evidence of such selection as may be required by the
Internal Revenue Service.
14. All communications from you shall be addressed to us
care of National Securities Corporation, West 505 Riverside
Avenue, Suite 604, Spokane, Washington 99201, Attention:
Syndicate Department. Any notice from us to you shall be deemed
to have been fully authorized by the underwriters and to have
been duly given if mailed, telegraphed or telexed to you at the
address to which this letter is mailed. This Agreement shall be
construed in accordance with the laws of the State of New York
without giving effect to conflict of laws. Time is of the essence
in this Agreement.
If you desire to become a member of the Selected Dealers,
please advise us to that effect immediately by telegram and sign
and return to us the enclosed counterpart of this letter.
Very truly yours,
NATIONAL SECURITIES CORPORATION
By:____________________________
Steven A. Rothstein
Chairman
<PAGE>
We accept membership in the Selected Dealers on the terms
specified above and acknowledge receipt of the final Prospectus.
In purchasing any shares of Common Stock or Preferred Stock, we
have relied solely on the final Prospectus and on no other
statements, written or oral.
Dated:______________ ___, 1997.
__________________________________
By:_______________________________
Exhibit 2.1(e)
FIFTH AMENDMENT TO CONSOLIDATION AGREEMENT
This Fifth Amendment ("Fifth 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
Fifth Amendment relating to the transfer of interests in Twin
Lakes L.C., 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 by deleting paragraph
(a) and inserting in its stead the following:
(a) each Transferring Shareholder shall transfer a 49%
interest in Twin Lakes L.C., a Florida limited
liability company.
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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Fifth 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 3.1
FORM OF RESTATED
CERTIFICATE OF INCORPORATION
OF
GRAND COURT LIFESTYLES, INC.
(Pursuant to Section 245 of the General
Corporation Law of the State of Delaware)
GRAND COURT LIFESTYLES, INC., a corporation organized
and existing under the laws of the State of Delaware, hereby
certifies as follows:
1. The original Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of
Delaware on January 25, 1996.
2. The original Certificate of Incorporation of the
Corporation was amended by a Certificate of Amendment filed with
the Secretary of State of the State of Delaware on February 20,
1996.
3. The original Certificate of Incorporation of the
Corporation was further amended by a Certificate of Amendment
filed with the Secretary of State of Delaware on May 21, 1996.
4. This Restated Certificate of Incorporation amends,
restates and integrates the provisions of the original
Certificate of Incorporation of the Corporation as amended to the
date hereof, and was duly adopted in accordance with the
provisions of Section 245 of the General Corporation Law of the
State of Delaware.
5. The text of the Certificate of Incorporation is
hereby restated to read in its entirety as follows:
ARTICLE I
---------
The name of the Corporation is Grand Court Lifestyles, Inc.
ARTICLE II
----------
The address of the Corporation's registered office in
the State of Delaware is 9 East Loockerman Street, City of Dover,
County of Kent, Delaware 19901. The name of its registered agent
at such address is National Corporate Research, Ltd.
ARTICLE III
-----------
The nature of the business or purposes to be conducted
or promoted by the Corporation are to engage in any lawful act or
activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
ARTICLE IV
----------
Section 4.1. Authorized Capital. The total number of
------------------
shares of all classes of stock which the Corporation shall have
authority to issue is Fifty-Five Million (55,000,000) shares,
consisting of:
(a) Fifteen Million (15,000,000) shares of
preferred stock, $.0001 par value (the "Preferred Stock"), and
(b) Forty Million (40,000,000) shares of common
stock, $.01 par value ("Common Stock").
Section 4.2. Preferred Stock. Shares of the preferred
---------------
stock of the Corporation may be issued by the Board of Directors,
without stockholder approval, from time to time in one or more
classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the Board
of Directors of the Corporation prior to the issuance of any
shares thereof. Each such class or series of preferred stock
shall have such voting powers, full or limited, or no voting
powers, and such other relative rights, powers and preferences,
including, without limitation, the dividend rate, conversion
rights, if any, redemption price and liquidation preference, and
such qualifications, limitations or restrictions thereof, as
shall be stated in such resolution or resolutions providing for
the issuance of such class or series of preferred stock as may be
adopted from time to time by the Board of Directors or a
committee thereof prior to the issuance of any shares thereof
pursuant to the authority hereby expressly vested in it, all in
accordance with the laws of the State of Delaware.
Section 4.3. Common Stock. The powers, rights and
------------
other matters relating to the Common Stock are as follows:
(a) Dividends. Subject to the limitations set
---------
forth in this Article IV, dividends may be paid on Common Stock
out of any funds legally available for that purpose, when, as and
if declared by the Board of Directors.
(b) Liquidation Rights. In the event of any
------------------
liquidation, dissolution or winding up of the Corporation, after
there shall have been paid to or set aside for the holders of
outstanding shares having superior liquidation preferences to
Common Stock the full preferential amounts to which they are
respectively entitled, the holders of outstanding shares of all
classes of Common Stock shall be entitled to receive pro rata,
according to the number of shares held by them, the remaining
assets of the Corporation legally available for distribution to
the stockholders.
(c) Voting Rights. (1) Except as set forth in
-------------
or provided for by this Article IV or as by statute or otherwise
mandatorily provided, the holders of the outstanding shares of
Common Stock shall exclusively possess full voting powers for the
election of directors of the Corporation and for all other
corporate purposes.
(2) Any action required or permitted to be taken
at any annual or special meeting of stockholders may be taken
only upon the vote of the stockholders at an annual or special
meeting duly noticed and called, as provided in the By-Laws of
the Corporation, and may not be taken by a written consent of the
stockholders pursuant to the General Corporation Law of the State
of Delaware.
(3) Special meetings of the stockholders of the
Corporation for any purpose or purposes may be called at any time
by the Board of Directors or the Chairman of the Board of
Directors. Special meetings of the stockholders of the
Corporation may not be called by any other Person or Persons.
(d) Definitions. For purposes of Article IV of
-----------
this Restated Certificate of Incorporation:
"Person" means an individual, a
------
partnership, a joint venture, a corporation, an
association, a trust, or any other entity or
organization.
ARTICLE V
---------
In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors of the Corporation
is expressly authorized to adopt, alter or repeal its By-Laws.
In addition, the By-Laws may be made, altered, amended, changed
or repealed by the stockholders of the Corporation upon the
affirmative vote of the holders of at least 66-2/3% of the
outstanding Common Stock entitled to vote thereon.
ARTICLE VI
----------
Election of directors need not be by written ballot
unless the By-Laws of the Corporation shall so provide.
ARTICLE VII
-----------
Whenever a compromise or arrangement is proposed
between the Corporation and its creditors or any class of them
and/or between the Corporation and its stockholders or any class
of them, any court of equitable jurisdiction within the State of
Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the
Corporation under the provisions of Section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or
of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of the Corporation, as
the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in
value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any
reorganization of the Corporation as a consequence of such
compromise or arrangement, the said compromise or arrangement and
the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders
or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
ARTICLE VIII
------------
A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary
damages for injury resulting from a breach of his fiduciary duty
as a director, except for liability (i) for injury resulting from
a breach of his duty of loyalty to the Corporation and its
stockholders, (ii) for injury resulting from acts or omissions
not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, as the same exists or hereafter may be
amended, or (iv) for injury resulting from any transaction from
which the director derives an improper personal benefit. If the
Delaware General Corporation Law hereafter is amended so as to
authorize the further elimination or limitation of the liability
of directors to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, then the
liability of a director of the Corporation for monetary damages,
in addition to the limitation on personal liability provided in
the preceding sentence, shall automatically, by virtue hereof and
without any further action on the part of the Corporation or its
stockholders, be further limited so as to be limited to the
fullest extent permitted by the Delaware General Corporation Law.
Any repeal or modification of this Section by the stockholders of
the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a
director of the Corporation with regard to actions taken or
omitted before such repeal or modification.
ARTICLE IX
----------
The Corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened,
pending or complete action, suit or proceeding, whether civil,
criminal, administrative or investigative, or by or in the right
of the Corporation to procure judgment in its favor, by reason of
the fact that he is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests
of the Corporation, in accordance with and to the full extent
permitted by statute. Expenses incurred in defending a civil or
criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action,
suit or proceeding as authorized by the Board of Directors in the
specific case upon receipt of an undertaking by or on behalf of
the director, officer, employee or agent to repay such amount
unless it shall ultimately be determined that he is entitled to
be indemnified by the Corporation as authorized in this section.
The indemnification provided by this section shall not be deemed
exclusive of any other rights to which those seeking
indemnification may be entitled under this Restated Certificate
of Incorporation or any agreement or vote of stockholders or
disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators
of such a person.
ARTICLE X
---------
Notwithstanding anything contained in this Restated
Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 66-2/3% of the outstanding shares
of Common Stock shall be required to amend, repeal, or adopt any
provision inconsistent with Sections 4.3(c)(2) or 4.3(c)(3) of
Article IV, Article V or this Article X of this Restated
Certificate of Incorporation.
<PAGE>
IN WITNESS WHEREOF, this Restated Certificate of
Incorporation has been executed on behalf of the Corporation this
day of , 1997.
---- ------------
GRAND COURT LIFESTYLES, INC.
By:
--------------------------------
Bernard M. Rodin, President
Attest:
----------------------------
Keith E. Marlowe, Secretary
Exhibit 4.1
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
% SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK
OF
GRAND COURT LIFESTYLES, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
I, John Luciani, Chairman of the Board and Chief
Executive Officer of Grand Court Lifestyles, Inc., a corporation
organized and existing under the General Corporation Law of the
State of Delaware, in accordance with the provisions of Section
103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board
of Directors by the Certificate of Incorporation of the said
Corporation, the said Board of Directors , acting through a duly
authorized committee thereof, on March ___, 1997, adopted the
following resolution creating a series of 1,875,000 shares of %
Senior Convertible Redeemable Preferred Stock, par value $.0001
per share, designated as Preferred Stock:
RESOLVED, that pursuant to the authority vested in the
Board of Directors of this Corporation in accordance with the
provisions of its Certificate of Incorporation, a series of
Preferred Stock of the Corporation be and it hereby is created,
and that the designation and amount thereof and the voting
powers, preferences and relative, participating, optional and
other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof are as
follows:
1. Designation and Number. The designation of the series
----------------------
of preferred stock fixed by this resolution shall be " % Senior
Convertible Redeemable Preferred Stock" (hereinafter referred to
as the "Initial Series Preferred Stock") and the number of shares
constituting such series shall be 1,875,000.
2. Rank. The Initial Series Preferred Stock shall rank:
----
(i) prior to all of the Corporation's Common Stock, par value
$.01 per share ("Common Stock"), (ii) prior to any class or
series of capital stock of the Corporation hereafter created
either specifically ranking by its terms junior to the Initial
Series Preferred Stock or not specifically ranking by its terms
senior to or on parity with the Initial Series Preferred Stock
(collectively with the Common Stock, "Junior Securities"); (iii)
subject to the provisions of subparagraph 4(ii) hereof, on parity
with any class or series of capital stock of the Corporation
hereafter created specifically ranking by its terms on parity
with the Initial Series Preferred Stock ("Parity Securities");
and (iv) subject to the provisions of subparagraph 4(ii) hereof,
junior to any class or series of capital stock of the Corporation
hereafter created specifically ranking by its terms senior to the
Initial Series Preferred Stock ("Senior Securities"), in each
case, as to payment of dividends or as to distributions of assets
upon liquidation, dissolution or winding-up of the Corporation,
whether voluntary or involuntary (all such distributions being
referred to collectively as "Distributions").
3. Dividends.
---------
(i) The dividend rate of the Initial Series Preferred
Stock shall be computed at a rate of $. per share per annum
from the date of the issuance of the Initial Series Preferred
Stock. Dividends shall be payable quarterly in arrears out of
funds legally available therefor on the last business day of
January, April, July and October of each year, commencing
April 30, 1997 (each an "Initial Series Dividend Payment Date").
Dividends on shares of Initial Series Preferred Stock shall be
cumulative and shall accrue (whether or not declared), without
interest, from the first day of the quarterly period in which
such dividend may be payable as herein provided, except with
respect to the first quarterly payment which shall accrue from
the date of issuance. On each Initial Series Dividend Payment
Date all dividends which shall have accrued on each share of
Initial Series Preferred Stock outstanding on the applicable
record date shall accumulate and be deemed to become "due." Any
dividend which shall not be paid on the Initial Series Dividend
Payment Date on which it shall become due shall be deemed to be
"past due" (a "Cumulated Initial Series Dividend") until such
Cumulated Initial Series Dividend shall have been paid.
(ii) The Board of Directors shall declare and pay
current dividends out of funds legally available therefor (after
giving effect to the payment of all requisite dividends on Senior
Securities); provided that no dividends shall be declared, paid
or made if the Corporation would be rendered in default under the
terms of Senior Securities or obligations by virtue of such
dividend or distribution.
(iii) In order to determine the holders of the
Initial Series Preferred Stock entitled to receive dividends,
the Corporation shall fix a record date not more than 60 days
prior to any Initial Series Dividend Payment Date. If any such
Initial Series Dividend Payment Date should fall on a day that
is not a Business Day, then the Corporation shall pay the
applicable dividend on the next succeeding Business Day.
"Business Day" shall mean a day other than a Saturday, Sunday on
other day on which any national securities exchange or quotation
system on which the Common Stock of the Corporation is traded or
quoted is authorized or required by law to close.
(iv) The Corporation shall not: (A) pay or declare and
set apart for payment any dividends or Distributions on the
Corporation's Junior Securities, other than dividends payable in
the form of additional shares of the same Junior Security as that
on which such dividend is declared, or (B) redeem, purchase, or
otherwise acquire any shares of Junior Securities or any right,
warrant or option to acquire any Junior Securities, unless full
Cumulated Initial Series Dividends have been, or contem-
poraneously are, paid or declared and set apart for such payment
on the Initial Series Preferred Stock.
(v) No full dividends shall be paid or declared and
set apart for payments on any class or series of Parity
Securities for any period unless full Cumulated Initial Series
Dividends have been, or contemporaneously are, paid or declared
and set apart for such payment on the Initial Series Preferred
Stock for all dividend periods terminating on or prior to the
date of payment of such full Cumulated Initial Series Dividends.
No full dividends shall be paid or declared and set apart for
payment on the Initial Series Preferred Stock for any period
unless full cumulative dividends have been, or contemporaneously
are, paid or declared and set apart for payment on the Parity
Securities, for all dividend periods terminating on or prior to
the date of payment of such full Cumulated Initial Series
Dividends. When dividends are not paid in full upon the Initial
Series Preferred Stock and the Parity Securities, all dividends
paid or declared and set apart for payment upon shares of Initial
Series Preferred Stock and the Parity Securities shall be paid
or declared and set apart for payment pro rata, so that the
--- ----
amount of dividends paid or declared and set apart for payment
per share on the Initial Series Preferred Stock and the Parity
Securities shall in all cases bear to each other the same ratio
that accrued and unpaid dividends per share on the shares of
Initial Series Preferred Stock and the Parity Securities bear to
each other (without taking into account the dividends so paid and
those so declared and set apart for payment).
4. Voting Rights
-------------
(i) Except as may otherwise be provided herein or
required by law, the holders of the shares of Initial Series
Preferred Stock ("Initial Series Holders") shall not be entitled
to any vote in respect of such shares.
(ii) The affirmation vote, in person or by proxy, of
the Initial Series Holders of the majority of the outstanding
shares of the Initial Series Preferred Stock, voting as a
single class, on a one-vote-per-share of Initial Series
Preferred Stock basis, shall be necessary for the Corporation to
authorize: (x) any class or series of Senior Securities; or (y)
any class or series of Parity Securities; provided, however, that
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no such vote shall be required pursuant to clause (x) or (y) in
the event the Corporation shall then have the right to redeem the
Initial Series Preferred Stock and, prior to the date of
issuance or such new class or series of Senior Securities or
Parity Securities provision shall have been made for the
redemption of all the outstanding shares of the Initial Series
Preferred Stock and such redemption occurs on or prior to the
date of issuance of such new series or class of Senior Securities
or Parity Securities.
(iii) In the event that the Corporation fails to pay any
dividends for four consecutive Initial Series Dividend Payment
Dates, Initial Series Holders, voting separately as a single
class, on a one-vote-per-share of Initial Series Preferred Stock
basis, shall be entitled to elect one director, and the presence,
in person or by proxy, of the Initial Series Holders of a
majority of the outstanding shares of the Initial Series
Preferred Stock shall constitute a quorum. Such right of the
Initial Series Holders shall terminate as of next annual meeting
of stockholders of the Corporation following payment of full
Cumulated Initial Series Dividends.
(iv) On all matters on which the Initial Series
Preferred Stock is entitled to vote by law, the Initial Series
Holders shall be entitled to one vote per share of Initial Series
Preferred Stock, voting separately as a single class, and the
presence, in person or by proxy, of the Initial Series Holders
of a majority of the outstanding shares of the Initial Series
Preferred Stock shall constitute a quorum.
5. Conversion Rights.
-----------------
(i) Each share of Initial Series Preferred Stock may
be converted, at the option of each Initial Series Holder, at
any time and from time to time, into fully-paid and
non-assessable shares of Common Stock; provided, however, a
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Initial Series Holder's right to so convert shares of Initial
Series Preferred Stock shall terminate as to shares thereof that
are redeemed by the Corporation on the Redemption Date (as
hereinafter defined) therefor as provided in and subject to the
terms and conditions of paragraph 7 hereof. The number of
shares of Common Stock to which the Initial Series Holder of
each share of Initial Series Preferred Stock shall be entitled
upon conversion shall be the product obtained by multiplying the
number of shares of Initial Series Preferred Stock to be
converted by the Conversion Rate; in addition, the Initial Series
Holder shall be entitled upon conversion to receive cash in an
amount equal to all Cumulated Initial Series Dividends on each
share of Initial Series Preferred Stock so converted, provided
--------
there are funds legally available therefor and provided, further,
--------
that no such payment shall be made if the Corporation would be
rendered in default under the terms of Senior Securities or
obligations by virtue of such payment. To the extent the
Corporation shall not have funds legally available to pay all
such amounts equal to such Cumulated Initial Series Dividends
or if such payment would render the Corporation in default under
the terms of Senior Securities or obligations by virtue of such
payment, the Corporation's obligation to make such payment shall
be deferred until the first date on which the Corporation shall
have funds legally available for all or a portion of such
payment, and such payment would not render the Corporation in
default under the terms of Senior Securities or obligations,
which shall then be made in whole or in part, as the case may be,
until such amounts equal to such Cumulated Initial Series
Dividends shall have been paid in full. The "Conversion Rate,"
that is, the number of shares of Common Stock for which each
share of Initial Series Preferred Stock may be converted, shall
be determined by dividing $10.00 by $12.00 ("Conversion Price").
The Conversion Price shall be adjusted from time to time as set
forth in subsection (ii) hereof. The Corporation shall not issue
fractional shares of Common Stock upon conversion of Initial
Series Preferred Stock but, in lieu thereof, shall pay to a
Initial Series Holder cash in an amount equal to such fraction
multiplied by the Last Sale Price of the Common Stock on the
trading day prior to the date on which the shares are converted.
"Last Sale Price" shall mean the reported last sale price regular
way or, in case no such reported sale takes place on such day,
the average of the reported closing bid and asked prices regular
way, in either case on the principal national securities exchange
on which the Common Stock is listed or admitted to trading or, if
not listed or admitted to trading on any national securities
exchange, on the Nasdaq National Market or, if not listed or admitted
to trading thereon, the closing bid price as reported by the Nasdaq
SmallCap Market, or, if the Common Stock is not listed or admitted
to trading on any national securities exchange or quoted on such
National Market or SmallCap Market, the average of the closing bid
and asked prices in the over-the-counter market as furnished by any
New York Stock Exchange member firm selected from time to time by
the Board of Directors for that purpose.
(ii) The Initial Series Preferred Stock shall be converted
into Common Stock in the following manner:
(A) Shares of Initial Series Preferred Stock received
by the Corporation in exchange for Common Stock shall be retired
and canceled and shall no longer be available for issuance as
Initial Series Preferred Stock.
(B) A Initial Series Holder shall give written notice
to the Corporation of its desire to convert all or a portion of
the shares of Initial Series Preferred Stock owned by such
Initial Series Holder. Such notice shall be accompanied by
certificates, duly endorsed for conversion, evidencing the number
of shares of Initial Series Preferred Stock such Initial Series
Holder desires to convert, together with cash, if any required by
subparagraph 5(ii) (C) hereof. The Corporation will, as soon as
practicable thereafter, deliver to such Initial Series Holder or
to such Initial Series Holder's nominee or nominees, a
certificate or certificates for the appropriate number of shares
of Common Stock, together with cash, as provided in subparagraph
5(i), with respect to any fractional shares otherwise issuable
upon conversion, and cash in an amount equal to all Cumulated
Initial Series Dividends on each share of Initial Series
Preferred Stock so converted, provided there are funds legally
--------
available therefor and provided, further, that no such payment
--------
shall be made if the Corporation would be rendered in default
under the terms of Senior Securities or obligations by virtue of
such payment, and, in the event of a partial conversion, a
certificate representing the balance, if any, of the shares of
Initial Series Preferred Stock represented by the surrendered
certificate or certificates but not converted to Common Stock.
To the extent the Corporation shall not have funds legally
available to pay all such Cumulated Initial Series Dividends or
if such payment would render the Corporation in default under the
terms of Senior Securities or obligations by virtue of such
payment, the Corporation's obligation to make such payment shall
be deferred until the first date on which the Corporation shall
have funds legally available for all or a portion of such payment
and such payment would not render the Corporation in default
under the terms of Senior Securities or obligations, which shall
then be made in whole or in part, as the case may be, until such
Cumulated Initial Series Dividends shall have been paid in
full.
(C) In the event that shares of Initial Series
Preferred Stock are surrendered for conversion on any date during
the period from the close of business on a record date fixed for
determining the Initial Series Holders entitled to receive
dividends to the opening of business on the corresponding Initial
Series Dividend Payment Date, the Initial Series Holder must
also deliver to the Corporation an amount equal to the dividend
payable with respect to such shares of Initial Series Preferred
Stock on such Initial Series Dividend Payment Date and shall
continue to be entitled to receive such dividend on such Initial
Series Dividend Payment Date. In the event that the date on
which the shares are converted is the Initial Series Dividend
Payment Date, such Initial Series Holder will be entitled to
receive the dividend payable with respect to such Initial Series
Preferred Stock and shall not be required to include any payment
in the amount of the dividend payable with respect to such
converted shares of Initial Series Preferred Stock.
(D) If, prior to the date on which all shares of
Initial Series Preferred Stock are converted, the Corporation
shall (1) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock, (2) subdivide its
outstanding Common Stock, (3) combine its outstanding Common
Stock into a smaller number of shares of Common Stock or (4)
issue by reclassification of its Common Stock other securities of
the Corporation, the Conversion Price in effect on the opening of
business on the record date for determining stockholders entitled
to participate in such transaction shall thereupon be adjusted,
or, if necessary, the right to convert shall be amended, such
that the number of shares of Common Stock receivable upon
conversion of the shares of Initial Series Preferred Stock
immediately prior thereto shall be adjusted so that the Initial
Series Holder shall be entitled to receive, upon the conversion
of such shares of Initial Series Preferred Stock, the kind and
number of shares of Common Stock or other securities of the
Corporation which it would have owned or would have been entitled
to receive after the happening of any of the events described
above had the Initial Series Preferred Stock been converted
immediately prior to the happening of such event or any record
date with respect thereto. Any adjustment made pursuant to this
subparagraph 5(ii)(D) shall become effective immediately after
the effective date of such event and such adjustment shall be
retroactive to the record date, if any, for such event. No
adjustment with respect to any ordinary cash dividends (made out
of current or accumulated earnings) on shares of Common Stock
shall be made.
(E) Except in respect of transactions described in
subparagraph 5(ii)(D) above, if, prior to the date on which all
shares of Initial Series Preferred Stock are converted, the
Corporation shall sell or issue Common Stock or rights, options,
warrants or convertible securities (or rights, options or
warrants to purchase convertible securities) containing the right
to subscribe for or purchase shares of Common Stock
(collectively, "Rights"), and the sale or issuance price per
share of Common Stock (or in the case of Rights, the sum of the
consideration paid or payable for any such Right entitling the
holder thereof to acquire one share of Common Stock and such
additional consideration paid or payable upon exercise or
conversion of any such Right to acquire one share of Common
Stock) is less than the lower of the then current Conversion
Price or the then current Market Price of the Common Stock (as
defined in subparagraph 7(i) below) for the trading day
immediately preceding the dates of such sale or issuance (the
"Current Common Stock Price"), the Conversion Price shall
thereupon be adjusted such that the number of shares of Common
Stock receivable upon conversion of the Initial Series Preferred
Stock shall be the number determined by multiplying (1) the
number of shares of Common Stock receivable upon conversion of
the shares of Initial Series Preferred Stock immediately prior
to such issuance or sale by (2) a fraction (not to be less than
one) with a numerator equal to the product of the number of
shares of Common Stock outstanding after giving effect to such
sale or issuance (and assuming, in the case of Rights that such
Rights had been fully exercised or converted, as the case may be)
and the Current Common Stock Price and a denominator equal to the
sum of (x) the product of the number of shares of Common Stock
outstanding immediately before the issuance or sale or the record
date, as the case may be, multiplied by the Current Common Stock
Price and (y) the aggregate consideration received or deemed to
be received by the Corporation for the shares of Common Stock to
be issued or sold or to be purchased or subscribed for upon
exercise of such Rights. For the purposes of such adjustments,
the Common Stock which the holders of any such Rights shall be
entitled to subscribe for or purchase shall be deemed to be
issued and outstanding as of the date of such issuance or sale or
the record date, as the case may be.
(F) Except in respect of transitions described in
subparagraph 5(ii)(D) above, if, prior to the date on which all
shares of Initial Series Preferred Stock are converted, the
Corporation shall declare, order, pay or make a dividend or other
distribution (including without limitation any distribution of
cash, other or additional stock or other securities or property
or options, by way of dividend or spin-off, reclassification,
recapitalization or similar corporate rearrangement or otherwise,
but excluding dividends described in paragraph 3 or in the last
sentence of subparagraph 5(ii)(D)), then, in each case, the
Conversion Price shall thereupon be adjusted such that the number
of shares of Common Stock thereafter receivable upon the
conversion of shares of Initial Series Preferred Stock shall be
determined by multiplying (1) the number of shares of Common
Stock theretofore receivable upon conversion of the shares of the
Initial Series Preferred Stock by (2) a fraction of which the
numerator shall be the then Conversion Price on the record date
for the determination of stockholders entitled to receive such
dividend or other distribution, and of which the denominator
shall be such Conversion Price on such date minus the amount of
such dividend or distribution applicable to one share of Common
Stock. The Board of Directors of the Corporation shall determine
the amount of such dividend or distribution allocable to one
share of Common Stock and such determination, if reasonable and
based upon the Board of Directors' good faith business judgment,
shall be binding upon the Initial Series Holder. Such
adjustment shall be made whenever any such distribution is made
and shall become effective on the date of distribution
retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
(G) Upon the expiration of any Rights if such shall
not have been exercised, the Conversion Price, to the extent that
shares of Initial Series Preferred Stock have not been
converted, shall, upon such expiration, be readjusted and shall
thereafter be such as they would have been had they not been
originally adjusted (or had the original adjustment not been
required, as the case may be) on the basis of (1) the fact that
the only shares of Common Stock so issued were the shares of
Common Stock, if any, actually issued or sold upon the exercise
of such Rights and (2) such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the
Corporation (including for purposes hereof, any underwriting
discounts or selling commissions paid by the Corporation) for the
issuance, sale or grant of all such Rights, whether or not
exercised; provided, however, that no such readjustment shall
-------- -------
have the effect of increasing the Conversion Price by a
proportion (relative to the Conversion Price in effect
immediately prior to such readjustment) in excess of the inverse
of the aggregate proportional adjustment thereof made in respect
of the issue, sale, grant or assumption of such Rights.
If the consideration provided for in any Right or the
additional consideration, if any, payable upon the conversion or
exchange of any Right shall be reduced, or the rate at which any
Right is exercisable or convertible into or exchangeable for
shares of Common Stock shall be increased, at any time under or
by reason of provisions with respect thereto designed to protect
against dilution, then, effective concurrently with each such
change, the Conversion Price then in effect shall first be
adjusted to eliminate the effects (if any) of the issuance (or
deemed issuance) of such Right on the Conversion Price and then
readjusted as if such Right had been issued on the date of such
change with the terms in effect after such change, but only if as
a result of such readjustment the Conversion Price then in effect
hereunder is thereby reduced.
(H) If, prior to the date on which all shares of
Initial Series Preferred Stock are converted, the Corporation
shall (1) consolidate with or merge with or into another person
resulting in a reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock or (2) sell or
otherwise transfer all or substantially all of the assets of the
Corporation, then a Initial Series Holder shall thereafter have
the right to convert such shares of Initial Series Preferred
Stock into the kind and amount of stock, securities or assets, if
any, such Initial Series Holder would have been entitled to
receive upon such consolidation, merger, sale or transfer had
such Initial Series Holder converted its shares of Initial
Series Preferred Stock into Common Stock immediately prior to
such transaction.
(I) For the purposes of this paragraph 5: (x) the
consideration for the issue or sale of any additional shares of
Common Stock shall, irrespective of the accounting treatment of
such consideration, be deemed to be the consideration actually
received by the Corporation and (1) insofar as it consists of
cash, be computed at the net amount of cash received by the
Corporation, plus any expense paid or incurred by the Corporation
and any commissions or compensation paid or concessions or
discounts allowed to underwriters, dealers or others performing
similar services in connection with such issue or sale, (2)
insofar as it consists of property (including securities) other
than cash, be computed at the fair value thereof at the time of
such issue or sale, as determined in good faith by the Board of
Directors of the Corporation, and (3) in case additional shares
of Common Stock are issued or sold together with other stock or
securities or other assets of the Corporation for a consideration
which covers both, be the portion of such consideration so
received, computed as provided in clauses (1) and (2) above,
allocable to such additional shares of Common Stock, all as
determined in good faith by the Board of Directors of the
Corporation; (y) additional shares of Common Stock deemed to have
been issued pursuant to subparagraph 5(ii)(G) relating to Rights,
shall be deemed to have been issued for a consideration per share
determined by dividing (1) the total amount, if any, received by
the Corporation as consideration for the issue, sale or grant of
the Rights in question, less the value of the Rights not actually
received by the Corporation as consideration therefor, plus the
minimum aggregate amount of additional consideration (as set
forth in the instruments relating thereto, without regard to any
provisions contained therein for a subsequent adjustment of such
consideration to protect against dilution) payable to the
Corporation upon the exercise in or the conversion or exchange of
such Rights or, in the case of Rights which are rights, options
or warrants for convertible securities, the exercise of such
Rights for convertible securities and the conversion or exchange
of such convertible securities, in each case computing such
consideration as provided in the foregoing clause (x) of this
subparagraph 5(ii)(I), by (2) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for subsequent
adjustment of such number to protect against dilution) issuable
upon the exercise, conversion or exchange of such Rights; and,
(z) additional shares of Common Stock deemed to have been issued
pursuant to subparagraph 5(ii)(D) and (F), relating to stock
dividends, stock splits, etc., shall be deemed to, have been
issued for no consideration. For the purposes of this paragraph
5, the term "Common Stock" shall mean (i) the class of stock
designated as Common Stock in the Certificate of Incorporation of
the Corporation as may be amended as of the date hereof, or (ii)
any other class of stock resulting from successive changes or
reclassification of such Common Stock consisting solely of
changes in par value or from par value to no par value, or from
no par value to par value.
(J) No adjustment in the Conversion Price shall be
required unless explicitly provided for in this paragraph 5 and
unless such adjustment (plus any adjustments not previously made
by reason of this subparagraph 5(ii)(J)), would require an
increase or decrease of at least five percent (5%) in such price;
provided, however, that any adjustments which by reason of this
-------- -------
subparagraph 5(ii)(J) are not required to be made shall be
carried forward and taken into account in any subsequent
adjustment. All calculations under this subparagraph 5(ii)(J)
shall be made to the nearest cent.
(K) No adjustment shall be made (1) upon conversion of
the Initial Series Preferred Stock, (2) upon exercise of options
and/or warrants of the Corporation outstanding on the date hereof
or to be issued to underwriters in connection with the Corporation's
initial public offering of its Common Stock and the Initial Series
Preferred Stock, and (3) with respect to common stock or options
thereafter granted to employees, officers, directors or
stockholders of or consultants to the Corporation, pursuant to
common stock or stock option plans, provided that, in the case of
all such stock plans, 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 Initial Series
Preferred Stock then outstanding.
(L) Whenever the Conversion Price is adjusted pursuant
to any of the foregoing provisions of this paragraph 5, the
Corporation shall forthwith prepare a written statement signed by
the president or any vice president and the treasurer or any
assistant treasurer or the secretary or any assistant secretary
of the Corporation, setting forth the adjusted Conversion Rate
determined as provided in the paragraph 5, and in reasonable
detail the facts requiring such adjustment. Such statement shall
be filed among the permanent records of the Corporation and a
copy thereof shall be furnished to any Initial Series Holder
requesting the same, and shall at all reasonable times during
business hours be open to inspection by the Initial Series
Holders. Within 10 days of the event requiring an adjustment,
the Corporation shall also cause a notice, stating that such an
adjustment has been made and setting forth the adjusted
Conversion Rate, to be mailed, first-class, postage prepaid, to
all then Initial Series Holders of record at their addresses as
the same appear on the stock records of the Corporation.
(M) If a Initial Series Holder has delivered notice
to the Corporation of its desire to convert all or a portion, of
its shares of Initial Series Preferred Stock, and certificates,
duly endorsed for conversion in respect of such shares and cash,
if any, required by subparagraph 5(ii)(C) hereof, then all shares
of Initial Series Preferred Stock so tendered to the Corporation
shall be deemed to be no longer outstanding and, notwithstanding
the failure of the Corporation to issue the Common Stock, such
Initial Series Holder shall be deemed, for all purposes (except
as set forth in the next sentence of this subparagraph 5(ii)(M)),
to be a holder of the number of shares of Common Stock into which
the shares of Initial Series Preferred Stock such Initial Series
Holder is entitled to receive pursuant to the terms of this
paragraph 5 in each case as of the close of business on the date
on which such conversion notice is delivered. In the event such
Initial Series Holder has delivered notice to the Corporation of
his desire to convert all or a portion of his shares of Initial
Series Stock, such Initial Series Holder shall retain the
right to receive all Cumulated Initial Series Dividends payable
on the shares so converted, as provided in this paragraph 5,
notwithstanding such conversion.
(iii) The Corporation shall at all times reserve and
keep available out of its authorized but unissued Common Stock
the full number or shares of Common Stock deliverable upon the
conversions of all the then outstanding shares of Initial Series
Preferred Stock and shall take all such action and obtain all
such permits or orders as may be necessary to enable the
Corporation to validly and legally issue fully paid and
non-assessable shares of Common Stock upon the conversion of
Initial Series Preferred Stock. The Corporation shall pay any
and all transfer, stamp and other like taxes that may be payable
in respect of tho issuance or delivery to a Initial Series
Holder of shares of Common Stock or conversion of the Initial
Series Preferred Stock by such holder.
6. Liquidation Price. In the event of any voluntary
-----------------
or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, the amount that shall be paid to a
Initial Series Holder of each share of Initial Series Preferred
Stock shall be $10.00 and an additional sum equal to all
Cumulated Initial Series Dividends on a share of Initial Series
Preferred Stock (hereinafter called the "Liquidation Price"), and
no more. Upon any liquidation, dissolution or winding-up of the
Corporation, the Initial Series Holders will be entitled to be
paid, after payment or provision for payment of the debts and
other liabilities of the Corporation and after payment or
provision for payment is made upon any Senior Securities, but
before any Distribution or payment is made upon any Junior
Securities, an amount in cash equal to the aggregate Liquidation
Price of all shares outstanding, and the Initial Series Holders
will not be entitled to any further payment. If, upon any such
liquidation, dissolution or winding-up of the Corporation, the
Corporation's assets to be distributed among the Initial Series
Holders and the holders of Parity Securities (the "Parity
Holders") are insufficient to permit payment in full to such
Initial Series Holders and the Parity Holders of the aggregate
amount which they are entitled to be paid, then the available
assets to be distributed will be distributed ratably among such
Initial Series Holders and Parity Holders based upon the
aggregate Liquidation Price of the Initial Series Preferred
Stock and the aggregate liquidation preference of any Parity
Securities held by each such Initial Series Holder and Parity
Holder, respectively. The Corporation will mail written notice
of such liquidation, dissolution or winding-up, not less than 30
days prior to the payment date stated therein, to each Initial
Series Holder of record. Neither the consolidation or merger of
the Corporation into or with any other corporation or any other
person, nor the sale or transfer by the Corporation of all or any
part of its assets, nor the reduction of the capital stock of the
Corporation will be deemed to be a liquidation, dissolution or
winding-up, voluntary or involuntary, of the Corporation within
the meaning of paragraphs 2 and 6.
7. Redemption.
----------
(i) Time of Redemption. The Corporation may, at its option,
------------------
redeem shares of the Initial Series Preferred Stock, in whole or
in part, out of funds legally available therefor, by action of
the Board of Directors, at any time after March __, 2000, at a
redemption price of $10.00 per share, plus all Cumulated Initial
Series Dividends on a share of Initial Series Preferred Stock,
upon notice and in the manner set forth in, and subject to the
conditions of, this paragraph 7; provided the current market
--------
price of the Common Stock (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 Small Cap 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 of
the Corporation) (the "Market Price") equals or exceeds $15.00
per share for at least 20 consecutive trading days ending no more
than 10 trading days prior to the date of notice of redemption.
In addition, the Corporation may, at its option, redeem the
Initial Series Preferred Stock, in whole or in part, out of
funds legally available therefor, by action of the Board of
Directors, at any time on or after March __, 2001 at the per
share redemption prices set forth below plus all Cumulated
Initial Series Dividends on a share of Initial Series Preferred
Stock, upon notice and in the manner set forth in, and subject to
the conditions of this paragraph 7:
Redemption Price
Date of Redemption Per Share
------------------ ----------------
March , 2001 to March , 2002 $
March , 2002 to March , 2003 $
March , 2003 to March , 2004 $
March , 2004 and thereafter $
(ii) Priority of Redemption. None of the shares of any
----------------------
class or series of Parity Securities or Junior Securities shall
be redeemed, repurchased or otherwise acquired unless full
Cumulated Initial Series Dividends have been, or
contemporaneously are, paid or declared and set apart for such
payment on the Initial Series Preferred Stock for all dividend
periods terminating on or prior to the date of payment of such
full Cumulated Initial Series Dividends. None of the shares of
Initial Series Preferred Stock shall be redeemed, repurchased or
otherwise acquired unless full cumulative dividends have been, or
contemporaneously are, paid or declared and set apart for payment
on the Parity Securities or Senior Securities, for all dividend
periods terminating on or prior to the Redemption Date of Initial
Series Preferred Stock.
8. Procedures for Redemption. The Initial Series
-------------------------
Preferred Stock shall be redeemed pursuant to subparagraph 7(i)
in the following manner:
(A) Shares of the Initial Series Preferred Stock
redeemed, repurchased or otherwise acquired by the Corporation
shall be retired and canceled and shall no longer be available
for issuance as Initial Series Preferred Stock.
(B) In the event of a redemption of shares of Initial
Series Preferred Stock pursuant to subparagraph 7(i), notice of
redemption of shares of Initial Series Preferred Stock shall be
given by the Corporation, not less than 30 nor more than 60 days
prior to the Business Day designated in such notice (the
"Redemption Date"), by first class mail to Initial Series
Holders at their respective addresses then appearing on the
records of the Corporation, and shall also be published, on or
about the date of such mailing, in the National Edition of the
Wall Street Journal. Such notice of redemption shall specify the
Redemption Date, the redemption price plus the Cumulated Initial
Series Dividends on a share of Initial Series Preferred Stock,
if any (the "Redemption Price"), the total number of shares of
Initial Series Preferred Stock to be redeemed and, if fewer than
all the shares held by such Initial Series Holder, the number of
shares to be redeemed from such holder, and the place or places
of payment. The conversion rights of the Initial Series Holders
shall continue until the Redemption Date (provided no default by
the Corporation in the payment of the redemption price shall have
occurred and be continuing, and in the event of any such default
the Initial Series Holders' conversion rights shall continue
until such shares are actually redeemed, exchanged or converted,
and such notice shall state the then effective Conversion Price
and that the right of Initial Series Holders to exercise their
conversion rights shall terminate at the close of business on the
Redemption Date (provided no default by the Corporation in the
payment of the redemption price shall have occurred and be
continuing). On or before the Redemption Date, each Initial
Series Holder shall surrender to the Corporation or its
designated agent, at such place as it may designate in the
redemption notice, certificates, duly endorsed for transfer,
evidencing the number of shares of Initial Series Preferred
Stock held by such Initial Series Holder and being redeemed.
Upon such surrender, the Initial Series Holder shall be entitled
to receive payment of the Redemption Price without interest.
(C) If, on the Redemption Date, (1) notice of
redemption has been mailed or delivered as provided herein, (2)
the Corporation has deposited with an independent paying agent
funds necessary to pay the amount due for all shares of Initial
Series Preferred Stock subject to such redemption, and (3) all
such funds are available for the sole purpose of paying such
amount, then, unless the Corporation defaults on the payment of
the Redemption Price, all shares of Initial Series Preferred
Stock subject to redemption shall, whether or not certificates
for such shares have been surrendered for cancellation, be deemed
to be no longer outstanding for any purpose and all rights with
respect to such shares shall cease, except the right of the
Initial Series Holder to receive the redemption price, without
interest; provided, however, that the Corporation shall not have
-------- -------
to so redeem any shares of Initial Series Preferred Stock which
have been converted to Common Stock prior to the date of such
redemption. If the Corporation shall not have funds legally
available for redemption of shares to be redeemed pursuant to
subparagraph 7(i) on the Redemption Date, the notice of
redemption shall be null and void and at such time as the
Corporation shall have funds legally available for redemption of
such shares and shall determine to redeem the Initial Series
Preferred Stock on the terms and conditions set forth in
subparagraph 7(i), a new notice of redemption to Initial Series
Holders shall be required to effect such redemption.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be signed by John Luciani, its Chairman of the
Board and Chief Executive Officer, and attested to by its
Secretary this ____ day of March 1997.
GRAND COURT LIFESTYLES, INC.
By:_________________________________
John Luciani
Chairman of the Board and Chief
Executive Officer
ATTEST:
___________________________________
Secretary
REID & PRIEST LLP
40 West 57th Street
New York, NY 10019-4097
Telephone 212 603-2000
Fax 212 603-2001
Exhibit 5(a)
and 8
New York, New York
March 10, 1997
Grand Court Lifestyles, Inc.
One Executive Drive
Fort Lee, New Jersey 07024
Ladies and Gentlemen:
We are acting as special counsel to Grand Court
Lifestyles, Inc., a Delaware corporation (the "Company"), in
connection with the proposed issuance and sale (the "Public
Offering") to a group of underwriters (the "Underwriters") of (i)
up to 1,725,000 shares of the Company's Common Stock, $.01 par
value (the "Common Stock"), of which 300,000 shares will be sold
by selling stockholders (the "Selling Stockholders") and (ii) up
to 1,725,000 shares of the Company's Senior Convertible
Redeemable Preferred Stock, $.0001 par value, which will be
convertible into Common Stock (the "Convertible Preferred Stock")
pursuant to an agreement among the Company, the Selling
Stockholders and the Underwriters (the "Underwriting Agreement");
and the issuance of warrants (the "Warrants") to purchase up to
150,000 shares of Common Stock and up to 150,000 shares of
Convertible Preferred Stock pursuant to an agreement between the
Company and the representative for the Underwriters (the "Warrant
Agreement") (the Common Stock and the Convertible Preferred
Stock, including the Common Stock and Convertible Preferred Stock
to be issued upon exercise of the Warrants and the Common Stock
to be issued upon conversion of the Convertible Preferred Stock
are, collectively, the "Securities"), all as contemplated by the
registration statement on Form S-1 filed by the Company with the
Securities and Exchange Commission on June 14, 1996, as amended,
for the registration of the Securities under the Securities Act
of 1933, as amended (the "Act"), as amended to date and
hereafter, said registration statement being hereinafter called
the "Registration Statement".
We are of the opinion that, subject to the
qualifications hereinafter expressed:
<PAGE>
Grand Court -2- March 10, 1997
Lifestyles, Inc.
1. The Company is a corporation duly organized and
validly existing under the laws of the State of Delaware.
2. When:
(a) the Registration Statement shall have become
effective under the Act;
(b) the Company's Board of Directors or a duly
authorized committee thereof shall have taken such action as
may be necessary to authorize the execution and delivery of
the Underwriting Agreement, the execution and delivery of
the Warrant Agreement and the issuance and sale of the
Securities on the terms set forth in or contemplated by the
Registration Statement, the Underwriting Agreement and the
Warrant Agreement, and to authorize such other action as may
be necessary in connection with the consummation of the
issuance and sale of the Securities;
(c) the Company's Board of Directors or a duly
authorized committee thereof and the Company's stockholders
shall have taken such action as may be necessary to
authorize an amendment to the Company's Certificate of
Incorporation to reflect the change in the Company's
capitalization contemplated by the Registration Statement;
(d) the Company shall have caused to be filed with the
Secretary of State of the State of Delaware such Restated
Certificate of Incorporation;
(e) in the case of the Convertible Preferred Stock,
the Company's Board of Directors or a duly authorized
committee thereof shall have taken such action as may be
necessary to authorize the creation of the Convertible
Preferred Stock as a series of the Company's preferred stock
having such designation, preferences and rights set forth in
the Registration Statement;
(f) in the case of the Convertible Preferred Stock,
the Company shall have caused to be filed with the Secretary
of State of the State of Delaware a Certificate of
Designation, Preferences and Rights setting forth the terms
of the Convertible Preferred Stock;
<PAGE>
Grand Court -3- March 10, 1997
Lifestyles, Inc.
(g) in the case of the Common Stock, the Company's
Board of Directors or a duly authorized committee thereof
shall have taken such action as may be necessary to
authorize a 1,626.1925-for-1 split of the Common Stock;
(h) in the case of Securities issued in connection
with the Public Offering, such Securities shall have been
issued, sold and delivered by the Company to the
Underwriters against payment therefor or sold and delivered
by Selling Stockholders to the Underwriters against payment
therefor, all as contemplated by, and in conformity with,
the Registration Statement, the Underwriting Agreement and
the Company's Restated Certificate of Incorporation;
(i) in the case of Securities to be issued upon
exercise of Warrants, such Securities shall have been
issued, sold and delivered by the Company to the holders of
such Warrants against payment therefor, all as contemplated
by, and in conformity with, the Registration Statement, the
Warrant Agreement and the Company's Restated Certificate of
Incorporation; and
(j) in the case of Common Stock to be issued upon
conversion of Convertible Preferred Stock, such Common Stock
shall have been issued upon conversion of the Convertible
Preferred Stock in accordance with the terms of such
Convertible Preferred Stock,
each of the Securities shall have been validly issued and will be
fully paid and non-assessable.
We are members of the Bar of the State of New York.
This opinion is limited to the laws of the State of New York, the
General Corporation Law of the State of Delaware and the Federal
law of the United States.
We confirm our opinion as set forth under the caption
"Certain Federal Income Tax Considerations" in the prospectus
constituting a part of the Registration Statement ("Prospectus").
<PAGE>
Grand Court -4- March 10, 1997
Lifestyles, Inc.
We hereby authorize and consent to the use of this
opinion as Exhibit 5(a) and 8 to the Registration Statement, and
authorize and consent to the references to our firm in the
Registration Statement and in the Prospectus.
Very truly yours,
/s/ Reid & Priest LLP
REID & PRIEST LLP
Exhibit 10.1
GRAND COURT LIFESTYLES, INC.
1996 STOCK OPTION AND PERFORMANCE AWARD PLAN
_______________
EFFECTIVE AS OF FEBRUARY 24, 1997
<PAGE>
GRAND COURT LIFESTYLES, INC.
1996 STOCK OPTION AND PERFORMANCE AWARD PLAN
INTRODUCTION
Grand Court Lifestyles, Inc., a Delaware corporation
(hereinafter referred to as the "Corporation"), hereby
establishes an incentive compensation plan to be known as the
"Grand Court Lifestyles, Inc. 1996 Stock Option and Performance
Award Plan" (hereinafter referred to as the "Plan"), as set forth
in this document. The Plan permits the grant of Non-Qualified
Stock Options, Incentive Stock Options, Stock Appreciation
Rights, Restricted Stock, Performance Units and Performance
Shares.
The Plan shall become effective as of February 24,
1997. However, it shall be rendered null and void and have no
effect, and all Plan Awards granted hereunder shall be canceled,
if the Plan is not approved by a majority vote of the
Corporation's stockholders within twelve (12) months of such
date.
The purpose of the Plan is to promote the success and
enhance the value of the Corporation by linking the personal
interests of Participants to those of the Corporation's
stockholders by providing Participants with an incentive for
outstanding performance. The Plan is further intended to provide
flexibility to the Corporation in its ability to motivate, and
retain the services of, Participants upon whose judgment,
interest and special effort the successful conduct of its
operations is largely dependent.
The Plan also provides pay systems that support the
Corporation's business strategy and emphasizes pay-for-
performance by tying reward opportunities to carefully determined
and articulated performance goals at corporate, operating unit,
business unit and/or individual levels.
<PAGE>
DEFINITIONS
For purposes of this Plan, the following terms shall be
defined as follows unless the context clearly indicates
otherwise:
(a) "Code" shall mean the Internal Revenue Code of
----
1986, as amended, and the rules and regulations thereunder.
(b) "Committee" shall mean the Board of Directors of
---------
the Corporation or any committee of two or more persons
designated by the Board of Directors of the Corporation to serve
as the Committee. If the Committee is not composed of the entire
Board of Directors of the Corporation, it shall be composed
solely of at least two Non-Employee Directors (as defined in Rule
16b-3 promulgated under the Exchange Act).
(c) "Common Stock" shall mean the common stock, par
------------
value $0.01 per share, of the Corporation.
(d) "Corporation" shall mean Grand Court Lifestyles,
-----------
Inc., a Delaware corporation.
(e) "Disability" shall have the same meaning as the
----------
term "permanent and total disability" under Section 22(e)(3) of
the Code.
(f) "Exchange Act" shall mean the Securities Exchange
------------
Act of 1934, as amended, and the rules and regulations
thereunder.
(g) "Fair Market Value" of the Corporation's Common
-----------------
Stock on a Trading Day shall mean the last reported sale price
for Common Stock or, in case no such reported sale takes place on
such Trading Day, the average of the closing bid and asked prices
for the Common Stock for such Trading Day, in either case on the
principal national securities exchange on which the Common Stock
is listed or admitted to trading, or if the Common Stock is not
listed or admitted to trading on any national securities
exchange, but is traded in the over-the-counter market, the
closing sale price of the Common Stock or, if no sale is publicly
reported, the average of the closing bid and asked quotations for
the Common Stock, as reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or any
comparable system or, if the Common Stock is not listed on NASDAQ
or a comparable system, the closing sale price of the Common
Stock or, if no sale is publicly reported, the average of the
closing bid and asked prices, as furnished by two members of the
National Association of Securities Dealers, Inc. who make a
market in the Common Stock selected from time to time by the
Corporation for that purpose. In addition, for purposes of this
definition, a "Trading Day" shall mean, if the Common Stock is
listed on any national securities exchange, a business day during
which such exchange was open for trading and at least one trade
of Common Stock was effected on such exchange on such business
day, or, if the Common Stock is not listed on any national
securities exchange but is traded in the over-the-counter market,
a business day during which the over-the-counter market was open
for trading and at least one "eligible dealer" quoted both a bid
and asked price for the Common Stock. An "eligible dealer" for
any day shall include any broker-dealer who quoted both a bid and
asked price for such day, but shall not include any broker-dealer
who quoted only a bid or only an asked price for such day. In
the event the Corporation's Common Stock is not publicly traded,
the Fair Market Value of such Common Stock shall be determined by
the Committee in good faith.
(h) "Freestanding SAR" shall mean an SAR that is
----------------
granted independently of any Option.
(i) "Good Cause" shall mean (i) a Participant's
----------
willful or gross misconduct or willful or gross negligence in the
performance of his duties for the Corporation or for any Parent
or Subsidiary after prior written notice of such misconduct or
negligence and the continuance thereof for a period of 30 days
after receipt by such Participant of such notice, (ii) a
Participant's intentional or habitual neglect of his duties for
the Corporation or for any Parent or Subsidiary after prior
written notice of such neglect, or (iii) a Participant's theft or
misappropriation of funds of the Corporation or of any Parent or
Subsidiary or commission of a felony.
(j) "Incentive Stock Option" shall mean a stock option
----------------------
satisfying the requirements for tax-favored treatment under
Section 422 of the Code.
(k) "Non-Qualified Option" shall mean a stock option
--------------------
which does not satisfy the requirements for, or which is not
intended to be eligible for, tax-favored treatment under Section
422 of the Code.
(l) "Option" shall mean an Incentive Stock Option or a
------
Non-Qualified Stock Option granted pursuant to the provisions of
Section V hereof.
(m) "Optionee" shall mean a Participant who is
--------
granted an Option under the terms of this Plan.
(n) "Parent" shall mean a parent corporation of the
------
Corporation within the meaning of Section 424(e) of the Code.
(o) "Participant" shall mean any employee
-----------
participating under the Plan.
(p) "Performance Share" shall mean a Plan Award
-----------------
granted pursuant to the provisions of Section VII hereof, with
each such Award being denominated in terms of one share of Common
Stock and nominally being based upon the performance of the
Corporation's Common Stock, or any other factor as determined by
the Committee.
(q) "Performance Unit" shall mean a Plan Award granted
----------------
pursuant to the provisions of Section VII hereof, which Award may
be based upon any performance factor established by the
Committee, as set forth under such Section.
(r) "Plan Award" shall mean an Option, Performance
----------
Share, Performance Unit Stock Appreciation Right or share of
Restricted Stock granted pursuant to the terms of this Plan.
(s) "Restricted Stock" shall mean a grant of one or
----------------
more shares of Common Stock subject to certain restrictions as
provided under Section VII hereof.
(t) "Securities Act" shall mean the Securities Act of
--------------
1933, as amended, and the rules and regulations thereunder.
(u) "Stock Appreciation Right" or "SAR" shall mean a
------------------------ ---
right, granted alone or in connection with a related Option,
designated as a SAR, to receive a payment on the day the right is
exercised, pursuant to the terms of Section VI hereof. Each SAR
shall be denominated in terms of one share of Common Stock.
(v) "Subsidiary" shall mean a subsidiary corporation
----------
of the Corporation within the meaning of Section 424(f) of the
Code.
(w) "Tandem SAR" shall mean an SAR that is granted in
----------
connection with a related Option, the exercise of which shall
require forfeiture of the right to purchase a share of Common
Stock under the related Option (and when a share of Common Stock
is purchased under such Option, the Tandem SAR being similarly
canceled).
SECTION I
ADMINISTRATION
The Plan shall be administered by the Committee.
Subject to the provisions of the Plan, the Committee may
establish from time to time such regulations, provisions,
proceedings and conditions of awards which, in its opinion, may
be advisable in the administration of the Plan. A majority of
the Committee shall constitute a quorum, and, subject to the
provisions of Section IV of the Plan, the acts of a majority of
the members present at any meeting at which a quorum is present,
or acts approved in writing by a majority of the Committee, shall
be the acts of the Committee as a whole.
SECTION II
SHARES AVAILABLE
Subject to the adjustments provided in Section IX of
the Plan, the aggregate number of shares of the Common Stock
which may be granted for all purposes under the Plan shall be two
million five hundred thousand (2,500,000) shares. Shares of
Common Stock underlying awards of securities (derivative or not)
and shares of Common Stock awarded hereunder (whether or not on a
restricted basis) shall be counted against the limitation set
forth in the immediately preceding sentence and may be reused to
the extent the related Award to any individual is settled in cash
or expires, is terminated unexercised, or is forfeited. Stock
granted to satisfy Awards under the Plan may be authorized and
unissued shares of the Common Stock, issued shares of such Common
Stock held in the Corporation's treasury or shares of Common
Stock acquired on the open market.
SECTION III
ELIGIBILITY
Officers and key employees of the Corporation, or of
any Parent or Subsidiary, who are regularly employed on a
salaried basis as common law employees shall be eligible to
participate in the Plan. Directors of the Corporation or of any
Parent or Subsidiary who are not employees shall also be eligible
to participate under the Plan and where appropriate hereunder,
shall be referred to as "employees" and their service as
directors as "employment".
SECTION IV
AUTHORITY OF COMMITTEE
The Plan shall be administered by, or under the
direction of, the Committee, which shall administer the Plan so
as to comply at all times with Section 16 of the Exchange Act, to
the extent such compliance is required, and, subject to the Code,
shall otherwise have plenary authority to interpret the Plan and
to make all determinations specified in or permitted by the Plan
or deemed necessary or desirable for its administration or for
the conduct of the Committee's business. Subject to the
provisions of Section XIII hereof, all interpretations and
determinations of the Committee may be made on an individual or
group basis and shall be final, conclusive, and binding on all
interested parties. Subject to the express provisions of the
Plan, the Committee shall have authority, in its discretion, to
determine the persons to whom Plan Awards shall be granted, the
times when such Plan Awards shall be granted, the number of Plan
Awards, the purchase price or exercise price of each Plan Award,
the period(s) during which such Plan Award shall be exercisable
(whether in whole or in part), the restrictions to be applicable
to Plan Awards and the other terms and provisions thereof (which
need not be identical). In addition, the authority of the
Committee shall include, without limitation, the following:
(a) Financing. The arrangement of temporary financing
---------
for an Optionee by registered broker-dealers, under the rules and
regulations of the Federal Reserve Board, for the purpose of
assisting the Optionee in the exercise of an Option, such
authority to include the payment by the Corporation of the
commissions of the broker-dealer;
(b) Procedures for Exercise of Option. The
---------------------------------
establishment of procedures for an Optionee (i) to exercise an
Option by payment of cash (ii) to have withheld from the total
number of shares of Common Stock to be acquired upon the exercise
of an Option that number of shares having a Fair Market Value,
which, together with such cash as shall be paid in respect of
fractional shares, shall equal the Option exercise price of the
total number of shares of Common Stock to be acquired, (iii) to
exercise all or a portion of an Option by delivering that number
of shares of Common Stock already owned by him having a Fair
Market Value which shall equal the Option exercise price for the
portion exercised and, in cases where an Option is not exercised
in its entirety, and subject to the requirements of the Code, to
permit the Optionee to deliver the shares of Common Stock thus
acquired by him in payment of shares of Common Stock to be
received pursuant to the exercise of additional portions of such
Option, the effect of which shall be that an Optionee can in
sequence utilize such newly acquired shares of Common Stock in
payment of the exercise price of the entire Option, together with
such cash as shall be paid in respect of fractional shares and
(iv) to engage in any form of "cashless" exercise.
(c) Withholding. The establishment of a procedure
-----------
whereby a number of shares of Common Stock or other securities
may be withheld from the total number of shares of Common Stock
or other securities to be issued upon exercise of an Option,
Stock Appreciation Right or other grant or award, as applicable,
or for the tender of shares of Common Stock owned by the
Participant to meet the obligation of withholding for taxes
incurred by the Optionee upon such exercise.
SECTION V
STOCK OPTIONS
The Committee shall have the authority, in its
discretion, to grant Incentive Stock Options or to grant
Non-Qualified Stock Options or to grant both types of Options.
Notwithstanding anything contained herein to the contrary, an
Incentive Stock Option may be granted only to common law
employees of the Corporation or of any Parent or Subsidiary now
existing or hereafter formed or acquired, and not to any director
or officer who is not also such a common law employee. The terms
and conditions of the Options shall be determined from time to
time by the Committee; provided, however, that the Options
-------- -------
granted under the Plan shall be subject to the following:
(a) Exercise Price. The Committee shall establish the
--------------
exercise price at the time any Option is granted at such amount
as the Committee shall determine; provided, however, that the
-------- -------
exercise price for each share of Common Stock purchasable under
any Incentive Stock Option granted hereunder shall be such amount
as the Committee shall, in its best judgment, determine to be not
less than one hundred percent (100%) of the Fair Market Value per
share of Common Stock at the date the Option is granted; and
provided, further, that in the case of an Incentive Stock Option
granted to a person who, at the time such Incentive Stock Option
is granted, owns shares of stock of the Corporation or of any
Parent or Subsidiary which possess more than ten percent (10%) of
the total combined voting power of all classes of shares of stock
of the Corporation or of any Parent or Subsidiary, the exercise
price for each share of Common Stock shall be such amount as the
Committee, in its best judgment, shall determine to be not less
than one hundred ten percent (110%) of the Fair Market Value per
share of Common Stock at the date the Option is granted. The
exercise price will be subject to adjustment in accordance with
the provisions of Section IX of the Plan.
(b) Payment of Exercise Price. The price per share of
-------------------------
Common Stock with respect to each Option shall be payable at the
time the Option is exercised. Such price shall be payable in
cash or pursuant to any of the methods set forth in Sections
IV(a) or (b) hereof, as determined by the Participant. Shares of
Common Stock delivered to the Corporation in payment of the
exercise price shall be valued at the Fair Market Value of the
Common Stock on the date preceding the date of the exercise of
the Option.
(c) Exercisability of Options. Each Option shall be
-------------------------
exercisable in whole or in installments, and at such time(s), and
subject to the fulfillment of any conditions on exercisability as
may be determined by the Committee at the time of the grant of
such Options. The right to purchase shares of Common Stock shall
be cumulative so that when the right to purchase any shares of
Common Stock has accrued such shares of Common Stock or any part
thereof may be purchased at any time thereafter until the
expiration or termination of the Option.
(d) Expiration of Options. No Option by its terms
---------------------
shall be exercisable after the expiration of ten (10) years from
the date of grant of the Option; provided, however, in the case
-------- -------
of an Incentive Stock Option granted to a person who, at the time
such Option is granted, owns shares of stock of the Corporation
or of any Parent or Subsidiary possessing more than ten percent
(10%) of the total combined voting power of all classes of shares
of stock of the Corporation or of any Parent or Subsidiary, such
Option shall not be exercisable after the expiration of five (5)
years from the date such Option is granted.
(e) Exercise Upon Death of Optionee. In the event of
-------------------------------
the death of the Optionee prior to his termination of employment
with the Corporation or with any Parent or Subsidiary, any
nonvested Options granted to such Optionee shall vest immediately
and his estate (or other beneficiary, if so designated in writing
by the Participant) shall have the right, until the expiration
date of the Option(s), to exercise his Option(s) with respect to
all or any part of the shares of Common Stock as to which the
deceased Optionee had not exercised his Option(s) at the time of
his death, regardless of whether such Option or Options were
fully exercisable at such time.
(f) Exercise Upon Disability of Optionee. If the
------------------------------------
employment by the Corporation or by any Parent or Subsidiary of
an Optionee is terminated because of such Optionee's Disability,
any nonvested Options granted to such Optionee shall vest
immediately and he shall have the right, within one (1) year
after the date of such termination in the case of an Incentive
Stock Option (but in no case after the expiration of the
Option(s)), and until the expiration date of the Option(s) in the
case of a Non-Qualified Stock Option, to exercise his Option(s)
with respect to all or any part of the shares of Common Stock as
to which he had not exercised his Option(s) at the time of such
termination, regardless of whether such Option or Options were
fully exercisable at such time.
(g) Exercise Upon Optionee's Other Termination of
---------------------------------------------
Employment. Except as provided in the following sentence, if the
----------
employment of an Optionee by the Corporation or by any Parent or
Subsidiary is terminated (in the case of an Optionee (with
respect to any Non-Qualified Options granted to such Optionee)
who is an employee and a director of the Corporation and/or any
Parent or Subsidiary, termination of service both as an employee
and as such a director) for any reason other than those specified
in Sections V(e) or (f), above, he shall have the right, within
three (3) months after the date of such termination in the case
of an Incentive Stock Option (but in no case after the expiration
date of the Option(s)), and until the expiration date of the
Option in the case of a Non-Qualified Stock Option, to exercise
his Option(s) only with respect to that number of shares of
Common Stock that he was entitled to purchase pursuant to
Option(s) that were exercisable immediately prior to such
termination. Notwithstanding the provisions of the immediately
preceding sentence, (i) if an Optionee's employment is terminated
by the Corporation or by any Parent or Subsidiary for Good Cause
or (ii) if an Optionee voluntarily terminates his employment with
the Corporation or with any Parent or Subsidiary without the
written consent of the Committee (in both cases, regardless of
whether such Optionee continues to serve as a director of the
Corporation or any Parent or Subsidiary), then the Optionee
shall, at the time of such termination of employment, forfeit his
rights to exercise any and all of such Option(s).
(h) Maximum Amount of Incentive Stock Options. Each
-----------------------------------------
Plan Award under which Incentive Stock Options are granted shall
provide that to the extent the aggregate of the (i) Fair Market
Value of the shares of Common Stock (determined as of the time of
the grant of the Option) subject to such Incentive Stock Option
and (ii) the fair market values (determined as of the date(s) of
grant of the option(s)) of all other shares of Common Stock
subject to incentive stock options granted to an Optionee by the
Corporation or any Parent or Subsidiary, which are exercisable
for the first time by any person during any calendar year,
exceed(s) one hundred thousand dollars ($100,000), such excess
shares of Common Stock shall not be deemed to be purchased
pursuant to Incentive Stock Options. The terms of the
immediately preceding sentence shall be applied by taking all
options, whether or not granted under this Plan, into account in
the order in which they are granted.
SECTION VI
STOCK APPRECIATION RIGHTS
(a) Tandem Stock Appreciation Rights. The Committee
--------------------------------
shall have the authority to grant Stock Appreciation Rights in
tandem with an Option, either at the time of grant of the Option
or by amendment. Each such Stock Appreciation Right shall be
subject to the same terms and conditions as the related Option,
if any, and shall be exercisable only at such times and to such
extent as the related Option is exercisable; provided, however,
-------- -------
that a Stock Appreciation Right may be exercised only when the
Fair Market Value of the Common Stock exceeds the exercise price
of the related Option. A Stock Appreciation Right shall entitle
the Optionee to surrender to the Corporation unexercised the
related Option, or any portion thereof, and to receive from the
Corporation in exchange therefor cash (as provided below) or that
number of shares of Common Stock having an aggregate value equal
to the excess of the Fair Market Value of one share of the Common
Stock of the Corporation on the day preceding the surrender of
such Option over the exercise price per share of Common Stock
multiplied by the number of shares of Common Stock provided for
under the Option, or portion thereof, which is surrendered;
provided, however, that no fractional shares shall be issued of
-------- -------
Common Stock (cash being delivered to the Participant in lieu of
such fractional shares). The number of shares of Common Stock
which may be received pursuant to the exercise of a Stock
Appreciation Right may not exceed the number of shares of Common
Stock provided for under the Option, or portion thereof, which is
surrendered. The Committee shall have the right, in its sole
discretion, to approve an election by a Participant to receive
cash in whole or in part in settlement of the Stock Appreciation
Right. Within thirty (30) days following the receipt by the
Committee of a request to receive cash in whole or in part in
settlement of a Stock Appreciation Right, the Committee shall, in
its sole discretion, either consent to or disapprove, in whole or
in part, such a request. A request to receive cash in whole or
in part in settlement of a Stock Appreciation Right may provide
that, in the event the Committee shall disapprove such request,
such request shall be deemed to be an exercise of such Stock
Appreciation Right for shares of Common Stock.
(b) Freestanding Stock Appreciation Rights. The
--------------------------------------
Committee also shall have the authority to grant Stock
Appreciation Rights unrelated to any Option that may be granted
hereunder. Each such Stock Appreciation Right shall be subject
to the terms and conditions as determined by the Committee.
Freestanding Stock Appreciation Rights shall entitle the Optionee
to surrender to the Corporation a portion or all of such rights
and to receive from the Corporation in exchange therefor cash (as
provided below) or that number of shares of Common Stock having
an aggregate value equal to the excess of the Fair Market Value
of one share of the Common Stock of the Corporation on the day
preceding the surrender of such Rights over the Fair Market Value
per share of Common Stock (determined as of the date the Stock
Appreciation Right was granted) multiplied by the number of Stock
Appreciation Rights which are surrendered; provided, however,
-------- -------
that no fractional shares of Common Stock shall be issued (cash
being delivered to the Participant in lieu of such fractional
shares). The Committee shall have the right, in its sole
discretion, to approve an election by a Participant to receive
cash in whole or in part in settlement of a Stock Appreciation
Right. Within thirty (30) days following the receipt by the
Committee of a request to receive cash in whole or in part in
settlement of a Stock Appreciation Right, the Committee shall, in
its sole discretion, either consent to or disapprove, in whole or
in part, such a request. A request to receive cash in whole or
in part in settlement of a Stock Appreciation Right may provide
that, in the event the Committee shall disapprove such request,
such request shall be deemed to be an exercise of such Stock
Appreciation Right for shares of Common Stock.
(c) Exercise of Stock Appreciation Rights. If the
-------------------------------------
Participant (i) voluntarily ceases to be an employee of the
Corporation, or of any Parent or Subsidiary, with the written
consent of the Committee, (ii) dies or becomes Disabled or (iii)
suffers an involuntary termination of his employment with the
Corporation or with any Parent or Subsidiary for reasons other
than Good Cause, the Plan Award earned under Section VI(b) with
respect to any outstanding Freestanding Stock Appreciation Rights
shall be determined as otherwise provided herein or in any
agreement executed by the Corporation and such Participant
hereunder. If the Participant ceases to be an employee of the
Corporation or of any Parent or Subsidiary for any other reason
(regardless of whether such Participant continues to serve as a
director/employee of the Corporation or any Parent or
Subsidiary), all Plan Awards granted under Section VI(b) shall be
forfeited.
SECTION VII
PERFORMANCE SHARES, RESTRICTED STOCK AND PERFORMANCE UNITS
The Committee shall have the authority to grant
Performance Shares, Restricted Stock or Performance Units either
separately or in combination with other Plan Awards. The terms
and conditions of Performance Shares, Restricted Stock or
Performance Units shall be determined from time to time by the
Committee, without limitation, except as otherwise provided in
the Plan. Furthermore:
(a) Performance Account. The Corporation shall
-------------------
establish a performance account for each Participant to whom
Performance Shares or Performance Units are granted, and the Per-
formance Shares or Performance Units granted shall be credited to
such account.
(b) Duration of Performance or Restriction Period.
---------------------------------------------
The duration of the performance or restriction period shall be
determined by the Committee at the time each such grant is made
and will be set forth under the Award Agreement. More than one
grant may be outstanding at any one time, and performance or
restriction periods may be of different lengths.
(c) Restricted Stock. Shares of Common Stock granted
----------------
in the form of Restricted Stock shall be registered in the name
of the Participant and, together with a stock power endorsed in
blank, deposited with the Corporation. With respect to such
Restricted Stock, the Participant shall generally have the rights
and privileges of a stockholder of the Corporation as to such
shares, including the right to vote such Restricted Stock, except
that the following restrictions shall apply: (i) the Participant
shall not be entitled to delivery of a certificate until the
expiration or termination of the restriction period, (ii) none of
the shares of Restricted Stock may be sold, transferred,
assigned, pledged, or otherwise encumbered or disposed of during
the restriction period and (iii) all of the shares of Restricted
Stock shall be forfeited by the Participant without further
obligation on the part of the Corporation as set forth in Section
VII(h) hereof. Cash and stock dividends with respect to the
Restricted Stock will be distributed as declared. Upon the
forfeiture of any Restricted Stock, such forfeited shares of
Common Stock shall be transferred to the Corporation without
further action by the Participant. Upon the expiration or
termination of the restriction period, the restrictions imposed
on the appropriate Restricted Stock shall lapse and a stock
certificate for the number of shares of Restricted Stock with
respect to which the restrictions have lapsed shall be delivered,
free of all such restrictions, except any that may be imposed by
law or by any applicable stockholders' agreement, to the
Participant. A Participant who files an election with the
Internal Revenue Service to include the fair market value of any
Restricted Stock in gross income while they are still subject to
restrictions shall promptly furnish the Corporation with a copy
of such election together with the amount of any federal, state,
local or other taxes that may be required to be withheld to
enable the Corporation to claim an income tax deduction with
respect to such election.
(d) Payments of Performance Shares/Performance Units.
------------------------------------------------
Any Performance Shares or Performance Units earned during a
performance period shall be paid in cash or in shares of Common
Stock (as set forth under the Award Agreement, or as otherwise
determined by the Committee) as soon as is practicable after the
end of the performance period to which such Plan Award relates.
(e) Performance Targets. At the time of each grant,
-------------------
the Committee shall establish performance targets (to be
satisfied during the performance period) and/or periods of
service to which the vesting of Performance Shares, Performance
Units and/or Restricted Stock shall be conditioned. The Committee
may also establish a relationship between performance targets and
the number of Performance Shares or the number or value of
Performance Units which shall be earned. The Committee also may
establish a relationship between performance results other than
the targets and the number of Performance Shares or Restricted
Stock and the number or value of Performance Units, if any, which
shall be earned. The Committee shall determine the measures of
performance to be used in determining the extent to which
Performance Shares or Performance Units are earned or to which
restrictions on Restricted Stock or units shall lapse.
Performance measures and targets may vary among grants. The
Committee may, in its sole discretion, make such adjustments to
performance targets, the number of Performance Shares or the
number or value of Performance Units which shall be earned, or
such other changes as it may deem necessary or advisable in the
event of material changes in the criteria used for establishing
performance targets which would result in the dilution or
enlargement of a Participant's award outside the goals intended
by the Committee at the time of the grant of the Plan Award.
(f) Dividend or Interest Equivalents for Performance
------------------------------------------------
Shares and Performance Units. The Committee may provide that
----------------------------
amounts equivalent to dividends or interest shall be payable with
respect to Performance Shares or Performance Units held in the
Participant's performance account. Such amounts shall be
credited to the performance account, and shall be payable to the
Participant in cash or in Common Stock, as set forth under the
terms of the Plan Award, at such time as the Performance Shares
or Performance Units are earned. The Committee further may
provide that amounts equivalent to interest or dividends held in
the performance accounts shall be credited to such accounts on a
periodic or other basis.
(g) Termination of Employment. If the Participant (i)
-------------------------
voluntarily ceases to be an employee of the Corporation, or of
any Parent or Subsidiary, with the written consent of the
Committee, (ii) dies or becomes Disabled, (iii) terminates his
employment with the Corporation or with any Parent or Subsidiary
due to retirement or (iv) suffers an involuntary termination of
his employment with the Corporation or with any Parent or
Subsidiary for reasons other than Good Cause, the Plan Award
earned under this Section with respect to any outstanding
Performance Shares, Restricted Stock, Performance Units or
interest or dividend equivalents shall be determined as otherwise
provided herein or in any agreement executed by such Participant
hereunder. If the Participant ceases to be an employee of the
Corporation or of any Parent or Subsidiary for any other reason
(regardless of whether such Participant continues to serve as a
director/employee of the Corporation or any Parent or
Subsidiary), all Plan Awards granted under this Section VII and
subject to restrictions shall be forfeited. In such case, the
Corporation shall have the right to complete the blank stock
power with respect to Restricted Stock and transfer the same to
its treasury.
SECTION VIII
DEFERRAL OF PAYMENTS
The Committee may establish procedures by which a
Participant may elect to defer payment of a Performance Share or
a Performance Unit. The Committee shall determine the terms and
conditions of such deferral. Any such deferral shall be subject
to the following:
(a) Contingent Nature of Allocation. Every allocation
-------------------------------
under the Plan to a performance account shall be considered
"contingent" and unfunded until any forfeiture restrictions under
the terms of the Plan Award expire or lapse, until all conditions
contained in the Plan Award are satisfied, and until any elective
deferral period expires. Such contingent allocations shall be
considered bookkeeping entries only, notwithstanding the
crediting of deemed "dividends" or "interest." Nothing
contained herein shall be construed as creating a trust or
fiduciary relationship between the Participant and the
Corporation or the Committee.
(b) Participant's Rights to Awards. Until the Plan
------------------------------
Award vests, the elective deferral period expires, and any
restrictions are lifted, the related amounts held in the
Participant's performance account cannot be sold, conveyed,
transferred, pledged, hypothecated, or assigned. Until the Plan
Award vests and becomes payable, such account balances shall be
the property of the Corporation. The Participant's right to such
account balances shall be subject to the claims of the general
creditors of the Corporation. Receipt of the Plan Award is
conditioned upon satisfactory compliance with the terms and
conditions of the such Plan Award and other requirements of the
Plan.
(c) Election to Defer Payment. If a Participant
-------------------------
desires to defer the normal receipt of Common Stock or cash due
him under a Plan Award, he must make an irrevocable election in a
calendar year prior to the calendar year or years in which he is
to perform services that will entitle him to the Plan Award.
Such election shall provide a fixed date or dates for the
termination of the deferral period. The Participant shall not be
permitted to receive his Plan Award prior to the end of the
elected deferral period, except in the event of his death,
Disability or termination of employment with the Corporation or
any Parent or Subsidiary.
SECTION IX
ADJUSTMENT OF SHARES; MERGER OR
CONSOLIDATION, ETC. OF THE CORPORATION
(a) Recapitalization, Etc. In the event there is any
----------------------
change in the Common Stock of the Corporation by reason of any
reorganization, recapitalization, stock split, stock dividend or
otherwise, there shall be substituted for or added to each share
of Common Stock theretofore appropriated or thereafter subject,
or which may become subject, to any Option, Stock Appreciation
Right, grant of Restricted Stock, Performance Share or
Performance Unit award, the number and kind of shares of stock or
other securities into which each outstanding share of Common
Stock shall be so changed or for which each such share shall be
exchanged, or to which each such share be entitled, as the case
may be, and the per share price thereof also shall be
appropriately adjusted. Notwithstanding the foregoing, (i) each
such adjustment with respect to an Incentive Stock Option shall
comply with the rules of Section 424(a) of the Code and (ii) in
no event shall any adjustment be made which would render any
Incentive Stock Option granted hereunder to be other than an
incentive stock option for purposes of Section 422 of the Code.
(b) Merger, Consolidation or Change in Control of
---------------------------------------------
Corporation. Upon (i) the merger or consolidation of the
-----------
Corporation with or into another corporation, (pursuant to which
the stockholders of the Corporation immediately prior to such
merger or consolidation will not, as of the date of such merger
or consolidation, own a beneficial interest in shares of voting
securities of the corporation surviving such merger or
consolidation having at least a majority of the combined voting
power of such corporation's then outstanding securities), if the
agreement of merger or consolidation does not provide for (1) the
continuance of the Options, Stock Appreciation Rights and shares
of Restricted Stock granted hereunder or (2) the substitution of
new Options, Stock Appreciation Rights or shares of Restricted
Stock for Options, Stock Appreciation Rights and shares of
Restricted Stock granted hereunder, or for the assumption of such
Options, Stock Appreciation Rights and shares of Restricted Stock
by the surviving corporation or (ii) the dissolution,
liquidation, or sale of all of, or substantially all of, the
assets, of the Corporation or (iii) the Change in Control of the
Corporation, (1) the holder of any such Option or Stock
Appreciation Right theretofore granted and still outstanding (and
not otherwise expired) shall have the right immediately prior to
the effective date of such merger, consolidation, dissolution,
liquidation, sale of assets or Change in Control of the
Corporation to exercise such Option(s) or Stock Appreciation
Right(s) in whole or in part without regard to any installment
provision that may have been made part of the terms and
conditions of such Option(s) or Stock Appreciation Right(s) and
(2) all restrictions regarding transferability and forfeiture on
shares of Restricted Stock shall be removed immediately prior to
the effective date of such merger, consolidation, dissolution,
liquidation, sale of assets or Change in Control of the
Corporation; provided that any conditions precedent to the
exercise of such Options or Stock Appreciation Rights and the
transfer of such shares of Restricted Stock, other than the
passage of time, have occurred. The Corporation, to the extent
practicable, shall give advance notice to affected Optionees and
holders of Stock Appreciation Rights or shares of Restricted
Stock of such merger, consolidation, dissolution, liquidation,
sale of assets or Change in Control of the Corporation. All such
Options and Stock Appreciation Rights which are not so exercised
shall be forfeited as of the effective time of such merger,
consolidation, dissolution, liquidation or sale of assets (but
not in the Change in Control of the Corporation).
(c) Effect of Merger or Consolidation. As of the
---------------------------------
effective date of the merger, consolidation, dissolution,
liquidation or sale of all or substantially all of the assets of
the Corporation, no Participant shall earn any additional
Performance Share or Performance Unit or dividend or interest
equivalent under this Plan. Furthermore, if the value of any
Performance Share or Performance Unit cannot be determined as of
such date because such Plan Award is conditioned upon the future
financial performance of the Corporation, such Performance Share
or Performance Unit (including any applicable dividend or
interest equivalents) shall be prorated based on the percentage
of the performance period completed prior to such date and based
upon the assumption that such financial performance criteria have
been satisfied at the maximum level. Any Performance Share or
Performance Unit payable after the date of the merger,
consolidation, dissolution, liquidation or sale of substantially
all of the assets of the Corporation shall be paid in cash, as of
the date such Performance Share or Performance Unit originally
was to have been paid, or as of such earlier date as may be
determined by the Corporation or its successor.
(d) Definition of Change in Control of the
--------------------------------------
Corporation. As used herein, a "Change in Control of the
-----------
Corporation" shall be deemed to have occurred if any person
(including any individual, firm, partnership or other entity)
together with all Affiliates and Associates (as defined under
Rule 12b-2 of the General Rules and Regulations promulgated under
the Exchange Act) of such person (but excluding (i) a trustee or
other fiduciary holding securities under an employee benefit plan
of the Corporation or any subsidiary of the Corporation, (ii) a
corporation owned, directly or indirectly, by the stockholders of
the Corporation in substantially the same proportions as their
ownership of the Corporation, (iii) the Corporation or any
subsidiary of the Corporation, (iv) John Luciani and Bernard M.
Rodin together with all Affiliates and Associates of either such
person, or (v) only as provided in the immediately following
sentence, a Participant together with all Affiliates and
Associates of the Participant) is or becomes the Beneficial Owner
(as defined in Rule 13d-3 promulgated under the Exchange Act),
directly or indirectly, of securities of the Corporation
representing 40% of more of the combined voting power of the
Corporation's then outstanding securities. The provisions of
clause(v) of the immediately preceding sentence shall apply only
with respect to the Option(s) held by the Participant who,
together with his Affiliates or Associates, if any, is or becomes
the direct or indirect Beneficial Owner of the percentage of
securities set forth in such clause.
SECTION X
MISCELLANEOUS PROVISIONS
(a) Administrative Procedures. The Committee may
-------------------------
establish any procedures determined by it to be appropriate in
discharging its responsibilities under the Plan. Subject to the
provisions of Section XIII hereof, all actions and decisions of
the Committee shall be final.
(b) Assignment or Transfer. No grant or award of any
----------------------
Plan Award (other than a Non- Qualified Option) or any rights or
interests therein shall be assignable or transferable by a
Participant except by will or the laws of descent and
distribution or pursuant to a domestic relations order. During
the lifetime of a Participant, Incentive Stock Options granted
hereunder shall be exercisable only by the Participant.
Performance Shares or Restricted Stock or Performance Units may
not be sold, assigned, transferred, redeemed, pledged or
otherwise encumbered during the restriction period, except as may
be provided in Section VIII(b) hereof.
(c) Investment Representation. In the case of Plan
-------------------------
Awards paid in shares of Common Stock or other securities, the
Committee may require, as a condition of receiving such
securities, that the Participant furnish to the Corporation such
written representations and information as the Committee deems
appropriate to permit the Corporation, in light of the existence
or nonexistence of an effective registration statement under the
Securities Act to deliver such securities in compliance with the
provisions of the Securities Act.
(d) Withholding Taxes. The Corporation shall have the
-----------------
right to deduct from all cash payments hereunder any federal,
state, local or foreign taxes required by law to be withheld with
respect to such payments. In the case of the issuance or
distribution of Common Stock or other securities hereunder, the
Corporation, as a condition of such issuance or distribution, may
require the payment (through withholding from the Participant's
salary, reduction of the number of shares of Common Stock or
other securities to be issued, or otherwise) of any such taxes.
Each Participant may satisfy the withholding obligations by
paying to the Corporation a cash amount equal to the amount
required to be withheld or by tendering to the Corporation a
number of shares of Common Stock having a value equivalent to
such cash amount, or by use of any available procedure as
described under Section IV(c) hereof.
(e) Costs and Expenses. The costs and expenses of
------------------
administering the Plan shall be borne by the Corporation and
shall not be charged against any award nor to any employee
receiving a Plan Award.
(f) Funding of Plan. Except in the case of awards of
---------------
Restricted Stock, the Plan shall be unfunded. The Corporation
shall not be required to segregate any of its assets to assure
the payment of any Plan Award under the Plan. Neither the
Participants nor any other persons shall have any interest in any
fund or in any specific asset or assets of the Corporation or any
other entity by reason of any Plan Award, except to the extent
expressly provided hereunder. The interests of each Participant
and former Participant hereunder are unsecured and shall be
subject to the general creditors of the Corporation.
(g) Other Incentive Plans. The adoption of the Plan
---------------------
does not preclude the adoption by appropriate means of any other
incentive plan for employees.
(h) Plurals and Gender. Where appearing in the Plan,
------------------
masculine gender shall include the feminine and neuter genders,
and the singular shall include the plural, and vice versa, unless
the context clearly indicates a different meaning.
(i) Headings. The headings and sub-headings in this
--------
Plan are inserted for the convenience of reference only and are
to be ignored in any construction of the provisions hereof.
(j) Severability. In case any provision of this Plan
------------
shall be held illegal or void, such illegality or invalidity
shall not affect the remaining provisions of this Plan, but shall
be fully severable, and the Plan shall be construed and enforced
as if said illegal or invalid provisions had never been inserted
herein.
(k) Payments Due Missing Persons. The Corporation
----------------------------
shall make a reasonable effort to locate all persons entitled to
benefits under the Plan; however, notwithstanding any provisions
of this Plan to the contrary, if, after a period of one (1) year
from the date such benefits shall be due, any such persons
entitled to benefits have not been located, their rights under
the Plan shall stand suspended. Before this provision becomes
operative, the Corporation shall send a certified letter to all
such persons at their last known addresses advising them that
their rights under the Plan shall be suspended. Subject to all
applicable state laws, any such suspended amounts shall be held
by the Corporation for a period of one (1) additional year and
thereafter such amounts shall be forfeited and thereafter remain
the property of the Corporation.
(l) Liability and Indemnification. (i) Neither the
-----------------------------
Corporation nor any Parent or Subsidiary shall be responsible in
any way for any action or omission of the Committee, or any other
fiduciaries in the performance of their duties and obligations as
set forth in this Plan. Furthermore, neither the Corporation nor
any Parent or Subsidiary shall be responsible for any act or
omission of any of their agents, or with respect to reliance upon
advice of their counsel provided that the Corporation and/or the
appropriate Parent or Subsidiary relied in good faith upon the
action of such agent or the advice of such counsel.
(ii) Except for their own gross negligence or willful
misconduct regarding the performance of the duties specifically
assigned to them under, or their willful breach of the terms of,
this Plan, the Corporation, each Parent and Subsidiary and the
Committee shall be held harmless by the Participants, former
Participants, beneficiaries and their representatives against
liability or losses occurring by reason of any act or omission.
Neither the Corporation, any Parent or Subsidiary, the Committee,
nor any agents, employees, officers, directors or shareholders of
any of them, nor any other person shall have any liability or
responsibility with respect to this Plan, except as expressly
provided herein.
(m) Incapacity. If the Committee shall receive
----------
evidence satisfactory to it that a person entitled to receive
payment of any Plan Award is, at the time when such benefit
becomes payable, a minor, or is physically or mentally
incompetent to receive such Plan Award and to give a valid
release thereof, and that another person or an institution is
then maintaining or has custody of such person and that no
guardian, committee or other representative of the estate of such
person shall have been duly appointed, the Committee may make
payment of such Plan Award otherwise payable to such person to
such other person or institution, including a custodian under a
Uniform Gifts to Minors Act, or corresponding legislation (who
shall be an adult, a guardian of the minor or a trust company),
and the release by such other person or institution shall be a
valid and complete discharge for the payment of such Plan Award.
(n) Cooperation of Parties. All parties to this Plan
----------------------
and any person claiming any interest hereunder agree to perform
any and all acts and execute any and all documents and papers
which are necessary or desirable for carrying out this Plan or
any of its provisions.
(o) Governing Law. All questions pertaining to the
-------------
validity, construction and administration of the Plan shall be
determined in accordance with the laws of the State of Delaware.
(p) Nonguarantee of Employment. Nothing contained in
--------------------------
this Plan shall be construed as a contract of employment between
the Corporation (or any Parent or Subsidiary), and any employee
or Participant, as a right of any employee or Participant to be
continued in the employment of the Corporation (or any Parent or
Subsidiary), or as a limitation on the right of the Corporation
or any Parent or Subsidiary to discharge any of its employees,
with or without cause.
(q) Notices. Each notice relating to this Plan shall
-------
be in writing and delivered in person or by certified mail to the
proper address. All notices to the Corporation or the Committee
shall be addressed to it at 2650 N. Military Trail, Suite 350,
Boca Raton, Florida 33431, Attn: John W. Luciani, III. All
notices to Participants, former Participants, beneficiaries or
other persons acting for or on behalf of such persons shall be
addressed to such person at the last address for such person
maintained in the Committee's records.
(r) Written Agreements. Each Plan Award shall be
------------------
evidenced by a signed written agreement between the Corporation
and the Participant containing the terms and conditions of the
award.
SECTION XI
AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Corporation shall have
the right to amend, suspend or terminate the Plan at any time,
provided that no amendment shall be made which shall increase
the total number of shares of the Common Stock of the Corporation
which may be issued and sold pursuant to Incentive Stock Options,
reduce the minimum exercise price in the case of an Incentive
Stock Option or modify the provisions of the Plan relating to
eligibility with respect to Incentive Stock Options unless such
amendment is made by or with the approval of the stockholders
(such approval being granted within 12 months of the effective
date of such amendment), but only if such approval is required by
any applicable provision of law. The Board of Directors of the
Corporation shall also be authorized to amend the Plan and the
Options granted thereunder to maintain qualification as
"incentive stock options" within the meaning of Section 422 of
the Code, if applicable. Except as otherwise provided herein, no
amendment, suspension or termination of the Plan shall alter or
impair any Plan Awards previously granted under the Plan without
the consent of the holder thereof.
SECTION XII
TERM OF PLAN
The Plan shall terminate on the day immediately prior
to the tenth anniversary of the date the Plan was adopted by the
Board of Directors of the Corporation, unless sooner terminated
by such Board of Directors. No Plan Awards may be granted under
the Plan subsequent to the termination of the Plan.
SECTION XIII
CLAIMS PROCEDURES
(a) Denial. If any Participant, former Participant or
------
beneficiary is denied any vested benefit to which he is, or
reasonably believes he is, entitled under this Plan, either in
total or in an amount less than the full vested benefit to which
he would normally be entitled, the Committee shall advise such
person in writing the specific reasons for the denial. The
Committee shall also furnish such person at the time with a
written notice containing (i) a specific reference to pertinent
Plan provisions, (ii) a description of any additional material or
information necessary for such person to perfect his claim, if
possible, and an explanation of why such material or information
is needed and (iii) an explanation of the Plan's claim review
procedure.
(b) Written Request for Review. Within 60 days of
--------------------------
receipt of the information stated in subsection (a) above, such
person shall, if he desires further review, file a written
request for reconsideration with the Committee.
(c) Review of Document. So long as such person's
------------------
request for review is pending (including the 60 day period in
subsection (b) above), such person or his duly authorized
representative may review pertinent Plan documents and may submit
issues and comments in writing to the Committee.
(d) Committee's Final and Binding Decision. A final
--------------------------------------
and binding decision shall be made by the Committee within 60
days of the filing by such person of this request for
reconsideration; provided, however, that if the Committee, in its
-------- -------
discretion, feels that a hearing with such person or his repre-
sentative is necessary or desirable, this period shall be
extended for an additional 60 days.
(e) Transmittal of Decision. The Committee's decision
-----------------------
shall be conveyed to such person in writing and shall (i) include
specific reasons for the decision, (ii) be written in a manner
calculated to be understood by such person and (iii) set forth
the specific references to the pertinent Plan provisions on which
the decision is based.
(f) Limitation on Claims. Notwithstanding any
--------------------
provisions of this Plan to the contrary, no Participant (nor the
estate or other beneficiary of a Participant) shall be entitled
to assert a claim against the Corporation (or against any Parent
or Subsidiary) more than three years after the date the
Participant (or his estate or other beneficiary) initially is
entitled to receive benefits hereunder.
Exhibit 10.2(a)
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of November 25th, 1996, by and between
LEISURE CENTERS LLC-1, a Texas limited liability company ("Borrower"), and
BANK UNITED, a federal savings bank ("Lender").
Borrower has requested Lender to make a certain loan to Borrower in an
aggregate principal amount of SEVEN MILLION DOLLARS AND NO/100
($7,000,000.00). Lender is willing to make such loan to Borrower upon the
terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I
Definitions
-----------
Section 1.01. Definitions. As used in this Agreement, the following
-----------
terms have the following meanings:
"Absolute Assignment" means the Absolute Assignment of Rents and
-------------------
Income (With License Back) by Borrower in favor of Lender of even date
herewith, as the same may be amended, supplemented or modified from
time to time.
"Advance" means the advance of funds by Lender to Borrower
-------
pursuant to Article II.
"Affiliate" means any Person directly or indirectly controlling,
---------
controlled by, or under common control with Borrower. For purposes of
this definition, "control" (including "controlled by" and "under
common control with") means (i) ownership of twenty-five percent (25%)
or more of the voting rights of any class of shares of an entity or
(ii) the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person,
whether through the ownership or voting securities or otherwise.
Without limiting the generality of the foregoing, for purposes of this
Agreement, Borrower, Guarantor, and each of their respective
subsidiaries shall be deemed an Affiliate of one another.
"Affiliate Acknowledgement" means the Acknowledgement of
-------------------------
Assignment of Agreement and Subordination Agreement executed by any
affiliates of Borrower that will provide services to the Project in
favor of the Lender;
"Assumed Monthly Payment" means an assumed monthly payment of
-----------------------
principal and interest resulting from a 25-year amortization of the
principal balance of the Loan at a fixed rate of interest equal to 225
basis points over the 5-year Treasury Yield, selected by Lender at the
time of calculation.
"Budget" means the Construction Budget set forth in Exhibit C of
------
the Loan Commitment.
"Business Day" means any day other than a Saturday, Sunday or
------------
legal holiday for commercial banks in Houston, Texas.
"Closing Date" means the date upon which Borrower and Lender
------------
execute the Loan Documents.
"Collateral" has the meaning specified in Section 4.01.
----------
"Collateral Assignment" means the Collateral Assignment of
---------------------
Leases, Deposits and Agreements of even date herewith by Borrower in
favor of Lender.
"Construction Inspector" means AECC, Inc.
----------------------
"Contract Rate" means a variable rate of interest, adjusted
-------------
monthly equal to the LIBOR Rate plus 2.75% per annum. The Contract
Rate shall be set each month based on the LIBOR Rate in effect two (2)
business days prior to the first day of each calendar month during the
term of the Note.
"Contracts" means the leases, management agreements and all
---------
contracts with the Project Architect and the General Contractor of the
Project.
"Debt" means for any Person: (i) all indebtedness, whether or not
----
represented by bonds, debentures, notes, securities, or other
evidences of indebtedness, for the repayment of money borrowed, (ii)
all indebtedness representing deferred payment of the purchase price
of property or assets, (iii) all indebtedness under any lease which,
in conformity with GAAP, is required to be capitalized for balance
sheet purposes, (iv) all indebtedness under guaranties, endorsements,
assumptions, or other contingent obligations, in respect of, or to
purchase or otherwise acquire, indebtedness of others, and (v) all
indebtedness secured by a Lien existing on property owned, subject to
such Lien, whether or not the indebtedness secured thereby shall have
been assumed by the owner thereof.
"Debt Service Coverage Ratio" for any calendar quarter means the
---------------------------
ratio of Net Income for such calendar quarter to the Assumed Monthly
Payment on the Loan, as hereinafter defined for the same calendar
quarter.
"Deed of Trust" means the first lien Deed of Trust, Mortgage,
-------------
Security Agreement and Financing Statement on the Project from
Borrower in favor of Lender of even date herewith, as the same may be
amended, supplemented, or modified from time to time.
"Default Rate" means a floating rate of interest equal to the
------------
lesser of (i) the Contract Rate, from time to time in effect, plus
five percent (5.0%) per annum or (ii) the Maximum Rate.
"DHS" means the Texas Department of Human Services.
---
"DHS Licenses" means all now or hereafter issued licenses from
------------
the Texas Department of Human Services or other governmental entities
for the operation of a Personal Care Facility and any food services
licenses related thereto.
"Disbursement Account" has the meaning specified in Section
--------------------
2.01(b).
"Environmental Indemnity" means the Certificate and
-----------------------
Indemnification Regarding Hazardous Substances executed by Borrower in
favor of Lender of even date herewith, as the same may be amended,
supplemented or modified from time to time.
"Event of Default" has the meaning specified in Section 9.01.
----------------
"First Extended Maturity Date" means forty-two months from the
----------------------------
date hereof.
"First Extended Period" means the six month period commencing on
---------------------
the Maturity Date and ending on the First Extended Maturity Date.
"GAAP" means generally accepted accounting principles, applied on
----
a consistent basis, as set forth in Opinions of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and/or in statements of the Financial Accounting Standards
Board and/or their respective successors and which are applicable in
the circumstances as of the date in question. Accounting principles
are applied on a "consistent basis" when the accounting principles
observed in a current period are comparable in all material respects
to those accounting principles applied in a preceding period.
"General Contractor" means Tecom Construction, Inc., a Texas
------------------
corporation, 5608 Parkcrest Drive, Suite 100, Austin, Texas 78731.
"General Contractor's Acknowledgement" means the Acknowledgement
------------------------------------
of Assignment and Agreement executed by the General Contractor in
favor of Lender.
"Guaranty" means the Guaranty Agreement of even date herewith
--------
executed by Guarantor for the benefit of Lender.
"Guarantor" means Grand Court Lifestyles, Inc.
---------
"Improvements" shall mean a certain 142 unit congregate,
------------
independent living and personal care facility to be located on the
Real Property.
"LIBOR Rate" means the 30-day London Interbank Offered Rate,
----------
reflected as the one-month LIBOR Rate on page 5 of the Telerate screen
or as published or quoted by such other reputable and nationally-
recognized rate quoting service or publication selected by Lender.
"Lien" means any lien, mortgage, security interest, tax lien,
----
pledge, encumbrance, financing statement, or conditional sale or title
retention agreement, or any other interest in property designed to
secure the repayment of Debt or any other obligation, whether arising
by agreement, operation of law, or otherwise.
"Loan" means the loan in the original principal amount of Seven
----
Million and No/100 Dollars ($7,000,000.00) made or to be made by
Lender pursuant to Section 2.01.
"Loan Commitment" means the Construction Loan and Term Commitment
---------------
relating to the Loan dated October 22, 1996, accepted by Borrower on
October 23, 1996.
"Loan Documents" means, without limitation, this Agreement, the
--------------
Loan Commitment, the Note, the Deed of Trust, the Absolute Assignment,
the Collateral Assignment, the Guaranty, the Environmental Indemnity,
and all other promissory notes, deeds of trust, assignments, financing
statements, easements, security agreements and other instruments,
documents, and agreements executed either by Borrower or by Guarantor,
or both, as the case may be, and delivered pursuant to or in
connection with this Agreement, as such instruments, documents, and
agreements may be amended, modified, renewed, extended, or
supplemented from time to time and in accordance with their respective
terms.
"Maturity Date" means thirty-six months from the date hereof
-------------
subject to the two (2) Extension Options provided for in the Loan
Commitment.
"Maximum Rate" means the maximum rate of nonusurious interest
------------
permitted from day to day by applicable law, including Article 5069-
1.04, Vernon's Texas Civil Statutes (and as the same may be
incorporated by reference in other Texas statutes), but otherwise
without limitation, that rate based upon the "indicated rate ceiling"
and calculated after taking into account any and all relevant fees,
payments and other charges in respect to the Loan Documents which are
deemed to be interest under applicable law.
"Net Income" means the net income from normal operations of the
----------
Project (excluding extraordinary income and expense and before income
taxes applicable to such Project, but after all property taxes and
other taxes applicable to the Project without deduction for actual
management fees paid) and based upon average revenue per unit and an
occupancy rate of not more than ninety-five percent (95%), as set
forth in the quarterly financial information provided to Lender under
the Loan Documents, calculated based upon the preceding calendar
quarter, plus interest expense paid or incurred with respect to the
Loan for such period and non-cash expenses or allowances for
depreciation or amortization of the Project for such period, less the
greater of actual management fees or assumed management fees of four
percent (4%) of total resident revenues for such preceding calendar
quarter.
"Note" means the recourse Promissory Note executed by Borrower of
---- - -
even date herewith in the amount of the Loan payable to the order of
Lender, and all extensions, renewals, and modifications thereof.
"Notice" means the Notice Pursuant to Section 26.02, Texas
------
Business and Commerce Code by Borrower and Guarantor in favor of
Lender of even date herewith.
"Obligations" means (i) all amounts, including, without
-----------
limitation, principal and interest, due or becoming due under the
Note; (ii) any and all costs or sums due and owing or to become due
and owing under any of the Loan Documents; (iii) any renewal or
extension of the indebtedness or costs described in (i) through (ii)
preceding or any part thereof; and (iv) all covenants, agreements and
undertakings of the Borrower to the Lender hereunder or under any of
the Loan Documents.
"Person" means any individual, corporation, business trust,
------
association, company, partnership, joint venture, or other entity.
"Personalty" means all equipment, furnishings, furniture and all
----------
tangible and intangible personal property of whatever character now
owned or hereafter acquired by Borrower for use in, on or about the
Project, including replacements, substitutions and after acquired
property.
"Plans and Specifications" means the final plans and
------------------------
specifications for the Improvements signed and dated by Borrower and
certified by the Project Architect (with the seal of such Project
Architect affixed).
"Pledge of Deposit Account" means the Pledge of Deposit Account
-------------------------
by Borrower in favor of Lender of even date herewith, as same may be
amended, supplemented or modified from time to time.
"Project" means the Improvements, the Real Property, and the
-------
Personalty.
"Project Architect" means Morgan Spears Associates, Inc., a Texas
-----------------
corporation, 225 South Carancahua, Corpus Christi, Texas 78401.
"Project Architect's Acknowledgement" means the Acknowledgement
-----------------------------------
of Assignment of Agreement and Subordination Agreement executed by the
Project Architect in favor of Lender.
"Property Manager" means Grand Court Lifestyles, Inc., a Delaware
----------------
corporation, 2650 North Military Trail, Suite 350, Boca Raton, Florida
33431.
"Property Manager's Acknowledgement" means the Acknowledgement of
----------------------------------
Assignment of Management Agreement and Subordination Agreement
executed by the Property Manager in favor of the Lender.
"Property Revenues" means all income, revenues, profits,
-----------------
distributions and funds from any source whatsoever which derive
directly or indirectly from the Project.
"Real Property" means the real property located in Corpus
-------------
Christi, Nueces County, Texas, as more fully described on Exhibit A,
----------
attached hereto and incorporated herein by reference for all purposes.
"Second Extended Maturity Date" means forty-eight (48) months
-----------------------------
from the date hereof.
"Second Extended Period" means the six month period commencing on
----------------------
the First Extended Maturity Date and ending on the Second Extended
Maturity Date.
"Title Agent" means Stewart Title Guaranty Company.
-----------
"Title Company" means Stewart Title Guaranty Company.
-------------
"Title Policy" means the Mortgagee Policy of Title Insurance
------------
described in Section 5.01(o) hereof.
Section 1.02. Other Definitional Provisions. All definitions
-----------------------------
contained in this Agreement are equally applicable to the singular and
plural forms of the terms defined. The words "hereof", "herein", and
"hereunder" and words of similar import referring to this Agreement
refer to this Agreement as a whole and not to any particular provision
of this Agreement. Unless otherwise specified, all Article and Section
references pertain to this Agreement. All accounting terms not
specifically defined herein shall be construed in accordance with
GAAP.
ARTICLE II
Loan
----
Section 2.01. Loan: Advances. Subject to the terms and conditions of
--------------
this Agreement, Lender agrees to make the Loan to Borrower in Advances
strictly in accordance with this Agreement as follows:
(a) The Loan proceeds shall be disbursed by Lender no more
frequently than once monthly during the course of the construction of
the Improvements in accordance with the terms herein and the other
Loan Documents.
(b) Lender shall be furnished with a detailed construction
disbursement schedule in a form satisfactory to Lender, and
disbursements shall be made under the procedures and title safeguards
reasonably acceptable to Lender. Borrower shall open a special bank
account, of a type acceptable to Lender, with Lender into which all
Loan proceeds shall be disbursed ("Disbursement Account") which shall
--------------------
be pledged to Lender pursuant to the Pledge of Deposit Agreement;
provided, however, if funding the Loan proceeds into such Disbursement
Account, in Lender's sole judgment, puts the Title Policy coverage at
risk, the disbursements of the proceeds of the Loan shall be made by
and through the Title Company.
(c) Disbursements shall be made only after notice is given to
Lender five (5) Business Days prior to the requested date for each
such disbursement and in the draw request form attached hereto and
incorporated herein by reference for all purposes as Schedule 1. Such
----------
form shall be accompanied by an Affidavit of Bills Paid in the form
attached hereto and incorporated herein by reference for all purposes
as Schedule 2, and, if required by Lender, a Partial Release of Lien
-----------
in the form attached hereto and incorporated herein by reference for
all purposes as Schedule 3, executed by the General Contractor and
-----------
each subcontractor who has received payments in excess $10,000.00.
Disbursement requests shall be submitted by Borrower on AIA forms for
review and approval of the Construction Inspector. All disbursements
must conform to the Budget for the materials and/or services covered
by such disbursement request; no variances will be permitted without
Lender's prior written approval.
(d) Bills or statements for all expenses for which a
disbursement is requested shall, at Lender's option, be presented to
Lender along with the request for disbursement. All requests for
disbursement shall include certification by Borrower, the General
Contractor, the Project Architect and the Construction Inspector that
all labor and material for which disbursement is requested have gone
into the construction of the Improvements according to the approved
Plans and Specifications and that the remaining undisbursed portion of
the Loan and the funds on deposit are adequate to complete the
construction of the Improvements on the Real Property.
(e) Unless otherwise approved by Lender, no disbursements of the
proceeds shall be made if the Loan is not current or an Event of
Default exists, or an event exists which with the passage of time or
notice or both would constitute an Event of Default. Lender shall not
be obligated at any time to disburse proceeds of the Loan in excess of
the Budget or that recommended by the Construction Inspector nor shall
the Lender be obligated to disburse proceeds of the Loan for materials
stored off of the Project. As a condition of each draw, Lender must
be satisfied that sufficient funds are available to complete the
Improvements.
(f) All interim disbursements of Loan proceeds for construction
work shall be subject to a ten percent (10%) retainage requirement;
provided there shall be no retainage for direct materials purchases.
(g) Each disbursement must be accompanied by an endorsement to
the Title Policy, obtained by Borrower at Borrower's sole expense, so
that the coverage reflects the amounts that have been advanced.
(h) Final disbursement, to the General Contractor, including
retainage, shall be subject to and conditioned upon Lender having
secured the following (i) a certificate of occupancy for the
Improvements from the appropriate governmental agency if such
certificate is deemed necessary by Lender, in its sole discretion;
(ii) a certificate of completion prepared and submitted by the
Borrower and the Project Architect, and approved by the Construction
Inspector, which certificate shall contain only such qualifications as
are acceptable to Lender, in Lender's sole discretion, and indicating
that the construction of the Improvements has been completed
substantially in accordance with the approved Plans and
Specifications, all construction has been completed in a good and
workmanlike manner, all applicable zoning, building, or other
governmental codes or regulations have been complied with, there are
no known structural deficiencies, and all mechanical equipment,
including, without limitation, plumbing, air conditioning and heating,
electrical, and kitchen equipment, if any, is in good working order;
(iii) a certificate of completion executed by the General Contractor
and filed in the Real Property Records of Nueces County, Texas; (iv)
an affidavit executed by the General Contractor satisfactory to
Lender, Lender's counsel and the Title Company in their sole
discretion, stating, among other things, that all work has been
completed in accordance with the Plans and Specifications approved by
Lender; (v) if required by Lender, lien waivers from any and all
subcontractors, in form and substance satisfactory to Lender, Lender's
counsel and the Title Company in their sole discretion; and (vi) such
other additional documents as Lender may reasonably request.
Section 2.02. The Note. The obligation of Borrower to repay the Loan
--------
shall be evidenced by the Note executed by Borrower, payable to the order
of Lender, in the principal amount of the Loan and dated of even date
herewith, and shall be full recourse to Borrower and Guarantor.
Section 2.03. Repayment of Loan. Interest shall be due and payable
-----------------
monthly, the first payment of which shall be due and payable on the first
(lst) day of the calendar month next following one (1) month from the date
hereof, and subsequent payments of interest shall be due and payable on the
same day of each month thereafter until the Maturity Date, as hereinafter
defined. All outstanding principal, plus accrued and unpaid interest at
the Contract Rate, shall be due and payable in one final balloon payment on
the Maturity Date.
Section 2.04. Interest. The unpaid principal amount of Advances on
--------
the Loan shall bear interest prior to maturity at a per annum rate equal to
the lesser of (i) the Maximum Rate or (ii) the Contract Rate.
Notwithstanding the foregoing, in the event that any payment on the Note is
more than thirty (30) days past due, all past due principal and interest
shall bear interest from the maturity date thereof until the date of
payment at the Default Rate.
Section 2.05. Use of Proceeds. The proceeds of the Loan shall be
---------------
used for the sole purpose of financing the construction of the Improvements
on the Real Property and shall cover the items shown on the Budget annexed
as Exhibit C to the Loan Commitment.
Section 2.06. Late Payment Fee. A late payment equal to five percent
----------------
(5.0% )of any past due payment will be payable by Borrower if any payment
on the Note is not received by the Lender within fifteen (15) days of its
due date.
Section 2.07. Extension.
---------
(a) Borrower shall have the right to extend the maturity of the
Loan for two consecutive six (6) month terms provided that at the time
of each extension request:
(i) the construction of Project has been completed, lien
free, in a manner satisfactory to and in accordance with the
Plans and Specifications approved by Lender;
(ii) No Event of Default then exists under any of the Loan
Documents;
(iii) An appraisal of the Project acceptable to Lender
shows that the outstanding principal balance of the Loan does not
exceed seventy-five percent (75%) of the appraised value of the
Project as completed.
(iv) Immediately prior to the First Extension Period, the
Project has achieved a minimum Debt Service Coverage Ratio of at
least 1.10 to 1.00, and immediately prior to the Second Extension
Period, the Project has achieved a minimum Debt Service Coverage
Ratio of at least 1.2 to 1.00; and
(v) Borrower shall have paid Lender an extension fee for
each extension in the amount of one half of one percent (0.5%) of
the outstanding principal balance of the Loan.
(b) In the event that Borrower qualifies for the First Extension
Period and elects to extend the Maturity Date as herein provided,
monthly payments of accrued, but unpaid interest, at the Contract Rate
shall continue to be due and payable on the first day of each month
commencing with the month next following the last scheduled monthly
payment during the original term of the Loan and successive payments
shall be due on the first day of each month thereafter until the First
Extended Maturity Date, when the unpaid principal balance of the Loan
and accrued, but unpaid interest, thereon shall be paid in full in one
final balloon payment unless Borrower qualifies for the Second
Extension Period and elects to extend the First Extended Maturity
Date.
(c) If Borrower qualifies for the Second Extension Period and
elects to extend the First Extended Maturity Date, monthly payments of
accrued, but unpaid interest at the Contract Rate shall continue to be
due and payable on the first day of each month commencing with the
month next following the last scheduled monthly payment of the First
Extended Loan Period and successive payments being due on the first
day of the month thereafter until the Second Extended Maturity Date,
when the unpaid principal balance of the Loan, an accrued but unpaid
interest thereon shall be paid in one final balloon payment.
(d) As a condition to such extensions, Borrower and Guarantor
shall execute such amendments, notes, documents, agreements and
instruments as Lender reasonably deems necessary to extend the
maturity of the Loan, and Borrower shall cause the Title Company to
endorse the Title Policy to reflect the extended maturity of the Loan,
such endorsement to be in form reasonably satisfactory to Lender. If
an endorsement is not available, Borrower shall obtain a new Title
Policy for Lender, in form satisfactory to Lender. Borrower shall pay
all reasonable costs incurred by Lender in connection with such
extension, including reasonable attorney's fees, and shall pay all
Title Company charges and premiums.
ARTICLE III
Payments
--------
Section 3.01. Method of Payment. All payments of principal,
-----------------
interest, and other amounts to be made by Borrower hereunder and under the
Note shall be made to Lender at its office at 3200 Southwest Freeway, Suite
1900, P.O. Box 1370, Houston, Texas 77252-1370, Attention: Commercial Loan
Servicing, in lawful money of the United States of America and in
immediately available funds. Whenever any payment hereunder or under the
Note shall be stated to be due on a day that is not a Business Day, such
payment may be made on the next succeeding Business Day, and interest shall
continue to accrue during such extension.
Section 3.02. Prepayment. Borrower shall have the right to prepay,
----------
at any time and from time to time without premium or penalty, the entire
unpaid principal balance of the Note or any portion thereof, with accrued
interest to the date of prepayment on the amounts prepaid.
Section 3.03. Insurance and Tax Escrow. So long as Borrower is
------------------------
maintaining insurance in types and amounts required hereunder and paying
the ad valorem taxes as such taxes come due and providing Lender with
evidence of such insurance and the payment of such taxes, no insurance and
tax escrow shall be required.
ARTICLE IV
Collateral
----------
Section 4.01. Collateral. To secure full and complete payment and
----------
performance of the Obligations, Borrower shall execute and deliver or cause
to be executed and delivered the documents described below covering the
property and collateral described in this Section (which, together with any
other property and collateral which may now or hereafter secure the
Obligations or any part thereof, is sometimes herein called the
"Collateral"):
----------
(a) Borrower shall grant to Lender a first priority lien and/or
security interest on the Real Property, Improvements and Personalty
pursuant to the Deed of Trust and shall assign to Lender all rents,
income, and profits relating to the Project pursuant to the Absolute
Assignment;
(b) Borrower shall collaterally assign and grant a first lien
security interest in, without limitation, all utility deposits,
security deposits (to the extent assignable and subject to the
tenants' rights to reimbursement under the tenant leases), tenant
leases, management agreements, construction contracts, architect
contracts and agreements, waste water capacity reservation agreements,
and any other contracts, licenses (including the DHS Licenses, to the
extent assignable), permits, architects and engineering contracts, and
agreements pertaining to the Project pursuant to the Collateral
Assignment or such other instruments as Lender may require;
(c) Guarantor will guarantee severally the repayment of the
entire indebtedness of Borrower to Lender, and the performance by
Borrower of all of Borrower's obligations to Lender under the Loan
Documents evidencing or securing the Loan pursuant to the Guaranty;
(d) Borrower shall pledge to Lender the funds advanced to the
Disbursement Account pursuant to the Pledge of Deposit Account; and
(e) Borrower shall execute and cause to be executed such further
documents and instruments, including without limitation, Uniform
Commercial Code financing statements, necessary to evidence and
perfect Lender's liens and security interests as herein described, in
the Collateral.
Section 4.02. Setoff. Upon the occurrence of an Event of Default,
------
Lender shall have the right to set off and apply against the Obligations in
such manner as Lender may determine, at any time and without notice to
Borrower, any and all deposits (general or special, time or demand,
provisional or final) or other sums at any time credited by or owing from
Lender to Borrower whether or not the Obligations are then due. As further
security for the Obligations, Borrower hereby grants to Lender a security
interest in all money, instruments, and other property of Borrower now or
hereafter held by Lender, including, without limitation, property held in
safekeeping. In addition to Lender's right of setoff and as further
security for the Obligations, Borrower hereby grants to Lender a security
interest in all deposits (general or special, time or demand, provisional
or final) and other accounts of Borrower now or hereafter on deposit with
or held by Lender and all other sums at any time credited by or owing from
Lender to Borrower. The rights and remedies of Lender hereunder are in
addition to other rights and remedies (including, without limitation, other
rights of setoff) which Lender may have; provided, however that with
respect to security deposits by tenants or residents, the foregoing is
subject to the residents' or tenants' rights to reimbursement under the
tenants' or residents' leases.
ARTICLE V
Conditions Precedent
--------------------
Section 5.01. Loan. In addition to the conditions of Lender's
----
obligation to make the Loan set forth in the Loan Commitment, the
obligation of Lender to make advances under the Loan is subject to the
condition precedent that Lender shall have received all of the following,
each dated as of the Closing Date (unless otherwise indicated) and in form
and substance satisfactory to Lender:
(a) Resolutions. Borrower shall have delivered to Lender a
-----------
resolution of Borrower certified by its secretary or assistant
secretary which authorizes the execution, delivery, and performance by
Borrower of this Agreement and the other Loan Documents to which
Borrower is or is to be a party and a resolution of the Guarantor
authorizing the execution, delivery and performance by the Guarantor
of the Guaranty and the other Loan Documents to which Guarantor is a
party. The Resolutions shall designate (i) the officers of the
Borrower and Guarantor which are authorized to sign the Loan Documents
and (ii) the officers of Borrower which are authorized to request and
receive advances under the Loan, together with specimen signatures of
such officers,
(b) Incumbency Certificates. Borrower shall have delivered to
-----------------------
Lender certificates of incumbency certified by the respective
secretary or assistant secretary of Borrower and Guarantor certifying
the names of the officers of Borrower and Guarantor authorized to sign
this Agreement and each of the other Loan Documents to which Borrower
and/or Guarantor is to be a party (including the certificates
contemplated herein) together with specimen signatures of such
officers.
(c) Regulations; Articles of Organization and Bylaws. Borrower
------------------------------------------------
shall have delivered to Lender: (i) Borrower's Articles of
Organization and Regulations, and all amendments thereto, (ii)
certified copies of the Articles of Incorporation of Guarantor,
together with all amendments thereto, (iii) the bylaws of Guarantor,
together with all amendments thereto, certified by the Secretary or
Assistant Secretary of Guarantor, and (iv) certified copies of
existence for Borrower and Guarantor and certified copies of good
standing for Borrower and Guarantor (all of the above dated within ten
(10) days prior to the Closing Date).
(d) Loan Agreement. The Borrower shall have executed and
--------------
delivered this Agreement to the Lender.
(e) Note. Borrower shall have executed and delivered the Note
----
to Lender.
(f) Absolute Assignment. Borrower shall have executed and
-------------------
delivered the Absolute Assignment to Lender.
(g) Collateral Assignment. Borrower shall have executed and
---------------------
delivered the Collateral Assignment to Lender.
(h) Environmental Indemnity. Borrower and Guarantor shall have
-----------------------
executed and delivered the Environmental Indemnity to Lender.
(i) Deed of Trust. Borrower shall have executed and delivered
-------------
the Deed of Trust to Lender which shall grant a first lien on the
Project and a first and prior security interest in the Personalty.
(j) Financing Statements. Borrower shall have executed and
--------------------
delivered to Lender the Uniform Commercial Code financing statements
covering such Collateral as Lender may request.
(k) Notice. Borrower and Guarantor shall have executed and
------
delivered to Lender the Notice.
(l) Affidavits. Borrower shall have executed and delivered the
----------
Affidavit of Borrower, and Guarantor shall have executed and delivered an
Affidavit of Guarantor in form and substance satisfactory to Lender.
(m) Guaranty. The Guarantor shall have executed and delivered
--------
the Guaranty to Lender.
(n) Pledge of Deposit Account. Borrower shall have executed and
-------------------------
delivered the Pledge of Deposit Account.
(o) Mortgagee Title Insurance Policy;. Simultaneously with the
---------------------------------
execution of this Loan Agreement, but before funding of the Loan,
Borrower, at Borrower's sole cost and expense, shall have caused to be
furnished to Lender, a Texas Mortgagee Policy of Title Insurance
issued by the Title Agent, as agent for the Title Company, in favor of
Lender pursuant to an insured closing protection letter satisfactory
to Lender showing a policy amount equal to the aggregate amount of the
Loan, insuring that the Lender has a valid first and prior lien
against the Real Property, and containing only such exceptions as
shall be approved by Lender and its legal counsel, provided that the
premium can be paid in installments as provided in Rule R-2(a) of the
Rules for Title Insurance promulgated by the Texas Board of Insurance.
Any exception in the Title Policy regarding restrictive covenants
shall be deleted or shall list such restrictive covenants and insure
that they will not affect the validity or priority of Lender's lien.
The standard pre-printed exception in the Title Policy regarding any
discrepancies, conflicts or shortages in area or boundary lines shall
be modified to read only "shortages in area." The standard pre-printed
exception regarding taxes shall be modified to read "Standby fees and
taxes for the year 1996 and subsequent years not yet due and payable."
The Title Policy may contain the standard pre-printed "pending
completion" and "pending disbursements" exceptions, and Borrower
shall, at Borrower's cost and expense, obtain endorsements to the
Title Policy as Advances are made so that the coverage reflects the
amounts that have been advanced under the terms of the Loan Documents.
The Title Policy shall also insure access to the Project from a
publicly dedicated street.
(p) Appraisal. Lender shall have received an MAI appraisal of
---------
the Project in form and substance satisfactory to Lender and conducted
by an appraiser selected by Lender. The appraisal shall show that the
Real Property and Improvements shall have a fair market value of at
least $9,400,000.00 as built in accordance with the approved Plans and
Specifications. The appraisal shall be commissioned by Lender, but
paid for by Borrower.
(q) Environmental Report. Borrower, at Borrower's sole cost and
--------------------
expense, shall have delivered to Lender an unqualified Phase I
environmental site assessment covering the Project which shall be in
form and substance satisfactory to Lender and which shall be conducted
by an environmental service firm selected by Lender or selected from
Lender's approved list of environmental service firms. Such
environmental assessment shall verify that the Project is free from
any Hazardous Materials and Hazardous Waste, as those terms are
defined by federal and state statutes, laws and regulations,
including, without limitation, asbestos and diesel fuel (as reflected
on the Phase I environmental assessment). Such environmental
assessment shall include a determination of "wetlands" status and
condition. Borrower shall provide Lender with evidence in form and
substance acceptable to Lender, in Lender's sole discretion,
indicating that any Hazardous Materials or Hazardous Waste previously
located on the Project have been properly disposed of in accordance
with all applicable laws and which satisfies the requirements of
Thrift Bulletin 16.
(r) Survey. Borrower, at Borrower's sole cost and expenses,
------
shall have provided Lender and Lender's counsel with originals of a
current staked survey ("Survey") of the Real Property and all
Improvements thereon, prepared by a professional engineer or
registered surveyor, acceptable to Lender and Title Company, in form
and substance satisfactory to Lender, dated within ninety (90) days of
the Closing Date, which survey shall satisfy the requirements of a
Category 1A land survey pursuant to the Texas Surveyor's Association
Standards for land surveys. The survey shall contain a certificate
which shall among other things contain the following information: (i)
metes and bounds description of the Real Property showing all corners
and points of course changes and/or marked with iron pins or rods; and
(ii) the location of all existing and proposed roads, highways and
streets adjoining the Real Property and access thereto and all
Improvements, encroachments, easements, drainage districts, utilities,
parking areas, rights of way, set-back lines, and other matters
located upon or affecting the Real Property. The Survey shall contain
a certification that the Real Property is not located in any flood
hazard area. The certificate shall be in form and substance acceptable
to Lender and Lender's counsel and shall be in favor of both the
Lender and the Title Company. The certificate must be acceptable to
the Title Company to delete the survey exception regarding shortages
in area from the Title Policy.
(s) UCC Search. Lender shall have received Uniform Commercial
----------
Code searches (which searches shall be ordered by Lender's counsel but
paid for by Borrower) showing no financing statements or other
documents or instruments on file against Borrower or any Guarantor in
the office of the Secretary of State of Texas and the UCC Records of
Nueces County, Texas, or the counties where the Borrower or any
Guarantor reside, such search to be as of a date no more than ten (10)
days prior to the Closing Date.
(t) Opinion of Counsel. Borrower and Guarantor shall have
------------------
delivered to Lender favorable opinions of legal counsels to Borrower
and Guarantor in form, scope and substance satisfactory to Lender
acceptable to Lender, concerning all aspects of the Loan including,
without limitation, usury, doing business, due authorization,
legality, validity, enforceability, and binding effect of all required
Loan Documents.
(u) Financial Statements. Lender shall be provided with
--------------------
certified financial statements from Borrower, Guarantor (or J & B
Management Company) and the General Contractor in a form and only with
qualifications acceptable to Lender in Lender's sole discretion for
the years ending January 1, 1995 and January 31, 1996. Borrower and
Guarantor shall also provide Lender with their 1995 and 1996 income
tax returns, as filed with the Internal Revenue Services.
(v) Origination Fee. Borrower shall have paid to Lender an
---------------
origination fee in the amount of Seventy Thousand and No/100 Dollars
($70,000.00), which shall be fully earned, non-refundable, and due and
payable on the Closing Date.
(w) Project Architect/Project Engineer's Certificates. Lender
-------------------------------------------------
shall have received letters from the Project Architect certifying that
utilities are available to the boundaries of the Real Property in
amounts adequate to serve the contemplated Improvements. In addition,
the Project Architect will certify that the Project complies with, or
when built, will comply with applicable zoning ordinances and other
applicable laws, and can be operated for the purposes for which the
Project was constructed, that all permits, licenses (to the extent
obtainable prior to the commencement of construction), and approvals
have been issued by the appropriate authorities, that all Improvements
will be constructed above the 100 year flood plain for the Real
Property, and that the budget submitted to and approved by Lender
provides for all sums necessary to complete the work called for in the
Project Architect's/Project Engineer's contracts with Borrower.
(x) Project Architect's Acknowledgement. Lender shall have
-----------------------------------
received the Project Architect's Acknowledgement executed by the
Project Architect.
(y) Property Manager's Acknowledgement. Lender shall have
----------------------------------
received the Property Manager's Acknowledgement executed by the
Property Manager.
(z) Affiliate Acknowledgement. Lender shall have received the
-------------------------
Affiliate's Acknowledgement executed by any affiliates of Borrower
that will provide services to the Project.
(aa) General Contractor's Acknowledgement. Lender shall have
------------------------------------
received the General Contractor's Acknowledgment executed by the
General Contractor.
(bb) Taxes, Assessments and Insurance. Lender shall have
--------------------------------
received evidence that all ad valorem taxes for 1996 and prior years
against the Project and all required insurance premiums for the first
year of the Loan shall have been paid in full.
(cc) Evidence of Available Capital. Lender shall have received
-----------------------------
evidence satisfactory to it that the Borrower has available a minimum
of $2,375,000.00 in capital in good funds, including equity in the
Real Property, which may immediately be expended for the development
and construction of the Project or the purchase of the Real Property
prior to the first advance of the Loan proceeds; provided, however,
that funds expended for the purchase of the Real Property may be
credited to the required equity contribution only to the extent of the
"AS IS" appraised value of the Real Property.
(dd) Soil Tests and Other Reports. Lender shall have been
----------------------------
furnished with a copy of the soil test reports, and all concrete and
steel stress reports and a letter of certification from the
Construction Inspector indicating that the soil conditions are
satisfactory for the construction of the Improvements in accordance
with the approved Plans and Specifications.
(ee) Availability of Utilities. Borrower shall have provided
-------------------------
Lender with letters from authorized officials of each governmental
entity or public utility providing any utility services to the
Project, including water, sewer, telephone, gas and electricity,
stating that such services will be made available to the Project
within the time required by the construction schedule in amounts
adequate to serve the Project after its completion in accordance with
the Plans and Specifications.
(ff) Plans and Specifications. Borrower, at Borrower's sole cost
------------------------
and expense, shall have provided Lender with two (2) complete sets of
final Plans and Specifications signed and dated by the Borrower and
certified by the Project Architect and Project Engineer (and with
their respective seals affixed). The Plans and Specifications shall
contain all certificates and approvals required by all governmental
authorities (including the DHS) having jurisdiction over the Real
Property and the construction of the Improvements thereon, which Plans
and Specifications shall have been submitted to and approved by Lender
prior to closing. Any material deviation from the approved plans or
specifications must be approved by Lender in writing in advance of the
issuance of any change orders.
(gg) Budget. Lender has been furnished with the Budget for the
------
construction of the Improvements approved by the Construction
Inspector and Lender. The Budget shall reflect all direct
construction costs and indirect and overhead items and shall include a
draw schedule in such detail as Lender may require and a schedule of
completion will be provided to Lender. The Budget shall be
substantially the same as the preliminary construction cost estimate
submitted in connection with the Loan Commitment. Cost savings in any
line item shall be transferred to the contingency reserve line item;
provided, however, that any savings in the interest line item shall be
credited to the "lease-up reserve." Following construction and
provided that Borrower is not in default under the Loan Documents, all
amounts in the contingency reserve shall be funded to Borrower.
(hh) Required Additional Funds. Borrower and Guarantor have
deposited in the Disbursement Account additional funds over and above
the Loan proceeds in an amount equal to any difference between (i) the
Loan amount plus the total of the paid receipts for permissible
development and construction costs of the Project approved by Lender
and paid by Borrower from Borrower's own funds and (ii) the final
approved cost (including, without limitation, a sufficient reserve for
the funding of interest) to be incurred in connection with the
acquisition and construction of the Project.
(ii) Construction Schedule. Lender shall have received and
---------------------
approved a detailed construction schedule showing a trade by trade
breakdown of the estimated periods of commencement and completion of
construction of the Improvements on the Real Property, which schedule
shall be confirmed in writing by the Project Architect and the General
Contractor, and approved by the Construction Inspector and Lender.
(jj) Construction Inspection. A statement has been provided by
-----------------------
the Construction Inspector to Lender stating that the Construction
Inspector has reviewed the Plans and Specifications and the cost
breakdown and that the proceeds of the Loan and the funds supplied
pursuant to Section 5.01(hh) above are adequate to complete the
construction of the Improvements on the Project. The appointment of a
Construction Inspector shall not place any duty or responsibility upon
Lender to inspect the Improvements or any obligation or liability upon
Lender regarding the quality of construction or the absence therefrom
of defects.
(kk) Lien Waivers. Borrower shall have delivered to Lender lien
------------
waivers and subordination of lien rights from the Project Architect,
the General Contractor and all subcontractors providing materials or
services to the Project prior to Closing.
(ll) Insurance Policies. Borrower shall have provided Lender
------------------
with certified copies of all insurance policies required by the Loan
Commitment and this Agreement, from companies satisfactory to Lender
showing Lender as loss payee and in amounts and with deductibles
acceptable to Lender, including, without limitation, policies of flood
insurance if the Project is situated in a "Flood Hazard Area".
(mm) Insurance Certificate. Lender shall have received a
---------------------
certificate from Borrower's or the General Contractor's insurance
carrier approved by Lender that indicates that the General Contractor
is covered by public liability and workman's compensation insurance,
in amounts acceptable to Lender in Lender's sole discretion.
(nn) Itemized Statement. Borrower shall have provided Lender
------------------
with (i) an itemized statement certified by Borrower of all costs and
expenses incurred by Borrower in connection with the acquisition of
the Real Property through the Closing Date and (ii) and a copy of
Borrower's fully executed contract for the purchase of the Real
Property.
(oo) Closing Statement. Borrower shall have delivered to Lender
-----------------
a closing statement executed by Borrower and Seller, if the Real
Property is acquired at closing and a non-foreign person certificate
from Seller.
(pp) Estoppel Certificate. Borrower shall have delivered to
--------------------
Lender an estoppel certificate and/or pay off letter from every
individual and entity holding a lien on the Real Property and/or
Improvements thereon. The certificate shall be signed by the
lienholder and shall indicate the present unpaid balance of the lien
including accrual interest to the proposed Closing Date, the daily
rate of accrual after such date, and the amount required to satisfy
and release the lien as of the proposed Closing Date. In the
alternative, Borrower shall certify to Lender that there are no liens
against the Property and/or Improvements as of the Closing Date.
(qq) Zoning Compliance. Borrower shall provide Lender with a copy
-----------------
of the applicable zoning ordinances, certified by an appropriate
municipal or county official to be a complete and accurate statement
therefore and written certification by said municipal or county
official setting forth the zoning classification of the Real Property
and stating that the contemplated Improvements and use thereof comply
with all applicable zoning ordinances. If such certification is not
available, Borrower shall provide such evidence of zoning as may be
acceptable to Lender.
(rr) Construction Contracts. Lender shall have received and
----------------------
approved a fixed cost contract with the General Contractor for the
construction of the Improvements on the Real Property covering the
items shown on the Budget, showing all direct construction costs and
indirect and overhead items. The General Contractor must be
acceptable to Lender. The General Contractor's contract shall be
subordinated to Lender and its liens. Borrower will not agree or
consent to any material amendment thereto without Lender's prior
written consent. Borrower shall also furnish to Lender, for Lender's
approval, financial statements of the General Contractor.
(ss) Payment and Performance Bond. Borrower shall provide Lender
----------------------------
with a performance and payment bond by a surety company acceptable to
Lender covering the General Contractor on the Project (and any
subcontractor for major structural components of the Project) for not
less than the cost of the construction contract and naming Lender as a
dual obligee. The dual obligee rider shall provide: "The Contractor
and Surety shall not be liable under this bond to the Owner or Lender
unless the said obligee, or either of them, shall make payments to the
Contractor in accordance with the terms of said Contract as to
payment, and shall perform all of the other obligations to be
performed under said Contract at the time and in the manner therein
set forth, provided that the obligations of Contractor and Surety
under said bond shall not be impaired unless Lender fails to cure any
default by Owner under the said Contract within a reasonable time
after Lender's receipt of written notice of said default." The bond
shall also provide that the surety waives notice of, and consents to,
changes in the construction contract, including changes in the plans
and specifications, to the extent any such changes do not increase the
contract price more than ten percent (10%).
(tt) Construction Permits. Borrower shall have provided Lender
--------------------
with certified copies of all necessary building and construction
permits, curb cut, sewer and water tap and other permits, licenses,
franchises and other agreements required for the development of the
Project, issued in the name of the Borrower.
(uu) Additional Information. Borrower shall have delivered such
----------------------
additional documents, instruments, and information as Lender or
Lender's legal counsel may reasonably request.
Section 5.02. Interim Advances:Continuing Conditions to the Lender's
------------------------------------------------------
Obligations to Make Loan Advances. Lender shall not be obligated to make
----------------------------------
any Advances hereunder unless and until each and every one of the
conditions set forth in Sections 2.01 and 5.01 hereof (which shall
---- ----
constitute continuing conditions for all Advances hereunder) and the
following further conditions shall have been satisfied (with proof thereof
in form and sufficiency as may be requested by Lender):
(a) No Event of Default. No Event of Default or any condition
-------------------
which with the passage of time or notice or both would constitute an
Event of Default shall exist hereunder or under any other Loan
Document.
(b) Compliance with Covenants. Borrower shall be in substantial
-------------------------
compliance with all covenants hereunder and under the other Loan
Documents.
(c) No Breach of Representations and Warranties. No breach of
-------------------------------------------
any representation or warranty of the Borrower or Guarantor hereunder
or under any of the Loan Documents shall have occurred.
(d) Adequate Funds. Borrower and Guarantor shall have proved to
--------------
Lender's satisfaction that sufficient funds are available to complete
the Improvements according to the plans and specifications.
(e) Inspection Reports. The Borrower, at the Borrower's sole
------------------
cost and expense, shall provide to the Lender an inspection report
from the Construction Inspector covering the stage of construction and
the condition of the Project, including the structure, roofing,
mechanical systems and electrical systems, the results of which report
shall be acceptable to Lender.
(f) Mortgagee Policy. The Borrower, at Borrower's sole cost and
-----------------
expense, will obtain endorsements to the original Title Policy so that
the coverage reflects the amount of the Advances made under the Loan
Documents.
(g) Notice of Commencement. Prior to commencement of
-----------------------
construction of the Project, Borrower shall deliver a Notice of
Commencement of Construction to Lender.
(h) Lien Waivers. If required by Lender, Borrower shall have
------------
delivered to Lender lien waivers and subordination of lien rights from
the General Contractor, Project Architect, and all subcontractors (who
have received or are owed payments in excess of $10,000.00) providing
materials or services to the Project.
(i) Inventory. Upon completion of the Improvements, Borrower
---------
shall have provided Lender with an inventory of the fixtures and
personal property owned by Borrower and purchased with any Loan
proceeds used in the maintenance, management and operation of the
Project, accompanied by a certification from Borrower that said
listing is a true and correct schedule of all fixtures and personal
property used in the maintenance, management and operation of the
Project, that such items constitute all of the fixtures and Personal
Property required in the maintenance, management and operation of the
Project, and that all such items are owned by Borrower free and clear
of any lien or security interest except that created by the Loan
Documents.
(j) Contracts. Within ten (10) days from the date of closing or
----------
in any case prior to the commencement of construction, Borrower shall
have provided Lender with fully executed counterparts of all
construction and design related contracts (together with all
amendments and modifications thereto) with the Project Architect and
any other person or entity relating to the construction of the
Improvements, which contracts shall be subordinated to Lender and its
liens. Borrower will not agree or consent to any material amendment
thereto without Lender's prior written consent. The contracts,
together with the identity of the Project Architect, Construction
Inspector and any other person or entity relating to the construction
of the Improvements shall have been previously approved by Lender in
writing.
(k) Certified Rent Roll. Following completion of the
-------------------
Improvements, Borrower shall have provided a certified rent roll to
the Lender covering the Project.
(l) Management and Lease Agreements. On or prior to the
-------------------------------
completion of the Improvements, Borrower shall have provided Lender
with a copy of the proposed Management Agreement, with any and all
amendments thereto, for the Project and form lease agreement covering
units in the Project, which agreements shall be in form and substance
satisfactory to Lender. The Management Agreement shall provide for a
fee not to exceed five percent (5%) of monthly collections and shall
provide for termination for cause on thirty (30) days notice and
shall further provide that in the event of foreclosure of the Project
by Lender or its assignee, Lender or its assignee shall have the right
to immediately terminate the Management Agreement without penalty.
(m) DHS Licenses. As soon as reasonably possible after the date
------------
that the Improvements are completed, Borrower shall provide Lender
will copies of all applicable DHS Licenses and other licenses
necessary for the operation of the Project.
(n) Other Documentation. If requested by the Lender, the
-------------------
Borrower shall have furnished to the Lender any other additional
documents as Lender may reasonably request.
Section 5.03. Final Disbursement. The final disbursement of the
------------------
Loan, including retainage, shall be subject and conditioned upon all
conditions for Advances set forth in Sections 2.01, 5.01 and 5.02 being
satisfied.
Section 5.04. Waiver of Conditions. Lender may defer any of the
--------------------
foregoing conditions to the Loan and Term Loan, and the fact that all of
the conditions may not have been satisfied at the time Lender executes this
Loan Agreement or advances any funds pursuant to the Loan or Term Loan
shall in no circumstances be considered evidence that Lender has waived any
of such conditions. Any waiver of such conditions must be in writing.
ARTICLE VI
Representations and Warranties
------------------------------
To induce Lender to enter into this Agreement, Borrower represents and
warrants to Lender that:
Section 6.01. Existence and Authority. Borrower is a Texas limited
-----------------------
liability company duly organized and validly existing under the laws of the
State of Texas; Borrower (a) has all requisite power to own assets and
carry on its business as now being or as proposed to be conducted; and (b)
is qualified to do business in all jurisdictions in which the nature of its
business makes such qualification necessary and where failure to so qualify
would have a material adverse effect on its business, financial condition,
or operations. Borrower has the power and authority to execute, deliver,
and perform its obligations under this Agreement and the other Loan
Documents to which it is or may become a party.
Section 6.02. Financial Statements. Borrower has delivered to Lender
--------------------
certain financial statements of Borrower and the Guarantor. The financial
statements are true and correct, have been prepared in accordance with
GAAP, and fairly and accurately present the financial condition of Borrower
and, to the best of Borrower's knowledge, the Guarantor as of the date
indicated therein and the results of operations for the period indicated
therein. Borrower does not have any material contingent liabilities,
liabilities for taxes, material forward or long-term commitments, or
unrealized or anticipated losses from any unfavorable commitments not
reflected in such financial statements. No material adverse change in the
condition, financial or otherwise, or operations of Borrower has occurred
since the effective date of the most recent financial statement referred to
in this Section.
Section 6.03. Default. Borrower is not in default in any respect
-------
under any loan agreement, indenture, mortgage, security agreement, or other
agreement or obligation to which it is a party or by which any of its
properties may be bound.
Section 6.04. Authorization and Compliance with Laws and Material
---------------------------------------------------
Agreements. The execution, delivery, and performance by Borrower of this
-----------
Agreement and the other Loan Documents to which Borrower is or may become a
party have been duly authorized by all requisite action on the part of
Borrower and do not and will not violate the organizational agreements of
Borrower or any law or any order of any court, governmental authority, or
arbitrator, and do not and will not conflict with, result in a breach of,
or constitute a default under, or result in the imposition of any Lien upon
any assets of Borrower pursuant to the provisions of any indenture,
mortgage, deed of trust, security agreement, franchise, permit, license, or
other instrument or agreement by which Borrower is bound.
Section 6.05. Litigation and Judgments. There is no action, suit,
------------------------
or proceeding before any court, governmental authority, or arbitrator
pending, or to the knowledge of Borrower, threatened against or affecting
Borrower or the Guarantor that would, if adversely determined, have a
material adverse effect on the financial condition or operations of
Borrower or the Guarantor or the ability of Borrower or the Guarantor to
pay and perform the Obligations. There are no outstanding judgments against
Borrower or the Guarantor.
Section 6.06. Rights in Properties; Liens. Borrower has good and
---------------------------
indefeasible title to or valid leasehold interests in its properties and
assets, real and personal reflected in the financial statements described
in Section 6.02, and none of the properties, assets, or leasehold interests
of Borrower is subject to any Lien, except as shown thereon.
Section 6.07. Enforceability. This Agreement constitutes, and the
--------------
other Loan Documents to which Borrower is party, when delivered, shall
constitute the legal, valid, and binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms,
except as limited by bankruptcy, insolvency, or other laws of general
application relating to the enforcement of creditor's rights.
Section 6.08. Approvals. No authorization, approval, or consent of,
---------
and no filing or registration with, any court, governmental authority, or
third party is or will be necessary for the execution, delivery, or
performance by Borrower of this Agreement and the other Loan Documents to
which Borrower is or may become a party or the validity or enforceability
thereof.
Section 6.09. Taxes. Borrower has filed all tax returns (federal,
-----
state, and local) required to be filed, including all income, franchise,
employment, property, and sales taxes, and has paid all of its tax
liabilities, and Borrower has no knowledge of any pending investigation of
Borrower by any taxing authority or of any pending but unassessed tax
liability of Borrower.
Section 6.10. Disclosure. No representation or warranty made by
----------
Borrower in this Agreement or in any other Loan Document contains any
untrue statement of a material fact or omits to state any material fact
necessary to make the statements herein or therein not misleading. There is
no fact known to Borrower which has a material adverse effect or which can
have a material adverse effect on the business, assets, financial
condition, or operations of Borrower that has not been disclosed in writing
to Lender.
Section 6.11. Principal Place of Business. The principal place of
---------------------------
business and chief executive office of Borrower and the place where
Borrower keeps its books and records is located at the address set forth in
Section 10.09.
Section 6.12. Other Agreements. Borrower is not a party to, or bound
----------------
by any agreement, condition, contract, or arrangement which might in the
future have a material adverse effect on the business, operations, or
financial condition of Borrower.
Section 6.13. Compliance with Law. Borrower is in compliance with
-------------------
all laws, rules, regulations, orders, and decrees which are applicable to
Borrower or any of its properties.
Section 6.14. No Work. Prior to the recording of the Deed of Trust,
-------
no work on the Project shall be commenced, and no materials or equipment
shall be delivered to or upon the Project.
Section 6.15. Forfeiture. Neither Borrower nor any Guarantor is or
----------
has been charged with or, to their knowledge, are under investigation for,
possible violations of the Racketeering, Influenced and Corrupt
Organizations Act ("RICO"), the Continuing Criminal Enterprises Act
("CCE"), the Controlled Substance Act of 1978, the Money Laundering Act of
1986, the Anti-Drug Abuse Act of 1986, or similar law providing for the
possible forfeiture of any of their respective assets or properties.
Section 6.16. Contracts. The Contracts as presented to Lender,
---------
include all amendments and modifications to the Contracts.
Section 6.17. DHS Requirements. The Improvements will be
----------------
constructed in accordance with all applicable DHS requirements. Upon
completion of the Improvements, the Borrower will operate the Project in
accordance with all applicable DHS rules and regulations. Borrower shall
promptly notify Lender of any notices or other correspondence received from
the DHS or any other governmental entity indicating that the Project is not
in compliance with DHS rules and regulations. Borrower shall take all
action necessary to maintain its DHS Licenses and shall take prompt action
to renew its DHS Licenses each year. Borrower shall provide Lender with
copies of all renewal DHS Licenses upon receipt.
ARTICLE VII
Positive Covenants and Agreements
---------------------------------
Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or Lender has any commitment hereunder,
Borrower will perform and observe the following positive covenants and
agreements, unless Lender shall otherwise consent in writing (which consent
may be conditioned upon the payment of a consent fee or an increase in the
interest rate on the Note).
Section 7.01. Financial Statements.
--------------------
(a) Guarantor shall furnish management prepared financial
statements to Lender for each fiscal quarter which statements shall be
due thirty (30) days after the end of each fiscal quarter.
Following completion of the Project, monthly operating statements
shall be due from Borrower within thirty (30) days of the end of each
month. Guarantor shall also furnish to Lender audited annual
financial statements beginning with the fiscal year ending January 31,
1997, containing balance sheets (reflecting, without limitation, all
contingent liabilities), income statements and statements of changes
in financial position (reflecting, without limitation, cash flow
changes) as at the end of such fiscal year and for the 12-month period
then ended, in each case setting forth in comparative form the figures
for the preceding fiscal year. All financial statements will be
prepared in reasonable detail, and all of the above prepared in
accordance with GAAP, consistently followed and applied and containing
only qualifications acceptable to Lender, in Lender's sole discretion.
Guarantor's and Borrower's financial statements shall be prepared by
the authorized officers of each familiar with and knowledgeable of the
information therein presented and responsible for the supervision of
the preparation of said financial statements for Borrower and
Guarantor. Borrower's financial statements shall be accompanied with
compiled accounts payable information and such other financial
information as Lender shall request.
(b) Within sixty days after the filing of Borrower's tax return,
Borrower shall furnish Lender with a copy of Borrower's United States
income tax return as filed with the Internal Revenue Service, together
with any and all exhibits and schedules filed in connection therewith,
beginning with the tax year ending January 31, 1997, and continuing
annually thereafter.
(c) Within sixty days after the filing of Guarantor's tax
return, Borrower shall cause Guarantor to furnish Lender with a copy
of Guarantor's United States income tax return as filed with the
Internal Revenue Service, together with any and all exhibits and
schedules filed in connection therewith, beginning with the tax year
ending January 31, 1997, and continuing annually thereafter.
Section 7.02. Certificates; Rent Roll; Other Information. Borrower
------------------------------------------
shall furnish to Lender all of the following:
(a) Within thirty (30) days from the end of each month beginning
with the first month after the completion of construction, (i) a copy
of the rent roll of the Project reflecting, at a minimum, the names of
all tenants, terms of leases, base rents, security deposits and
renewal options, and (ii) operating statements for the Project, which
rent roll and operating statement shall be certified by an authorized
officer of Borrower as to their accuracy, completeness and
truthfulness; and
(b) Promptly, upon request by Lender, any additional information
concerning Borrower which Lender may reasonably request.
Section 7.03. Performance of Obligations. Borrower will duly and
--------------------------
punctually pay and perform the Obligations in accordance with their
respective terms.
Section 7.04. Preservation of Existence and Conduct of Business.
-------------------------------------------------
Borrower will preserve and maintain its limited liability company status
and all of its leases, privileges, franchises, qualifications, and rights
that are necessary or desirable in the ordinary conduct of its business,
and conduct its business as presently conducted in an orderly and efficient
manner in accordance with good business practices.
Section 7.05. Maintenance of Project. Borrower will maintain the
----------------------
Project in good condition and repair (ordinary wear and tear excepted).
Section 7.06. Payment of Taxes and Claims. Borrower will pay or
---------------------------
discharge at or before maturity or before becoming delinquent (i) all
taxes, levies, assessments, and governmental charges imposed on it or any
of its property, and (ii) all lawful claims for labor, material, and
supplies, which, if unpaid, might become a Lien upon any of its property;
provided, however, that Borrower shall not be required to pay or discharge
any tax, levy, assessment, or governmental charge which is being contested
in good faith by appropriate proceedings diligently pursued, and for which
adequate reserves have been established.
Section 7.07. Insurance. Before commencement of the construction of
---------
the Improvements, and at all times thereafter, Borrower will maintain (or
with respect to the all-builder's risk coverage cause General Contractor to
maintain) with financially sound and reputable insurance companies
reasonably acceptable to Lender, workmen's compensation insurance and
insurance on Borrower's property, assets, and business in such amounts, and
with deductibles, acceptable to Lender, and against such risks as required
by Lender, and as set forth in the Loan Commitment (including, without
limitation, all builder's risk coverage for the Improvements, hazard,
comprehensive general liability insurance and extended coverage), and
Borrower shall provide Lender with evidence satisfactory to Lender in
Lender's reasonable discretion of such insurance coverage. Hazards
covered, the amounts of such coverage and the carrier providing such
coverage must be approved by Lender in writing. Lender shall provide
Borrower with a list of the hazards to be covered and the amounts of such
coverage prior to closing. In the case of hazard insurance and all
builder's risk, such insurance shall at least be in an amount equal to the
lesser of hundred percent (100%) of the full insurable value of the
insurable portion of the Improvements or an amount equal to the Loan
amount. All insurance policies shall be issued by insurers with a Best's
rating of not less than A+ and a financial size category of at least VII,
unless otherwise agreed by Lender. Each insurance policy covering
Collateral shall name Lender (or the holder of the Note) as a loss payee
subject to a mortgagee clause (without contribution) of the standard form
attached to or otherwise made a part of the applicable policy, and shall
provide that the same shall not be canceled or modified without at least
thirty (30) days prior written notice to Lender. All insurance policies
and renewals thereof shall be in a form reasonably acceptable to Lender.
Lender shall have the right to hold the policies and Borrower shall
promptly furnish or cause to be furnished to Lender all renewal notices and
all receipts of paid premiums. At least fifteen (15) days prior to the
expiration date of a policy, Borrower shall deliver to Lender a renewal
policy in form reasonably satisfactory to Lender.
If any of the Improvements on the Project is in a "Flood Hazard Area",
Borrower shall provide Lender with a flood insurance policy in an amount
equal to the Loan amount or the maximum amount available under the Flood
Disaster Protection Act of 1973 and regulations issued pursuant thereto, as
may be amended from time to time, whichever is less, in form complying with
the "insurance purchase requirement" of the Act which shall contain a
mortgagee clause in favor of Lender.
Section 7.08. Inspection Rights. At any reasonable time and from
-----------------
time to time, Borrower will permit representatives of Lender to examine the
books and records of, and visit and inspect the properties of Borrower and
to discuss the business, operations, and financial condition of Borrower
with Borrower's officers and employees and with their independent certified
public accountants.
Section 7.09. Keeping Books and Records. Borrower will maintain
-------------------------
proper books of record and account in which full, true, and correct entries
in conformity with GAAP shall be made of all dealings and transactions in
relation to its business and activities.
Section 7.10. Compliance with Laws. Borrower will comply with all
--------------------
material applicable laws, rules, regulations, and orders of any court,
governmental authority or arbitrator.
Section 7.11. Compliance with Agreements. Borrower will comply in
--------------------------
all material respects with all material agreements, indentures, mortgages,
deeds of trust, and other documents binding on it or affecting its
properties or business.
Section 7.12. Notices. Borrower will promptly notify Lender of (i)
-------
the occurrence of an Event of Default, (ii) the commencement of any action,
suit, or proceeding against Borrower that might have a material adverse
effect on the business, financial condition, or operations of Borrower, and
(iii) any other matter that might have a material adverse effect on the
business, financial condition, or operations of Borrower.
Section 7.13. Further Assurances. Borrower will execute and deliver
------------------
such further instruments as may be deemed reasonably necessary or desirable
by Lender to carry out the provisions and purposes of this Agreement and
the other Loan Documents and to preserve and perfect the Liens of Lender in
the Collateral.
Section 7.14. Required Additional Funds. In order to assure Lender
-------------------------
that sufficient funds are available to pay all of the costs to be incurred
in the construction of the Improvements on the Real Property, Borrower will
if required by Lender deposit in the Disbursement Account with Lender
additional funds over and above the amount of the Loan in an amount equal
to the difference between (i) the amount of the Loan plus paid receipts
for permissible development and construction costs approved by Lender and
paid by Borrower from Borrower's own funds and (ii) the finally approved
total cost to be incurred in connection with the construction of the
Improvements on the Project (including, without limitation, a sufficient
reserve for funding of interest). Prior to the disbursement of any Loan
proceeds pursuant to a request for disbursement, Borrower and the Guarantor
shall provide Lender with evidence satisfactory to Lender, in Lender's sole
discretion, that sufficient funds are available to complete the
construction of the Improvements on the Real Property according to the
approved Plans and Specifications.
Section 7.15. Commencement of Construction; Completion Deadline.
Borrower will commence construction of the Improvements on the Project
within sixty (60) days from the Closing Date (but not prior to the Closing
Date). Borrower shall cause the construction to be pursued with reasonable
diligence. Borrower shall cause the Improvements to be completed in
accordance with the Plans and Specifications approved by Lender no later
than thirty-six (36) months from the Closing Date, regardless of whether
the proceeds of the Loan are sufficient for that purpose. Borrower shall
notify Lender by written notice of the date upon which construction has
commenced.
Section 7.16. Security Deposits. If, at any time during the term of
-----------------
the Loan, Lender deems itself insecure, Borrower will upon Lender's written
request, establish an escrow account with Lender into which all security
deposits received by Borrower in connection with leasing units in the
Project shall be deposited, subject to the rights of tenants to
reimbursement under the leases.
Section 7.17. Contracts. Borrower shall maintain all Contracts in
---------
full force and effect during the term thereof.
Section 7.18. Net Worth and Liquidity. At all times during the loan,
-----------------------
Guarantor shall maintain a net worth of $30,000,000.00 and liquidity of
$6,000,000.00.
Section 7.19. Ownership of Guarantor. John Luciani (50.0% owner) and
----------------------
Bernard Rodin (50.0% owner) shall maintain their current ownership
interests in Guarantor for the term of the Loan and all extensions thereof.
Notwithstanding the foregoing, the Guarantor may be taken public by the
issuance of stock and up to 49% of the ownership interests in the Guarantor
may be sold to the general public in such offering, but Mr. Luciani and Mr.
Rodin shall maintain no less than a 51% ownership interest in Borrower.
ARTICLE VIII
Negative Covenants
------------------
Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or Lender has any commitment hereunder,
Borrower will perform and observe the following negative covenants, unless
Lender shall otherwise consent in writing, which consent may be conditioned
upon the payment of a consent fee or an increase in the interest rate on
the Note):
Section 8.01. Debt. Except as otherwise herein provided under
----
Section 10.20, Borrower will not incur, create, assume or permit to exist
any Debt, except (i) Debt to Lender, and (ii) Debt that is not secured by
liens on the Project.
Section 8.02. Limitation on Liens. Except as otherwise herein
-------------------
provided, Borrower will not incur, create, assume, or permit to exist any
Lien (other than as contemplated by the Loan Documents) against the Project
without the Lender's prior written consent.
Section 8.03. Transactions With Affiliates. Except for the
----------------------------
Management Agreement, Borrower shall not enter into any transaction with
any director, officer, employee, or any Affiliate of Borrower, without the
express written approval of Lender, other than in the ordinary course of
its business and upon substantially the same or better terms as it could
obtain in an arm's length transaction with an entity or person who is not
an Affiliate of Borrower.
Section 8.04. Disposition of Project. Borrower will not sell, lease
----------------------
(other than to tenants in the ordinary course of business), assign,
transfer, or otherwise dispose of any of the Project, without the Lender's
prior written approval.
Section 8.05. Structure of Borrower. No change in the structure of
---------------------
Borrower or the Guarantor shall occur except as contemplated by Section
7.19 hereof without Lender's written approval.
Section 8.06. Distributions/Fees. Borrower shall not make any
------------------
distribution of Project revenues to any of its members until the
Improvements are completed (such completion to be evidenced by a
Certificate of Substantial Completion of the Project Architect and
confirmed by the Construction Inspector). Distributions are permitted
thereafter, so long as (i) no Event of Default exists at such time, or
would exist immediately thereafter, and (ii) the Borrower has complied with
Section 7.05 hereof.
Section 8.07. Management of the Project. The management agreement
-------------------------
approved by Lender can not be amended without Lender's approval.
Section 8.08. Lease Agreements. Borrower shall not enter into any
----------------
leases providing for the occupancy of any unit in the Project except for
tenant leases in substantially the form approved by Lender in writing.
Borrower shall not permit any amendment of the Leases except in the
ordinary course of business.
Section 8.09. Asbestos Containing Materials. Borrower will not
-----------------------------
permit the use of any product, floor covering, insulation, or paint that
contains asbestos in connection with the construction of the Improvements.
Section 8.10. Amendments to Contracts and Plans and Specifications.
----------------------------------------------------
Borrower will neither seek nor permit any further amendment to the
Contracts, or any of them, as approved by Lender, without prior written
consent of Lender. No material amendment or deviation shall be made to the
Plans and Specifications, and no change order shall be issued without the
prior written consent of Lender.
ARTICLE IX
Default
-------
Section 9.01. Events of Default. Each of the following shall be
-----------------
deemed an "Event of Default":
(a) Borrower shall fail to pay or perform when due the
Obligations or any part thereof, and such failure, shall continue for
ten (10) days following notice thereof from Lender.
(b) Any representation or warranty made by Borrower or Guarantor
in any Loan Document or in any certificate, report, notice, or
financial statement furnished at any time in connection with this
Agreement shall be false, incomplete or erroneous in any material
adverse respect when made.
(c) Unless otherwise specified herein, Borrower shall fail to
perform, observe, or comply in any material respect with any covenant,
agreement, or term contained in this Agreement or any other Loan
Document (other than the failure to make payment when due on the
Obligations), and such failure shall continue for thirty (30) days
following notice thereof from Lender.
(d) Borrower shall commence a voluntary proceeding seeking
liquidation, reorganization, or other relief with respect to itself or
its debts under any bankruptcy, insolvency, or other similar law now
or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian, or other similar official of it or a
substantial part of its property or shall consent to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it or shall
make a general assignment for the benefit of creditors or shall
generally fail to pay its debts as they become due or shall take any
corporate action to authorize any of the foregoing.
(e) Borrower shall fail to contest and dismiss within a period
of ninety (90) days after the commencement thereof any involuntary
proceeding commenced against Borrower seeking liquidation,
reorganization, or other relief with respect to it or its debts under
any bankruptcy, insolvency, or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
custodian, or other similar official for it or a substantial part of
its property.
(f) Borrower shall fail to discharge within a period of sixty
(60) days after the commencement thereof any attachment,
sequestration, or similar proceeding against the Project or Personalty
that will in Lender's sole discretion have a materially adverse impact
on the financial and business affairs of Borrower.
(g) Borrower shall fail to satisfy and discharge within ninety
(90) days after entry (but in any event prior to the commencement of
proceedings to enforce collection) of any final judgment or judgments
against it for the payment of money in an amount that will in Lender's
sole discretion have a materially adverse impact on the financial and
business affairs of Borrower.
(h) This Agreement or any other Loan Document shall cease to be
in full force and effect in a material respect or shall be declared
null and void or the validity or enforceability thereof shall be
contested or challenged by Borrower or Borrower shall deny that it has
any further liability or obligation under any of the Loan Documents.
(i) A material deterioration in the financial condition of
Borrower shall have occurred.
(j) Borrower shall default in any payment of principal or
interest due on any other recourse Debt beyond any grace period or
Borrower is made a party defendant to a law suit in which damages are
alleged equal to or in excess of $1,000,000 and such damages are not
covered by Borrower's liability insurance, or if dollar amounts are
not specifically pled in one or more of the claims for relief in any
such lawsuit, where Lender concludes that the exposure thereunder, if
the claims asserted were true, would equal or exceed $1,000,000, where
Lender determines that these damages will not be covered by Borrower's
liability insurance (provided that Lender's conclusion is not
arbitrary or capricious), or where the insurance deductible is greater
than $100,000.00 per casualty.
(k) Borrower shall admit in writing its inability to pay its
Debts as they become due.
(l) Borrower shall fail to discharge within a period of ninety
(90) days of the filing of any formal charges under federal or state
law for which forfeiture of Borrower's interest in the Project or the
granting of a lien against the Project, which lien is or could be
superior to any of Lender's liens against the Project, is a potential
penalty or remedy.
Section 9.02. Remedies Upon Default. Upon the occurrence of an Event
---------------------
of Default, Lender may without notice terminate its obligation to lend
hereunder and declare the Obligations or any part thereof to be immediately
due and payable, and the same shall thereupon become immediately due and
payable, without notice, demand, presentment, notice of dishonor, notice of
acceleration, notice of intent to accelerate, notice of intent to demand,
protest, or other formalities of any kind, all of which are hereby
expressly waived by Borrower; provided, however, that upon the occurrence
of an Event of Default under Section 9.01(d) or Section 9.01(e), the
obligation of Lender to lend hereunder shall automatically terminate, and
the Obligations shall become immediately due and payable without notice,
demand, presentment, notice of dishonor, notice of acceleration, notice of
intent to accelerate, notice of intent to demand, protest, or other
formalities of any kind, all of which are hereby expressly waived. Upon the
occurrence of any Event of Default, Lender may exercise all rights and
remedies available to it in law or in equity, under the Loan Documents, or
otherwise. Upon the occurrence of any Event of Default, Lender shall have
the right to require Borrower to replace the Property Manager, and to
immediately deposit all security deposits in an escrow account maintained
with Lender subject to the rights of tenants under tenant leases.
ARTICLE X
Miscellaneous
-------------
Section 10.01. Reimbursement of Expenses of Lender. Borrower and
-----------------------------------
Guarantor shall be severally liable for and hereby agree to pay Lender on
demand or if no demand is made within twenty (20) days following receipt of
an invoice therefor: (i) all reasonable costs and expenses incurred by
Lender in connection with the preparation, negotiation, and execution of
this Agreement and the other Loan Documents and any and all amendments,
modifications, renewals, extensions, and supplements thereof and thereto,
including, without limitation, the reasonable fees and expenses of Lender's
legal counsel, (ii) all reasonable costs and expenses incurred by Lender in
connection with the enforcement of this Agreement or any other Loan
Document, including, without limitation, the reasonable fees and expenses
of Lender's legal counsel, (iii) all other reasonable costs and expenses
incurred by Lender in connection with this Agreement or any other Loan
Document, including, without limitation, all costs, expenses, taxes
(excluding income taxes), assessments, filing fees, credit investigations,
and other charges levied by a governmental authority or otherwise payable
in respect of this Agreement or any other Loan Document or in obtaining any
mortgagee title insurance policy, endorsement, survey, environmental
report, or appraisal in respect of the Collateral, and (iv) all reasonable
costs and expenses incurred by Lender or Lender's agents relating to any
inspections of the Project and any audit of the books, records and
operations of Borrower and the Project, including independent analysts,
consultants, engineers, inspectors, auditors, and appraisers. The amounts
described herein shall be paid even if Borrower fails to satisfy the
conditions of Article V hereof and this Loan fails to fund as a result.
Lender shall not be required to pay any premium or other charge or any
brokerage fee or commission or similar compensation in connection with the
Loan unless the foregoing is asserted by, through or under Lender.
Section 10.02. Indemnification. Borrower hereby indemnifies Lender
---------------
and each affiliate thereof and their respective officers, directors,
employees, and agents from, and holds each of them harmless against, any
and all losses, liabilities, claims, damages, costs, and expenses to which
any of them may become subject, insofar as such losses, liabilities,
claims, damages, costs, and expenses arise from or relate to (i) any of the
Loan Documents or any of the transactions contemplated thereby, (ii) from
any investigation, litigation, or other proceeding, including, without
limitation, any threatened investigation, litigation, or other proceeding
relating to any of the foregoing, including the violation of any applicable
environmental law, rule or regulation, now or hereafter existing, that
affects the Project, but excluding any of the foregoing attributable to
Lender's negligence or willful misconduct, and (iii) the claims of any and
all brokers or anyone else claiming a fee by, through or under Borrower in
connection with arranging the financing herein described.
Section 10.03. Restatement. The delivery of each statement, report,
-----------
and certificate to Lender pursuant to this Agreement shall by virtue of
such delivery alone constitute a restatement of the representations and
warranties contained in Article VI hereof on and as of the date of
delivery. Each such delivery shall also constitute a representation and
warranty at the time of said delivery that no Event of Default has occurred
and is continuing.
Section 10.04. No Waiver; Cumulative Remedies. No failure on the
------------------------------
part of Lender to exercise and no delay in exercising, and no course of
dealing with respect to, any right, power, or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power, or privilege under this Agreement
preclude any other or further exercise thereof or the exercise of any other
right, power, or privilege. The rights and remedies provided for in this
Agreement and the other Loan Documents are cumulative and not exclusive of
any rights and remedies provided by law.
Section 10.05. Successors and Assigns. This Agreement is binding
----------------------
upon and shall inure to the benefit of Lender and Borrower and their
respective successors and assigns, except that Borrower may not assign or
transfer any of its rights or obligations under this Agreement without the
prior written consent of Lender.
Section 10.06. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made in this Agreement or any other Loan
Document or in any document, statement, or certificate furnished in
connection with this Agreement shall survive the execution and delivery of
this Agreement and the other Loan Documents, and no investigation by Lender
or any closing shall affect the representations and warranties or the right
of Lender to rely upon them.
Section 10.07. Entire Agreement; Amendment. THE PARTIES HERETO
---------------------------
EXPRESSLY ACKNOWLEDGE AND AGREE, THAT WITH REGARD TO THE SUBJECT MATTER OF
THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREIN: (1) THERE ARE NO
ORAL AGREEMENTS BETWEEN THE PARTIES HERETO AND (2) THIS AGREEMENT,
INCLUDING THE DEFINED TERMS AND ALL EXHIBITS AND ADDENDA, IF ANY, ATTACHED
HERETO: (a) EMBODIES THE FINAL AND COMPLETE AGREEMENT BETWEEN THE PARTIES;
(b) SUPERSEDES ALL PRIOR AND CONTEMPORANEOUS NEGOTIATIONS, OFFERS,
PROPOSALS, AGREEMENTS, COMMITMENTS, PROMISES, ACTS, CONDUCT, COURSE OF
DEALING, REPRESENTATIONS, STATEMENTS, ASSURANCES AND UNDERSTANDINGS,
WHETHER ORAL OR WRITTEN; AND (c) MAY NOT BE VARIED OR CONTRADICTED BY
EVIDENCE OF ANY SUCH PRIOR OR CONTEMPORANEOUS MATTER OR BY EVIDENCE OF ANY
SUBSEQUENT ORAL AGREEMENT OF THE PARTIES HERETO. The provisions of this
Agreement and the other Loan Documents to which Borrower is a party may be
amended or waived only by an instrument in writing signed by the parties
hereto.
Section 10.08. Maximum Interest Rate. It is the intention of Lender,
---------------------
Borrower, the Guarantor, and all other parties to the Loan to conform to
and contract in strict compliance with applicable usury laws from
time-to-time in effect. All agreements between Lender or any other holder
of the Note and Borrower (or any other party liable with respect to
indebtedness under the Loan Documents) are hereby limited by this
provision, which shall control and override all such agreements. In no
way, nor in any event or contingency (including, but not limited to,
prepayment, default, demand for payment, or the acceleration of maturity of
any Obligations, or the recharacterization of any application fee, loan
commitment fees, additional commitment fees, or origination fees as
interest), shall the interest taken, reserved, contracted for, charged or
received under the Note, or otherwise, exceed the Maximum Rate. If, from
any possible construction of any document, interest would otherwise be
payable in excess of the Maximum Rate, any such construction shall be
subject to this provision, and such document shall be automatically
reformed, and the interest payable shall be automatically reduced to the
Maximum Rate permitted under applicable law, without the necessity of the
execution of any amendment or new document. If Lender or the holder of the
Note shall ever receive any thing of value that is characterized as
interest under applicable law and that would apart from this provision, be
in excess of the Maximum Rate, an amount equal to the amount that would
have been excessive interest shall, without penalty, be applied to the
reduction of the principal amount owing on the Note in the inverse order of
its maturity and not to the payment of interest, or refunded to Borrower or
the other payor thereof if and to the extent such amount, which would have
been excessive, exceeds such unpaid principal. The right to accelerate the
maturity of the Note, or any other indebtedness, does not include the right
to accelerate any interest that has not otherwise accrued on the date of
such acceleration, and the Lender or the holder thereof does not intend to
charge or receive any unearned interest in the event of acceleration. All
interest paid or agreed to be paid to the Lender or the holder of the Note
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full stated term (including any renewal
or extension) of the Note so that the amount of interest on account of such
indebtedness does not exceed the Maximum Rate. As used in this paragraph,
the term "applicable law" shall mean the laws of the State of Texas or the
federal laws of the United States of America, which ever laws allow the
greater h laws now exist may be changed or amended or come in effect in the
future.
Section 10.09. Notices. Any notice, consent, request, demand or
-------
other communication required or permitted to be given under any of the Loan
Documents to Lender or Borrower must be in writing and shall be deemed
sufficiently given or made when (i) delivered in person, (ii) sent by
private courier or national overnight delivery service with proof of
delivery and courier fees paid by sender, (iii) sent by telecopy with
either telephonic confirmation of receipt or with a hard copy sent that day
by national overnight delivery service, or (iv) three (3) days after
depositing in the United States mail by first class mail, registered or
certified, return receipt requested, postage prepaid, as follows:
To Lender: Bank United
3200 Southwest Freeway, Suite 1900
P.O. Box 1370
Houston, Texas 77251-1370
Attention: Casey Moore
Telephone: (713) 543-6500
Telecopy: (713) 543-6604
With copy to: Nancy F. Martin
Shannon, Martin, Finkelstein & Sayre
1300 Two Allen Center
1200 Smith Street
Houston, Texas 77002
Telecopy: (713) 752-0337
Telephone: (713) 646-5560
To Borrower: Leisure Centers LLC-1
c/o Grand Court Lifestyles, Inc.
2650 North Military Trail, Suite 350
Boca Raton, Florida 33431-6358
Attention: Mr. Dorian Luciani
Telephone: (561) 997-0323
Telecopy: (561) 997-7592
With copy to: Eugene Sanders, Esq.
2650 North Military Trial, Suite 250
Boca Raton, Florida 33431-6358
Telecopy: (561) 994-9585
Telephone: (561) 994-8342
or such other address as shall be set forth in a notice from the
appropriate party given in compliance with this Section. Notwithstanding
anything to the contrary herein, any notice delivered pursuant to Section
51.002 of the Texas Property Code shall be deemed sufficiently given when
deposited in the United States mail by first class mail, registered or
certified, return receipt requested, postage prepaid to the address of
Borrower as set forth above.
Section 10.10. Applicable Law and Venue. This Agreement shall be
------------------------
governed by and construed in accordance with the laws of the State of Texas
and the applicable laws of the United States of America. This Agreement has
been entered into in Harris County, Texas, and it shall be performable for
all purposes in Harris County, Texas. Courts within the State of Texas
shall have jurisdiction over any and all disputes between Borrower and
Lender, whether in law or equity, including, but not limited to, any and
all disputes arising out of or relating to this Agreement or any other Loan
Document; and venue in any such dispute whether in federal or state court
shall be laid in Harris County, Texas.
Section 10.11. Counterparts. This Agreement may be executed in one
------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 10.12. Severability. Any provision of this Agreement held by
------------
a court of competent jurisdiction to be invalid or unenforceable shall not
impair or invalidate the remainder of this Agreement and the effect thereof
shall be confined to the provision held to be invalid or illegal.
Section 10.13. Headings. The headings, captions, and arrangements
--------
used in this Agreement are for convenience only and shall not affect the
interpretation of this Agreement.
Section 10.14. Participation. Lender shall have the right at any
-------------
time and from time to time to grant participation in the Note and any other
Loan Documents. Each actual or proposed participant shall be entitled to
receive from Lender all information received by Lender regarding the credit
worthiness of Borrower, including, without limitation, information required
to be disclosed to a participant pursuant to Banking Circular 181 (Rev.,
August 2, 1984), issued by the Comptroller of the Currency (whether the
actual or proposed participant is subject to the circular or not).
Section 10.15. Construction. Borrower and Lender acknowledge that
------------
each of them has had the benefit of legal counsel of its own choice and has
been afforded an opportunity to review this Agreement and the other Loan
Documents with its legal counsel.
Section 10.16. Waiver of Jury Trial. Borrower and Guarantor hereby
--------------------
expressly waive any right to a trial by jury in any action or legal
proceeding arising out of or relating to this Agreement or any other Loan
Document or the transactions contemplated hereby or thereby.
Section 10.17. Calculation of Deficiency. If all or any portion of
-------------------------
the Project is foreclosed upon pursuant to a judicial or nonjudicial
foreclosure sale, then notwithstanding the provisions of Sections 51.003,
51.004, and 51.005 of the Texas Property Code (as the same may be amended
from time to time), and to the extent permitted by law, Borrower agrees
that Lender shall be entitled to seek a deficiency judgment from Borrower
and any other party obligated on the Note or a Guaranty of such Note equal
to the difference between the amount owing on the Note and the total amount
for which the Project was sold pursuant to a judicial or nonjudicial
foreclosure sale. Borrower expressly recognizes that this Section
constitutes a waiver of the above-cited provisions of the Texas Property
Code which would otherwise permit Borrower, Guarantor and other persons
against whom recovery of deficiencies is sought or Guarantor independently
(even absent the initiation of deficiency proceedings against them) to
present competent evidence of the fair market value of the Project as of
the date of the applicable foreclosure sale and offset against any
deficiency the amount by which the foreclosure sale price is determined to
be less than such fair market value. Borrower further recognizes and
agrees that this waiver creates an irrebuttable presumption that the
foreclosure sale price is equal to the fair market value of the Project for
purposes of calculating deficiencies owed by Borrower, any Guarantor, and
others against whom recovery of a deficiency is sought.
Alternatively, in the event the waiver provided above is determined by
a court of competent jurisdiction to be unenforceable, the following shall
be the basis for the finder of fact's determination of the fair market
value of the Project as of the date of the foreclosure sale in proceedings
governed by Sections 51.003, 51.004, and 51.005 of the Texas Property Code
(as amended from time to time);
(1) The Project shall be valued in an "as is" condition as of the
date of the foreclosure sale, without any assumption or expectation
that the Project will be repaired or improved in any manner before a
resale of the Project after foreclosure;
(2) The valuation shall be based upon an assumption that the
foreclosure purchaser desires a prompt resale of the Project for cash
promptly (but no later than twelve months) following the foreclosure
sale;
(3) All reasonable closing costs customarily borne by the seller in a
commercial real estate transaction shall be deducted from the gross
fair market value of the Project, including, without limitation,
reasonable brokerage commissions, title insurance, a survey of the
Project, tax prorations, reasonable attorney's fees, and marketing
costs;
(4) The gross fair market value of the Project shall be further
discounted to account for any estimated holding costs associated with
maintaining the Project pending sale, including, without limitation,
utilities expenses, property management fees, taxes and assessments
(to the extent not accounted for in paragraph 3 above), and other
maintenance expenses; and
(5) Any expert opinion testimony given or considered in connection
with a determination of the fair market value of the Project must be
given by persons having at least five years experience in appraising
property similar to the Project and who have conducted and prepared a
complete written appraisal of the Project taking into consideration
the factors set forth above.
Section 10.18. Arbitration. To the maximum extent not prohibited by
-----------
law, any controversy, dispute or claim arising out of, in connection with,
or relating to the Loan or the Loan Documents or any transaction provided
for therein, including, but not limited to, any claim based on or arising
from an alleged tort or an alleged breach of any agreement contained in any
of the Loan Documents, shall, at the request of any party to the Loan or
Loan Documents (either before or after the commencement of judicial
proceedings) be settled by arbitration pursuant to Title 9 of the United
States Code, which the parties hereto acknowledge and agree applies to the
transaction involved herein, and in accordance with the Commercial
Arbitration Rules of the American Arbitration Association (the "AAA"). In
any such arbitration proceeding: (i) all statutes of limitations which
would otherwise be applicable shall apply; and (ii) the proceeding shall be
conducted in Houston, Texas, by a single arbitrator, if the amount in
controversy is one million dollars ($1,000,000.00) or less, or by a panel
of three arbitrators if the amount in controversy is over one million
dollars ($1,000,000.00). All arbitrators shall be selected by the process
of appointment from a panel pursuant to Section 13 of the AAA Commercial
Arbitration Rules, and each arbitrator shall have AAA acknowledged
expertise in the subject matter of the controversy, dispute or claim. Any
award rendered in any such arbitration proceeding shall be final and
binding, and judgment upon any such award may be entered in any court
having jurisdiction.
If any party to the Loan or Loan Documents files a proceeding in any
court to resolve any such controversy, dispute or claim, such action shall
not constitute a waiver of the right of such party or a bar to the right of
any other party to seek arbitration under the provisions of this Section of
that or any other claim, dispute or controversy, and the court shall, upon
motion of any party to the proceeding, direct that such controversy,
dispute or claim be arbitrated in accordance with this Section.
Notwithstanding any of the foregoing, the parties hereto agree that no
arbitrator or panel of arbitrators shall possess or have the power to (i)
assess punitive damages, (ii) dissolve, rescind or reform (except that the
arbitrator may construe ambiguous terms) the Loan or any Loan Documents,
(iii) enter judgment on the debt, (iv) exercise equitable powers or issue
or enter any equitable remedies or (v) allow discovery of attorney/client
privileged information, and the parties hereby waive the aforementioned
remedies. The Commercial Arbitration Rules of the AAA are hereby modified
to this extent for the purpose of arbitration of any dispute, controversy
or claim arising out of, in connection with, or relating to the Loan or any
Loan Document.
No provision of, or the exercise of any rights under, this Section
shall limit or impair the right of any party to the Loan Documents before,
during or after any arbitration proceeding to: (i) exercise self-help
remedies such as setoff or repossession; (ii) foreclose (judicially or
otherwise) any lien on or security interest in any real or personal
property Collateral; or (iii) obtain emergency relief from a court of
competent jurisdiction to prevent the dissipation, damage, destruction,
transfer, hypothecation, pledging or concealment of assets or of Collateral
securing any indebtedness, obligation or guaranty referenced in the Loan
Documents. Such emergency relief may be in the nature of, but is not
limited to: pre-judgment attachments, garnishments, sequestrations,
appointments of receivers, or other emergency injunctive relief to preserve
the status quo.
In the event applicable law prohibits the submission of a particular
controversy, dispute, or claim arising out of or in connection with any of
the Loan Documents or transactions contemplated therein to arbitration,
Borrower and Lender agree that any actions or proceedings in connection
therewith shall be tried and litigated only in the state and federal courts
located in the jurisdiction in which the Property is located or any other
court in which Lender shall initiate legal or equitable proceedings that
has subject matter jurisdiction over the matter in controversy. Borrower
and Lender, to the extent permitted by applicable law, waive any right to
assert the doctrine of forum non-conveniens or to object to the venue to
the extent any proceeding is brought in accordance with this paragraph.
Section 10.19. Additional Obligations. In addition to all
----------------------
Obligations hereunder, under the Note and under the other Loan Documents,
Borrower shall be personally liable on a joint and several basis with the
Guarantor, in the amount of any loss, damage or cost resulting from (i)
fraud or intentional misrepresentation by Borrower or any Guarantor in
connection with obtaining the loan evidenced by the Note or in complying
with Borrower's obligations under the Note, the Deed of Trust, or any other
Loan Documents ( In such event, the "loss" shall be deemed to include but
not be limited to, any loss of sums owing from Borrower under the Note, the
Deed of Trust and any other Loan Documents), (ii) failure to remit to
Lender insurance proceeds, condemnation awards, or other sums or payments
attributable to the Project in accordance with the provisions of the Deed
of Trust, except to the extent that Borrower did not have the legal right,
because of a bankruptcy, receivership, or similar judicial proceeding, to
direct disbursement of such sums or payments, (iii) failure to apply to
principal and interest under the Note, payment of utilities, taxes and
assessments, ground rents, if any, on the Project as they become due and
payable, or otherwise remit to Lender all rents, profits, issues, products
and income of the Project received following any Event of Default and its
continuance under the Note or the Deed of Trust (including any received or
collected by or on behalf of Borrower after an Event of Default, except to
the extent that Borrower did not have the legal right, because of a
bankruptcy, receivership or similar judicial proceeding, to direct the
disbursement of such sums), (iv) removal of any personalty or fixtures
constituting a portion of the Project except as otherwise allowed herein or
under the terms of the Deed of Trust, (v) failure to pay any valid
mechanics', materialman's or similar lien claimants' liens arising from
work performed or materials furnished in connection with the Project prior
to any sale or foreclosure thereof, (vi) Borrower's failure to deliver to
Lender following default under the Loan Documents and upon demand by
Lender, all security deposits received in connection with the Project,
subject to the rights of tenants under tenant leases, (vii) any waste of or
damage to the Project caused by the willful or wanton acts or omissions of
Borrower or its agents, or any deferred maintenance of the Project caused
by the inaction of Borrower in which case the loss shall be deemed to
include all costs of repair, replacement or rehabilitation of the Project
(for purposes of this Section 10.19, "deferred maintenance" shall mean a
failure to maintain the Project in good repair (reasonable wear and tear
excepted) by failing to replace and/or repair improvements, fixtures, and
appliances as needed to maintain the Project in good repair (reasonable
wear and tear excepted) and the equivalent of its original condition,
reasonable wear and tear excepted) and (viii) any obligation of Borrower
arising under Paragraph 2.4 of the Deed of Trust, and/or the Environmental
Indemnity which event, the "loss" shall include all obligations of Borrower
under the Environmental Indemnity.
Section 10.20. Subordinate Debt. Notwithstanding anything contained
----------------
herein to the contrary, Borrower shall have the right to obtain a
subordinated second lien deed of trust on the Project from an affiliated
entity, provided (i) that the lien of such second lien deed of trust is
subordinate and inferior to the Deed of Trust in favor of Lender to secure
the Loan and (ii) under the terms of the second lien deed of trust the
Trustee is not allowed to foreclose at any time while the Loan is
outstanding.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
BORROWER:
--------
LEISURE CENTERS LLC-1,
a Texas limited liability company
By: Grand Court Lifestyles, Inc.,
Its Manager
By: /s/ Dorian Luciani
---------------------------------------------
Dorian Luciani, Senior Vice President
LENDER:
------
BANK UNITED
By: /s/ Casey Moore
---------------------------------------------
Casey Moore, Vice President
<PAGE>
SCHEDULE 1
----------
Date
Mr. Casey Moore
Bank United
3200 Southwest Freeway, Suite 1300
Houston, Texas 77027
Re: Loan Number , Loan Amount: $7,000,000 ("Loan")
--------------
Borrower Name: Leisure Centers LLC-1 ("Borrower")
Dear Mr. Moore:
Borrower hereby requests funding of $ from the above
--------------
referenced Loan for the work in place documented in the attached AIA draw
schedule. Borrower represents that all of the materials submitted in
support of this draw have been reviewed by Borrower and are true and
correct to the best of Borrower's knowledge.
Borrower understands that the final draw funding is subject to change, due
to third party inspections and lender's approval. Borrower authorizes that
the draw be funded by:
1) Wire to:
-------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
2) Check to:
------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
Signed:
LEISURE CENTERS LLC-1,
a Texas limited liability company
By: Grand Court Lifestyles, Inc., Its Manager
By:
----------------------------------------------------------------------
Dorian Luciani, Senior Vice President
<PAGE>
SCHEDULE 2
----------
AFFIDAVIT OF BILLS PAID
STATE OF TEXAS :
: KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF :
---------
BEFORE ME, the undersigned authority, a Notary Public in and for the
State of Texas, on this day personally appeared:
, as vice president of Grand Court
-------------------------------
Lifestyles, Inc., the of Leisure Centers LLC-1
----------------
("Borrower") who being duly sworn by me, upon oath says:
On behalf of the Borrower, the owner of the land for improvements
being erected on the following described property, I certify that all bills
for labor and materials have been paid or will be paid with the proceeds of
this draw; that the Borrower has no notice of any liens other than that of
Bank United, Houston, Texas, being in existence in the following described
property, to wit:
SEE EXHIBIT A
That the facts herein stated are within my knowledge as such officer.
I further acknowledge the receipt of from Bank United,
---------------
Houston, Texas, on , for improvements on and for
------ -------------------
which the above described property is security.
LEISURE CENTERS LLC-1,
a Texas limited liability company
By: Grand Court Lifestyles, Inc.,
Its Manager
By:
-----------------------------------
Dorian Luciani, Senior Vice
President
UBSCRIBED AND SWORN TO BEFORE ME, this day of , 199 .
---- -------------- ----
--------------------------------------------------
-----------
Notary Public in and for the
State of Texas
<PAGE>
SCHEDULE 3
----------
PARTIAL RELEASE OF LIEN
-----------------------
STATE OF TEXAS :
: KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF :
-------
The undersigned, (the "Subcontractor"), has performed the labor or
furnished materials or done both, pursuant to either a Purchase Order or a
Subcontract with Leisure Centers LLC-1, a Texas limited liability company
(the "Owner"), in connection with the construction of the improvements
located at (the "Subject
-----------------------------------------
Property").
As a result of the foregoing, $ is due and payable to the
--------------
Subcontractor, for the period ending, , 19 , (the "Payment
------------ ----
Date"). This amount represents all sums due Subcontractor, except as
hereinafter noted, for materials supplied, and/or labor performed to the
Payment Date in connection with the construction of improvements on the
Subject Property.
In consideration of the payment of the above stated sum, the receipt of
which is hereby acknowledged, Subcontractor hereby waives, relinquishes,
and releases any and all liens, rights, and interests (including, without
limitation, all interest in and to mechanic's and materialmen's liens),
owned, claimed or held, to be owned, claimed or held by Subcontractor in
and to the Subject Property and to the improvements now or hereafter
constructed thereon, and does hereby release, discharge and acquit the
Owner, its successors and assigns, from all claims, debts, and demand by
reason of the labor performed and/or materials furnished by Subcontractor
prior to and including the Payment Date, except as herein provided.
The undersigned has actual knowledge that all bills owed by Subcontractor
as of the Payment Date for materials furnished and labor performed in
connection with the construction have been fully paid and satisfied or will
be fully paid and satisfied out of the sum stated above. Subcontractor does
further guaranteed that if for any reason a lien or liens are filed for
materials or labor against the Subject Property by virtue of
Subcontractor's participation in the construction of said improvements, or
that of any individual or entity Subcontractor has subcontracted with or
procured materials from, Subcontractor will immediately obtain a settlement
of such lien or liens and obtain and furnish Owner, its successors and
assigns, a release thereof or a bond for release thereof, and if
Subcontractor cannot obtain such a release, indemnify the Owner, its
successors and assigns, for any and all costs the Owner, its successor and
assigns, may incur in removing said lien or liens.
Subcontractor does hereby acknowledge and agree that but for the
representations and agreements contained herein concerning the total
amounts due and owing, the Owner would not make the payment receipted
herein above, and Owner is relying upon such representations and
agreements. The only amounts not included within the waiver and release
contained herein as of the Payment Date are: $ , (retainage),
-------------
and $ , (disputed charges).
---------------
Executed this day of , 19 .
---------------- ---------------------- --
"Subcontractor"
--------------------
(Company Name)
By:
---------------------
Title:
------------------
THE STATE OF TEXAS :
:
COUNTY OF :
----------
This instrument was acknowledged before me on this
------------- ----
of , 19 by
---------- -------------------------- --- -----------------------
, of
----------------------------- ---------------------------- -----------
, on behalf of said .
---------- ---------------
--------------------------------------------------
Notary Public in and for the State of Texas
My commission Expires: , 19
------- --
--------------------------------------------------
Printed Name of Notary
<PAGE>
EXHIBIT A
Legal description of land:
Being a tract situated in Corpus Christi, Nueces County, Texas
comprised of Lot Four (4), Block Seven (7), Bent Tree Unit 2, as
shown on the map thereof in Volume 57 at Pages 99-100, inclusive
of the Map Records of Nueces County, Texas and being more
particularly described by metes and bounds as follows:
BEGINNING at a 5/8 inch iron rod found for the eastmost corner of
said Lot 4, Block 7, and the eastmost corner of this tract,
CONTINUATION OF SCHEDULE A, NO. 4:
said point lying in the northwest right of way line of Cimarron
Boulevard.
THENCE S 29 degrees 00'00" W along the northwest right-of-way of
Cimarron Boulevard and the Southeast line of Lot 4 a distance of
517.02 feet to a 5/8 inch iron rod found the south corner of Lot
4 and the south corner of this tract;
THENCE N 60 degrees 57'30" W along the southwest line of Lot 4 a
distance of 505.86 feet to a 5/8 inch iron rod found for the
southwest corner of this tract;
THENCE N 9 degrees 00'15" E a distance of 353.41 feet to a 5/8
inch iron rod found for an intermediate corner of this tract said
point lying on a curve to the left whose center point bears N 44
degrees 48'49" W at 165 feet;
THENCE along the northwest line of Lot 4 on a curve to the left
whose radius is 165 feet a distance of 46.49 feet to a 5/8 iron
rod found for the point of tangency of said curve and an
intermediate corner of this tract;
THENCE continuing along the northwest line of Lot 4, N 29 degrees
02'30" E a distance of 139.12 feet to a 5/8 inch rod found for the
north corner of Lot 4, and the northmost corner of this tract;
THENCE S 60 degrees 57'30" E along the northeast line of Lot 4 a
distance of 620.17 feet to the point of beginning forming a tract
embracing 302,860 square feet (6.953 acres), more or less.
Exhibit 10.2(c)
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of January 29, 1997, by and between
LEISURE CENTERS LLC-1, a Texas limited liability company ("Borrower"), and
BANK UNITED, a federal savings bank ("Lender").
Borrower has requested Lender to make a certain loan to Borrower in an
aggregate principal amount of SEVEN MILLION THREE HUNDRED THOUSAND DOLLARS
AND NO/100 ($7,300,000.00). Lender is willing to make such loan to
Borrower upon the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I
Definitions
-----------
Section 1.01. Definitions. As used in this Agreement, the following
-----------
terms have the following meanings:
"Absolute Assignment" means the Absolute Assignment of Rents and
-------------------
Income (With License Back) by Borrower in favor of Lender of even date
herewith, as the same may be amended, supplemented or modified from
time to time.
"Advance" means the advance of funds by Lender to Borrower
-------
pursuant to Article II.
"Affiliate" means any Person directly or indirectly controlling,
---------
controlled by, or under common control with Borrower. For purposes of
this definition, "control" (including "controlled by" and "under
common control with") means (i) ownership of twenty-five percent (25%)
or more of the voting rights of any class of shares of an entity or
(ii) the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person,
whether through the ownership or voting securities or otherwise.
Without limiting the generality of the foregoing, for purposes of this
Agreement, Borrower, Guarantor, and each of their respective
subsidiaries shall be deemed an Affiliate of one another.
"Affiliate Acknowledgement" means the Acknowledgement of
-------------------------
Assignment of Agreement and Subordination Agreement executed by any
affiliates of Borrower that will provide services to the Project in
favor of the Lender;
"Assumed Monthly Payment" means an assumed monthly payment of
-----------------------
principal and interest resulting from a 25-year amortization of the
principal balance of the Loan at a fixed rate of interest equal to 225
basis points over the 5-year Treasury Yield, selected by Lender at the
time of calculation.
"Budget" means the Construction Budget set forth in Exhibit C of
------
the Loan Commitment.
"Business Day" means any day other than a Saturday, Sunday or
------------
legal holiday for commercial banks in Houston, Texas.
"Closing Date" means the date upon which Borrower and Lender
------------
execute the Loan Documents.
"Collateral" has the meaning specified in Section 4.01.
----------
"Collateral Assignment" means the Collateral Assignment of
---------------------
Leases, Deposits and Agreements of even date herewith by Borrower in
favor of Lender.
"Construction Inspector" means AECC, Inc.
----------------------
"Contract Rate" means a variable rate of interest, adjusted
-------------
monthly equal to the LIBOR Rate plus 2.75% per annum. The Contract
Rate shall be set each month based on the LIBOR Rate quoted two (2)
business days prior to the first day of each calendar month during the
term of the Note.
"Contracts" means the leases, management agreements and all
---------
contracts with the Project Architect and the General Contractor of the
Project.
"Debt" means for any Person: (i) all indebtedness, whether or not
----
represented by bonds, debentures, notes, securities, or other
evidences of indebtedness, for the repayment of money borrowed, (ii)
all indebtedness representing deferred payment of the purchase price
of property or assets, (iii) all indebtedness under any lease which,
in conformity with GAAP, is required to be capitalized for balance
sheet purposes, (iv) all indebtedness under guaranties, endorsements,
assumptions, or other contingent obligations, in respect of, or to
purchase or otherwise acquire, indebtedness of others, and (v) all
indebtedness secured by a Lien existing on property owned, subject to
such Lien, whether or not the indebtedness secured thereby shall have
been assumed by the owner thereof.
"Debt Service Coverage Ratio" for any calendar quarter means the
---------------------------
ratio of Net Income for such calendar quarter to the Assumed Monthly
Payment on the Loan, as hereinafter defined for the same calendar
quarter.
"Deed of Trust" means the first lien Deed of Trust, Mortgage,
-------------
Security Agreement and Financing Statement on the Project from
Borrower in favor of Lender of even date herewith, as the same may be
amended, supplemented, or modified from time to time.
"Default Rate" means a floating rate of interest equal to the
------------
lesser of (i) the Contract Rate, from time to time in effect, plus
five percent (5.0%) per annum or (ii) the Maximum Rate.
"DHS" means the Texas Department of Human Services.
----
"DHS Licenses" means all now or hereafter issued licenses from
------------
the Texas Department of Human Services or other governmental entities
for the operation of a Personal Care Facility and any food services
licenses related thereto.
"Disbursement Account" has the meaning specified in Section
--------------------
2.01(b).
"Environmental Indemnity" means the Certificate and
-----------------------
Indemnification Regarding Hazardous Substances executed by Borrower in
favor of Lender of even date herewith, as the same may be amended,
supplemented or modified from time to time.
"Event of Default" has the meaning specified in Section 9.01.
----------------
"First Extended Maturity Date" means forty-two months from the
----------------------------
date hereof.
"First Extended Period" means the six month period commencing on
---------------------
the Maturity Date and ending on the First Extended Maturity Date.
"GAAP" means generally accepted accounting principles, applied on
----
a consistent basis, as set forth in Opinions of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and/or in statements of the Financial Accounting Standards
Board and/or their respective successors and which are applicable in
the circumstances as of the date in question. Accounting principles
are applied on a "consistent basis" when the accounting principles
observed in a current period are comparable in all material respects
to those accounting principles applied in a preceding period.
"General Contractor" means Faulkner Construction Company.
------------------
"General Contractor's Acknowledgement" means the Acknowledgement
------------------------------------
of Assignment and Agreement executed by the General Contractor in
favor of Lender.
"Guaranty" means the Guaranty Agreement of even date herewith
--------
executed by Guarantor for the benefit of Lender.
"Guarantor" means Grand Court Lifestyles, Inc.
---------
"Improvements" shall mean a certain 126 unit congregate,
------------
independent living and personal care facility to be located on the
Real Property.
"LIBOR Rate" means the one month London Interbank Offered Rate,
----------
reflected as the one-month LIBOR Rate on page 5 of the Telerate screen
or as published or quoted by such other reputable and nationally-
recognized rate quoting service or publication selected by Lender.
"Lien" means any lien, mortgage, security interest, tax lien,
----
pledge, encumbrance, financing statement, or conditional sale or title
retention agreement, or any other interest in property designed to
secure the repayment of Debt or any other obligation, whether arising
by agreement, operation of law, or otherwise.
"Loan" means the loan in the original principal amount of Seven
----
Million Three Hundred Thousand and No/100 Dollars ($7,300,000.00) made
or to be made by Lender pursuant to Section 2.01.
"Loan Commitment" means the Construction Loan Commitment relating
---------------
to the Loan dated November 25, 1996, accepted by Borrower on December
13, 1996.
"Loan Documents" means, without limitation, this Agreement, the
--------------
Loan Commitment, the Note, the Deed of Trust, the Absolute Assignment,
the Collateral Assignment, the Guaranty, the Environmental Indemnity,
and all other promissory notes, deeds of trust, assignments, financing
statements, easements, security agreements and other instruments,
documents, and agreements executed either by Borrower or by Guarantor,
or both, as the case may be, and delivered pursuant to or in
connection with this Agreement, as such instruments, documents, and
agreements may be amended, modified, renewed, extended, or
supplemented from time to time and in accordance with their respective
terms.
"Maturity Date" means thirty-six months from the date hereof
-------------
subject to the two (2) Extension Options provided for in the Loan
Commitment.
"Maximum Rate" means the maximum rate of nonusurious interest
------------
permitted from day to day by applicable law, including Article 5069-
1.04, Vernon's Texas Civil Statutes (and as the same may be
incorporated by reference in other Texas statutes), but otherwise
without limitation, that rate based upon the "indicated rate ceiling"
and calculated after taking into account any and all relevant fees,
payments and other charges in respect to the Loan Documents which are
deemed to be interest under applicable law.
"Net Income" means the net income from normal operations of the
----------
Project (excluding extraordinary income and expense and before income
taxes applicable to such Project, but after all property taxes and
other taxes applicable to the Project without deduction for actual
management fees paid) and based upon average revenue per unit and an
occupancy rate of not more than ninety-five percent (95%), as set
forth in the quarterly financial information provided to Lender under
the Loan Documents, calculated based upon the preceding calendar
quarter, plus interest expense paid or incurred with respect to the
Loan for such period and non-cash expenses or allowances for
depreciation or amortization of the Project for such period, less the
greater of actual management fees or assumed management fees of four
percent (4%) of total resident revenues for such preceding calendar
quarter.
"Note" means the recourse Promissory Note executed by Borrower of
----
even date herewith in the amount of the Loan payable to the order of
Lender, and all extensions, renewals, and modifications thereof.
"Notice" means the Notice Pursuant to Section 26.02, Texas
------
Business and Commerce Code by Borrower and Guarantor in favor of
Lender of even date herewith.
"Obligations" means (i) all amounts, including, without
-----------
limitation, principal and interest, due or becoming due under the
Note; (ii) any and all costs or sums due and owing or to become due
and owing under any of the Loan Documents; (iii) any renewal or
extension of the indebtedness or costs described in (i) through (ii)
preceding or any part thereof; and (iv) all covenants, agreements and
undertakings of the Borrower to the Lender hereunder or under any of
the Loan Documents.
"Person" means any individual, corporation, business trust,
------
association, company, partnership, joint venture, or other entity.
"Personality" means all equipment, furnishings, furniture and all
-----------
tangible and intangible personal property of whatever character now
owned or hereafter acquired by Borrower for use in, on or about the
Project, including replacements, substitutions and after acquired
property.
"Plans and Specifications" means the final plans and
------------------------
specifications for the Improvements signed and dated by Borrower and
certified by the Project Architect (with the seal of such Project
Architect affixed).
"Pledge of Deposit Account" means the Pledge of Deposit Account
-------------------------
by Borrower in favor of Lender of even date herewith, as same may be
amended, supplemented or modified from time to time.
"Project" means the Improvements, the Real Property, and the
-------
Personalty.
"Project Architect" means Morgan Spears Associates, Inc.
-----------------
"Project Architect's Acknowledgement" means the Acknowledgement
-----------------------------------
of Assignment of Agreement and Subordination Agreement executed by the
Project Architect in favor of Lender.
"Property Manager" means Grand Court Lifestyles, Inc., a Delaware
----------------
corporation, 2650 North Military Trail, Suite 350, Boca Raton, Florida
33431.
"Property Manager's Acknowledgement" means the Acknowledgement of
----------------------------------
Assignment of Management Agreement and Subordination Agreement
executed by the Property Manager in favor of the Lender.
"Property Revenues" means all income, revenues, profits,
-----------------
distributions and funds from any source whatsoever which derive
directly or indirectly from the Project.
"Real Property" means the real property located in Temple, Bell
-------------
County, Texas, as more fully described on Exhibit A, attached hereto
---------
and incorporated herein by reference for all purposes.
"Second Extended Maturity Date" means forty-eight (48) months
-----------------------------
from the date hereof.
"Second Extended Period" means the six month period commencing on
----------------------
the First Extended Maturity Date and ending on the Second Extended
Maturity Date.
"Title Agent" means Stewart Title Guaranty Company.
-----------
"Title Company" means Stewart Title Guaranty Company.
-------------
"Title Policy" means the Mortgagee Policy of Title Insurance
------------
described in Section 5.01(o) hereof.
Section 1.02. Other Definitional Provisions. All definitions
-----------------------------
contained in this Agreement are equally applicable to the singular and
plural forms of the terms defined. The words "hereof", "herein", and
"hereunder" and words of similar import referring to this Agreement refer
to this Agreement as a whole and not to any particular provision of this
Agreement. Unless otherwise specified, all Article and Section references
pertain to this Agreement. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP.
ARTICLE II
Loan
----
Section 2.01. Loan: Advances. Subject to the terms and conditions of
--------------
this Agreement, Lender agrees to make the Loan to Borrower in Advances
strictly in accordance with this Agreement as follows:
(a) The Loan proceeds shall be disbursed by Lender no more
frequently than once monthly during the course of the construction of
the Improvements in accordance with the terms herein and the other
Loan Documents.
(b) Lender shall be furnished with a detailed construction
disbursement schedule in a form satisfactory to Lender, and
disbursements shall be made under the procedures and title safeguards
reasonably acceptable to Lender. Borrower shall open a special bank
account, of a type acceptable to Lender, with Lender into which all
Loan proceeds shall be disbursed ("Disbursement Account") which shall
--------------------
be pledged to Lender pursuant to the Pledge of Deposit Agreement;
provided, however, if funding the Loan proceeds into such Disbursement
Account, in Lender's sole judgment, puts the Title Policy coverage at
risk, the disbursements of the proceeds of the Loan shall be made by
and through the Title Company.
(c) Disbursements shall be made only after notice is given to
Lender five (5) Business Days prior to the requested date for each
such disbursement and in the draw request form attached hereto and
incorporated herein by reference for all purposes as Schedule 1. Such
----------
form shall be accompanied by an Affidavit of Bills Paid in the form
attached hereto and incorporated herein by reference for all purposes
as Schedule 2, and, if required by Lender, a Partial Release of Lien
-----------
in the form attached hereto and incorporated herein by reference for
all purposes as Schedule 3, executed by the General Contractor and
----------
each subcontractor who has received payments in excess $10,000.00.
Disbursement requests shall be submitted by Borrower on AIA forms for
review and approval of the Construction Inspector. All disbursements
must conform to the Budget for the materials and/or services covered
by such disbursement request; no variances will be permitted without
Lender's prior written approval.
(d) Bills or statements for all expenses for which a
disbursement is requested shall, at Lender's option, be presented to
Lender along with the request for disbursement. All requests for
disbursement shall include certification by Borrower, the General
Contractor, the Project Architect and the Construction Inspector that
all labor and material for which disbursement is requested have gone
into the construction of the Improvements according to the approved
Plans and Specifications and that the remaining undisbursed portion of
the Loan and the funds on deposit are adequate to complete the
construction of the Improvements on the Real Property.
(e) Unless otherwise approved by Lender, no disbursements of the
proceeds shall be made if the Loan is not current or an Event of
Default exists, or an event exists which with the passage of time or
notice or both would constitute an Event of Default. Lender shall not
be obligated at any time to disburse proceeds of the Loan in excess of
the Budget or that recommended by the Construction Inspector nor shall
the Lender be obligated to disburse proceeds of the Loan for materials
stored off of the Project. As a condition of each draw, Lender must
be satisfied that sufficient funds are available to complete the
Improvements.
(f) All interim disbursements of Loan proceeds for construction
work shall be subject to a ten percent (10%) retainage requirement;
provided there shall be no retainage for direct materials purchases.
(g) Each disbursement must be accompanied by an endorsement to
the Title Policy, obtained by Borrower at Borrower's sole expense, so
that the coverage reflects the amounts that have been advanced.
(h) Final disbursement, to the General Contractor, including
retainage, shall be subject to and conditioned upon Lender having
secured the following (i) a certificate of occupancy for the
Improvements from the appropriate governmental agency if such
certificate is deemed necessary by Lender, in its sole discretion;
(ii) a certificate of completion prepared and submitted by the
Borrower and the Project Architect, and approved by the Construction
Inspector, which certificate shall contain only such qualifications as
are acceptable to Lender, in Lender's sole discretion, and indicating
that the construction of the Improvements has been completed
substantially in accordance with the approved Plans and
Specifications, all construction has been completed in a good and
workmanlike manner, all applicable zoning, building, or other
governmental codes or regulations have been complied with, there are
no known structural deficiencies, and all mechanical equipment,
including, without limitation, plumbing, air conditioning and heating,
electrical, and kitchen equipment, if any, is in good working order;
(iii) a certificate of completion executed by the General Contractor
and filed in the Real Property Records of Bell County, Texas; (iv) an
affidavit executed by the General Contractor satisfactory to Lender,
Lender's counsel and the Title Company in their sole discretion,
stating, among other things, that all work has been completed in
accordance with the Plans and Specifications approved by Lender; (v)
if required by Lender, lien waivers from any and all subcontractors,
in form and substance satisfactory to Lender, Lender's counsel and the
Title Company in their sole discretion; (vi) an "AS BUILT" survey of
the Project and (vii) such other additional documents as Lender may
reasonably request.
Section 2.02. The Note. The obligation of Borrower to repay the Loan
--------
shall be evidenced by the Note executed by Borrower, payable to the order
of Lender, in the principal amount of the Loan and dated of even date
herewith, and shall be full recourse to Borrower and Guarantor.
Section 2.03. Repayment of Loan. Interest shall be due and payable
-----------------
monthly, the first payment of which shall be due and payable on the first
(1st) day of the calendar month next following one (1) month from the date
hereof, and subsequent payments of interest shall be due and payable on the
same day of each month thereafter until the Maturity Date, as hereinafter
defined. All outstanding principal, plus accrued and unpaid interest at
the Contract Rate, shall be due and payable in one final balloon payment on
the Maturity Date.
Section 2.04. Interest. The unpaid principal amount of Advances on
--------
the Loan shall bear interest prior to maturity at a per annum rate equal to
the lesser of (i) the Maximum Rate or (ii) the Contract Rate.
Notwithstanding the foregoing, in the event that any payment on the Note is
more than thirty (30) days past due, all past due principal and interest
shall bear interest from the maturity date thereof until the date of
payment at the Default Rate.
Section 2.05. Use of Proceeds. The proceeds of the Loan shall be
---------------
used for the sole purpose of financing the construction of the Improvements
on the Real Property and shall cover the items shown on the Budget annexed
as Exhibit C to the Loan Commitment.
Section 2.06. Late Payment Fee. A late payment equal to five percent
----------------
(5.0% )of any past due payment will be payable by Borrower if any payment
on the Note is not received by the Lender within fifteen (15) days of its
due date.
Section 2.07. Extension.
---------
(a) Borrower shall have the right to extend the maturity of the
Loan for two consecutive six (6) month terms provided that at the time
of each extension request:
(i) the construction of Project has been completed, lien
free, in a manner satisfactory to and in accordance with the
Plans and Specifications approved by Lender;
(ii) No Event of Default then exists under any of the Loan
Documents;
(iii) An appraisal of the Project acceptable to Lender
shows that the outstanding principal balance of the Loan does not
exceed seventy-five percent (75%) of the appraised value of the
Project as completed.
(iv) Immediately prior to the First Extension Period, the
Project has achieved a minimum Debt Service Coverage Ratio of at
least 1.25 to 1.00, and immediately prior to the Second Extension
Period, the Project has achieved a minimum Debt Service Coverage
Ratio of at least 1.25 to 1.00; and
(v) Borrower shall have paid Lender an extension fee for
each extension in the amount of one half of one percent (0.5%) of
the outstanding principal balance of the Loan.
(b) In the event that Borrower qualifies for the First Extension
Period and elects to extend the Maturity Date as herein provided,
monthly payments of accrued, but unpaid interest, at the Contract Rate
shall continue to be due and payable on the first day of each month
commencing with the month next following the last scheduled monthly
payment during the original term of the Loan and successive payments
shall be due on the first day of each month thereafter until the First
Extended Maturity Date, when the unpaid principal balance of the Loan
and accrued, but unpaid interest, thereon shall be paid in full in one
final balloon payment unless Borrower qualifies for the Second
Extension Period and elects to extend the First Extended Maturity
Date.
(c) If Borrower qualifies for the Second Extension Period and
elects to extend the First Extended Maturity Date, monthly payments of
accrued, but unpaid interest at the Contract Rate shall continue to be
due and payable on the first day of each month commencing with the
month next following the last scheduled monthly payment of the First
Extended Loan Period and successive payments being due on the first
day of the month thereafter until the Second Extended Maturity Date,
when the unpaid principal balance of the Loan, an accrued but unpaid
interest thereon shall be paid in one final balloon payment.
(d) As a condition to such extensions, Borrower and Guarantor
shall execute such amendments, notes, documents, agreements and
instruments as Lender reasonably deems necessary to extend the
maturity of the Loan, and Borrower shall cause the Title Company to
endorse the Title Policy to reflect the extended maturity of the Loan,
such endorsement to be in form reasonably satisfactory to Lender. If
an endorsement is not available, Borrower shall obtain a new Title
Policy for Lender, in form satisfactory to Lender. Borrower shall pay
all reasonable costs incurred by Lender in connection with such
extension, including reasonable attorney's fees, and shall pay all
Title Company charges and premiums.
ARTICLE III
Payments
--------
Section 3.01. Method of Payment. All payments of principal,
-----------------
interest, and other amounts to be made by Borrower hereunder and under the
Note shall be made to Lender at its office at 3200 Southwest Freeway, Suite
1900, P.O. Box 1370, Houston, Texas 77252-1370, Attention: Commercial Loan
Servicing, in lawful money of the United States of America and in
immediately available funds. Whenever any payment hereunder or under the
Note shall be stated to be due on a day that is not a Business Day, such
payment may be made on the next succeeding Business Day, and interest shall
continue to accrue during such extension.
Section 3.02. Prepayment. Borrower shall have the right to prepay,
----------
at any time and from time to time without premium or penalty, the entire
unpaid principal balance of the Note or any portion thereof, with accrued
interest to the date of prepayment on the amounts prepaid.
Section 3.03. Insurance and Tax Escrow. So long as Borrower is
------------------------
maintaining insurance in types and amounts required hereunder and paying
the ad valorem taxes as such taxes come due and providing Lender with
evidence of such insurance and the payment of such taxes, no insurance and
tax escrow shall be required.
ARTICLE IV
Collateral
----------
Section 4.01. Collateral. To secure full and complete payment and
----------
performance of the Obligations, Borrower shall execute and deliver or cause
to be executed and delivered the documents described below covering the
property and collateral described in this Section (which, together with any
other property and collateral which may now or hereafter secure the
Obligations or any part thereof, is sometimes herein called the
"Collateral"):
----------
(a) Borrower shall grant to Lender a first priority lien and/or
security interest on the Real Property, Improvements and Personalty
pursuant to the Deed of Trust and shall assign to Lender all rents,
income, and profits relating to the Project pursuant to the Absolute
Assignment;
(b) Borrower shall collaterally assign and grant a first lien
security interest in, without limitation, all utility deposits,
security deposits (to the extent assignable and subject to the
tenants' rights to reimbursement under the tenant leases), tenant
leases, management agreements, construction contracts, architect
contracts and agreements, waste water capacity reservation agreements,
and any other contracts, licenses (including the DHS Licenses, to the
extent assignable), permits, architects and engineering contracts, and
agreements pertaining to the Project pursuant to the Collateral
Assignment or such other instruments as Lender may require;
(c) Guarantor will guarantee severally the repayment of the
entire indebtedness of Borrower to Lender, and the performance by
Borrower of all of Borrower's obligations to Lender under the Loan
Documents evidencing or securing the Loan pursuant to the Guaranty;
(d) Borrower shall pledge to Lender the funds advanced to the
Disbursement Account pursuant to the Pledge of Deposit Account; and
(e) Borrower shall execute and cause to be executed such further
documents and instruments, including without limitation, Uniform
Commercial Code financing statements, necessary to evidence and
perfect Lender's liens and security interests as herein described, in
the Collateral.
Section 4.02. Setoff. Upon the occurrence of an Event of Default,
------
Lender shall have the right to set off and apply against the Obligations in
such manner as Lender may determine, at any time and without notice to
Borrower, any and all deposits (general or special, time or demand,
provisional or final) or other sums at any time credited by or owing from
Lender to Borrower whether or not the Obligations are then due. As further
security for the Obligations, Borrower hereby grants to Lender a security
interest in all money, instruments, and other property of Borrower now or
hereafter held by Lender, including, without limitation, property held in
safekeeping. In addition to Lender's right of setoff and as further
security for the Obligations, Borrower hereby grants to Lender a security
interest in all deposits (general or special, time or demand, provisional
or final) and other accounts of Borrower now or hereafter on deposit with
or held by Lender and all other sums at any time credited by or owing from
Lender to Borrower. The rights and remedies of Lender hereunder are in
addition to other rights and remedies (including, without limitation, other
rights of setoff) which Lender may have; provided, however that with
respect to security deposits by tenants or residents, the foregoing is
subject to the residents' or tenants' rights to reimbursement under the
tenants' or residents' leases.
ARTICLE V
Conditions Precedent
--------------------
Section 5.01. Loan. In addition to the conditions of Lender's
----
obligation to make the Loan set forth in the Loan Commitment, the
obligation of Lender to make advances under the Loan is subject to the
condition precedent that Lender shall have received all of the following,
each dated as of the Closing Date (unless otherwise indicated) and in form
and substance satisfactory to Lender:
(a) Resolutions. Borrower shall have delivered to Lender a
-----------
resolution of Borrower certified by its secretary or assistant
secretary which authorizes the execution, delivery, and performance by
Borrower of this Agreement and the other Loan Documents to which
Borrower is or is to be a party and a resolution of the Guarantor
authorizing the execution, delivery and performance by the Guarantor
of the Guaranty and the other Loan Documents to which Guarantor is a
party. The Resolutions shall designate (i) the officers of the
Borrower and Guarantor which are authorized to sign the Loan Documents
and (ii) the officers of Borrower which are authorized to request and
receive advances under the Loan, together with specimen signatures of
such officers,
(b) Incumbency Certificates. Borrower shall have delivered to
-----------------------
Lender certificates of incumbency certified by the respective
secretary or assistant secretary of Borrower and Guarantor certifying
the names of the officers of Borrower and Guarantor authorized to sign
this Agreement and each of the other Loan Documents to which Borrower
and/or Guarantor is to be a party (including the certificates
contemplated herein) together with specimen signatures of such
officers.
(c) Regulations; Articles of Organization and Bylaws. Borrower
------------------------------------------------
shall have delivered to Lender: (i) Borrower's Articles of
Organization and Regulations, and all amendments thereto, (ii)
certified copies of the Articles of Incorporation of Guarantor,
together with all amendments thereto and (iii) the bylaws of
Guarantor, together with all amendments thereto, all of the foregoing
certified by the Secretary or Assistant Secretary of Borrower or
Guarantor, as applicable, and (iv) certified copies of existence for
Borrower and Guarantor, certified copies of good standing for Borrower
and Guarantor and a certified copy of Guarantor's qualification to do
business in Texas (all of the above dated within ten (10) days prior
to the Closing Date).
(d) Loan Agreement. The Borrower shall have executed and
--------------
delivered this Agreement to the Lender.
(e) Note. Borrower shall have executed and delivered the Note
----
to Lender.
(f) Absolute Assignment. Borrower shall have executed and
-------------------
delivered the Absolute Assignment to Lender.
(g) Collateral Assignment. Borrower shall have executed and
---------------------
delivered the Collateral Assignment to Lender.
(h) Environmental Indemnity. Borrower and Guarantor shall have
-----------------------
executed and delivered the Environmental Indemnity to Lender.
(i) Deed of Trust. Borrower shall have executed and delivered
-------------
the Deed of Trust to Lender which shall grant a first lien on the
Project and a first and prior security interest in the Personalty.
(j) Financing Statements. Borrower shall have executed and
--------------------
delivered to Lender the Uniform Commercial Code financing statements
covering such Collateral as Lender may request.
(k) Notice. Borrower and Guarantor shall have executed and
------
delivered to Lender the Notice.
(l) Affidavits. Borrower shall have executed and delivered the
----------
Affidavit of Borrower, and Guarantor shall have executed and delivered
an Affidavit of Guarantor in form and substance satisfactory to
Lender.
(m) Guaranty. The Guarantor shall have executed and delivered
--------
the Guaranty to Lender.
(n) Pledge of Deposit Account. Borrower shall have executed and
-------------------------
delivered the Pledge of Deposit Account.
(o) Mortgagee Title Insurance Policy;. Simultaneously with the
---------------------------------
execution of this Loan Agreement, but before funding of the Loan,
Borrower, at Borrower's sole cost and expense, shall have caused to be
furnished to Lender, a Texas Mortgagee Policy of Title Insurance
issued by the Title Agent, as agent for the Title Company, in favor of
Lender pursuant to an insured closing protection letter satisfactory
to Lender showing a policy amount equal to the aggregate amount of the
Loan, insuring that the Lender has a valid first and prior lien
against the Real Property, and containing only such exceptions as
shall be approved by Lender and its legal counsel, provided that the
premium can be paid in installments as provided in Rule R-2(a) of the
Rules for Title Insurance promulgated by the Texas Board of Insurance.
Any exception in the Title Policy regarding restrictive covenants
shall be deleted or shall list such restrictive covenants and insure
that they will not affect the validity or priority of Lender's lien.
The standard pre-printed exception in the Title Policy regarding any
discrepancies, conflicts or shortages in area or boundary lines shall
be modified to read only "shortages in area." The standard pre-printed
exception regarding taxes shall be modified to read "Standby fees and
taxes for the year 1997 and subsequent years not yet due and payable."
The Title Policy may contain the standard pre-printed "pending
completion" and "pending disbursements" exceptions, and Borrower
shall, at Borrower's cost and expense, obtain endorsements to the
Title Policy as Advances are made so that the coverage reflects the
amounts that have been advanced under the terms of the Loan Documents.
The Title Policy shall also insure access to the Project from a
publicly dedicated street.
(p) Appraisal. Lender shall have received an MAI appraisal of
---------
the Project in form and substance satisfactory to Lender and conducted
by an appraiser selected by Lender. The appraisal shall show that the
Real Property and Improvements shall have a fair market value of at
least $9,730,000.00 as built in accordance with the approved Plans and
Specifications. The appraisal shall be commissioned by Lender, but
paid for by Borrower.
(q) Environmental Report. Borrower, at Borrower's sole cost and
--------------------
expense, shall have delivered to Lender an unqualified Phase I
environmental site assessment covering the Project which shall be in
form and substance satisfactory to Lender and which shall be conducted
by an environmental service firm selected by Lender or selected from
Lender's approved list of environmental service firms. Such
environmental assessment shall verify that the Project is free from
any Hazardous Materials and Hazardous Waste, as those terms are
defined by federal and state statutes, laws and regulations,
including, without limitation, asbestos and diesel fuel (as reflected
on the Phase I environmental assessment). Such environmental
assessment shall include a determination of "wetlands" status and
condition. Borrower shall provide Lender with evidence in form and
substance acceptable to Lender, in Lender's sole discretion,
indicating that any Hazardous Materials or Hazardous Waste previously
located on the Project have been properly disposed of in accordance
with all applicable laws and which satisfies the requirements of
Thrift Bulletin 16.
(r) Survey. Borrower, at Borrower's sole cost and expenses,
------
shall have provided Lender and Lender's counsel with originals of a
current staked survey ("Survey") of the Real Property and all
Improvements thereon, prepared by a professional engineer or
registered surveyor, acceptable to Lender and Title Company, in form
and substance satisfactory to Lender, dated within ninety (90) days of
the Closing Date, which survey shall satisfy the requirements of a
Category 1A land survey pursuant to the Texas Surveyor's Association
Standards for land surveys. The survey shall contain a certificate
which shall among other things contain the following information: (i)
metes and bounds description of the Real Property showing all corners
and points of course changes and/or marked with iron pins or rods; and
(ii) the location of all existing and proposed roads, highways and
streets adjoining the Real Property and access thereto and all
Improvements, encroachments, easements, drainage districts, utilities,
parking areas, rights of way, set-back lines, and other matters
located upon or affecting the Real Property. The Survey shall contain
a certification that the Real Property is not located in any flood
hazard area. The certificate shall be in form and substance acceptable
to Lender and Lender's counsel and shall be in favor of both the
Lender and the Title Company. The certificate must be acceptable to
the Title Company to delete the survey exception regarding shortages
in area from the Title Policy.
(s) UCC Search. Lender shall have received Uniform Commercial
----------
Code searches (which searches shall be ordered by Lender's counsel but
paid for by Borrower) showing no financing statements or other
documents or instruments on file against Borrower or any Guarantor in
the office of the Secretary of State of Texas and the UCC Records of
Bell County, Texas, or the counties where the Borrower or any
----
Guarantor reside, such search to be as of a date no more than ten (10)
days prior to the Closing Date.
(t) Opinion of Counsel. Borrower and Guarantor shall have
------------------
delivered to Lender favorable opinions of legal counsels to Borrower
and Guarantor in form, scope and substance satisfactory to Lender
acceptable to Lender, concerning all aspects of the Loan including,
without limitation, usury, doing business, due authorization,
legality, validity, enforceability, and binding effect of all required
Loan Documents.
(u) Financial Statements. Lender shall be provided with
--------------------
certified financial statements from Borrower, Guarantor (or J & B
Management Company) and the General Contractor in a form and only with
qualifications acceptable to Lender in Lender's sole discretion for
the years ending January 1, 1995 and January 31, 1996. Borrower and
Guarantor shall also provide Lender with their 1995 and 1996 income
tax returns, as filed with the Internal Revenue Services.
(v) Origination Fee. Borrower shall have paid to Lender an
---------------
origination fee in the amount of Seventy Three Thousand and No/100
Dollars ($73,000.00), which shall be fully earned, non-refundable, and
due and payable on the Closing Date.
(w) Project Architect Certificate. Lender shall have received
-----------------------------
letters from the Project Architect certifying that utilities are
available to the boundaries of the Real Property in amounts adequate
to serve the contemplated Improvements. In addition, the Project
Architect will certify that the Project complies with, or when built,
will comply with applicable zoning ordinances and other applicable
laws, and can be operated for the purposes for which the Project was
constructed, that all permits, licenses (to the extent obtainable
prior to the commencement of construction), and approvals have been
issued by the appropriate authorities, that all Improvements will be
constructed above the 100 year flood plain for the Real Property, and
that the budget submitted to and approved by Lender provides for all
sums necessary to complete the work called for in the Project
Architect's contracts with Borrower.
(x) Project Architect's Acknowledgement. Lender shall have
-----------------------------------
received the Project Architect's Acknowledgement executed by the
Project Architect.
(y) Property Manager's Acknowledgement. Lender shall have
----------------------------------
received the Property Manager's Acknowledgement executed by the
Property Manager.
(z) Affiliate Acknowledgement. Lender shall have received the
-------------------------
Affiliate's Acknowledgement executed by any affiliates of Borrower
that will provide services to the Project.
(aa) General Contractor's Acknowledgement. Lender shall have
------------------------------------
received the General Contractor's Acknowledgment executed by the
General Contractor.
(bb) Taxes, Assessments and Insurance. Lender shall have
--------------------------------
received evidence that all ad valorem taxes for 1996 and prior years
against the Project and all required insurance premiums for the first
year of the Loan shall have been paid in full.
(cc) Evidence of Available Capital. Lender shall have received
-----------------------------
evidence satisfactory to it that the Borrower has available a minimum
of $1,825,000.00 in capital in good funds, including equity in the
Real Property, which may immediately be expended for the development
and construction of the Project or the purchase of the Real Property
prior to the first advance of the Loan proceeds; provided, however,
that funds expended for the purchase of the Real Property may be
credited to the required equity contribution only to the extent of the
"AS IS" appraised value of the Real Property.
(dd) Soil Tests and Other Reports. Lender shall have been
----------------------------
furnished with a copy of the soil test reports, and all concrete and
steel stress reports and a letter of certification from the
Construction Inspector indicating that the soil conditions are
satisfactory for the construction of the Improvements in accordance
with the approved Plans and Specifications.
(ee) Availability of Utilities. Borrower shall have provided
-------------------------
Lender with letters from authorized officials of each governmental
entity or public utility providing any utility services to the
Project, including water, sewer, telephone, gas and electricity,
stating that such services will be made available to the Project
within the time required by the construction schedule in amounts
adequate to serve the Project after its completion in accordance with
the Plans and Specifications.
(ff) Plans and Specifications. Borrower, at Borrower's sole cost
------------------------
and expense, shall have provided Lender with two (2) complete sets of
final Plans and Specifications signed and dated by the Borrower and
certified by the Project Architect (and with his seals affixed).
The Plans and Specifications shall contain all certificates and
approvals required by all governmental authorities (including the DHS)
having jurisdiction over the Real Property and the construction of the
Improvements thereon, which Plans and Specifications shall have been
submitted to and approved by Lender prior to closing. Any material
deviation from the approved plans or specifications must be approved
by Lender in writing in advance of the issuance of any change orders.
(gg) Budget. Lender has been furnished with the Budget for the
------
construction of the Improvements approved by the Construction
Inspector and Lender. The Budget shall reflect all direct
construction costs and indirect and overhead items and shall include a
draw schedule in such detail as Lender may require and a schedule of
completion will be provided to Lender. The Budget shall be
substantially the same as the preliminary construction cost estimate
submitted in connection with the Loan Commitment. Cost savings in any
line item shall be transferred to the contingency reserve line item;
provided, however, that any savings in the interest line item shall be
credited to the "lease-up reserve." Following construction and
provided that Borrower is not in default under the Loan Documents, all
amounts in the contingency reserve shall be funded to Borrower.
(hh) Required Additional Funds. Borrower and Guarantor have
-------------------------
deposited in the Disbursement Account additional funds over and above
the Loan proceeds in an amount equal to any difference between (i) the
Loan amount plus the total of the paid receipts for permissible
development and construction costs of the Project approved by Lender
and paid by Borrower from Borrower's own funds and (ii) the final
approved cost (including, without limitation, a sufficient reserve for
the funding of interest) to be incurred in connection with the
acquisition and construction of the Project.
(ii) Construction Schedule. Lender shall have received and
---------------------
approved a detailed construction schedule showing a trade by trade
breakdown of the estimated periods of commencement and completion of
construction of the Improvements on the Real Property, which schedule
shall be confirmed in writing by the Project Architect and the General
Contractor, and approved by the Construction Inspector and Lender.
(jj) Construction Inspection. A statement has been provided by
-----------------------
the Construction Inspector to Lender stating that the Construction
Inspector has reviewed the Plans and Specifications and the cost
breakdown and that the proceeds of the Loan and the funds supplied
pursuant to Section 5.01(hh) above are adequate to complete the
construction of the Improvements on the Project. The appointment of a
Construction Inspector shall not place any duty or responsibility upon
Lender to inspect the Improvements or any obligation or liability upon
Lender regarding the quality of construction or the absence therefrom
of defects.
(kk) Lien Waivers. Borrower shall have delivered to Lender lien
------------
waivers and subordination of lien rights from the Project Architect,
the General Contractor and all subcontractors providing materials or
services to the Project prior to Closing.
(ll) Insurance Policies. Borrower shall have provided Lender
------------------
with certified copies of all insurance policies required by the Loan
Commitment and this Agreement, from companies satisfactory to Lender
showing Lender as loss payee and in amounts and with deductibles
acceptable to Lender, including, without limitation, policies of flood
insurance if the Project is situated in a "Flood Hazard Area".
(mm) Insurance Certificate. Lender shall have received a
---------------------
certificate from Borrower's or the General Contractor's insurance
carrier approved by Lender that indicates that the General Contractor
is covered by public liability and workman's compensation insurance,
in amounts acceptable to Lender in Lender's sole discretion.
(nn) Itemized Statement. Borrower shall have provided Lender
------------------
with (i) an itemized statement certified by Borrower of all costs and
expenses incurred by Borrower in connection with the acquisition of
the Real Property through the Closing Date and (ii) and a copy of
Borrower's fully executed contract for the purchase of the Real
Property.
(oo) Closing Statement. Borrower shall have delivered to Lender
-----------------
a closing statement executed by Borrower and Seller, if the Real
Property is acquired at closing and a non-foreign person certificate
from Seller.
(pp) Estoppel Certificate. Borrower shall have delivered to
--------------------
Lender an estoppel certificate and/or pay off letter from every
individual and entity holding a lien on the Real Property and/or
Improvements thereon. The certificate shall be signed by the
lienholder and shall indicate the present unpaid balance of the lien
including accrual interest to the proposed Closing Date, the daily
rate of accrual after such date, and the amount required to satisfy
and release the lien as of the proposed Closing Date. In the
alternative, Borrower shall certify to Lender that there are no liens
against the Property and/or Improvements as of the Closing Date.
(qq) Zoning Compliance. Borrower shall provide Lender with a copy
-----------------
of the applicable zoning ordinances, certified by an appropriate
municipal or county official to be a complete and accurate statement
therefore and written certification by said municipal or county
official setting forth the zoning classification of the Real Property
and stating that the contemplated Improvements and use thereof comply
with all applicable zoning ordinances. If such certification is not
available, Borrower shall provide such evidence of zoning as may be
acceptable to Lender.
(rr) Construction Contracts. Lender shall have received and
----------------------
approved a fixed cost contract with the General Contractor for the
construction of the Improvements on the Real Property covering the
items shown on the Budget, showing all direct construction costs and
indirect and overhead items. The General Contractor must be
acceptable to Lender. The General Contractor's contract shall be
subordinated to Lender and its liens. Borrower will not agree or
consent to any material amendment thereto without Lender's prior
written consent. Borrower shall also furnish to Lender, for Lender's
approval, financial statements of the General Contractor.
(ss) Payment and Performance Bond. Borrower shall provide Lender
----------------------------
with a performance and payment bond by a surety company acceptable to
Lender covering the General Contractor on the Project (and any
subcontractor for major structural components of the Project) for not
less than the cost of the construction contract and naming Lender as a
dual obligee. The dual obligee rider shall provide: "The Contractor
and Surety shall not be liable under this bond to the Owner or Lender
unless the said obligee, or either of them, shall make payments to the
Contractor in accordance with the terms of said Contract as to
payment, and shall perform all of the other obligations to be
performed under said Contract at the time and in the manner therein
set forth, provided that the obligations of Contractor and Surety
under said bond shall not be impaired unless Lender fails to cure any
default by Owner under the said Contract within a reasonable time
after Lender's receipt of written notice of said default." The bond
shall also provide that the surety waives notice of, and consents to,
changes in the construction contract, including changes in the plans
and specifications, to the extent any such changes do not increase the
contract price more than ten percent (10%).
(tt) Construction Permits. Borrower shall have provided Lender
--------------------
with certified copies of all necessary building and construction
permits, curb cut, sewer and water tap and other permits, licenses,
franchises and other agreements required for the development of the
Project, issued in the name of the Borrower.
(uu) Letter of Credit. Borrower shall deliver to Lender an
----------------
irrevocable letter of credit ("Letter of Credit") issued by Sterling
National Bank and Trust Company of New York in favor of Lender in the
amount of $730,000.00 which letter of credit shall be in form and
substance acceptable to Lender;
(vv) Additional Information. Borrower shall have delivered such
----------------------
additional documents, instruments, and information as Lender or
Lender's legal counsel may reasonably request.
Section 5.02. Interim Advances:Continuing Conditions to the Lender's
------------------------------------------------------
Obligations to Make Loan Advances. Lender shall not be obligated to make
---------------------------------
any Advances hereunder unless and until each and every one of the
conditions set forth in Sections 2.01 and 5.01 hereof (which shall
---- ----
constitute continuing conditions for all Advances hereunder) and the
following further conditions shall have been satisfied (with proof thereof
in form and sufficiency as may be requested by Lender):
(a) No Event of Default. No Event of Default or any condition
-------------------
which with the passage of time or notice or both would constitute an
Event of Default shall exist hereunder or under any other Loan
Document.
(b) Compliance with Covenants. Borrower shall be in substantial
-------------------------
compliance with all covenants hereunder and under the other Loan
Documents.
(c) No Breach of Representations and Warranties. No breach of
-------------------------------------------
any representation or warranty of the Borrower or Guarantor hereunder
or under any of the Loan Documents shall have occurred.
(d) Adequate Funds. Borrower and Guarantor shall have proved
--------------
to Lender's satisfaction that sufficient funds are available to
complete the Improvements according to the plans and specifications.
(e) Inspection Reports. The Borrower, at the Borrower's sole
------------------
cost and expense, shall provide to the Lender an inspection report
from the Construction Inspector covering the stage of construction and
the condition of the Project, including the structure, roofing,
mechanical systems and electrical systems, the results of which report
shall be acceptable to Lender.
(f) Mortgagee Policy. The Borrower, at Borrower's sole cost and
-----------------
expense, will obtain endorsements to the original Title Policy so that
the coverage reflects the amount of the Advances made under the Loan
Documents.
(g) Notice of Commencement. Prior to commencement of
-----------------------
construction of the Project, Borrower shall deliver a Notice of
Commencement of Construction to Lender.
(h) Lien Waivers. If required by Lender, Borrower shall have
------------
delivered to Lender lien waivers and subordination of lien rights from
the General Contractor, Project Architect, and all subcontractors (who
have received or are owed payments in excess of $10,000.00) providing
materials or services to the Project.
(i) Inventory. Upon completion of the Improvements, Borrower
---------
shall have provided Lender with an inventory of the fixtures and
personal property owned by Borrower and purchased with any Loan
proceeds used in the maintenance, management and operation of the
Project, accompanied by a certification from Borrower that said
listing is a true and correct schedule of all fixtures and personal
property used in the maintenance, management and operation of the
Project, that such items constitute all of the fixtures and Personal
Property required in the maintenance, management and operation of the
Project, and that all such items are owned by Borrower free and clear
of any lien or security interest except that created by the Loan
Documents.
(j) Contracts. Within ten (10) days from the date of closing or
----------
in any case prior to the commencement of construction, Borrower shall
have provided Lender with fully executed counterparts of all
construction and design related contracts (together with all
amendments and modifications thereto) with the Project Architect and
any other person or entity relating to the construction of the
Improvements, which contracts shall be subordinated to Lender and its
liens. Borrower will not agree or consent to any material amendment
thereto without Lender's prior written consent. The contracts,
together with the identity of the Project Architect, Construction
Inspector and any other person or entity relating to the construction
of the Improvements shall have been previously approved by Lender in
writing.
(k) Certified Rent Roll. Following completion of the
-------------------
Improvements, Borrower shall have provided a certified rent roll to
the Lender covering the Project.
(l) Management and Lease Agreements. On or prior to the
-------------------------------
completion of the Improvements, Borrower shall have provided Lender
with a copy of the proposed Management Agreement, with any and all
amendments thereto, for the Project and form lease agreement covering
units in the Project, which agreements shall be in form and substance
satisfactory to Lender. The Management Agreement shall provide for a
fee not to exceed five percent (5%) of monthly collections and shall
provide for termination for cause on thirty (30) days notice and
shall further provide that in the event of foreclosure of the Project
by Lender or its assignee, Lender or its assignee shall have the right
to immediately terminate the Management Agreement without penalty.
(m) DHS Licenses. As soon as reasonably possible after the date
------------
that the Improvements are completed, Borrower shall provide Lender
will copies of all applicable DHS Licenses and other licenses
necessary for the operation of the Project.
(n) Other Documentation. If requested by the Lender, the
-------------------
Borrower shall have furnished to the Lender any other additional
documents as Lender may reasonably request.
Section 5.03. Final Disbursement. The final disbursement of the
------------------
Loan, including retainage, shall be subject and conditioned upon all
conditions for Advances set forth in Sections 2.01, 5.01 and 5.02 being
satisfied.
Section 5.04. Waiver of Conditions. Lender may defer any of the
--------------------
foregoing conditions to the Loan and Term Loan, and the fact that all of
the conditions may not have been satisfied at the time Lender executes this
Loan Agreement or advances any funds pursuant to the Loan or Term Loan
shall in no circumstances be considered evidence that Lender has waived any
of such conditions. Any waiver of such conditions must be in writing.
ARTICLE VI
Representations and Warranties
------------------------------
To induce Lender to enter into this Agreement, Borrower represents and
warrants to Lender that:
Section 6.01. Existence and Authority. Borrower is a Texas limited
-----------------------
liability company duly organized and validly existing under the laws of the
State of Texas; Borrower (a) has all requisite power to own assets and
carry on its business as now being or as proposed to be conducted; and (b)
is qualified to do business in all jurisdictions in which the nature of its
business makes such qualification necessary and where failure to so qualify
would have a material adverse effect on its business, financial condition,
or operations. Borrower has the power and authority to execute, deliver,
and perform its obligations under this Agreement and the other Loan
Documents to which it is or may become a party.
Section 6.02. Financial Statements. Borrower has delivered to Lender
--------------------
certain financial statements of Borrower and the Guarantor. The financial
statements are true and correct, have been prepared in accordance with
GAAP, and fairly and accurately present the financial condition of Borrower
and, to the best of Borrower's knowledge, the Guarantor as of the date
indicated therein and the results of operations for the period indicated
therein. Borrower does not have any material contingent liabilities,
liabilities for taxes, material forward or long-term commitments, or
unrealized or anticipated losses from any unfavorable commitments not
reflected in such financial statements. No material adverse change in the
condition, financial or otherwise, or operations of Borrower has occurred
since the effective date of the most recent financial statement referred to
in this Section.
Section 6.03. Default. Borrower is not in default in any respect
-------
under any loan agreement, indenture, mortgage, security agreement, or other
agreement or obligation to which it is a party or by which any of its
properties may be bound.
Section 6.04. Authorization and Compliance with Laws and Material
---------------------------------------------------
Agreements. The execution, delivery, and performance by Borrower of this
----------
Agreement and the other Loan Documents to which Borrower is or may become a
party have been duly authorized by all requisite action on the part of
Borrower and do not and will not violate the organizational agreements of
Borrower or any law or any order of any court, governmental authority, or
arbitrator, and do not and will not conflict with, result in a breach of,
or constitute a default under, or result in the imposition of any Lien upon
any assets of Borrower pursuant to the provisions of any indenture,
mortgage, deed of trust, security agreement, franchise, permit, license, or
other instrument or agreement by which Borrower is bound.
Section 6.05. Litigation and Judgments. There is no action, suit,
------------------------
or proceeding before any court, governmental authority, or arbitrator
pending, or to the knowledge of Borrower, threatened against or affecting
Borrower or the Guarantor that would, if adversely determined, have a
material adverse effect on the financial condition or operations of
Borrower or the Guarantor or the ability of Borrower or the Guarantor to
pay and perform the Obligations. There are no outstanding judgments against
Borrower or the Guarantor.
Section 6.06. Rights in Properties; Liens. Borrower has good and
---------------------------
indefeasible title to or valid leasehold interests in its properties and
assets, real and personal reflected in the financial statements described
in Section 6.02, and none of the properties, assets, or leasehold interests
of Borrower is subject to any Lien, except as shown thereon.
Section 6.07. Enforceability. This Agreement constitutes, and the
--------------
other Loan Documents to which Borrower is party, when delivered, shall
constitute the legal, valid, and binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms,
except as limited by bankruptcy, insolvency, or other laws of general
application relating to the enforcement of creditor's rights.
Section 6.08. Approvals. No authorization, approval, or consent of,
---------
and no filing or registration with, any court, governmental authority, or
third party is or will be necessary for the execution, delivery, or
performance by Borrower of this Agreement and the other Loan Documents to
which Borrower is or may become a party or the validity or enforceability
thereof.
Section 6.09. Taxes. Borrower has filed all tax returns (federal,
-----
state, and local) required to be filed, including all income, franchise,
employment, property, and sales taxes, and has paid all of its tax
liabilities, and Borrower has no knowledge of any pending but unassessed
tax liability of Borrower.
Section 6.10. Disclosure. No representation or warranty made by
----------
Borrower in this Agreement or in any other Loan Document contains any
untrue statement of a material fact or omits to state any material fact
necessary to make the statements herein or therein not misleading. There is
no fact known to Borrower which has a material adverse effect or which can
have a material adverse effect on the business, assets, financial
condition, or operations of Borrower that has not been disclosed in writing
to Lender.
Section 6.11. Principal Place of Business. The principal place of
---------------------------
business and chief executive office of Borrower and the place where
Borrower keeps its books and records is located at the address set forth in
Section 10.09.
Section 6.12. Other Agreements. Borrower is not a party to, or bound
----------------
by any agreement, condition, contract, or arrangement which might in the
future have a material adverse effect on the business, operations, or
financial condition of Borrower.
Section 6.13. Compliance with Law. Borrower is in compliance with
-------------------
all laws, rules, regulations, orders, and decrees which are applicable to
Borrower or any of its properties.
Section 6.14. No Work. Prior to the recording of the Deed of Trust,
-------
no work on the Project shall be commenced, and no materials or equipment
shall be delivered to or upon the Project.
Section 6.15. Forfeiture. Neither Borrower nor any Guarantor is or
----------
has been charged with or, to their knowledge, are under investigation for,
possible violations of the Racketeering, Influenced and Corrupt
Organizations Act ("RICO"), the Continuing Criminal Enterprises Act
("CCE"), the Controlled Substance Act of 1978, the Money Laundering Act of
1986, the AntiDrug Abuse Act of 1986, or similar law providing for the
possible forfeiture of any of their respective assets or properties.
Section 6.16. Contracts. The Contracts as presented to Lender,
---------
include all amendments and modifications to the Contracts.
Section 6.17. DHS Requirements. The Improvements will be
----------------
constructed in accordance with all applicable DHS requirements. Upon
completion of the Improvements, the Borrower will operate the Project in
accordance with all applicable DHS rules and regulations. Borrower shall
promptly notify Lender of any notices or other correspondence received from
the DHS or any other governmental entity indicating that the Project is not
in compliance with DHS rules and regulations. Borrower shall take all
action necessary to maintain its DHS Licenses and shall take prompt action
to renew its DHS Licenses each year. Borrower shall provide Lender with
copies of all renewal DHS Licenses upon receipt.
ARTICLE VII
Positive Covenants and Agreements
---------------------------------
Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or Lender has any commitment hereunder,
Borrower will perform and observe the following positive covenants and
agreements, unless Lender shall otherwise consent in writing (which consent
may be conditioned upon the payment of a consent fee or an increase in the
interest rate on the Note).
Section 7.01. Financial Statements.
--------------------
(a) Guarantor shall furnish management prepared financial
statements to Lender for each fiscal quarter which statements shall be
due thirty (30) days after the end of each fiscal quarter.
Following completion of the Project, monthly operating statements
shall be due from Borrower within thirty (30) days of the end of each
month. Guarantor shall also furnish to Lender audited annual
financial statements beginning with the fiscal year ending January 31,
1997, containing balance sheets (reflecting, without limitation, all
contingent liabilities), income statements and statements of changes
in financial position (reflecting, without limitation, cash flow
changes) as at the end of such fiscal year and for the 12-month period
then ended, in each case setting forth in comparative form the figures
for the preceding fiscal year. All financial statements will be
prepared in reasonable detail, and all of the above prepared in
accordance with GAAP, consistently followed and applied and containing
only qualifications acceptable to Lender, in Lender's sole discretion.
Guarantor's and Borrower's financial statements shall be prepared by
the authorized officers of each familiar with and knowledgeable of the
information therein presented and responsible for the supervision of
the preparation of said financial statements for Borrower and
Guarantor. Borrower's financial statements shall be accompanied with
compiled accounts payable information and such other financial
information as Lender shall request.
(b) Within sixty days after the filing of Borrower's tax return,
Borrower shall furnish Lender with a copy of Borrower's United States
income tax return as filed with the Internal Revenue Service, together
with any and all exhibits and schedules filed in connection therewith,
beginning with the tax year ending January 31, 1997, and continuing
annually thereafter.
(c) Within sixty days after the filing of Guarantor's tax
return, Borrower shall cause Guarantor to furnish Lender with a copy
of Guarantor's United States income tax return as filed with the
Internal Revenue Service, together with any and all exhibits and
schedules filed in connection therewith, beginning with the tax year
ending January 31, 1997, and continuing annually thereafter.
Section 7.02. Certificates; Rent Roll; Other Information. Borrower
------------------------------------------
shall furnish to Lender all of the following:
(a) Within thirty (30) days from the end of each month beginning
with the first month after the completion of construction, (i) a copy
of the rent roll of the Project reflecting, at a minimum, the names of
all tenants, terms of leases, base rents, security deposits and
renewal options, and (ii) operating statements for the Project, which
rent roll and operating statement shall be certified by an authorized
officer of Borrower as to their accuracy, completeness and
truthfulness; and
(b) Promptly, upon request by Lender, any additional information
concerning Borrower which Lender may reasonably request.
Section 7.03. Performance of Obligations. Borrower will duly and
--------------------------
punctually pay and perform the Obligations in accordance with their
respective terms.
Section 7.04. Preservation of Existence and Conduct of Business.
-------------------------------------------------
Borrower will preserve and maintain its limited liability company status
and all of its leases, privileges, franchises, qualifications, and rights
that are necessary or desirable in the ordinary conduct of its business,
and conduct its business as presently conducted in an orderly and efficient
manner in accordance with good business practices.
Section 7.05. Maintenance of Project. Borrower will maintain the
----------------------
Project in good condition and repair (ordinary wear and tear excepted).
Section 7.06. Payment of Taxes and Claims. Borrower will pay or
---------------------------
discharge at or before maturity or before becoming delinquent (i) all
taxes, levies, assessments, and governmental charges imposed on it or any
of its property, and (ii) all lawful claims for labor, material, and
supplies, which, if unpaid, might become a Lien upon any of its property;
provided, however, that Borrower shall not be required to pay or discharge
any tax, levy, assessment, or governmental charge which is being contested
in good faith by appropriate proceedings diligently pursued, and for which
adequate reserves have been established.
Section 7.07. Insurance. Before commencement of the construction of
---------
the Improvements, and at all times thereafter, Borrower will maintain (or
with respect to the all-builder's risk coverage cause General Contractor to
maintain) with financially sound and reputable insurance companies
reasonably acceptable to Lender, workmen's compensation insurance and
insurance on Borrower's property, assets, and business in such amounts, and
with deductibles, acceptable to Lender, and against such risks as required
by Lender, and as set forth in the Loan Commitment (including, without
limitation, all builder's risk coverage for the Improvements, hazard,
comprehensive general liability insurance and extended coverage), and
Borrower shall provide Lender with evidence satisfactory to Lender in
Lender's reasonable discretion of such insurance coverage. Hazards
covered, the amounts of such coverage and the carrier providing such
coverage must be approved by Lender in writing. Lender shall provide
Borrower with a list of the hazards to be covered and the amounts of such
coverage prior to closing. In the case of hazard insurance and all
builder's risk, such insurance shall at least be in an amount equal to the
lesser of hundred percent (100%) of the full insurable value of the
insurable portion of the Improvements or an amount equal to the Loan
amount. All insurance policies shall be issued by insurers with a Best's
rating of not less than A+ and a financial size category of at least VII,
unless otherwise agreed by Lender. Each insurance policy covering
Collateral shall name Lender (or the holder of the Note) as a loss payee
subject to a mortgagee clause (without contribution) of the standard form
attached to or otherwise made a part of the applicable policy, and shall
provide that the same shall not be canceled or modified without at least
thirty (30) days prior written notice to Lender. All insurance policies
and renewals thereof shall be in a form reasonably acceptable to Lender.
Lender shall have the right to hold the policies and Borrower shall
promptly furnish or cause to be furnished to Lender all renewal notices and
all receipts of paid premiums. At least fifteen (15) days prior to the
expiration date of a policy, Borrower shall deliver to Lender a renewal
policy in form reasonably satisfactory to Lender.
If any of the Improvements on the Project is in a "Flood Hazard Area",
Borrower shall provide Lender with a flood insurance policy in an amount
equal to the Loan amount or the maximum amount available under the Flood
Disaster Protection Act of 1973 and regulations issued pursuant thereto, as
may be amended from time to time, whichever is less, in form complying with
the "insurance purchase requirement" of the Act which shall contain a
mortgagee clause in favor of Lender.
Section 7.08. Inspection Rights. At any reasonable time and from
-----------------
time to time, Borrower will permit representatives of Lender to examine the
books and records of, and visit and inspect the properties of Borrower and
to discuss the business, operations, and financial condition of Borrower
with Borrower's officers and employees and with their independent certified
public accountants.
Section 7.09. Keeping Books and Records. Borrower will maintain
-------------------------
proper books of record and account in which full, true, and correct entries
in conformity with GAAP shall be made of all dealings and transactions in
relation to its business and activities.
Section 7.10. Compliance with Laws. Borrower will comply with all
--------------------
material applicable laws, rules, regulations, and orders of any court,
governmental authority or arbitrator.
Section 7.11. Compliance with Agreements. Borrower will comply in
--------------------------
all material respects with all material agreements, indentures, mortgages,
deeds of trust, and other documents binding on it or affecting its
properties or business.
Section 7.12. Notices. Borrower will promptly notify Lender of (i)
-------
the occurrence of an Event of Default, (ii) the commencement of any action,
suit, or proceeding against Borrower that might have a material adverse
effect on the business, financial condition, or operations of Borrower, and
(iii) any other matter that might have a material adverse effect on the
business, financial condition, or operations of Borrower.
Section 7.13. Further Assurances. Borrower will execute and deliver
------------------
such further instruments as may be deemed reasonably necessary or desirable
by Lender to carry out the provisions and purposes of this Agreement and
the other Loan Documents and to preserve and perfect the Liens of Lender in
the Collateral.
Section 7.14. Required Additional Funds. In order to assure Lender
-------------------------
that sufficient funds are available to pay all of the costs to be incurred
in the construction of the Improvements on the Real Property, Borrower will
if required by Lender deposit in the Disbursement Account with Lender
additional funds over and above the amount of the Loan in an amount equal
to the difference between (i) the amount of the Loan plus paid receipts
for permissible development and construction costs approved by Lender and
paid by Borrower from Borrower's own funds and (ii) the finally approved
total cost to be incurred in connection with the construction of the
Improvements on the Project (including, without limitation, a sufficient
reserve for funding of interest). Prior to the disbursement of any Loan
proceeds pursuant to a request for disbursement, Borrower and the Guarantor
shall provide Lender with evidence satisfactory to Lender, in Lender's sole
discretion, that sufficient funds are available to complete the
construction of the Improvements on the Real Property according to the
approved Plans and Specifications.
Section 7.15. Commencement of Construction; Completion Deadline.
-------------------------------------------------
Borrower will commence construction of the Improvements on the Project
within sixty (60) days from the Closing Date (but not prior to the Closing
Date). Borrower shall cause the construction to be pursued with reasonable
diligence. Borrower shall cause the Improvements to be completed in
accordance with the Plans and Specifications approved by Lender no later
than thirty-six (36) months from the Closing Date, regardless of whether
the proceeds of the Loan are sufficient for that purpose. Borrower shall
notify Lender by written notice of the date upon which construction has
commenced.
Section 7.16. Security Deposits. If, at any time during the term of
-----------------
the Loan, Lender deems itself insecure, Borrower will upon Lender's written
request, establish an escrow account with Lender into which all security
deposits received by Borrower in connection with leasing units in the
Project shall be deposited, subject to the rights of tenants to
reimbursement under the leases.
Section 7.17. Contracts. Borrower shall maintain all Contracts in
---------
full force and effect during the term thereof.
Section 7.18. Net Worth and Liquidity. At all times during the loan,
-----------------------
Guarantor shall maintain a net worth of $30,000,000.00 and liquidity of
$6,000,000.00.
Section 7.19. Ownership of Guarantor. John Luciani (50.0% owner) and
----------------------
Bernard Rodin (50.0% owner) shall maintain their current ownership
interests in Guarantor for the term of the Loan and all extensions thereof.
Notwithstanding the foregoing, the Guarantor may be taken public by the
issuance of stock and up to 49% of the ownership interests in the Guarantor
may be sold to the general public in such offering, but Mr. Luciani and Mr.
Rodin shall maintain no less than a 51% ownership interest in Guarantor.
Mr. Luciani and Mr. Rodin have joined in this Agreement individually for
the sole purpose of evidencing their consent to and agreement to be bound
by the requirements of this Section 7.19.
ARTICLE VIII
Negative Covenants
------------------
Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or Lender has any commitment hereunder,
Borrower will perform and observe the following negative covenants, unless
Lender shall otherwise consent in writing, which consent may be conditioned
upon the payment of a consent fee or an increase in the interest rate on
the Note):
Section 8.01. Debt. Except as otherwise herein provided under
----
Section 10.20, Borrower will not incur, create, assume or permit to exist
any Debt, except (i) Debt to Lender, and (ii) Debt that is not secured by
liens on the Project.
Section 8.02. Limitation on Liens. Except as otherwise herein
-------------------
provided, Borrower will not incur, create, assume, or permit to exist any
Lien (other than as contemplated by the Loan Documents) against the Project
without the Lender's prior written consent.
Section 8.03. Transactions With Affiliates. Except for the
----------------------------
Management Agreement, Borrower shall not enter into any transaction with
any director, officer, employee, or any Affiliate of Borrower, without the
express written approval of Lender, other than in the ordinary course of
its business and upon substantially the same or better terms as it could
obtain in an arm's length transaction with an entity or person who is not
an Affiliate of Borrower.
Section 8.04. Disposition of Project. Borrower will not sell, lease
----------------------
(other than to tenants in the ordinary course of business), assign,
transfer, or otherwise dispose of any of the Project, without the Lender's
prior written approval.
Section 8.05. Structure of Borrower. No change in the structure of
---------------------
Borrower or the Guarantor shall occur except as contemplated by Section
7.19 hereof without Lender's written approval.
Section 8.06. Distributions/Fees. Borrower shall not make any
------------------
distribution of Project revenues to any of its members until the
Improvements are completed (such completion to be evidenced by a
Certificate of Substantial Completion of the Project Architect and
confirmed by the Construction Inspector). Distributions are permitted
thereafter, so long as (i) no Event of Default exists at such time, or
would exist immediately thereafter, and (ii) the Borrower has complied with
Section 7.05 hereof.
Section 8.07. Management of the Project. The management agreement
-------------------------
approved by Lender can not be amended without Lender's approval.
Section 8.08. Lease Agreements. Borrower shall not enter into any
----------------
leases providing for the occupancy of any unit in the Project except for
tenant leases in substantially the form approved by Lender in writing.
Borrower shall not permit any amendment of the Leases except in the
ordinary course of business.
Section 8.09. Asbestos Containing Materials. Borrower will not
-----------------------------
permit the use of any product, floor covering, insulation, or paint that
contains asbestos in connection with the construction of the Improvements.
Section 8.10. Amendments to Contracts and Plans and Specifications.
----------------------------------------------------
Borrower will neither seek nor permit any further amendment to the
Contracts, or any of them, as approved by Lender, without prior written
consent of Lender. No material amendment or deviation shall be made to the
Plans and Specifications, and no change order shall be issued without the
prior written consent of Lender.
ARTICLE IX
Default
-------
Section 9.01. Events of Default. Each of the following shall be
-----------------
deemed an "Event of Default":
(a) Borrower shall fail to pay or perform when due the
Obligations or any part thereof, and such failure, shall continue for
ten (10) days following notice thereof from Lender.
(b) Any representation or warranty made by Borrower or Guarantor
in any Loan Document or in any certificate, report, notice, or
financial statement furnished at any time in connection with this
Agreement shall be false, incomplete or erroneous in any material
adverse respect when made.
(c) Unless otherwise specified herein, Borrower shall fail to
perform, observe, or comply in any material respect with any covenant,
agreement, or term contained in this Agreement or any other Loan
Document (other than the failure to make payment when due on the
Obligations or the failure to deliver any required renewal Letter of
Credit within the required time frames), and such failure shall
continue for thirty (30) days following notice thereof from Lender.
(d) Borrower shall commence a voluntary proceeding seeking
liquidation, reorganization, or other relief with respect to itself or
its debts under any bankruptcy, insolvency, or other similar law now
or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian, or other similar official of it or a
substantial part of its property or shall consent to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it or shall
make a general assignment for the benefit of creditors or shall
generally fail to pay its debts as they become due or shall take any
corporate action to authorize any of the foregoing.
(e) Borrower shall fail to contest and dismiss within a period
of ninety (90) days after the commencement thereof any involuntary
proceeding commenced against Borrower seeking liquidation,
reorganization, or other relief with respect to it or its debts under
any bankruptcy, insolvency, or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
custodian, or other similar official for it or a substantial part of
its property.
(f) Borrower shall fail to discharge within a period of sixty
(60) days after the commencement thereof any attachment,
sequestration, or similar proceeding against the Project or Personalty
that will in Lender's sole discretion have a materially adverse impact
on the financial and business affairs of Borrower.
(g) Borrower shall fail to satisfy and discharge within ninety
(90) days after entry (but in any event prior to the commencement of
proceedings to enforce collection) of any final judgment or judgments
against it for the payment of money in an amount that will in Lender's
sole discretion have a materially adverse impact on the financial and
business affairs of Borrower.
(h) This Agreement or any other Loan Document shall cease to be
in full force and effect in a material respect or shall be declared
null and void or the validity or enforceability thereof shall be
contested or challenged by Borrower or Borrower shall deny that it has
any further liability or obligation under any of the Loan Documents.
(i) A material deterioration in the financial condition of
Borrower shall have occurred.
(j) Borrower shall default in any payment of principal or
interest due on any other recourse Debt beyond any grace period or
Borrower is made a party defendant to a law suit in which damages are
alleged equal to or in excess of $1,000,000 and such damages are not
covered by Borrower's liability insurance, or if dollar amounts are
not specifically pled in one or more of the claims for relief in any
such lawsuit, where Lender concludes that the exposure thereunder, if
the claims asserted were true, would equal or exceed $1,000,000, where
Lender determines that these damages will not be covered by Borrower's
liability insurance (provided that Lender's conclusion is not
arbitrary or capricious), or where the insurance deductible is greater
than $100,000.00 per casualty.
(k) Borrower shall admit in writing its inability to pay its
Debts as they become due.
(l) Borrower shall fail to discharge within a period of ninety
(90) days of the filing of any formal charges under federal or state
law for which forfeiture of Borrower's interest in the Project or the
granting of a lien against the Project, which lien is or could be
superior to any of Lender's liens against the Project, is a potential
penalty or remedy.
(m) Borrower fails to deliver a replacement Letter of Credit to
Lender in the amount of $730,000.00 (or such other amount as may be
approved by Lender) issued by a bank acceptable to Lender and in form
and substance acceptable to Lender at least thirty (30) days prior to
the expiration date of the original Letter of Credit or any
replacement Letter of Credit. (In the case of an Event of Default
under this Section 9.01(m), Lender shall not be required to give
Borrower any notice of an Event of Default prior to making a draw
under the Letter of Credit. In the case of an Event of Default under
this Section, Lender may draw on the Letter of Credit and provided
that no other Event of Default exists hereunder or under any other
Loan Document, Lender shall apply all proceeds thereof in payment of
the principal balance of the Note. Upon receipt of the proceeds of the
Letter of Credit, the default under this Section 9.01(m) shall be
deemed cured. If any other Event of Default then exists hereunder or
under any other Loan Document, Lender may draw on the Letter of Credit
and apply it to the payment of interest, principal and reasonable
expenses in such order as Lender may choose.)
Section 9.02. Remedies Upon Default. Upon the occurrence of an Event
---------------------
of Default, Lender may without notice terminate its obligation to lend
hereunder and declare the Obligations or any part thereof to be immediately
due and payable, and the same shall thereupon become immediately due and
payable, without notice, demand, presentment, notice of dishonor, notice of
acceleration, notice of intent to accelerate, notice of intent to demand,
protest, or other formalities of any kind, all of which are hereby
expressly waived by Borrower; provided, however, that upon the occurrence
of an Event of Default under Section 9.01(d) or Section 9.01(e), the
obligation of Lender to lend hereunder shall automatically terminate, and
the Obligations shall become immediately due and payable without notice,
demand, presentment, notice of dishonor, notice of acceleration, notice of
intent to accelerate, nor other formalities of any kind, all of which are
hereby expressly waived. Upon the occurrence of any Event of Default,
Lender may exercise all rights and remedies available to it in law or in
equity, under the Loan Documents, or otherwise. Upon the occurrence of any
Event of Default, Lender shall have the right to require Borrower to
replace the Property Manager, and to immediately deposit all security
deposits in an escrow account maintained with Lender subject to the rights
of tenants under tenant leases.
ARTICLE X
Miscellaneous
-------------
Section 10.01. Reimbursement of Expenses of Lender. Borrower and
-----------------------------------
Guarantor shall be severally liable for and hereby agree to pay Lender on
demand or if no demand is made within twenty (20) days following receipt of
an invoice therefor: (i) all reasonable costs and expenses incurred by
Lender in connection with the preparation, negotiation, and execution of
this Agreement and the other Loan Documents and any and all amendments,
modifications, renewals, extensions, and supplements thereof and thereto,
including, without limitation, the reasonable fees and expenses of Lender's
legal counsel, (ii) all reasonable costs and expenses incurred by Lender in
connection with the enforcement of this Agreement or any other Loan
Document, including, without limitation, the reasonable fees and expenses
of Lender's legal counsel, (iii) all other reasonable costs and expenses
incurred by Lender in connection with this Agreement or any other Loan
Document, including, without limitation, all costs, expenses, taxes
(excluding income taxes), assessments, filing fees, credit investigations,
and other charges levied by a governmental authority or otherwise payable
in respect of this Agreement or any other Loan Document or in obtaining any
mortgagee title insurance policy, endorsement, survey, environmental
report, or appraisal in respect of the Collateral, and (iv) all reasonable
costs and expenses incurred by Lender or Lender's agents relating to any
inspections of the Project and any audit of the books, records and
operations of Borrower and the Project, including independent analysts,
consultants, engineers, inspectors, auditors, and appraisers. The amounts
described herein shall be paid even if Borrower fails to satisfy the
conditions of Article V hereof and this Loan fails to fund as a result.
Lender shall not be required to pay any premium or other charge or any
brokerage fee or commission or similar compensation in connection with the
Loan unless the foregoing is asserted by, through or under Lender.
Section 10.02. Indemnification. Borrower hereby indemnifies Lender
---------------
and each affiliate thereof and their respective officers, directors,
employees, and agents from, and holds each of them harmless against, any
and all losses, liabilities, claims, damages, costs, and expenses to which
any of them may become subject, insofar as such losses, liabilities,
claims, damages, costs, and expenses arise from or relate to (i) any of the
Loan Documents or any of the transactions contemplated thereby, (ii) from
any investigation, litigation, or other proceeding, including, without
limitation, any threatened investigation, litigation, or other proceeding
relating to any of the foregoing, including the violation of any applicable
environmental law, rule or regulation, now or hereafter existing, that
affects the Project, but excluding any of the foregoing attributable to
Lender's gross negligence or willful misconduct, and (iii) the claims of
any and all brokers or anyone else claiming a fee by, through or under
Borrower in connection with arranging the financing herein described.
Section 10.03. Restatement. The delivery of each statement, report,
-----------
and certificate to Lender pursuant to this Agreement shall by virtue of
such delivery alone constitute a restatement of the representations and
warranties contained in Article VI hereof on and as of the date of
delivery. Each such delivery shall also constitute a representation and
warranty at the time of said delivery that no Event of Default has occurred
and is continuing.
Section 10.04. No Waiver; Cumulative Remedies. No failure on the
------------------------------
part of Lender to exercise and no delay in exercising, and no course of
dealing with respect to, any right, power, or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power, or privilege under this Agreement
preclude any other or further exercise thereof or the exercise of any other
right, power, or privilege. The rights and remedies provided for in this
Agreement and the other Loan Documents are cumulative and not exclusive of
any rights and remedies provided by law.
Section 10.05. Successors and Assigns. This Agreement is binding
----------------------
upon and shall inure to the benefit of Lender and Borrower and their
respective successors and assigns, except that Borrower may not assign or
transfer any of its rights or obligations under this Agreement without the
prior written consent of Lender.
Section 10.06. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made in this Agreement or any other Loan
Document or in any document, statement, or certificate furnished in
connection with this Agreement shall survive the execution and delivery of
this Agreement and the other Loan Documents, and no investigation by Lender
or any closing shall affect the representations and warranties or the right
of Lender to rely upon them.
Section 10.07. Entire Agreement; Amendment. THE PARTIES HERETO
---------------------------
EXPRESSLY ACKNOWLEDGE AND AGREE, THAT WITH REGARD TO THE SUBJECT MATTER OF
THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREIN: (1) THERE ARE NO
ORAL AGREEMENTS BETWEEN THE PARTIES HERETO AND (2) THIS AGREEMENT,
INCLUDING THE DEFINED TERMS AND ALL EXHIBITS AND ADDENDA, IF ANY, ATTACHED
HERETO: (a) EMBODIES THE FINAL AND COMPLETE AGREEMENT BETWEEN THE PARTIES;
(b) SUPERSEDES ALL PRIOR AND CONTEMPORANEOUS NEGOTIATIONS, OFFERS,
PROPOSALS, AGREEMENTS, COMMITMENTS, PROMISES, ACTS, CONDUCT, COURSE OF
DEALING, REPRESENTATIONS, STATEMENTS, ASSURANCES AND UNDERSTANDINGS,
WHETHER ORAL OR WRITTEN; AND (c) MAY NOT BE VARIED OR CONTRADICTED BY
EVIDENCE OF ANY SUCH PRIOR OR CONTEMPORANEOUS MATTER OR BY EVIDENCE OF ANY
SUBSEQUENT ORAL AGREEMENT OF THE PARTIES HERETO. The provisions of this
Agreement and the other Loan Documents to which Borrower is a party may be
amended or waived only by an instrument in writing signed by the parties
hereto.
Section 10.08. Maximum Interest Rate. It is the intention of Lender,
---------------------
Borrower, the Guarantor, and all other parties to the Loan to conform to
and contract in strict compliance with applicable usury laws from
time-to-time in effect. All agreements between Lender or any other holder
of the Note and Borrower (or any other party liable with respect to
indebtedness under the Loan Documents) are hereby limited by this
provision, which shall control and override all such agreements. In no
way, nor in any event or contingency (including, but not limited to,
prepayment, default, demand for payment, or the acceleration of maturity of
any Obligations, or the recharacterization of any application fee, loan
commitment fees, or origination fees as interest), shall the interest
taken, reserved, contracted for, charged or received under the Note, or
otherwise, exceed the Maximum Rate. If, from any possible construction of
any document, interest would otherwise be payable in excess of the Maximum
Rate, any such construction shall be subject to this provision, and such
document shall be automatically reformed, and the interest payable shall be
automatically reduced to the Maximum Rate permitted under applicable law,
without the necessity of the execution of any amendment or new document.
If Lender or the holder of the Note shall ever receive any thing of value
that is characterized as interest under applicable law and that would apart
from this provision, be in excess of the Maximum Rate, an amount equal to
the amount that would have been excessive interest shall, without penalty,
be applied to the reduction of the principal amount owing on the Note in
the inverse order of its maturity and not to the payment of interest, or
refunded to Borrower or the other payor thereof if and to the extent such
amount, which would have been excessive, exceeds such unpaid principal. The
right to accelerate the maturity of the Note, or any other indebtedness,
does not include the right to accelerate any interest that has not
otherwise accrued on the date of such acceleration, and the Lender or the
holder thereof does not intend to charge or receive any unearned interest
in the event of acceleration. All interest paid or agreed to be paid to
the Lender or the holder of the Note shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and spread throughout the
full stated term (including any renewal or extension) of the Note so that
the amount of interest on account of such indebtedness does not exceed the
Maximum Rate. As used in this paragraph, the term "applicable law" shall
mean the laws of the State of Texas or the federal laws of the United
States of America, which ever laws allow the greater h laws now exist may
be changed or amended or come in effect in the future.
Section 10.09. Notices. Any notice, consent, request, demand or
-------
other communication required or permitted to be given under any of the Loan
Documents to Lender or Borrower must be in writing and shall be deemed
sufficiently given or made when (i) delivered in person, (ii) sent by
private courier or national overnight delivery service with proof of
delivery and courier fees paid by sender, (iii) sent by telecopy with
either telephonic confirmation of receipt or with a hard copy sent that day
by national overnight delivery service, or (iv) three (3) days after
depositing in the United States mail by first class mail, registered or
certified, return receipt requested, postage prepaid, as follows:
To Lender: Bank United
3200 Southwest Freeway, Suite 1900
P.O. Box 1370
Houston, Texas 77251-1370
Attention: Casey Moore
Telephone: (713) 543-6500
Telecopy: (713) 543-6604
With copy to: Nancy F. Martin
Shannon, Martin, Finkelstein & Sayre
1300 Two Allen Center
1200 Smith Street
Houston, Texas 77002
Telecopy: (713) 752-0337
Telephone: (713) 646-5560
To Borrower: Leisure Centers LLC-1
c/o Grand Court Lifestyles, Inc.
2650 North Military Trail, Suite 350
Boca Raton, Florida 33431-6358
Attention: Mr. Dorian Luciani
Telephone: (561) 997-0323
Telecopy: (561) 997-7592
With copy to: Eugene Sanders, Esq.
2650 North Military Trial, Suite 250
Boca Raton, Florida 33431-6358
Telecopy: (561) 994-9585
Telephone: (561) 994-8342
or such other address as shall be set forth in a notice from the
appropriate party given in compliance with this Section. Notwithstanding
anything to the contrary herein, any notice delivered pursuant to Section
51.002 of the Texas Property Code shall be deemed sufficiently given when
deposited in the United States mail by first class mail, registered or
certified, return receipt requested, postage prepaid to the address of
Borrower as set forth above.
Section 10.10. Applicable Law and Venue. This Agreement shall be
------------------------
governed by and construed in accordance with the laws of the State of Texas
and the applicable laws of the United States of America. This Agreement has
been entered into in Harris County, Texas, and it shall be performable for
all purposes in Harris County, Texas. Courts within the State of Texas
shall have jurisdiction over any and all disputes between Borrower and
Lender, whether in law or equity, including, but not limited to, any and
all disputes arising out of or relating to this Agreement or any other Loan
Document; and venue in any such dispute whether in federal or state court
shall be laid in Harris County, Texas.
Section 10.11. Counterparts. This Agreement may be executed in one
------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 10.12. Severability. Any provision of this Agreement held by
------------
a court of competent jurisdiction to be invalid or unenforceable shall not
impair or invalidate the remainder of this Agreement and the effect thereof
shall be confined to the provision held to be invalid or illegal.
Section 10.13. Headings. The headings, captions, and arrangements
--------
used in this Agreement are for convenience only and shall not affect the
interpretation of this Agreement.
Section 10.14. Participation. Borrower acknowledges and agrees that
-------------
Lender may assign all or a part of its interests under the Loan Documents
to one or more third parties. Borrower acknowledges that all information
relating to the Loan Documents, the Projects, Borrower, any Guarantor, or
holders of equity interests in Borrower, within the possession of or later
acquired by Lender or its agents may be disclosed to prospective or actual
purchasers, participants, and their respective agents, and further, in
connection with a potential or actual securitization of the Note, to
underwriters, rating agencies, other loan servicers, and persons or
entities acting as trustee of any trusts, investment conduits, or other
entities to which the Note may be assigned. Borrower hereby consents to
such disclosures, as needed by Lender in connection with such assignments
aforesaid.
Section 10.15. Construction. Borrower and Lender acknowledge that
------------
each of them has had the benefit of legal counsel of its own choice and has
been afforded an opportunity to review this Agreement and the other Loan
Documents with its legal counsel.
Section 10.16. Waiver of Jury Trial. Borrower and Guarantor hereby
--------------------
expressly waive any right to a trial by jury in any action or legal
proceeding arising out of or relating to this Agreement or any other Loan
Document or the transactions contemplated hereby or thereby.
Section 10.17. Calculation of Deficiency. If all or any portion of
-------------------------
the Project is foreclosed upon pursuant to a judicial or nonjudicial
foreclosure sale, then notwithstanding the provisions of Sections 51.003,
51.004, and 51.005 of the Texas Property Code (as the same may be amended
from time to time), and to the extent permitted by law, Borrower agrees
that Lender shall be entitled to seek a deficiency judgment from Borrower
and any other party obligated on the Note or a Guaranty of such Note equal
to the difference between the amount owing on the Note and the total amount
for which the Project was sold pursuant to a judicial or nonjudicial
foreclosure sale. Borrower expressly recognizes that this Section
constitutes a waiver of the above-cited provisions of the Texas Property
Code which would otherwise permit Borrower, Guarantor and other persons
against whom recovery of deficiencies is sought or Guarantor independently
(even absent the initiation of deficiency proceedings against them) to
present competent evidence of the fair market value of the Project as of
the date of the applicable foreclosure sale and offset against any
deficiency the amount by which the foreclosure sale price is determined to
be less than such fair market value. Borrower further recognizes and
agrees that this waiver creates an irrebuttable presumption that the
foreclosure sale price is equal to the fair market value of the Project for
purposes of calculating deficiencies owed by Borrower, any Guarantor, and
others against whom recovery of a deficiency is sought.
Alternatively, in the event the waiver provided above is determined by
a court of competent jurisdiction to be unenforceable, the following shall
be the basis for the finder of fact's determination of the fair market
value of the Project as of the date of the foreclosure sale in proceedings
governed by Sections 51.003, 51.004, and 51.005 of the Texas Property Code
(as amended from time to time);
(1) The Project shall be valued in an "as is" condition as of the
date of the foreclosure sale, without any assumption or expectation
that the Project will be repaired or improved in any manner before a
resale of the Project after foreclosure;
(2) The valuation shall be based upon an assumption that the
foreclosure purchaser desires a prompt resale of the Project for cash
promptly (but no later than twelve months) following the foreclosure
sale;
(3) All reasonable closing costs customarily borne by the seller in a
commercial real estate transaction shall be deducted from the gross
fair market value of the Project, including, without limitation,
reasonable brokerage commissions, title insurance, a survey of the
Project, tax prorations, reasonable attorney's fees, and marketing
costs;
(4) The gross fair market value of the Project shall be further
discounted to account for any estimated holding costs associated with
maintaining the Project pending sale, including, without limitation,
utilities expenses, property management fees, taxes and assessments
(to the extent not accounted for in paragraph 3 above), and other
maintenance expenses; and
(5) Any expert opinion testimony given or considered in connection
with a determination of the fair market value of the Project must be
given by persons having at least five years experience in appraising
property similar to the Project and who have conducted and prepared a
complete written appraisal of the Project taking into consideration
the factors set forth above.
Section 10.18. Arbitration. To the maximum extent not prohibited by
-----------
law, any controversy, dispute or claim arising out of, in connection with,
or relating to the Loan or the Loan Documents or any transaction provided
for therein, including, but not limited to, any claim based on or arising
from an alleged tort or an alleged breach of any agreement contained in any
of the Loan Documents, shall, at the request of any party to the Loan or
Loan Documents (either before or after the commencement of judicial
proceedings) be settled by arbitration pursuant to Title 9 of the United
States Code, which the parties hereto acknowledge and agree applies to the
transaction involved herein, and in accordance with the Commercial
Arbitration Rules of the American Arbitration Association (the "AAA"). In
any such arbitration proceeding: (i) all statutes of limitations which
would otherwise be applicable shall apply; and (ii) the proceeding shall be
conducted in Houston, Texas, by a single arbitrator, if the amount in
controversy is one million dollars ($1,000,000.00) or less, or by a panel
of three arbitrators if the amount in controversy is over one million
dollars ($1,000,000.00). All arbitrators shall be selected by the process
of appointment from a panel pursuant to Section 13 of the AAA Commercial
Arbitration Rules, and each arbitrator shall have AAA acknowledged
expertise in the subject matter of the controversy, dispute or claim. Any
award rendered in any such arbitration proceeding shall be final and
binding, and judgment upon any such award may be entered in any court
having jurisdiction.
If any party to the Loan or Loan Documents files a proceeding in any
court to resolve any such controversy, dispute or claim, such action shall
not constitute a waiver of the right of such party or a bar to the right of
any other party to seek arbitration under the provisions of this Section of
that or any other claim, dispute or controversy, and the court shall, upon
motion of any party to the proceeding, direct that such controversy,
dispute or claim be arbitrated in accordance with this Section.
Notwithstanding any of the foregoing, the parties hereto agree that no
arbitrator or panel of arbitrators shall possess or have the power to (i)
assess punitive damages, (ii) dissolve, rescind or reform (except that the
arbitrator may construe ambiguous terms) the Loan or any Loan Documents,
(iii) enter judgment on the debt, (iv) exercise equitable powers or issue
or enter any equitable remedies or (v) allow discovery of attorney/client
privileged information. The Commercial Arbitration Rules of the AAA are
hereby modified to this extent for the purpose of arbitration of any
dispute, controversy or claim arising out of, in connection with, or
relating to the Loan or any Loan Document. The parties hereto further agree
to waive, each to each other, any claims for punitive damages, and agree
that neither an arbitrator nor any court shall have the power to assess
punitive damages.
No provision of, or the exercise of any rights under, this Section
shall limit or impair the right of any party to the Loan Documents before,
during or after any arbitration proceeding to: (i) exercise self-help
remedies such as setoff or repossession; (ii) foreclose (judicially or
otherwise) any lien on or security interest in any real or personal
property Collateral; or (iii) obtain emergency relief from a court of
competent jurisdiction to prevent the dissipation, damage, destruction,
transfer, hypothecation, pledging or concealment of assets or of Collateral
securing any indebtedness, obligation or guaranty referenced in the Loan
Documents. Such emergency relief may be in the nature of, but is not
limited to: pre-judgment attachments, garnishments, sequestrations,
appointments of receivers, or other emergency injunctive relief to preserve
the status quo.
In the event applicable law prohibits the submission of a particular
controversy, dispute, or claim arising out of or in connection with any of
the Loan Documents or transactions contemplated therein to arbitration,
Borrower and Lender agree that any actions or proceedings in connection
therewith shall be tried and litigated only in the state and federal courts
located in the jurisdiction in which the Property is located or any other
court in which Lender shall initiate legal or equitable proceedings that
has subject matter jurisdiction over the matter in controversy. Borrower
and Lender, to the extent permitted by applicable law, waive any right to
assert the doctrine of forum non-conveniens or to object to the venue to
the extent any proceeding is brought in accordance with this paragraph.
Section 10.19. Additional Obligations. In addition to all
----------------------
Obligations hereunder, under the Note and under the other Loan Documents,
Borrower shall be personally liable on a joint and several basis with the
Guarantor, in the amount of any loss, damage or cost resulting from (i)
fraud or intentional misrepresentation by Borrower or any Guarantor in
connection with obtaining the loan evidenced by the Note or in complying
with Borrower's obligations under the Note, the Deed of Trust, or any other
Loan Documents ( In such event, the "loss" shall be deemed to include but
not be limited to, any loss of sums owing from Borrower under the Note, the
Deed of Trust and any other Loan Documents), (ii) failure to remit to
Lender insurance proceeds, condemnation awards, or other sums or payments
attributable to the Project in accordance with the provisions of the Deed
of Trust, except to the extent that Borrower did not have the legal right,
because of a bankruptcy, receivership, or similar judicial proceeding, to
direct disbursement of such sums or payments, (iii) following and during
the continuance of any Event of Default, failure to remit to Lender or
otherwise apply all Income from the Property (as hereinafter defined) to
(a) principal and interest under the Note, (b) payment of utilities, taxes
and assessments, and (c) ground rents, if any, on the Property as they
become due and payable, (for purposes of this Section 10.19, the term
"Income from the Property" shall mean all rents, profits, issues, products
and income of the Property (including any received or collected by or on
behalf of Borrower after an Event of Default, except to the extent that
Borrower did not have the legal right, because of a bankruptcy,
receivership or similar judicial proceeding, to direct the disbursement of
such sums) (iv) removal of any personalty or fixtures constituting a portio
herein or under the terms of the Deed of Trust, (v) failure to pay any
valid mechanics', materialman's or similar lien claimants' liens arising
from work performed or materials furnished in connection with the Project
prior to any sale or foreclosure thereof, (vi) Borrower's failure to
deliver to Lender following default under the Loan Documents and upon
demand by Lender, all security deposits received in connection with the
Project, subject to the rights of tenants under tenant leases, (vii) any
waste of or damage to the Project caused by the willful or wanton acts or
omissions of Borrower or its agents, or any deferred maintenance of the
Project caused by the inaction of Borrower in which case the loss shall be
deemed to include all costs of repair, replacement or rehabilitation of the
Project (for purposes of this Section 10.19, "deferred maintenance" shall
mean a failure to maintain the Project in good repair (reasonable wear and
tear excepted) by failing to replace and/or repair improvements, fixtures,
and appliances as needed to maintain the Project in good repair (reasonable
wear and tear excepted) and the equivalent of its original condition
reasonable wear and tear excepted) and (viii) any obligation of Borrower
arising under Paragraph 2.4 of the Deed of Trust, and/or the Environmental
Indemnity which event, the "loss" shall include all obligations of Borrower
under the Environmental Indemnity.
Section 10.20. Subordinate Debt. Notwithstanding anything contained
----------------
herein to the contrary, Borrower shall have the right to obtain a
subordinated second lien deed of trust on the Project from an affiliated
entity, provided (i) that the lien of such second lien deed of trust is
subordinate and inferior to the Deed of Trust in favor of Lender to secure
the Loan and (ii) under the terms of the second lien deed of trust the
Trustee is not allowed to foreclose at any time while the Loan is
outstanding.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
BORROWER:
--------
LEISURE CENTERS LLC-1,
a Texas limited liability company
By: Grand Court Lifestyles, Inc.,
Its Manager
By: /s/ Dorian Luciani
----------------------------------------
Dorian Luciani, Senior Vice President
LENDER:
------
BANK UNITED
By: /s/ Casey Moore
---------------------------------------------
Casey Moore, Vice President
FOR THE LIMITED PURPOSES OF EVIDENCING
THEIR AGREEMENT TO BE BOUND BY SECTION 7.19 HEREOF
/s/ Bernard Rodin
-----------------------------------------
BERNARD RODIN
/s/ John Luciani
-----------------------------------------
JOHN LUCIANI
<PAGE>
SCHEDULE 1
----------
Date
Mr. Casey Moore
Bank United
3200 Southwest Freeway, Suite 1300
Houston, Texas 77027
Re: Loan Number______________, Loan Amount: $7,300,000 ("Loan")
Borrower Name: Leisure Centers LLC-1 ("Borrower")
Dear Mr. Moore:
Borrower hereby requests funding of $______________ from the above
referenced Loan for the work in place documented in the attached AIA draw
schedule. Borrower represents that all of the materials submitted in
support of this draw have been reviewed by Borrower and are true and
correct to the best of Borrower's knowledge.
Borrower understands that the final draw funding is subject to change, due
to third party inspections and lender's approval. Borrower authorizes that
the draw be funded by:
1) Wire to: _____________________________________________________________
______________________________________________________________________
______________________________________________________________________
2) Check to: ____________________________________________________________
______________________________________________________________________
______________________________________________________________________
Signed:
LEISURE CENTERS LLC-1,
a Texas limited liability company
By: Grand Court Lifestyles, Inc., Its Manager
By: ____________________________________
Dorian Luciani, Senior Vice President
<PAGE>
SCHEDULE 2
----------
AFFIDAVIT OF BILLS PAID
STATE OF TEXAS <Section>
<Section> KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF _________ <Section>
BEFORE ME, the undersigned authority, a Notary Public in and for the
State of Texas, on this day personally appeared:
_______________________________, as vice president of Grand Court
Lifestyles, Inc., the ________________ of Leisure Centers LLC-1
("Borrower") who being duly sworn by me, upon oath says:
On behalf of the Borrower, the owner of the land for improvements
being erected on the following described property, I certify that all bills
for labor and materials have been paid or will be paid with the proceeds of
this draw; that the Borrower has no notice of any liens other than that of
Bank United, Houston, Texas, being in existence in the following described
property, to wit:
SEE EXHIBIT A
That the facts herein stated are within my knowledge as such officer.
I further acknowledge the receipt of _______________ from Bank United,
Houston, Texas, on ______ ___________________, for improvements on and for
which the above described property is security.
LEISURE CENTERS LLC-1,
a Texas limited liability company
By: Grand Court Lifestyles, Inc.,
Its Manager
By: ______________________________
Dorian Luciani,
Senior Vice President
SUBSCRIBED AND SWORN TO BEFORE ME, this ____ day of ______, 199__.
_____________________________________________
Notary Public in and for the
State of Florida
-------
<PAGE>
SCHEDULE 3
----------
PARTIAL RELEASE OF LIEN
-----------------------
STATE OF TEXAS <Section>
<Section> KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF ___________ <Section>
The undersigned, (the "Subcontractor"), has performed the labor or
furnished materials or done both, pursuant to either a Purchase Order or a
Subcontract with Leisure Centers LLC-1, a Texas limited liability company
(the "Owner"), in connection with the construction of the improvements
located at _________________________________________ (the "Subject
Property").
As a result of the foregoing, $_____________ is due and payable to the
Subcontractor, for the period ending, ____________, 19____, (the "Payment
Date"). This amount represents all sums due Subcontractor, except as
hereinafter noted, for materials supplied, and/or labor performed to the
Payment Date in connection with the construction of improvements on the
Subject Property.
In consideration of the payment of the above stated sum, the receipt of
which is hereby acknowledged, Subcontractor hereby waives, relinquishes,
and releases any and all liens, rights, and interests (including, without
limitation, all interest in and to mechanic's and materialmen's liens),
owned, claimed or held, to be owned, claimed or held by Subcontractor in
and to the Subject Property and to the improvements now or hereafter
constructed thereon, and does hereby release, discharge and acquit the
Owner, its successors and assigns, from all claims, debts, and demand by
reason of the labor performed and/or materials furnished by Subcontractor
prior to and including the Payment Date, except as herein provided.
The undersigned has actual knowledge that all bills owed by Subcontractor
as of the Payment Date for materials furnished and labor performed in
connection with the construction have been fully paid and satisfied or will
be fully paid and satisfied out of the sum stated above. Subcontractor does
further guaranteed that if for any reason a lien or liens are filed for
materials or labor against the Subject Property by virtue of
Subcontractor's participation in the construction of said improvements, or
that of any individual or entity Subcontractor has subcontracted with or
procured materials from, Subcontractor will immediately obtain a settlement
of such lien or liens and obtain and furnish Owner, its successors and
assigns, a release thereof or a bond for release thereof, and if
Subcontractor cannot obtain such a release, indemnify the Owner, its
successors and assigns, for any and all costs the Owner, its successor and
assigns, may incur in removing said lien or liens.
Subcontractor does hereby acknowledge and agree that but for the
representations and agreements contained herein concerning the total
amounts due and owing, the Owner would not make the payment receipted
herein above, and Owner is relying upon such representations and
agreements. The only amounts not included within the waiver and release
contained herein as of the Payment Date are: $___________, (retainage),
and $_______________, (disputed charges).
Executed this ________________ day of ______________, 19__.
"Subcontractor"
_________________________
(Company Name)
By: _____________________
Title: __________________
THE STATE OF TEXAS <Section>
<Section>
COUNTY OF ______________ <Section>
This instrument was acknowledged before me on this ___________________
_______________ of __________________________, 19___ by ___________________
______________________________, ____________________________ of
_________________________, on behalf of said _______________.
_________________________________________________
Notary Public in and for the State of
Texas
My commission Expires: _______, 19__
__________________________________________________
Printed Name of Notary
<PAGE>
EXHIBIT A
Lot One (1), in Block One (1), of the final plat of Grand Courts
Subdivision, in the City of Temple, Bell County, Texas, according
to the plat of record in Cabinet C, Slide 65-A, Plat Records of
Bell County, Texas.
Also Known As:
BEING a 6.800 acre tract of land situated in the GEORGE GIVENS
SURVEY ABSTRACT No. 345, Bell County, Texas and being a part or
portion of that certain 87.45 acre tract of land described in a
Deed from U.S. Trust Company of New York to Elbert Aldrich,
Trustee being of record in Volume 1462, Page 335, Deed Records of
Bell County, Texas and being more particularly described by metes
and bounds as follows:
Commencing at a 1" iron pipe in concrete found at the southeast
corner of the Amending Plat of West Ridge Subdivision, Phase III,
an addition to the City of Temple, Bell County, Texas, according
to the map or plat of record in Cabinet B, Slide 311-A, Plat
Records of Bell County, Texas; said 1" iron pipe in concrete
found being in the west right-of-way line of 205 Loop; THENCE S.
18 degrees 02'04" W., 184.00 feet with the said west right-of-way
line to a 1/2" iron rod set at the beginning of a curve to the
right;
THENCE with the said curve to the right, radius equals 1965.60
feet, are length equals 86.02 feet and the long chord bearing
equals S. 19 degrees 17'17" W., 86.01 feet to a 1/2" iron rod
set for the Point of BEGINNING:
THENCE continuing with said curve to the right and said west
right-of-way line, radius equals 1965.60 feet, arc length equals
431.01 feet and the long chord bearing equals S. 26 degrees 49'25"
W., 430.15 feet to a 1/2" iron rod set for corner;
THENCE N. 73 degrees 20'51" W., 714.59 feet departing from said
west right-of-way line to a 1/2" iron rod set in the east right-
of-way line of Kegley Road for corner;
THENCE N. 37 degrees 34'22" E., 10.88 feet continuing with said
east right-of-way line to a 1/2" iron rod set at the beginning of
a curve to the left for corner;
THENCE with the said curve to the left and said east right-of-way
line, radius equals 1555.21 feet, arc length equals 425.58 feet,
long chord bearing equals N. 29 degrees 44'01" E., 424.25 feet to
a 1/2" iron rod set for corner;
THENCE S. 73 degrees 20'51" E., 690.65 feet departing from said
east right-of-way line to the Point of BEGINNING and containing
296,208 square feet or 6.800 acres of land.
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. J&B Financing, LLC, a Delaware Limited Liability Company
17. Leisure Centers, LLC-I, a Texas Limited Liability Company
18. Leisure Centers, LLC-II, a Texas Limited Liability Company
19. Leisure Centers, LLC-III, a Texas Limited Liability Company
20. Leisure Centers, LLC-IV, a Texas Limited Liability Company
21. Leisure Facilities, Inc., a Delaware Corporation
22. Leisure Facilities, Inc., II, a Delaware Corporation
23. Leisure Facilities, Inc., III, a Delaware Corporation
24. Leisure Facilities, Inc., IV, a Delaware Corporation
25. Leisure Facilities, Inc., V, a Delaware Corporation
26. Leisure Facilities, Inc., VI, a Delaware Corporation
27. Leisure Facilities, Inc., VII, a Delaware Corporation
28. Leisure Facilities, Inc., IX, a Delaware Corporation, doing
business in Texas under the fictitious name of Liberty
Place, Inc.
29. Leisure Facilities, Inc., X, a Delaware Corporation
30. Leisure Facilities, Inc., XII, a Delaware Corporation
31. Leisure Facilities, Inc. XV, a Delaware Corporation
32. 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 Amendment No. 5 to the Registration
Statement (No. 333-05955) of Grand Court Lifestyles, Inc. on Form
S-1 of our report dated April 26, 1996, except for Notes 12c and
13 as to which the date is February 3, 1997, appearing in the
Prospectus, which is part of this Amendment No. 5 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
March 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS AMENDED 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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> OCT-31-1996
<CASH> 8,860
<SECURITIES> 0
<RECEIVABLES> 234,486
<ALLOWANCES> 10,109
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 255,315
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 31,305
<TOTAL-LIABILITY-AND-EQUITY> 255,315
<SALES> 22,232
<TOTAL-REVENUES> 40,921
<CGS> 17,493
<TOTAL-COSTS> 4,603
<OTHER-EXPENSES> 30,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,017
<INCOME-PRETAX> (23,551)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,551)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,551)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS AMENDED 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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 17,961
<SECURITIES> 0
<RECEIVABLES> 236,736
<ALLOWANCES> 13,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 259,555
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 34,316
<TOTAL-LIABILITY-AND-EQUITY> 259,555
<SALES> 32,804
<TOTAL-REVENUES> 68,984
<CGS> 27,406
<TOTAL-COSTS> 7,664
<OTHER-EXPENSES> 12,295
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,808
<INCOME-PRETAX> 5,811
<INCOME-TAX> 2,324
<INCOME-CONTINUING> 3,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,487
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
