FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number: 0-21249
GRAND COURT LIFESTYLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3423087
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
2650 North Military Trail, 33431
Suite 350, Boca Raton, Florida
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (561) 997-0323
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- ----
At September 8, 1998, the Company had 17,800,000 shares of
Common Stock, $.01 par value, outstanding.
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GRAND COURT LIFESTYLES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 31, 1998
PAGE
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements and Supplementary Data . . . 2
Consolidated Balance Sheets as of
January 31, 1998 and July 31, 1998
Consolidated Statements of Operations
for the three and six months ended July
31, 1997 and 1998
Consolidated Statements of Cash Flows
for the six months ended July 31, 1997 and 1998
Notes to Consolidated Financial Statements
Item 2: Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . 8
Item 3: Quantitative and Qualitative Disclosures
about Market Risk . . . . . . . . . . . . . . . . 18
PART II - OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds . . . . 19
Item 6: Exhibits and Reports on Form 8-K . . . . . . . . 19
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Thousands, except per share data)
-------------------------------------------------------------------
January July 31,
31, (unaudited)
--------- -----------
1998 1998
--------- ---------
ASSETS
Cash and cash equivalents . . . . . . . $ 11,964 $ 27,516
Notes and receivables - net . . . . . . 231,140 238,717
Investments in partnerships . . . . . . 3,924 4,459
Construction in progress . . . . . . . 26,241 6,132
Buildings, furniture and
equipment - net . . . . . . . . . . . -- 32,416
Other assets - net . . . . . . . . . . 22,530 19,744
-------- --------
Total assets . . . . . . . . . . . . . $295,799 $328,984
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans and accrued interest payable . . $161,850 $168,111
Construction loan payable . . . . . . . 22,595 28,968
Notes and commissions payable . . . . . 5,299 5,187
Other liabilities . . . . . . . . . . . 3,531 7,158
Deferred income . . . . . . . . . . . . 76,112 79,218
-------- --------
Total liabilities . . . . . . . . . . . 269,387 288,642
-------- --------
Commitments and contingencies
Stockholders' equity
Preferred Stock, $.001 par value -
authorized, 15,000,000 shares;
none issued and outstanding . . . . . -- --
Common Stock, $.01 par value -
shares authorized, 40,000,000;
shares issued and outstanding,
15,000,000 and 17,800,000,
respectively . . . . . . . . . . . . . 150 178
Paid-in capital 51,189 73,453
Accumulated deficit (24,927) (33,289)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . 26,412 40,342
-------- --------
Total liabilities and
stockholders' equity . . . . . . . . . $295,799 $328,984
======== ========
See Notes to Consolidated Financial Statements.
2
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CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
-------------------------------------------------------------------
Three months ended Six months ended
July 31, July 31,
(unaudited) (unaudited)
------------------- -------------------
1997 1998 1997 1998
---- ---- ---- ----
Revenues:
Sales . . . . . . . . $ 11,239 $ 7,481 $ 20,918 $ 17,961
Syndication fee income 2,661 1,912 4,643 4,087
Deferred income earned 231 207 461 415
Interest income . . . 2,143 3,598 5,614 7,487
Property management
fees from related
parties . . . . . . 469 724 1,177 1,712
Equity in earnings
from partnerships . 118 164 232 322
Adult living rental
revenues . . . . . . -- 1,171 -- 1,589
Other income . . . . 283 665 283 1,350
------- ------- ------- -------
17,144 15,922 33,328 34,923
------- ------- ------- -------
Cost and Expenses:
Cost of sales . . . . 7,527 10,210 15,068 18,576
Selling . . . . . . . 2,225 1,522 4,383 3,632
Interest . . . . . . 4,438 5,280 8,788 10,750
General and
administrative . . . 2,221 2,597 4,063 5,081
Write off of
registration costs . 3,107 -- 3,107 --
Adult living operating
expenses . . . . . . -- 1,219 -- 2,165
Officers' compensation 300 300 600 600
Depreciation and
amortization . . . . 782 1,301 1,596 2,388
------- ------- ------- -------
20,600 22,429 37,605 43,192
------- ------- ------- -------
Net loss before
provision for taxes . (3,456) (6,507) (4,277) (8,269)
Provision for taxes . . -- 53 -- 93
------- ------- ------- -------
Net loss . . . . . . . (3,456) (6,560) (4,277) (8,362)
======= ======= ======= =======
Loss per common share
(basic and diluted) . $ (.19) $ (.37) $ (.24) $ (.47)
======= ======= ======= =======
Pro forma weighted
average common shares 17,800 17,800 17,800 17,800
======= ======= ======= =======
See Notes to Consolidated Financial Statements.
3
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
-------------------------------------------------------------------
Six months ended
July 31, (unaudited)
----------------------
1997 1998
-------- --------
Cash flows used from operating activities:
Net loss . . . . . . . . . . . . . . . $ (4,277) $ (8,362)
-------- --------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization . . . . 1,596 2,388
Deferred income earned . . . . . . . . (461) (415)
Write off of registration costs . . . 3,107 --
Changes in operating assets and liabilities:
Accrued interest on notes and
receivables . . . . . . . . . . . . (450) 4,695
Notes and receivables . . . . . . . . (10,391) (12,272)
Commissions payable . . . . . . . . . (159) 49
Other liabilities . . . . . . . . . . (334) 3,627
Deferred income . . . . . . . . . . . (470) 3,521
-------- --------
(7,562) 1,593
-------- --------
Net cash used by operating
activities . . . . . . . . . . . . (11,839) (6,769)
-------- --------
Cash flows used from investing activities:
Increase in investments . . . . . . . . (408) (535)
Building, furniture and equipment . . . -- (7,725)
Construction in progress . . . . . . . (5,851) (4,706)
-------- --------
Net cash used by investing activities (6,259) (12,966)
-------- --------
Cash flows provided by financing activities:
Payments on loans payable . . . . . . . (13,806) (11,712)
Proceeds from loans payable . . . . . 23,158 17,973
Proceeds from construction loan payable 7,822 6,373
Increase in other assets . . . . . . . (1,135) 522
Payments of notes payable . . . . . . . (93) (161)
Net proceeds from initial public
offering . . . . . . . . . . . . . . . -- 22,292
-------- --------
Net cash provided by financing
activities . . . . . . . . . . . . . 15,946 35,287
-------- --------
(Decrease) increase in cash and cash
equivalents . . . . . . . . . . . . . (2,152) 15,552
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . 14,111 11,964
-------- --------
Cash and cash equivalents, end of
period . . . . . . . . . . . . . . . . $ 11,959 $ 27,516
======== ========
Supplemental information:
Interest paid . . . . . . . . . . . . $ 9,015 $ 10,508
======== ========
See Notes to Consolidated Financial Statements.
4
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GRAND COURT LIFESTYLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JULY 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
-------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying consolidated financial statements of Grand
Court Lifestyles, Inc. and its wholly owned subsidiaries (the
"Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. The consolidated financial statements as of
and for the periods ended July 31, 1997 and 1998 are unaudited.
The results of operations for the interim periods are not
necessarily indicative of the results of operations for the
fiscal year. Certain amounts in the prior period have been
reclassified to conform with current year presentation. These
consolidated financial statements should be read in connection
with the financial statements and notes included thereto in the
Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1998.
Unless the context otherwise requires, (i) all references
herein to a "Fiscal" year refer to the fiscal year beginning on
February 1 of that year (for example, "Fiscal 1997" refers to the
fiscal year beginning on February 1, 1997) and (ii) all
references to the Company, include the Company, its subsidiaries
and its predecessors taken as a whole.
1. NEWLY DEVELOPED COMMUNITIES
The Company has completed construction of seven of its newly
developed adult living communities, all of which are in
their initial lease-up phase. Four of these newly
constructed adult living communities were developed as part
of its development financing arrangement with Capstone
Capital Corporation ("Capstone") and are leased to and
operated by the Company. These four communities, which are
located in El Paso, San Angelo, Abilene and Witchita Falls,
Texas, respectively, contain a total of 552 apartment units
offering both independent and assisted living services.
Three of these newly constructed adult living communities,
which are located in Corpus Christi, Temple, and Round Rock,
Texas, contain a total of 410 apartment units offering both
independent and assisted living services and are owned and
operated by the Company.
2. CAPITALIZATION
In March 1998, in an initial public offering of its common
stock, the Company sold 2,800,000 shares of its common stock
at price of $9.50 per share. The net proceeds, after
deducting for all offering expenses, that the Company
received as a result of this offering was $22,300. The
Company intends to use approximately $19,300 of the net
proceeds to finance the development of new adult living
communities and the remaining $3,000 for working capital.
As of July 29, 1998, $4,900 has been used to finance the
development of new adult living communities and $100 has
been used for working capital. The Company has purchased a
series of 30 day, 90 day and 180 day treasury bills with the
remaining net proceeds pending application of such funds to
the intended uses.
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3. COMMITMENTS AND CONTINGENCIES
The Company rents office space under a lease expiring
February 2000. Annual base rent under such lease is
approximately $197. The Company entered into a ten year
lease for additional office space, commencing September 1,
1991. The annual base rent is approximately $150 and will
increase 5% each year for ten years.
On November 14, 1997, an investor in a limited partnership
(the "First Partnership") which was formed to invest in a
second partnership which was formed to develop and own an
adult living community (the "Second Partnership"), filed a
lawsuit, Palmer v. Country Estates Associates Limited
--------------------------------------------
Partnership, et.al., in the United States District Court,
-------------------
District of New Jersey. The Company has never managed the
property owned by the Second Partnership and is not a
general partner in the Second Partnership or the First
Partnership. A predecessor of the Company was a general
partner of the Second Partnership. The Company has never
been a general partner of the First Partnership. The
defendants in the suits were the First Partnership, the
general partners of the First Partnership, the Second
Partnership, two affiliates of the Company, and the Company
(collectively the "Defendants"). The Plaintiff alleged a
breach of the First Partnership's partnership agreement,
negligent misrepresentation, fraud, negligence, breach of
guarantee and mail fraud. The Plaintiff sought (i) the
return of his original investment ($100), (ii) market
interest on such investment for the period 1987-1997 and
(iii) unspecified damages. The parties have entered into a
stipulation dismissing this lawsuit, with prejudice, without
payment of any kind by the Company.
The Company is involved in other legal proceedings which have
arisen in the ordinary course of business. The Company
intends to vigorously defend itself in these matters and
does not believe that the outcome of these matters will have
a material effect on its financial statements.
The Company's revenues have been, and are expected to
continue to be, primarily derived from the sales of
partnership interests ("Syndications") of partnerships it
organizes to acquire existing adult living communities
(each, an "Owning Partnership"). In a typical Syndication,
the Company identifies an adult living community suitable
for acquisition and forms an Owning Partnership (in which it
is the managing general partner and initially owns all of
the partnership interests) to acquire the property. Another
partnership (the "Investing Partnership") is also formed (
in which the Company is also the general partner with a 1%
interest) to purchase from the Company a 99% partnership
interest in the Owning Partnership (the "Purchased
Interest"), leaving the Company with a 1% interest in the
Owning Partnership and a 1% interest in the Investing
Partnership. The purchase price for the Purchased Interest
is paid in part in cash and in part by a note from the
Investing Partnership with a term of approximately five
years ( a "Purchase Note"). Limited partners purchase
partnership interests in the Investing Partnership by
agreeing to make capital contributions over approximately
five years to the Investing Partnership, which allows the
Investing Partnership to pay the purchase price for the
Purchased Interest, including the Purchase Note. The
limited partnership agreement of the Investing Partnership
provides that the limited partners are entitled to receive,
for a period not to exceed five years, distributions equal
to between 11% and 12% per annum of their then paid-in
scheduled capital contributions. Although the Company
incurs certain costs in connection with acquiring a
community and arranging for the Syndication of partnership
interests, the Company makes a profit on the sale of the
Purchased Interest. In addition, as part of the purchase
price for the Purchased Interest paid by the Investing
Partnership, the Company receives a 40% interest in sale and
refinancing proceeds after certain priority payments to the
limited partners. The Company also enters into a management
contract with the Owning Partnership pursuant to which the
Company agrees to manage the adult living community. As
part of the management fee arrangements, the management
contract requires the Company, for a period not to exceed
five years, to pay to the Owning Partnership (to the extent
that cash flows generated by the property are insufficient)
amounts sufficient to fund (i) any operating cash
deficiencies of such Owning Partnership and (ii) any part of
such 11% to 12% return not paid from cash flow from the
related property (which the Owning Partnerships distribute
to the Investing Partnerships for distribution to limited
partners) (collectively, the "Management Contract
Obligations"). The Company, therefore, has no direct
obligation to pay specified returns to limited partners.
Rather, the Company is obligated pursuant to the management
contract to pay to the Owning Partnership amounts sufficient
to make the specified returns to the limited partners, to
the extent the cash flows generated by the property are
insufficient to do so. The Owning Partnership then
distributes these amounts to the Investing Partnership
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which, in turn, distributes these amounts to the limited
partners. As a result of the Management Contract
Obligations, the Company and its stockholders bear the risks
of operations and financial viability of the related
property for such five-year period. The management
contract, however, rewards the Company for successful
management of the property by allowing the Company to retain
any cash flow generated by the property in excess of the
amount needed to satisfy the Management Contract Obligations
as an incentive management fee. After the initial five-year
period, the limited partners are entitled to the same
specified rate of return, but only to the extent there is
sufficient cash flow from the property, and any amounts of
cash flow available after payment of the specified return to
limited partners are shared as follows: 40% to the Company
as an incentive management fee and 60% for distribution to
the limited partners. The management contract is not
terminable during this initial five-year period and is
terminable thereafter by either party upon thirty to sixty
days notice.
The Company has arranged for the acquisition of the 38
Syndicated adult living communities and one nursing home
that it manages by utilizing mortgage financing and by
arranging for Syndications of 42 Investing Partnerships
formed to acquire interests in the 38 Owning Partnerships
that own the adult living communities and the nursing home.
The 38 Syndicated adult living communities and one nursing
home managed by the Company are owned by the respective
Owning Partnerships and not by the Company. The Company is
the managing general partner of all but one of the Owning
Partnerships and manages all of the adult living communities
and the one nursing home in its portfolio. The Company is
also the general partner of 33 of the 42 Investing
Partnerships. The mortgage financing of the Syndicated
adult living communities and nursing home are generally
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, or a wholly-owned entity formed solely
to be the general partner, 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. Although most of the mortgage loans
are non-recourse, (i) the Company is liable as a general
partner for approximately $12.9 million in principal amount
of mortgage debt relating to six Syndicated adult living
communities and (ii) wholly-owned entities are liable as
general partners for approximately $31.8 million in
principal amount of mortgage debt relating to six Syndicated
adult living communities and the one Syndicated nursing home
managed by the Company as of July 31, 1998. In the case of
the general partner liabilities of the wholly-owned
entities, the only assets of the Company at risk of loss are
the general partner interests in the specific properties.
As part of the Company's development program, on September
18, 1996 the Company entered into a master development
agreement with Capstone pursuant to which Capstone will fund
100% of the development cost of four adult living
communities. The maximum amount Capstone will fund per such
agreement is approximately $37,764 of which $34,774 has been
funded as of July 31, 1998.
The Capstone financing arrangement provides that the Company
will operate these four adult living communities pursuant to
long-term leases with Capstone, which leases were entered
into upon the completion of construction and the
satisfaction of certain other conditions. The initial term
of each lease is 15 years with three five-year extension
options. The cumulative annual base rent which the Company
is obligated to pay to Capstone for the two properties
placed in service during the three months ended July 31,
1998 is $3,682 with 3% per annum annual increases.
4. NEW ACCOUNTING PRONOUNCEMENTS
Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" establishes standards
for the way that public business enterprises report
information about operating segments in annual financial
statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. It also
establishes standards for related disclosures about products
and services, geographic areas, and major customers. In
accordance with Statement No. 131, the Company has elected
not to apply this statement to its interim financial
statements in Fiscal 1998; however, comparative information
for interim periods in Fiscal 1998 will be reported in
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financial statements for interim periods in Fiscal 1999.
Segment information will be provided based upon the
Company's primary revenue sources.
In February 1998, the Financial Accounting Standards Board
("FASB") issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits".
Statement No. 132 is effective for fiscal years beginning
after December 15, 1997. Statement No. 132 revises
employers' disclosure requirements concerning pension and
other postretirement benefit plans by standardizing such
disclosure requirements to the extent practicable, requires
additional information on changes in the benefit obligations
and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when FASB Statements
No. 87, "Employers' Accounting for Pensions", No. 88,
"Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits",
and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", were issued. Statement No.
132 suggests combined formats for presentation of pension
and other postretirement benefit disclosures and permits
reduced disclosures for nonpublic entities. Statement No.
132 will not have any material effect on disclosures
presented by the Company.
In June of 1998, the FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts,
and for hedging activities. It is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.
Because the Company does not currently utilize derivatives
or engage in hedging activities, management does not
anticipate that implementation of this statement will have
material effect on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, (i) all references
herein to a "Fiscal" year refer to the fiscal year beginning on
February 1 of that year (for example, "Fiscal 1997" refers to the
fiscal year beginning on February 1, 1997) and (ii) all
references to the Company, include the Company, its subsidiaries
and its predecessors taken as a whole.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statements
to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995 for any forward-looking statements made by, or on behalf, of
the Company in this Quarterly Report on Form 10-Q. Forward-
looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance and
underlying assumptions and other statements which are other than
statements of historical facts. Such forward-looking statements
may be identified, without limitation, by the use of the words
"anticipates", "estimates", "expects", "intends", "believes" and
similar expressions. From time to time, the Company or one of
its subsidiaries individually may publish or otherwise make
available forward-looking statements of this nature. All such
forward-looking statements, whether written or oral, and whether
made by or on behalf of the Company or its subsidiaries, are
expressly qualified by these cautionary statements and any other
cautionary statements which may accompany the forward-looking
statements. In addition, the Company disclaims any obligation to
update any forward-looking statements to reflect events or
circumstances after the date hereof.
Forward-looking statements made by the Company are subject
to risks and uncertainties that could cause actual results or
events to differ materially from those expressed in, or implied
by, the forward-looking statements. These forward-looking
statements include, among others, statements concerning the
Company's revenue and cost and expense, trends, the number and
economic impact of anticipated acquisitions and new developments,
planned capital expenditures and financing needs and
availability. Investors or other users of the forward-looking
statements are cautioned that such statements are not a guarantee
of future performance by the Company and that such forward-
looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those
expressed in, or implied by, such statements. In addition to
other factors and matters discussed elsewhere herein, the
following are some, but not all, of the important factors that,
in the view of the Company, could cause actual results to differ
materially from those discussed in the forward looking
statements:
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1. The potential impact of recent net losses and
anticipated operating losses.
2. The ability of the Company to service its substantial
debt obligations.
3. The ability of the Company to pay Management Contract
Obligations from the cash flow generated by the
Syndicated adult living communities and the terms of
future Syndications.
4. The need for the Company to utilize cash from
operations and obtain additional financing to pursue
its new development program.
5. The Company's ability to identify and Syndicate
suitable acquisition opportunities.
6. The Company's ability to identify suitable development
opportunities, pursue such opportunities, complete
development, lease-up and effectively operate the adult
living communities.
7. Changes in anticipated construction costs, operating
expenses and start-up losses relating to the Company's
new development program.
8. Unanticipated delays in the Company's new development
program, including without limitation, permitting,
licensing and construction delays.
9. The potential recourse and guarantee obligations of the
Company, including, but not limited to the correction
of hazardous environmental conditions, relating to the
mortgage financing of the adult living communities.
10. The impact of mortgage defaults and/or foreclosures
relating to Multi-Family Properties (as defined below)
on the Company's ability to collect on its Multi-Family
Notes (as defined below).
11. The potential liabilities arising from the Company's
status as the general partner of Syndicated adult
living communities.
12. The Company's ability to attract and retain qualified
personnel.
13. Competitive factors affecting the long-term care
services industry.
14. Changes in operating costs of adult living communities,
including without limitation, staffing and labor costs.
15. The ability to attract seniors with sufficient
resources to pay for the Company's services.
16. Governmental regulatory actions and initiatives,
including without limitation, those relating to
healthcare laws, benefitting disabled persons,
government mortgage insurance and subsidy programs,
environmental requirements and safety requirements.
17. Changes in general economic conditions, including, but
not limited to, factors particularly affecting real
estate and the capital markets.
OVERVIEW
The Company is a fully integrated provider of adult living
accommodations and services which acquires, develops and manages
adult living communities. The Company's revenues have been, and
are expected to continue to be, primarily derived from the
Syndication of partnerships it organizes to acquire existing
adult living communities. To the extent that the Company's
development plan to construct new adult living communities is
successfully implemented, the Company anticipates that the
percentage of its revenues derived from Syndications would
decrease and the percentage of its revenues derived from newly
constructed adult living communities would increase and, the
Company believes, over time, become the primary source of the
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Company's revenues. Due, in part, to anticipated start-up losses
from the Company's newly developed adult living communities, the
Company anticipates that it will incur losses for Fiscal 1998.
Future revenues, if any, of the Company relating to
previously Syndicated adult living communities would primarily
arise in the form of (i) deferred income earned on sales of the
Purchased Interest in the related Owning Partnership,
(ii) management fees, (iii) interest income on purchase notes
receivable, (iv) earnings derived from the Company's equity
interests in Owning Partnerships and Investing Partnerships, and
(v) amounts payable by the Investing Partnerships to the Company
in the event of the subsequent sale or refinancing of such
communities. Future revenues, if any, of the Company relating to
future Syndications of adult living communities would primarily
arise from any initial profit recognized upon completion of the
Syndication and from the same items listed in the previous
sentence.
The Company intends to continue to arrange for future
acquisitions of existing adult living communities by utilizing
mortgage financing and Syndications, and anticipates that between
six and twelve communities will be acquired in this manner during
the next two years. Future Syndications will require the
allocation of funds generated by the Company to cover the
Company's initial costs relating to the Syndication transactions
(primarily any funds required to acquire the property above the
amounts received from the mortgage financing obtained, the costs
of any improvements to the property deemed necessary and the
costs associated with arranging for the sale of the partnership
interests). The Company typically pays these costs from the
proceeds it receives from its sale of the Purchased Interests to
the Investing Partnership. In addition, future Syndications may
require the allocation of the Company's funds to satisfy any
associated Management Contract Obligations (including payment of
required returns for distribution to limited partners) that are
not funded from the respective property's operations.
The Company continually seeks adult living communities which
it deems are good acquisition prospects. In deciding which
properties it has and will acquire, the Company's senior
management exercises its business judgement to determine which
properties are good acquisition candidates and what constitutes
an acceptable purchase price. There are no fixed criteria for
these decisions, but rather, a number of factors are considered,
including the size, location, occupancy history, physical
condition, current income and expenses, quality of current
management, local demographic and market conditions, existing
competition and proposed entrants to the market.
The Company has instituted a development plan pursuant to
which it has completed construction of seven adult living
communities as of September 3, 1998, has commenced construction
on two additional communities and intends to commence
construction on between 30 and 34 additional new adult living
communities over the next two years. The Company plans to own or
lease pursuant to long-term operating leases or similar
arrangements the adult living communities that are being
developed under the plan. The Company will manage and operate
each of the newly developed communities. The Company does not
intend to Syndicate any of its newly developed adult living
communities. The Company estimates that the cost of developing
each new adult living community (including reserves necessary to
carry the community through its lease-up period) utilizing
mortgage financing will be approximately $10.5 million and
utilizing long-term lease financing will be approximately $11
million. The Company expects to complete the construction of one
of the two communities currently under construction by the end of
Fiscal 1998 and expects to complete construction of the remaining
community under construction by the end of the second quarter of
Fiscal 1999. These two adult living communities, along with the
seven communities already completed pursuant to the development
plan, contain an aggregate of 1,189 adult living apartment units.
The 30 to 34 additional new communities which the Company intends
to commence construction on over the next two years will contain
between 4,020 and 4,556 additional adult living apartment units.
The Company will use a substantial portion of the proceeds of the
Company's initial public offering which occurred in March, 1998,
funds generated by its business operations, mortgage construction
financing, the proceeds of anticipated refinancings of
construction financing on, and/or sale-leasebacks of, stabilized,
newly constructed communities, and may complete additional
issuances of debt or equity securities to finance the
development, construction and initial operating costs of
additional new adult living communities. Four of the completed
adult living communities are being operated by the Company
pursuant to long-term leases. The Company may use additional
long-term leases or similar arrangements which require the
investment of little or no capital on the part of the Company, to
the extent necessary to proceed with this development plan.
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EARNINGS
The Company recorded a net loss of $6.6 million and $8.4
million for the three and six months ended July 31, 1998,
respectively, compared to a net loss of $3.5 million and $4.3
million for the three and six months ended July 31, 1997,
respectively.
RESULTS OF OPERATION
. Revenues
Total revenues for the three months ended July 31, 1998 was
$15.9 million as compared to $17.1 million for the three months
ended July 31, 1997, representing a decrease of $1.2 million or
15.9%. Total revenues for the six months ended July 31, 1998 was
$34.9 million as compared to $33.3 million for the six months
ended July 31, 1997, representing an increase of $1.6 million or
4.8%.
Sales income for the three months ended July 31, 1998 was
$7.5 million as compared to $11.2 million for the three months
ended July 31, 1997, representing a decrease of $3.7 million or
33.0%. Sales income for the six months ended July 31, 1998 was
$18.0 million as compared to $20.9 million for the six months
ended July 31, 1997, representing a decrease of $2.9 million or
13.9%. The decreases are primarily attributable to the sale of
fewer partnership units in the three and six months ended July
31, 1998 as compared to the number of partnership units sold in
the three and six months ended July 31, 1997.
The primary factors that affect the number of partnership
units available for sale are (i) the availability of properties
for Syndications, (ii) the terms of the Syndications and (iii)
the initial cash flow of the properties being Syndicated. More
favorable Syndication terms along with a greater initial cash
flow of the properties will yield a greater number of units
available to be sold. Syndication terms become more favorable
for the Company if there is an increase in the ratio of (a) the
purchase price paid to the Company by the Investing Partnership
for its interest in the Operating Partnership, to (b) the initial
cash flow of the property. In the three months ended July 31,
1998, the terms of the Syndications completed were less favorable
than the terms of the Syndications in the three months ended July
31, 1997 and the properties syndicated in the three months ended
July 31, 1998 had lower initial cash flows than the properties
Syndicated in the three months ended July 31, 1997. In the six
months ended July 31, 1998, the terms of the Syndications
completed were less favorable than the terms of the Syndications
in the six months ended July 31, 1997, but the properties
Syndicated in the six months ended July 31, 1998 had greater
initial cash flow in the six months ended July 31, 1998 as
compared to the properties Syndicated in the six months ended
July 31, 1997.
Syndication fee income for the three months ended July 31,
1998 was $1.9 million as compared to $2.7 million for the three
months ended July 31, 1997, representing a decrease of $800,000
or 30.0%. Syndication fee income for the six months ended July
31, 1998 was $4.1 million as compared to $4.6 million in the six
months ended July 31, 1997, representing a decrease of $500,000
or 10.9%. The decreases are attributable to less commissions and
professional fees paid on a lower sales volume in the three and
six months ended July 31, 1998 as compared to the three and six
months ended July 31, 1997.
Interest income for the three months ended July 31, 1998 was
$3.6 million as compared to $2.1 million for the three months
ended July 31, 1997, representing an increase of $1.5 million or
71.4%. The increase is primarily attributable to interest income
realized on Multi-Family Notes as a result of excess proceeds
received as a result of mortgage debt refinancings on six Multi-
Family Properties in the three months ended July 31, 1998.
Interest income for the six months ended July 31, 1998 was $7.5
million as compared to $5.6 million for the six months ended July
31, 1997, representing an increase of $1.9 million or 33.9%. The
increase is primarily attributable to interest income realized on
Multi-Family Notes as a result of excess proceeds received as a
result of mortgage debt refinancings on six Multi-Family
Properties in the six months ended July 31, 1998 and interest
earned on the Company's net proceeds from its initial public
offering.
Property management fees from related parties was $700,000
in the three months ended July 31, 1998 as compared to $500,000
in the three months ended July 31, 1997, representing an increase
of $200,000 or 40%. Property management fees from related
parties was $1.7 million for the six months ended July 31, 1998
as compared to $1.2 million in the six months ended July 31,
1997, representing an increase of $500,000 or 41.7%. The
increase is primarily attributable to the cash flows from the
underlying Owning Partnerships exceeding the specified rate of
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return to the limited partners in the three and six months ended
July 31, 1998 as compared to the three and six months ended July
31, 1997.
Equity in earnings from partnerships was $200,000 in the
three months ended July 31, 1998 as compared to $100,000 in the
three months ended July 31, 1997, representing an increase of
$100,000 or 100%. Equity in earnings from partnerships was
$300,000 in the six months ended July 31, 1998 as compared to
$200,000 in the six months ended July 31, 1997, representing an
increase of $100,000 or 50%. The increases are attributable to
the Syndication of additional properties in which the Company
retains a partnership interest.
Adult living rental revenues was $1.2 million and $1.6
million in the three and six months ended July 31, 1998,
respectively. There were no adult living rental revenues in the
three and six months ended July 31, 1997 because none of the
Company's newly developed adult living rental communities had
been completed during such periods.
Other income was $700,000 in the three months ended July 31,
1998 as compared to $300,000 in the three months ended July 31,
1997, representing an increase of $400,000 or 133.33%. Other
income was $1.4 million in the six months ended July 31, 1998, as
compared to $300,000 in the six months ended July 31, 1997,
representing an increase of $1.1 million or 366.67%. The other
income in the three and six months ended July 31, 1998 represent
developer's fees the Company has earned in connection with the
four newly developed adult living communities the Company
operates pursuant to long-term leases which were placed in
service in the three and six months ended July 31, 1998. The
other income in the three and six months ended July 31, 1997,
respectively, is due to the write off of a liability.
. Cost of Sales
Cost of sales (which includes (i) the cash portion of the
purchase price for Syndicated adult living communities plus
related transaction costs and expenses, (ii) any payments with
respect to Management Contract Obligations other than payments
relating to previously established deferred income liabilities
and (iii) any increase in Management Contract Obligations
established in the relevant periods, which are recorded as
additional deferred income liabilities for the three months ended
July 31, 1998 was $10.2 million as compared to $7.5 million for
the three months ended July 31, 1997, representing an increase of
$2.7 million or 36%. The increase is attributable to (i) the
establishment of additional deffered income liabilities resulting
primarily from a slight decrease in the average occupancy of
certain adult living communities and an increase in operating
expenses of the same adult living communities (ii) less favorable
mortgage financing for the adult living community acquisitions
(requiring the expenditure of more cash to acquire the Syndicated
adult living communities) and (iii) increased funding of
Management Contract Obligations as partially offset by a lower
aggregate cash portion of the purchase prices plus related
transaction costs and expenses of the adult living communities
acquired and Syndicated in the three Months ended July 31, 1998
do to more favorable terms for adult living community
acquisitions ( in view of the relationship between the initial
cash flow generated by the properties and their purchase prices)
as compared to those acquired and Syndicated in the three months
ended July 31, 1997. Cost of sales for the six months ended July
31, 1998 was $18.6 million as compared to $ 15.1 million in the
six months ended July 31, 1997, representing an increase of $3.5
million or 23.2%. The increase is attributable to (i) the
establishment of deferred income liabilities (ii) increase
funding of Management Contract Obligations and (iii) less
favorable mortgage financing for the adult living community
acquisitions (requiring the expenditure of more cash to acquire
the Syndicated adult living communities) as partially offset by a
lower aggregate cash portion of the purchase prices plus related
transaction costs and expenses of the adult living communities
acquired and Syndicated in the six months ended July 31, 1998 do
to more favorable terms for adult living community acquisitions
(in view of the relationship between the initial cash flow
generated by the properties and their purchase prices) as
compared to those acquired and Syndicated in the six months ended
July 31, 1997 and a decrease in general transaction costs and
expenses in the six months ended July 31, 1998 as compared to
July 31, 1997. Costs of sales and selling expenses as a
percentage of sales and syndication fee income for the three
months ended July 31, 1998 was 124.9% as compared to 70.2% in the
three months ended July 31, 1997. Cost of sales and selling
expenses as a percentage of sales and syndication fee income for
the six months ended July 31, 1998 was 100.7% as compared to
76.1% in the six months ended July 31, 1997. The increases are
attributable to sales and syndication fee income decreasing and
costs of sales and selling expenses increasing for such periods.
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Several factors, including the decline 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. Although the Company
acquired adult living communities on more favorable terms in the
three and six months ended July 31, 1998 as compared to the three
and six months ended July 31, 1997 the Company believes that the
general trend towards less favorable acquisition terms
experienced during the last several years will continue in the
future. Although the Company was not able to obtain mortgage
financing for as great a percentage of the purchase price in the
three and six months ended July 31, 1998 as for the three and six
months ended July 31, 1997, the Company continued to obtain
mortgage financing with preferred interest rates on such
mortgages. This factor, combined with an overall reduction of
interest rates, has 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, Management Contract Obligations and the
Company's selling, and general and administrative expenses.
. Selling Expenses
Selling expense for the three months ended July 31, 1998 was
$1.5 million as compared to $2.2 million for the three months
ended July 31, 1997, representing a decrease of $700,000 or
31.8%. Selling expense for the six months ended July 31, 1998
was $3.6 million as compared to $4.4 million for the six months
ended July 31, 1997, representing a decrease of $800,000 or
18.2%. The decreases are attributable to a lower commission
rate paid on a lower sales volume in the three and six months
ended July 31, 1998 as compared to the three and six months ended
July 31, 1997.
. Interest Expense
Interest expense for the three months ended July 31, 1998
was $5.3 million as compared to $4.4 million in the three months
ended July 31, 1997, representing an increase of $900,000 or
20.5%. Interest expense for the six months ended July 31, 1998
was $10.8 million as compared to $8.8 million for the six months
ended July 31, 1997, representing an increase of $2.0 million or
22.7%. The increases are primarily attributable to (i) an
increase in the principal amount of debt and an increase in
interest rates for such debt during the three and six months
ended July 31, 1998 as compared to the three and six months ended
July 31, 1997, and (ii) interest on construction loans payable on
the three newly developed adult living communities which the
Company owns, which were placed in service in the three and six
months ended July 31, 1998. Such interest was capitalized during
the periods these communities were under construction. Interest
expense included interest on debentures ("Debenture Debt")
which had an average interest rate of 12.05% per annum in
the six months ended July 31, 1997 and 1998, respectively, and
was secured by the Purchase Notes the Company holds as a result
of its Syndication of multi-family properties prior to 1986 (the
"Purchase Note Collateral"). During the six months ended July
31, 1998 and 1997, total interest expense with respect to
Debenture Debt was approximately $3.9 million and $4.1 million,
respectively and the Purchase Note Collateral produced
approximately $2.3 million and $900,000, respectively, of
interest and related payments to the Company, which was $1.6
million and $3.2 million, respectively, less than the amount
required to pay interest on the Debenture Debt.
. General and Administrative Expenses
General and administrative expenses were $2.6 million for
the three months ended July 31, 1998 as compared to $2.2 million
for the three months ended July 31, 1997, representing an
increase of $400,000 or 18.2%. General and administrative
expenses for the six months ended July 31, 1998 were $5.1 million
as compared to $4.1 million for the six months ended July 31,
1997, representing an increase of $1.0 million or 24.4%. The
increases are primarily attributable to (i) increases in
professional fees, salary costs and other office expenses in
arranging for the acquisition of the Company's portfolio of
Syndicated adult living communities, and in managing the
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Company's portfolio of Syndicated and newly developed adult
living communities, which portfolio, in the aggregate, was larger
in the three and six months ended July 31, 1998 than the
Company's portfolio in the three and six months ended July 31,
1997, and (ii) an increase in development-related overhead due to
the completion of seven newly developed adult living communities,
which expenses were previously capitalized.
Write-off of Registration Costs
The Company expensed approximately $3.1 million of costs
relating to its proposed initial public offering of equity
securities in Fiscal 1997. Such costs were incurred prior to
April 30, 1997.
. Adult living operating expenses
Adult living operating expenses consist of operating
expenses of the newly developed adult living communities which
the Company either owns or operates pursuant to long-term leases.
Adult living operating expenses were $1.2 million and $2.2
million in the three and six months ended July 31, 1998,
respectively. In that no newly developed adult living
communities were completed in fiscal 1997, there was no adult
living operating expenses in the three and six months ended July
31, 1997.
. Depreciation and Amortization
Depreciation and amortization consists of (i) amortization
of deferred debt expense incurred in connection with debt
issuance, (ii) amortization of leasehold costs incurred in
connection with four of the newly developed adult living
communities which the Company operates pursuant to long-term
leases, and (iii) depreciation of buildings, furniture and
equipment on three of the newly developed adult living
communities the Company owns directly. Depreciation and
amortization for the three months ended July 31, 1998 was $1.3
million as compared to $800,000 for the three months ended July
31, 1997, representing an increase of $500,000 or 62.5%.
Depreciation and amortization for the six months ended July 31,
1998 was $2.4 million as compared to $1.6 million in the six
months ended July 31, 1997, representing an increase of $800,000
or 50%. The increases are primarily attributable to (i) the
increase in amortization of deferred loan costs due to the
additional Debenture Debt and unsecured debt incurred by the
Company in the three and six months ended July 31, 1998, as
compared to the three and six months ended July 31, 1997, (ii)
the amortization of leasehold costs associated with the four
newly developed communities operated by the Company pursuant to
long-term leases and (iii) the depreciation of buildings,
furniture and equipment associated with the three newly developed
adult living communities owned by the Company, which communities
described in (ii) and (iii) were not completed in Fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed operations through
cash flow generated by operations, Syndications and borrowings
consisting of debt secured by promissory notes from limited
partners of the Syndicated partnerships ("Investor Note Debt"),
unsecured debt ("Unsecured Debt"), mortgage debt ("Mortgage
Debt") and Debenture Debt. Now that the Company has completed
development of seven newly-developed adult living communities,
the ownership and/or operation of these communities will be an
additional source of cash flow. The Company, however,
anticipates that each newly developed adult living community will
incur operating losses until it completes its initial lease-up.
The Company's principal liquidity requirements are for payment of
operating expenses, costs associated with development of new
adult living communities, debt service obligations, and
Management Contract Obligations.
Cash flows used by operating activities for the six months
ended July 31, 1998 were $6.8 million and were comprised of (i)
net loss of $8.4 million plus (ii) adjustments for non-cash items
of $2.0 million less (iii) the net change in operating assets and
liabilities of $400,000. The adjustments for non-cash items is
comprised of depreciation and amortization of $2.4 million,
offset by deferred income earned of $400,000. The net change in
operating assets and liabilities of $400,000 was primarily
attributable to an increase in notes and receivables and accrued
interest on notes and receivables of $7.7 million as offset by an
increase of other liabilities of $3.6 million. Approximately
71% of the increase in "notes and receivables" was attributable
to an increase in Purchase Notes arising from the Syndication
of adult living communities ("Adult Living Notes") due to new
Syndications, as offset by principal reductions on Adult Living
Notes relating to previous Syndications, and approximately
20% of the increase in "notes and receivables" was primarily
attributable to an increase in advances made to Owning
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<PAGE>
Partnerships which own Syndicated multi-family properties
("Multi-Family Owning Partnerships"). Cash flows used by
operating activities for the six months ended July 31, 1997 were
$11.8 million and were comprised of: (i) net loss of $4.3
million plus (ii) adjustments for non-cash items of $4.2 million
less (iii) the net change in operating assets and liabilities of
$11.7 million. The adjustments for non-cash items is comprised
of depreciation and amortization of $1.6 million, write-off of
registration costs of $3.1 million less deferred income earned
of $500,000.
Net cash used by investing activities for the six months
ended July 31, 1998 of $13.0 million was comprised of an increase
of building, furniture and equipment of $7.7 million, an increase
in the cost of the adult living communities the Company is
constructing of $4.7 million, and an increase in investments in
general partner interests in adult living communities of
$600,000. Net cash used by investing activities in the six
months ended July 31, 1997 of $6.3 million was comprised of the
increase in the cost of the adult living communities the Company
is constructing of $5.9 million and the increase in investments
in general partner interests in adult living communities of
$400,000.
Net cash provided by financing activities for the six months
ended July 31, 1998 of $35.3 million was comprised of (i)
proceeds from the issuance of new debt of $18.0 million less debt
prepayments of $11.7 million plus (ii) proceeds from construction
mortgage financing of $6.4 million, less (iii) payments of notes
payable of $200,000 plus (iv) the decrease in other assets of
$500,000 plus (v) the net proceeds of the initial public offering
of $22.3 million. Net cash used by financing activities for the
six months ended July 31, 1997 of $15.9 million was comprised of
(i) proceeds from the issuance of new debt of $23.2 million less
debt prepayments of $13.8 million plus (ii) proceeds from
construction mortgage financing of $7.8 million, less (iii)
payments of notes payable of $100,000 less (iv) the increase in
other assets of $1.2 million.
At January 31, 1998, the Company had total indebtedness,
excluding accrued interest, of $160.9 million, consisting of
$65.5 million of Debenture Debt, $66.2 million of Unsecured Debt,
$5.0 million of Mortgage Debt and $24.2 million of Investor Note
Debt, and the Company had cash and cash equivalents at January
31, 1998 of $12.0 million. As of July 31, 1998, the Company has
increased Investor Note Debt from $24.2 million to $28.4 million,
increased Unsecured Debt from $66.2 million to $68.9 million and
reduced debenture debt from $65.5 million to $64.8 million. As a
result, total indebtedness increased from $160.9 million to
$167.1 million and the Company had cash and cash equivalents at
July 31, 1998 of $27.5 million.
Of the principal amount of total indebtedness at January 31,
1998, $25.5 million becomes due in the fiscal year ending January
31, 1999; $38.6 million becomes due in the fiscal year ending
January 31, 2000; $25.6 million becomes due in the fiscal year
ending January 31, 2001; $32.4 million becomes due in the fiscal
year ending January 31, 2002; $15.1 million becomes due in the
fiscal year ending January 31, 2003, and the balance of $23.7
million becomes due thereafter. Of the amount maturing in the
fiscal year ending January 31, 1999, $2.3 million is Investor
Note Debt, of which the Company repaid $2.2 million through the
collection of investor notes and intends to pay the remaining
$100,000 through the collection of investor notes. The balance,
approximately $23.2 million, includes $2.4 million of Debenture
Debt and $20.8 million of Unsecured Debt, of which $6.8 million
has been repaid. The Company expects to repay the balance
through funds generated by the Company's business operations
and/or to refinance by the issuance of new debt.
During the year ended January 31, 1998 and the six months
ended July 31, 1998, pursuant to the Company's development plan,
first mortgage loans were obtained to finance approximately 80%
of the cost of developing five new adult living communities.
The interest rate on four of the loans equals the 30 day LIBOR
plus 2 3/4% per annum. The fifth loan bears interest at the rate
of the prime rate plus 1.5% per annum. These loans mature between
November, 1999 and February, 2001. As of January 31, 1998 and
July 31, 1998, total funding under such first mortgage loans
amounted to $13.3 million and $19.7 million, respectivly. The
Company intends to increase its construction loans payable as
it pursues its development plan.
Pursuant to the Company's development plan, two limited
partnerships, in each of which the the Company holds a 1% general
partnership interest, have issued limited partnership interests
for aggregate capital contributions of $9.3 million, the net
proceeds of which have been used to make second mortgage loans to
the Company to fund approximately 20% of the cost of developing
three new adult living communities. Such second mortage loans
bear interest at the rate of 13.125% per annum. These second
mortage loans mature between November 2001 and March 2002.
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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. The Company has experienced
fluctuations in its net worth over the last several years. At
January 31, 1995, the Company had a net worth of $30.7 million,
at January 31, 1996, the Company had a net worth of $34.8
million, at January 31, 1997, the Company had a net worth of
$32.0 million, at January 31, 1998, the Company had a net worth
of $26.4 million and at July 31, 1998 the Company had a net worth
of $40.3 million. Pursuant to the Capstone agreements, the
Company is required to maintain a net worth of no less than $37.6
million. Certain obligations of the Company contain covenants
requiring the Company to maintain maximum ratios of the Company's
liabilities to its net worth. The most restrictive covenant
requires that the Company maintain a ratio of "loans and accrued
interest payable" to consolidated net worth of no more than 7 to
1. At January 31, 1998 and July 31, 1998, the Company's loan and
accrued interest to consolidated net worth ratio was 6.1 to 1 and
3.8 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 or upon a default in other obligations
of the Company.
The Company has utilized mortgage financing and Syndications
to arrange for the acquisitions of the adult living communities
it operates and intends to continue this practice for future
acquisitions of existing adult living communities. The Company
does not intend to Syndicate its newly developed communities.
The limited partnership agreements of the Investing Partnerships
provide that the limited partners are entitled to receive for a
period not to exceed five-years specified distributions equal to
11% to 12% per annum of their then paid-in scheduled capital
contributions. Pursuant to the management contracts with the
Owning Partnerships, for such five-year period, the Company has
Management Contract Obligations. During the six months ended
July 31, 1998, the adult living communities with respect to which
the Company had such Management Contract Obligations paid to the
Company, after payment of all operating expenses and debt
service, an aggregate of $5.1 million for application to the
Company's Management Contract Obligations. During such period,
the Company's Management Contract Obligations exceeded such
payments by an aggregate of $3.4 million. The $3.4 million of
funding that was required in respect to Management Contract
Obligations for the six months ended July 31, 1998 was primarily
attributable to (i) an increase in the scheduled capital
contributions by the limited partners on which the Company is
required to pay the specified rate of return, (ii) a slight
decrease in the average occupancy of certain adult living
communities in the Company's portfolio, and (iii) an increase in
operating expenses of the same adult living communities.
The aggregate amount of Management Contract Obligations
relating solely to returns to limited partners based on existing
management contracts is $6.8 million for the remaining portion of
Fiscal 1998, which will increase to $19.0 in Fiscal 1999, and
decrease to $18.7 million in Fiscal 2000, decrease to $14.2
million in Fiscal 2001 and decrease to $6.0 million in Fiscal
2002, and decrease to $200,000 in Fiscal 2003. Such amounts of
Management Contract Obligations are calculated based upon all
remaining scheduled capital contributions with respect to fiscal
years 1998 through 2003. Actual amounts of Management Contract
Obligations in respect of such contracts will vary based upon the
timing and amount of such capital contributions. Furthermore,
such amounts of Management Contract Obligations are calculated
without regard to any cash flow the related properties may
generate, which would reduce such obligations, and are calculated
without regard to the Management Contract Obligations and
property cash flows relating to future Syndications.
The aggregate amount of the Company's Management Contract
Obligations will depend upon a number of factors including, among
others, the expiration of such obligations for certain
partnerships, the cash flow generated by the properties and the
terms of future Syndications. The Company anticipates that for
at least the next two years, the aggregate Management Contract
Obligations with respect to existing and future Syndications will
exceed the aggregate cash flow generated by the related
properties, which will result in the need to utilize cash
generated by the Company from sources other than the operations
of the Syndicated adult living communities to meet its Management
Contract Obligations (including payment of specified returns for
distribution to limited partners) for these periods. In general,
the payment of expenses arising from obligations of the Company,
including Management Contract Obligations, have priority over
earnings that might otherwise be available for distribution to
stockholders. The Company intends to structure future
Syndications to minimize the likelihood that it will be required
to utilize the cash it generates to pay Management Contract
Obligations, but there can be no assurance that this will be the
case.
16
<PAGE>
The initial five-year terms of the management contracts and
the related Management Contract Obligations have expired for 10
Owning Partnerships. Although the Company has no obligation to
fund operating shortfalls after the five-year term of the
management contracts, during the six months ended July 31, 1998,
the Company had advanced an aggregate of approximately $542,000
to six of these Owning Partnerships to fund operating shortfalls.
These advances are included in the "notes and receivables"
recorded on the Company's Consolidated Balance Sheet. Although
the Company does not intend to do so in the future, from time to
time, the Company has also made discretionary advances to Owning
Partnerships beyond the Management Contract Obligations period
for the purpose of making distributions to limited partners.
In the past, limited partners have been allowed to prepay
capital contributions. The percentage of the prepayments
received upon the closings of the sales of limited partnership
interests in Investing Partnerships averaged 78.8% for Fiscal
1997 and 69.9% for the six months ended July 31, 1998.
Prepayments of capital contributions do not result in the
prepayment of the related Purchase Notes held by the Company.
Instead, such amounts are loaned to the Company by the Investing
Partnership. As a result of such loans and crediting provisions
of the related purchase agreements, the Company records the
Purchase Notes net of such loans. Therefore, these prepayments
act to reduce the recorded value of the Company's note
receivables and reduce interest income received by the Company.
Pursuant to the terms of the offerings, the Company has the
option not to accept future prepayments by limited partners of
capital contributions. The Company presently intends to continue
to accept prepayments by limited partners of capital
contributions. In addition, by arranging for the acquisition of
Syndicated adult living communities through, and acting as the
general partner of, partnerships, the potential exists for claims
by limited partners for violations of the terms of the
partnership agreements, or management contracts and of applicable
federal and state securities and blue sky laws and regulations.
The Company holds 169 Purchase Notes ("Multi-Family Notes")
which are secured by controlling interests in Multi-Family Owning
Partnerships which own 126 multi-family properties that were
Syndicated by the Company prior to 1986 (the "Multi-Family
Properties"). Although it has no obligation to do so, the
Company has also made advances to various Multi-Family Owning
Partnerships to support the operation of their properties, which
advances are included in the "notes and receivables" recorded on
the Company's Consolidated Balance Sheet. The Multi-Family Notes
and the related advances entitle the Company to receive all cash
flow and sale or refinancing proceeds generated by the respective
Multi-Family Property until the Multi-Family Note and related
advances are satisfied. As of July 31, 1998, the recorded
value, net of deferred income, of Multi-Family Notes was $107.7
million. All but approximately $2.3 million of the $61.8 million
of advances included in the "notes and receivables" recorded on
the Company's Consolidated Balance Sheet as of July 31, 1998
relate to advances to Multi-Family Owning Partnerships.
Fourteen of the Multi-Family Owning Partnerships are in
default on their respective mortgages. The Company neither owns
nor manages these properties, nor is it the general partner of
any Multi-Family Owning Partnerships, but rather, merely holds
the related Multi-Family Notes and related advances as
receivables. The Company, therefore, has no liability in
connection with these mortgage defaults. In that these mortgages
were insured by the United States Department of Housing and Urban
Development ("HUD"), HUD became the holder of these mortgages
after they went into default. In the past, HUD has instituted
initiatives to deal with its portfolio of defaulted mortgages,
such as selling such mortgages at auction. Although HUD has
discontinued this auction program, these auctions resulted in two
of the fourteen defaulted mortgages being sold to third parties,
subject to existing workout agreements. The remaining twelve
defaulted mortgages are held by HUD, with workout agreements in
place regarding six of them with terms of from one to nine years.
HUD's policies regarding the granting of workout agreements have
become more restrictive in recent years and there can be no
assurance that HUD will renew these workout agreements or
restructure the related mortgage debt when these workout
agreements expire. Similarly, there can be no assurance that the
related Multi-Family Owning Partnerships can obtain workout
agreements for the six defaulted mortgages without workout
agreements currently in place. HUD has held these six mortgages
for a number of years without taking any action to sell or
foreclose on these mortgages. There can be no assurance,
however, that HUD will not change its policies regarding
defaulted mortgages with or without workout agreements and take
actions to sell or foreclose on these mortgages. As of July 31,
1998, the recorded value, net of deferred income, of the Multi-
Family Notes and the related advances held by the Company
relating to these fourteen Multi-Family Owning Partnerships was
$32.8 million. The Company has established reserves of $10.1
million to address the possibility that these Multi-Family Notes
and related advances may not be collected in full. In view of
the foregoing, it is possible that the fourteen Multi-Family
Owning Partnerships which are in default of their mortgages will
17
<PAGE>
file bankruptcy petitions or take similar actions seeking
protection from their creditors and/or lose their properties
through foreclosure.
Many of the Multi-Family Properties are dependent to varying
degrees on housing assistance payment contracts with HUD, most of
which will expire over the next few years. In view of the
foregoing, there can be no assurance that other Multi-Family
Owning Partnerships will not default on their mortgages, file
bankruptcy petitions, and/or lose their properties through
foreclosure. The Company neither owns nor manages these
properties, nor is it the general partner of any Multi-Family
Owning Partnerships, but rather, holds the Multi-Family Notes and
related advances as receivables. Any such future mortgage
defaults could, and any such future filings of bankruptcy
petitions or the loss of any such property through foreclosure
would, cause the Company to realize a non-cash loss equal to the
recorded value of the applicable Multi-Family Note plus any
related advances, net of any deferred income recorded and any
reserves for such Multi-Family Note and advances previously
established by the Company, which would reduce such loss. In
addition, the Company could be required to realize such a non-
cash loss even in the absence of mortgage defaults, bankruptcy
petitions or the loss of any such property through foreclosure if
such note is considered impaired. Such impairment would be
measured under applicable accounting rules. Such losses, if any,
while non-cash in nature, could adversely affect the Company's
business, operating results and financial condition.
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.
Certain of the Multi-Family Owning Partnerships intend to
take advantage of the new HUD initiatives and/or improving market
conditions to either refinance their HUD-insured mortgages with
conventional mortgage financing or restructure their HUD-insured
mortgage debt. In some cases, the Multi-Family Owning
Partnerships will make certain improvements to the properties and
may not renew rental assistance contracts as part of a strategy
to reposition those Multi-Family Properties as market-rate, non-
subsidized properties. Sixteen of such Multi-Family Owning
Partnerships refinanced their HUD-insured mortgages with
conventional mortgage financing, one of such Multi-Family Owning
Partnerships has a commitment for such conventional mortgage
financing, and a number of others have applications for
commitments pending. To the extent that any of these Multi-
Family Owning Partnerships complete such actions, the Company
believes that the ability of the Investing Partnerships relating
to the Multi-Family Properties (the "Multi-Family Investing
Partnerships") to make payments to the Company on their
respective Multi-Family Notes will be enhanced and accelerated.
However, there can be no assurance that these additional Multi-
Family Owning Partnerships will be able to refinance their
mortgages or will be able to successfully reposition any of the
Multi-Family Properties.
The future growth of the Company will be based upon the
continued acquisition and Syndication of existing adult living
communities and the development of newly-constructed adult living
communities, which the Company does not intend to Syndicate. The
Company anticipates that it will acquire between six and twelve
existing adult living communities over the next two years. It is
anticipated that acquisitions of existing adult living
communities will be arranged by utilizing a combination of
mortgage financing and Syndications. In July, 1998, the Company
acquired an adult living community in South Miami, Florida
containing 96 apartment units and has entered into a contract to
purchase an adult living community in Carrolton, Georgia
containing 68 apartment units. The Company regularly obtains
acquisition mortgage 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 arrange for acquisitions of existing adult
living communities in part by Syndications.
18
<PAGE>
In a typical Syndication, limited partners 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 limited partners to generate cash when needed,
including to pursue its plan for the development of new adult
living communities and to repay debt. The Company's present
Investor Note Debt lenders do not have sufficient lending
capacity to meet all of the Company's future requirements.
However, the Company currently is negotiating with several new
Investor Note Debt lenders which the Company believes will have
sufficient lending capacity to meet all of the Company's
foreseeable Investor Note Debt borrowing requirements on
acceptable terms.
The Company anticipates that the proceeds of the Company's
recently completed initial public offering, funds generated by
its business operations and construction mortgage financing will
provide sufficient funds to pursue its development plan (as
described above) for at least 8 months at the projected rate of
development. The Company will use the proceeds of anticipated
refinancings of construction financing on, and/or sale-leasebacks
of, stabilized, newly constructed communities at higher principal
amounts than the original construction financing, additional
long-term leases or similar forms of financing which require the
investment of little or no capital on the part of the Company, or
may use funds raised through the issuance of additional debt or
equity securities, to continue with its development plan for more
than the next 8 months at its projected rate of development.
There can be no assurance that funds generated by these potential
sources will be available or sufficient to complete the Company's
development plan. In addition, there are a number of
circumstances beyond the Company's control and which the Company
cannot predict that may result in the Company's financial
resources being inadequate to meet its needs. A lack of
available funds may require the Company to delay, scale back or
eliminate some of the adult living communities that are currently
contemplated in its development plan.
The first new communities being constructed pursuant to the
Company's development plan are in Texas. The Company completed
construction with mortgage financing for up to $7.0 million on an
adult living community in Corpus Christi, Texas, for up to $7.3
million on an adult living community in Temple, Texas and for up
to $7.6 million on an adult living community in Round Rock,
Texas, respectively. The Company has commenced construction with
construction financing for $7.1 million on an adult living
community in Tyler, Texas and commenced construction with
construction financing for $7.8 on an adult living community in
Overland Park, Kansas. The Company has acquired additional sites
in Amarillo, Fort Bend County and League City, Texas,
respectively, has options to acquire sites in Crestview Hills,
Kentucky and Jackson, Tennessee, respectively and is negotiating
with several additional lenders to obtain financing to develop
these sites.
The Company has, and may in the future, utilize long-term
lease financing arrangements to develop and operate new
communities. The Company has obtained financing of up to $39
million, of which approximately $35 million has been funded, from
Capstone for 100% of the development cost of four adult living
communities that are being operated by the Company pursuant to
long-term leases with Capstone. The Company has completed
construction on all four of these communities in San Angelo, El
Paso, Wichita Falls and Abilene, Texas, respectively.
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 will contain
terms where the lender will fund at least 80% of such costs,
requiring the Company to contribute approximately 20% of such
costs.
Other than as described herein, management is not aware of
any other trends, events, commitments or uncertainties that will,
or are likely to, materially impact the Company's liquidity.
. NEW ACCOUNTING PRONOUNCEMENTS
Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" establishes standards for the
way that public business enterprises report information about
operating segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. In accordance with Statement No. 131, the
Company has elected not to apply this statement to its interim
financial statements in Fiscal 1998; however, comparative
19
<PAGE>
information for interim periods in Fiscal 1998 will be reported
in financial statements for interim periods in Fiscal 1999.
Segment information will be provided based upon the Company's
primary revenue sources.
In February 1998, the FASB issued Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits". Statement No. 132 is effective for fiscal years
beginning after December 15, 1997. Statement No. 132 revises
employers' disclosure requirements concerning pension and other
postretirement benefit plans by standardizing such disclosure
requirements to the extent practicable, requires additional
information on changes in the benefit obligations and fair values
of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer as useful as
they were when Statements No. 87, "Employers' Accounting for
Pensions", No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits", and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", were issued. Statement No. 132
suggests combined formats for presentation of pension and other
postretirement benefit disclosures and permits reduced
disclosures for nonpublic entities. Statement No. 132 will not
have any material effect on disclosures presented by the Company.
In June of 1998, the FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
It is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Because the Company does not currently
utilize derivatives or engage in hedging activities, management
does not anticipate that implementation of this statement will
have material effect on the Company's financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
NOT APPLICABLE
PART II - OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the registration statements (Nos. 333-05955
and 333-43331) for the Company's initial public offering of its
common stock, $.01 par value, was March 13, 1998. The offering
commenced on March 16, 1998. The managing underwriter of the
offering was Royce Investment Group, Inc. ("Royce"). Pursuant to
the offering, the Company sold to the public 2,800,000 shares of
its common stock at an initial offering price of $9.50 per share.
The aggregate price of the offering amount registered by the
Company was $26.6 million. On April 29, 1998, pursuant to an
over-allotment option granted to the underwriters, John Luciani
and Bernard M. Rodin (the "Selling Shareholders") each sold
173,030 shares of the Company's common stock to the public at a
price of $9.50 per share. The aggregate price of the shares
offered by and registered on behalf of the Selling Shareholders
was $3,287,600. Under the terms of the offering, the Company
incurred underwriting discounts of $1.6 million, and the Selling
Shareholders incurred aggregate underwriting discounts of
$197,250. The Company incurred the following expenses in
connection with the offering: (i) a non-accountable expense
allowance paid to Royce in the amount of $798,000, (ii) a
consulting fee paid to Royce in the amount of $266,000, and (iii)
other expenses related to the offering in the amount of $1.5
million.
The net proceeds that the Company received as a result of the
offering were 22.3 million. As of July 31, 1998, the Company's
net proceeds have been used as follows: $17.3 million has been
used to purchase a series of 30 day, 90 day and 180 day treasury
bills pending application of the funds, $4.9 million has been
used for the purchase of land and towards the construction of
plant, building and facilities and $100,000 has been used for
working capital.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GRAND COURT LIFESTYLES, INC.
(Registrant)
/s/ Bernard M. Rodin
-----------------------------------
Bernard M. Rodin
Chief Financial Officer
and Principal Financial Officer
Dated: September 14, 1998
21
<PAGE>
EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule.
22
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS, STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY AND STATEMENTS OF CASH FLOWS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JUL-31-1998
<CASH> 27,516
<SECURITIES> 0
<RECEIVABLES> 248,826
<ALLOWANCES> 10,109
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 32,550
<DEPRECIATION> 134
<TOTAL-ASSETS> 328,984
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0
0
<COMMON> 178
<OTHER-SE> 40,342
<TOTAL-LIABILITY-AND-EQUITY> 328,984
<SALES> 17,961
<TOTAL-REVENUES> 34,923
<CGS> 18,876
<TOTAL-COSTS> 3,632
<OTHER-EXPENSES> 10,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,750
<INCOME-PRETAX> (8,269)
<INCOME-TAX> (93)
<INCOME-CONTINUING> (8,362)
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